As filed with the Securities and Exchange Commission on January 24, 2005
Registration No. 333-120441
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
A.B. WATLEY GROUP INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 6211 13-3911867
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
90 Park Avenue
New York, New York 10016
(212) 500-6500
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Steven Malin
90 Park Avenue
New York, New York 10016
(212) 500-6500
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copy to:
Scott Rapfogel
Gottbetter & Partners, LLP
488 Madison Avenue
New York, New York 10022-5718
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities to Amount to be Offering Price Per Aggregate Offering Registration
be Registered Registered Share Price Fee
=================================================================================================================
Common Stock,
par value $.001 30,398,337 shares(1)(2) $.25(3) $7,559,584.00(3) $962.87(3)
- -----------------------------------------------------------------------------------------------------------------
(1) Includes 8,835,250 shares underlying outstanding stock options. We
previously included 9,535,250 shares underlying outstanding stock options
when we filed on November 12, 2004.
(2) Includes 10,347,178 shares underlying outstanding common stock purchase
warrants. We previously included 12,708,675 shares underlying outstanding
common stock purchase warrants when we filed on November 12, 2004.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933 based on the closing
price of the Registrant's common stock on November 8, 2004. We paid
$994.91 at the time of the November 12, 2004 filing. Fewer shares are now
being registered.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
2
Prospectus A.B. WATLEY GROUP INC.
30,398,337 Shares of Common Stock
All of the 30,398,337 shares of common stock of A.B. Watley Group Inc. covered
by this prospectus are being offered and sold from time to time by certain of
our stockholders, warrantholders and optionholders hereinafter referred to as
the Selling Stockholders. All of these shares are being registered for resale
only. We will not receive any of the proceeds from the sale of the shares by the
Selling Stockholders. We will pay the expenses of registering these shares on
behalf of the Selling Stockholders. These shares will be offered for sale by the
Selling Stockholders, from time to time, at prevailing market prices or in
negotiated transactions.
The shares being registered include 8,835,250 shares underlying outstanding
stock options and 10,347,178 shares underlying outstanding common stock purchase
warrants. Pending exercises of these options and warrants, the holders have no
voting or other ownership rights in the underlying shares.
The Selling Stockholders may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended, in connection with such sales.
Our common stock is traded in the over-the-counter market on the Bulletin Board
under the symbol ABWG. The last reported sales price for our common stock on
January 14, 2005 was $.20 per share.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE RISK FACTORS
BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
January 24, 2005
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TABLE OF CONTENTS
PAGE
Prospectus Summary ...............................................................5
Risk Factors .....................................................................6
Determination of Offering Price ................................................. 13
Selling Stockholders .............................................................13
Plan of Distribution .............................................................17
Legal Proceedings ................................................................18
Directors, Executive Officers, Promoters and Control Persons ............. .......23
Executive Compensation ......................................................... .24
Security Ownership of Certain Beneficial Owners
and Management ...... ............................................................27
Description of Securities ........................................................30
Experts ..........................................................................33
Legal Matters ....................................................................33
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities .......................................................33
Use of Proceeds ..................................................................33
Description of Business ..........................................................34
Management's Discussion and Analysis of Financial Condition
and Results of Operations ............. ..........................................44
Certain Relationships and Related Party Transactions ..................... .......49
Market for Common Equity and Related Stockholder Matters .............. ..........51
Changes In and Disagreements With Accountants on Accounting
And Financial Disclosure .............. ..........................................57
Where You Can Find Additional Information ................................ .......58
Financial Statements .............................................................59
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that which
is contained in this prospectus. This prospectus may be used only where it is
legal to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus, regardless of the time of delivery of
this prospectus or any sale of securities.
4
PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the information that
should be considered before investing in our common stock. Investors should read
the entire prospectus carefully, including the more detailed information
regarding our business, the risks of purchasing our common stock discussed under
Risk Factors, beginning on page 6, and our financial statements and the
accompanying notes. Unless otherwise indicated, "dollars" or "$" refers to the
United States Dollar.
References throughout this prospectus to we, us, our, and the Company refer to
A.B. Watley Group Inc., together with its subsidiaries.
BUSINESS
We are a Delaware corporation organized on May 15, 1996 under the name Internet
Financial Services, Inc. On August 27, 1999 we changed our name to A.B. Watley
Group Inc. We presently conduct our business primarily through our subsidiary
A.B. Watley Direct, Inc. ("Direct"). Direct is a registered broker-dealer with
the Securities and Exchange Commission, and a member of the National Association
of Securities Dealers, Inc. Direct engages in direct-access and web-based online
trading for retail customers. Direct also provides execution services for
institutional customers. Direct clears all transactions through clearing brokers
on a fully disclosed basis. Accordingly, Direct is exempt from Rule 15c3-3 of
the Securities and Exchange Act of 1934.
Until June 30, 2004 when we sold our then wholly owned subsidiary A.B. Watley
Futures Corp. ("ABW Futures") to a third party, we also operated through ABW
Futures. While owned by us, ABW Futures was an introducing broker-dealer
registered with the National Futures Association that conducted futures trading
activity for customers. ABW Futures cleared all of its business through clearing
brokers on a fully disclosed basis.
Until January 2004 when it ceased operations due to net capital deficiencies we
also operated an introducing broker-dealer through our wholly owned subsidiary,
A.B. Watley, Inc. In February 2004, A.B. Watley, Inc. withdrew its registration
as a broker-dealer.
Our executive offices are located at 90 Park Avenue, 26th Floor, New York, New
York 10016 and our telephone number at this location is (212) 500-6500.
FORWARD-LOOKING STATEMENTS
This prospectus and the exhibits hereto contain forward-looking statements as
described in Section 27A of the Securities Act and Section 21E of the Exchange
Act. These statements involve known and unknown risks, uncertainties and other
factors that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, those
listed under Risk Factors and elsewhere in this prospectus and the documents
incorporated by reference. In some cases, forward-looking statements can be
identified by terminology such as may, will, should, could, expects, plans,
intends, anticipates, believes, estimates, predicts, potential or continue or
the negative of such terms and other comparable terminology. Although we believe
that the expectations reflected in the forward-looking statements are reasonable
based on currently available information, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor anyone
else assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
5
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO CONTINUE COST CUTTING AND REVENUE GENERATION INITIATIVES,
ENTER INTO A STRATEGIC BUSINESS COMBINATION OR OBTAIN ADDITIONAL FUNDING SOURCES
AT ACCEPTABLE TERMS, OUR ABILITY TO OPERATE OUR BUSINESS WILL BE SIGNIFICANTLY
DIMINISHED.
We are implementing cost cutting and revenue generation initiatives, and
exploring strategic business combinations. We also will need to find additional
funding sources at rates and terms acceptable to us to meet our anticipated
capital and liquidity needs. To the extent that capital is raised through the
sale of equity or convertible debt securities, the issuance of these securities
could result in dilution to our stockholders. If we are unable to obtain such
financing, make sufficient improvement in our operating results or find a
strategic partner our ability to operate our business will be significantly
diminished.
PERIODS OF DECLINING SECURITIES PRICES, DECREASING TRADE VOLUMES, OR UNCERTAINTY
IN THE PUBLIC EQUITY MARKETS MAY ADVERSELY AFFECT OUR REVENUES.
Our future revenues are likely to be lower during periods of declining
securities prices or reduced securities market activity The public markets have
historically experienced significant volatility not only in the number and size
of share offerings, but also in the secondary market trading volume and prices
of newly issued securities. Activity in the private equity markets frequently
reflects the trends in the public markets. As a result, our revenues from
brokerage activities may also be adversely affected during periods of declining
prices or reduced activity in the public markets.
WE MAY NOT BE ABLE TO ADAPT WITH RAPID TECHNOLOGICAL CHANGE IN A COST EFFECTIVE
MANNER, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.
Traditional and online financial services businesses are characterized by rapid
technological change, changes in customer requirements, frequent new service and
product introductions and enhancements and evolving industry standards. Our
future success will depend on our ability to enhance our existing services and
products. We must also develop new services and products that address the
increasingly sophisticated and varied needs of our customers and prospective
customers. We must respond to technological advances and evolving industry
standards and practices on a timely and cost-effective basis. The development
and enhancement of services and products entails significant technical and
financial risks. We may fail to
6
o use new technologies effectively;
o adapt services and products to evolving industry standards; or
o develop, introduce and market service and product enhancements or
new services and products.
In addition, we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of our services and products,
and our new service and product enhancements may not achieve market acceptance.
If we encounter these problems, our business, financial condition and operating
results may be materially adversely affected.
OPERATIONAL RISKS MAY DISRUPT OUR BUSINESS OR LIMIT OUR GROWTH.
Like other securities and securities-related businesses, we are highly dependent
on information processing and telecommunications systems. We face operational
risks arising from potential mistakes made in the confirmation or settlement of
transactions or from the failure to properly record, evaluate or account for
transactions. Our business is highly dependent on our ability, and the ability
of our clearing firms, to process, on a daily basis, a large and growing number
of transactions across numerous and diverse markets. Consequently, we and our
clearing firms rely heavily on our respective financial, accounting,
telecommunications and other data processing systems. If any of these systems
fail to operate properly or become unavailable due to problems with our physical
infrastructure, we could suffer financial loss, a disruption of our business,
liability to clients, regulatory intervention or reputational damage. In
addition, we are aware that other companies in our industry have had problems
due to high volume of telephone and e-mail customer inquiries that has at times
strained the capacity of their telecommunications systems and customer service
staffs, and has also led to temporary disruptions in website service. Thus, any
inability of systems used to accommodate an increasing volume of transactions
and customer inquiries could also constrain our ability to expand our businesses
and could damage our reputation.
Pursuant to clearance arrangements, the clearing and depository operations for
us and our customers' securities transactions are provided by two clearing
broker-dealers. We earn commissions as an introducing broker for the
transactions of its customers. In the normal course of business, our customer
activities involve the execution and settlement of various customer securities
transactions. These activities may expose us to off-balance-sheet risk in the
event the customer or other broker is unable to fulfill its contracted
obligations and we have to purchase or sell the security underlying the contract
at a loss. Our customer securities are transacted on either a cash or margin
basis. In margin transactions, the clearing broker extends the credit to our
customer, subject to various regulatory margin requirements, collateralized by
cash and securities in the customers' accounts. However, we are required to
contact the customer and to either obtain additional collateral or to sell the
customer's position if such collateral in not forthcoming. We are responsible
for any losses on such margin loans, and has agreed to indemnify its clearing
brokers for losses that the clearing brokers may sustain from the customer
accounts introduced by us.
EMPLOYEE MISCONDUCT COULD HARM US AND IS DIFFICULT TO DETECT AND DETER.
There have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years, and
we run the risk that employee misconduct could occur. Misconduct by employees
could bind us to transactions that exceed authorized limits or present
unacceptable risks, or hide from us unauthorized or unsuccessful activities. In
either case, this type of conduct could result in unknown and unmanaged risks or
losses. Employee misconduct could also involve the improper use of confidential
information, which could result in regulatory sanctions and serious reputational
harm. It is not always possible to deter employee misconduct, and the
precautions we take to prevent and detect this activity may not be effective in
all cases.
THE SECURITIES INDUSTRY IN WHICH WE OPERATE IS HEAVILY REGULATED BY THE SEC,
STATE REGULATORS, AND THE NASD. IF WE FAIL TO COMPLY WITH APPLICABLE LAWS AND
REGULATIONS, WE MAY FACE PENALTIES OR OTHER SANCTIONS THAT MAY BE DETRIMENTAL TO
OUR BUSINESS.
7
The securities industry in the United States is subject to extensive regulation
under both federal and state laws. Broker-dealers are subject to regulations
covering all aspects of the securities business, including:
o sales methods;
o trade practices among broker-dealers;
o use and safekeeping of customers` funds and securities;
o capital structure;
o record keeping;
o conduct of directors, officers, and employees; and
o supervision of employees, particularly those in branch offices.
The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets, rather than protection of
creditors and stockholders of broker-dealers.
Uncertainty regarding the application of these laws and other regulations to our
business may adversely affect the viability and profitability of our business.
The SEC, the NASD, other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders, or suspend or
expel a broker-dealer or any of its officers or employees. Our ability to comply
with all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance in the
future, and the imposition of any material penalties or orders on us could have
a material adverse effect on our business, operating results and financial
condition. In addition, it is possible that noncompliance could subject us to
future civil lawsuits, the outcome of which could harm our business.
In addition, our mode of operation and profitability may be directly affected
by:
o additional legislation;
o changes in rules promulgated by the SEC, state regulators, the NASD,
and other regulatory and self-regulatory organizations; and
o changes in the interpretation or enforcement of existing laws and
rules.
THE FAILURE TO REMAIN IN COMPLIANCE WITH THE NET CAPITAL RULE WOULD ADVERSELY
AFFECT OUR ABILITY TO CONTINUE TO OPERATE AS A BROKER-DEALER.
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
brokers, including the SEC`s Uniform Net Capital Rule (the "Net Capital Rule").
Net capital is the net worth of a broker or dealer (assets minus liabilities),
less certain deductions that result from excluding assets that are not readily
convertible into cash and from conservatively valuing certain other assets.
Failure to maintain the required net capital may subject a firm to suspension or
revocation of registration by the SEC and suspension or expulsion by the NASD
and other regulatory bodies and ultimately could require the firm's liquidation.
8
In addition, a change in the Net Capital Rules, the imposition of new rules or
any unusually large charge against net capital could limit those aspects of our
contemplated operations that require the intensive use of capital, such as
trading activities and the financing of customer account balances. A significant
operating loss or any unusually large charge against net capital could adversely
affect our ability to operate and expand, which could have a material adverse
effect on our business, financial condition and operating results.
Direct is presently in compliance with its net capital requirements. There can
be no assurance, however, that it will not fall below minimum net capital
requirements in the future.
THE FAILURE OF BROKERAGE CUSTOMERS TO MEET THEIR MARGIN REQUIREMENTS COULD
RESULT IN SIGNIFICANT LIABILITIES.
The brokerage business, by its nature, is subject to risks related to defaults
by our customers in paying for securities they have agreed to purchase and
delivering securities they have agreed to sell. Our clearing broker may make
margin loans to our customers in connection with their securities transactions.
We are required by contract to indemnify that broker for, among other things,
any loss or expense incurred due to defaults by our customers in failing to
repay margin loans or to maintain adequate collateral for those loans. We will
be subject to risks inherent in extending credit, especially during periods of
volatile markets or in connection with the purchase of highly volatile stocks
which could lead to a higher risk of customer defaults.
WE MAY BE UNABLE TO OBTAIN CRITICAL GOODS OR SERVICES FROM OUR SUPPLIERS.
We obtain financial information from a number of third-party suppliers of
software and information services. We believe we have available to us at
comparable cost a number of alternative sources of supply of these items of
software and information services, to provide adequate replacements on a timely
basis, if arrangements with any of our current suppliers are abrogated. We have
established a number of relationships with third-party suppliers of software and
information services. There can be no assurance that such relationships will
continue or that timely replacement of such services will be available in the
future.
OUR FUTURE SUCCESS IS DEPENDENT ON THE PERFORMANCE AND CONTINUED SERVICE OF OUR
KEY EMPLOYEES AND OUR ABILITY TO ATTRACT AND RETAIN SKILLED PERSONNEL. THE LOSS
OF ANY OF OUR KEY EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATIONS.
We believe that our success depends to a significant extent on the efforts and
abilities of certain of our management personnel, in particular those of Steve
Malin, our Chairman, and Robert Malin, our President and Vice Chairman. The loss
of either of these persons could have a material adverse effect on our business,
prospects, operating results, and financial condition. We do not presently have
key man life insurance policies and do not intend to obtain any unless required
to do so under future financing arrangements. There can be no assurance that
such policies will be available to us on commercially reasonable terms, if at
all. Additionally, our ability to realize our business plan could be jeopardized
if any members of our senior management become incapable of fulfilling their
obligations to us and a capable successor is not found on a timely basis. There
can however be no assurance that, in such event, we will be able to locate and
retain a capable successor to any member of management.
9
OUR COMPETITORS HAVE GREATER FINANCIAL AND HUMAN RESOURCES THAN WE DO. THIS MAY
GIVE THEM A COMPETITIVE ADVANTAGE.
The market for electronic brokerage services is highly competitive and rapidly
changing. We believe that we compete on the basis of speed of order execution,
processing and confirmation, quality of client service, ease of use, amount and
timeliness of information provided, price and reliability of the trading systems
which we utilize. Our competitors may have greater financial, technical and
marketing resources than we do. We expect that our ability to compete will be
affected by our ability to introduce new services and enhancements to existing
services into the market on a timely basis.
We believe our competition consists of large and small brokerage firms utilizing
the Internet to transact retail brokerage business. Among these competitors are
E*TRADE Securities LLC.; Charles Schwab & Co., Inc.; TD Waterhouse Investor
Services, Inc.; Fidelity Brokerage Services LLC; and Ameritrade, Inc.; We also
face competition for clients from full commission brokerage firms.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK FOR THE FORESEEABLE
FUTURE.
We have never paid any cash dividends on our common stock, nor do we contemplate
or anticipate paying any dividends upon our common stock in the foreseeable
future.
RISKS RELATED TO OUR FINANCIAL CONDITION
WE NEED ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE AND, IF AVAILABLE, MIGHT
ONLY BE AVAILABLE ON UNFAVORABLE TERMS.
We have principally funded our operations through sales of our equity securities
and loans from affiliated parties. We expect to raise funds in the future
through sales of our debt or equity securities and through loans until such
time, if ever, as we are able to operate profitably. There can be no assurance
given that we will be able to obtain funds in such manner or on terms that are
beneficial to us. Our inability to obtain needed funding can be expected to have
a material adverse effect on our operations and our ability to achieve
profitability.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT AND EXPECT TO CONTINUE TO
INCUR LOSSES UNTIL WE ESTABLISH PROFITABLE BUSINESS OPERATIONS. THIS COULD DRIVE
THE PRICE OF OUR STOCK DOWN.
We incurred a net loss of $4,536,109 for the year ended September 30, 2004. As
at September 30, 2004, we had an accumulated deficit in the aggregate amount of
$74,143,583. We expect to incur additional operating losses for the foreseeable
future unless and until we are able to establish profitable business operations.
If we fail to do so and continue to incur losses the price of our common stock
can be expected to fall.
10
WE RECEIVED AN OPINION FROM OUR AUDITOR WHICH RAISES DOUBTS ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
The Report of our Independent Registered Public Accounting Firm, Marcum &
Kliegman LLP, dated December 3, 2004 contains an explanatory paragraph
respecting our ability to continue as a going concern. We will require
additional funds in the future, and there can be no assurance that any Report of
an Independent Registered Public Accounting Firm on our future financial
statements will not include a similar explanatory paragraph if we are unable to
raise sufficient funds or generate sufficient cash from operations to cover the
cost of our operations. The existence of the explanatory paragraph may
materially adversely affect our relationship with prospective customers and
suppliers, and therefore could have a material adverse effect on our business,
financial condition and results of operations.
RISKS RELATED TO THIS OFFERING
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD DEPRESS THE MARKET PRICE FOR OUR
COMMON STOCK.
We presently have issued and outstanding 22,512,138 shares of our common stock,
options to purchase 8,835,250 shares of our common stock at an average exercise
price of $.23 per share, and warrants to purchase 10,347,178 shares of our
common stock at an average exercise price of $.26 per share. With the exception
of shares held by affiliates which may be subject to resale limitations, most of
our issued and outstanding shares of common stock are eligible to be sold at any
time. Market sales of large amounts of our common stock, or the potential for
those sales even if they do not actually occur, may have the effect of
depressing the market price of our common stock. In addition, if our future
financing needs require us to issue additional shares of common stock or
securities convertible into common stock, the supply of common stock available
for resale could be increased which could stimulate trading activity and cause
the market price of our common stock to drop, even if our business is doing
well.
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. UNLESS SUCH MARKET IS
EXPANDED YOU MAY HAVE DIFFICULTY SELLING SHARES OF OUR COMMON STOCK.
Presently, there is only a limited and sporadic public market for our common
stock. There can be no assurance that an active and more reliable public market
will develop in the future or, if developed, that such market will be sustained.
Purchasers of shares of our common stock may, therefore, have difficulty in
reselling such shares. As a result, investors may find it impossible to
liquidate their investment in us should they desire to do so. Our common stock
is currently traded in the over-the-counter market and quoted on the Bulletin
Board. Accordingly an investor may find it more difficult to dispose of or to
obtain accurate quotations of prices for our common stock than would be the case
if our common stock were quoted on Nasdaq or an exchange. Irrespective of where
our common stock is traded, there can be no assurance that the public market for
our common stock will become more active or liquid in the future.
Market transactions in our common stock are subject to the "Penny Stock Rules"
of the Securities and Exchange Act of 1934, which are discussed in more detail,
below. These rules could make it difficult to trade our common stock because
compliance with them can delay or preclude certain trading transactions. This
could have an adverse effect on the ability of an investor to sell any shares of
our common stock.
11
THE PENNY STOCK RULES APPLY TO OUR COMMON STOCK. THIS MAY MAKE IT MORE DIFFICULT
FOR HOLDERS OF OUR COMMON STOCK TO RESELL THEIR SHARES.
At the present time our common stock is trading on the OTC Bulletin Board.
Although dealer prices for our common stock are listed on the OTC Bulletin
Board, trading in our common stock has been sporadic and limited.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires special
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a "penny stock". Commission regulations generally define a
penny stock to be an equity security that has a market price of less that $5.00
per share and is not listed on Nasdaq or a major stock exchange. These
regulations subject all broker-dealer transactions involving such securities to
the special "Penny Stock Rules" set forth in Rule 15g-9 of the Securities
Exchange Act of 1934 (the "34 Act"). The current market price of our common
stock is substantially less that $5 per share and such stock can, for at least
the foreseeable future, be expected to continue to trade in the over-the-counter
market at a per share market price of substantially less than $5. Accordingly,
any broker-dealer sales of our shares will be subject to the Penny Stock Rules.
These Rules affect the ability of broker-dealers to sell our securities and also
may affect the ability of purchasers of our common stock to sell their shares in
the secondary market.
The Penny Stock Rules also impose special sales practice requirements on
broker-dealers who sell securities to persons other than their established
customers or "Accredited Investors." Among other things, the Penny Stock Rules
require that a broker-dealer make a special suitability determination respecting
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. In addition, the Penny Stock Rules require that a
broker-dealer deliver, prior to any transaction, a disclosure schedule prepared
in accordance with the requirements of the Commission relating to the penny
stock market. Finally, monthly statements have to be sent to any holder of such
penny stocks disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Accordingly, for
so long as the Penny Stock Rules are applicable to our common stock, it may be
difficult to trade such stock because compliance with such Rules can delay or
preclude certain trading transactions. This could have an adverse effect on the
liquidity and price of our common stock.
OUR COMMON STOCK HAS EXPERIENCED, AND IS EXPECTED TO EXPERIENCE, SIGNIFICANT
PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY INCREASES THE RISK OF LOSS TO
PERSONS OWNING OUR COMMON STOCK.
Due to the limited trading market for our common stock, and because of the
possible price volatility, investors may not be able to sell their Company
shares when they desire to do so. Through the twelve months ended December 31,
2004, our stock price ranged from a high of $.45 to a low of $.13 per share. The
inability to sell shares in a rapidly declining market may substantially
increase the risk of loss because of such illiquidity and because the price for
our common stock may suffer greater declines because of its price volatility.
12
DETERMINATION OF OFFERING PRICE
The shares of common stock offered under this Prospectus will be sold from time
to time by the Selling Stockholders at prices then currently prevailing in the
market or at negotiated prices. See the discussion under the caption "Plan of
Distribution" beginning on page 17. There is no fixed or currently determinable
price at which any such shares will be offered or sold. For a historical price
range of our common stock over the past two fiscal years see the discussion
under the caption "Market for Common Equity and Related Stockholders Matters"
beginning on page 62.
SELLING STOCKHOLDERS
The following table provides certain information with respect to the beneficial
ownership of our common stock known by us as of January 17, 2005 by each Selling
Shareholder. Except as otherwise indicated, the percentages in the table have
been calculated on the basis of treating as outstanding for a particular person,
all shares of our common stock outstanding on January 17, 2005 and all shares of
our common stock issuable to the holder in the event of exercise of outstanding
options or warrants owned by that person at January 17, 2005 that are
exercisable or convertible within the next 60 days. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of our common stock owned by them, except to the extent
such power may be shared with a spouse. Certain of the Selling Shareholders have
material relationships with us. Robert Malin and Steven Malin are principal
shareholders, executive officers and directors of ours. Linda Malin is a
principal shareholder of ours and the sister of Messrs. Robert Malin and Steven
Malin. Anthony Huston, Penson Worldwide Inc. (including its subsidiary Penson
Financial Services Inc.), Kentan Ltd., Yanzu Inc., Eric Steinberg, Onsite
Trading Inc. Liquidating Trust, Highgate House Funds, Ltd., Michael H. Ference,
Richard A. Friedman and Gary Mednick are principal shareholders of ours. Mr.
Mednick is also the president of A.B. Watley Direct Inc.
13
- ------------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock Percentage Ownership
Beneficially Owned
- ------------------------------------------------------------------------------------------------------------------------------
Name of Beneficial Owner Before After Number of Shares Before After
Offering Offering Being Sold Offering Offering
- ------------------------------------------------------------------------------------------------------------------------------
Grant Thornton LLP 175,000 0 175,000 .8% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Compass Capital Group 250,000 0 250,000 1.1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Michael H. Ference 275,000 0 275,000 1.2% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Richard A. Friedman 275,000 0 275,000 1.2% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Sichenzia Ross Friedman Ference LLP 1,000,000 0 1,000,000 4.4% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Kentan Ltd. 2,500,000 0 2,500,000 11.1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Yanzu Inc. 2,500,000 0 2,500,000 11.1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Onsite Trading Inc. Liquidating Trust 1,700,000 0 1,700,000 7.6% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Howard Jahre 100,000 0 100,000 .4% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Jackson Steinem Inc. 100,000 0 100,000 .4% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Mel Steinberg 259,611 59,611 200,000 1.1% .3%
- ------------------------------------------------------------------------------------------------------------------------------
Paul Scharffer 144,091(1) 0 144,091(1) .6% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Penson Worldwide, Inc. 3,041,890(2) 359,092 2,682,798(2A) 12% 1.6%
- ------------------------------------------------------------------------------------------------------------------------------
Andrew Koslow 50,000(3) 0 50,000(3) .2% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Keefe, Bruyette & Woods Inc. 173,471(4) 23,471 150,000(4) .8% .1%
- ------------------------------------------------------------------------------------------------------------------------------
Anthony Huston 891,724(5) 447,280 444,444(5) 3.9% 2.2%
- ------------------------------------------------------------------------------------------------------------------------------
Linda Malin 2,207,397(6) 1,349,625 857,772(6) 9.44% 5.8%
- ------------------------------------------------------------------------------------------------------------------------------
Eric Steinberg 1,586,815(7) 486,400 1,100,415(7) 6.7% 2.2%
- ------------------------------------------------------------------------------------------------------------------------------
Nick Rego 5,000(8) 0 5,000(8) .02% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Global Trading Ltd. 512,500(9) 0 512,500(9) 2.2% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Highgate House Funds, Ltd. 2,140,909(10) 0 6,541,067(10A) 9.5% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Steven Malin 3,350,369(11) 2,850,369 800,000(11A) 14.6% 3.4%
- ------------------------------------------------------------------------------------------------------------------------------
Robert Malin 3,370,933(12) 1,937,600 2,600,000(12A) 14.1% 8.6%
- ------------------------------------------------------------------------------------------------------------------------------
Worth Consulting LLC 533,333(13) 0 1,400,000(13A) 2.3% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Linus Nwaigue 166,667(14) 0 500,000(14A) .7% 0%
- ------------------------------------------------------------------------------------------------------------------------------
John Coakley 58,333(15) 0 125,000(15A) .3% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Jim Besarany 16,667(16) 0 50,000(16A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Robert Corso 15,250(17) 0 45,250(17A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Keith Sorrentino 10,000(18) 0 30,000(18A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Mahan Kasinath 10,000(19) 0 30,000(19A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Michael Welsh 16,500(20) 0 36,500(20A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Ralph Armenti 12,750(21) 0 32,750(21A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Manish Buch 10,350(22) 0 30,350(22A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Tom Sattler 10,000(23) 0 30,000(23A) .1% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Dwight Burrell 400(24) 0 400(24) .002% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Gary Mednick 458,333(25) 0 1,325,000(25A) 2% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Michael Picone 500,000(26) 0 500,000(26) 2.4% 0%
- ------------------------------------------------------------------------------------------------------------------------------
Pamela Luteran 433,333(27) 0 1,300,000(27A) 2% 0%
- ------------------------------------------------------------------------------------------------------------------------------
14
(1) Includes 144,091 shares underlying presently exercisable warrants.
(2) Includes 2,682,798 shares underlying presently exercisable warrants and
359,092 shares owned by Penson Financial Services, Inc., a subsidiary of
Penson Worldwide Inc.
(2A) Includes 2,682,798 shares underlying presently exercisable warrants.
(3) Includes 50,000 shares underlying presently exercisable warrants.
(4) Includes 150,000 shares underlying presently exercisable warrants.
(5) Includes 444,444 shares underlying presently exercisable warrants.
(6) Includes 857,772 shares underlying presently exercisable warrants.
(7) Includes 1,100,415 shares underlying presently exercisable warrants.
(8) Includes 5,000 shares underlying presently exercisable warrants.
(9) Includes 512,500 shares underlying presently exercisable warrants.
(10) Excludes 100,000 shares owned by Jackson Steinem Inc., an affiliated
entity.
(10A) Includes 4,400,158 shares underlying warrants not exercisable within the
next 60 days.
(11) Includes 500,000 shares underlying presently outstanding stock options.
Does not include 1,166,667 shares issuable upon exercise of outstanding
stock options not exercisable within the next 60 days including 866,667
stock options owned by Mr. Malin's wife, Pamela Luteran or 433,333
presently exercisable stock options owned by Mr. Malin's wife.
(11A) Includes 500,000 shares issuable upon exercise of presently exercisable
stock options and 1,166,667 shares underlying stock options that are not
exercisable within the next 60 days. Excludes 1,300,000 shares issuable
upon exercise of stock options owned by Mr. Malin's wife, 433,333 of which
are presently exercisable.
(12) Includes 1,433,337 shares issuable upon exercise of presently exercisable
stock options. Excludes 1,166,667 shares underlying stock option that are
not exercisable within the next 60 days.
(12A) Includes 1,433,337 shares issuable upon exercise of presently exercisable
stock options and 1,166,667 shares underlying stock options that are not
exercisable within the next 60 days.
(13) Includes 533,333 shares underlying presently exercisable stock options.
Excludes 866,667 shares underlying stock options that are not exercisable
within the next 60 days and 500,000 shares issuable upon the exercise of
500,000 presently exercisable stock options owned by Michael Picone, the
owner of Worth Consulting LLC.
(14) Includes 166,667 shares issuable upon exercise of presently exercisable
stock options. Excludes 333,333 shares underlying stock options that are
not exercisable within the next 60 days.
(14A) Includes 166,667 shares issuable upon exercise of presently exercisable
stock options and 333,333 shares underlying stock options that are not
exercisable within the next 60 days.
(15) Includes 58,333 shares issuable upon exercise of presently exercisable
stock options. Excludes 66,667 shares underlying stock options that are
not exercisable within the next 60 days.
(15A) Includes 58,333 shares issuable upon exercise of presently exercisable
stock options and 66,667 shares underlying stock options that are not
exercisable within the next 60 days.
(16) Includes 16,667 shares issuable upon exercise of presently exercisable
stock options. Excludes 33,333 shares underlying stock options that are
not exercisable within the next 60 days.
15
(16A) Includes 16,667 shares issuable upon exercise of presently exercisable
stock options and 33,333 shares underlying stock options that are not
exercisable within the next 60 days.
(17) Includes 15,250 shares issuable upon exercise of presently exercisable
stock options. Excludes 30,000 shares underlying stock options that are
not exercisable within the next 60 days.
(17A) Includes 15,250 shares issuable upon exercise of presently exercisable
stock options and 30,000 shares underlying stock options that are not
exercisable within the next 60 days.
(18) Includes 10,000 shares issuable upon exercise of presently exercisable
stock options. Excludes 20,000 shares underlying stock options that are
not exercisable within the next 60 days.
(18A) Includes 10,000 shares issuable upon exercise of presently exercisable
stock options and 20,000 shares underlying stock options that are not
exercisable within the next 60 days.
(19) Includes 10,000 shares issuable upon exercise of presently exercisable
stock options. Excludes 20,000 shares underlying stock options that are
not exercisable within the next 60 days.
(19A) Includes 10,000 shares issuable upon exercise of presently exercisable
stock options and 20,000 shares underlying stock options that are not
exercisable within the next 60 days.
(20) Includes 16,500 shares issuable upon exercise of presently exercisable
stock options. Excludes 20,000 shares underlying stock options that are
not exercisable within the next 60 days.
(20A) Includes 16,500 shares issuable upon exercise of presently exercisable
stock options and 20,000 shares underlying stock options that are not
exercisable within the next 60 days.
(21) Includes 12,750 shares issuable upon exercise of presently exercisable
stock options. Excludes 20,000 shares underlying stock options that are
not exercisable within the next 60 days.
(21A) Includes 12,750 shares issuable upon exercise of presently exercisable
stock options and 20,000 shares underlying stock options that are not
exercisable within the next 60 days.
(22) Includes 10,350 shares issuable upon exercise of presently exercisable
stock options. Excludes 20,000 shares underlying stock options that are
not exercisable within the next 60 days.
(22A) Includes 10,350 shares issuable upon exercise of presently exercisable
stock options and 20,000 shares underlying stock options that are not
exercisable within the next 60 days.
(23) Includes 10,000 shares issuable upon exercise of presently exercisable
stock options. Excludes 20,000 shares underlying stock options that are
not exercisable within the next 60 days.
(23A) Includes 10,000 shares issuable upon exercise of presently exercisable
stock options and 20,000 shares underlying stock options that are not
exercisable within the next 60 days.
(24) Includes 400 shares underlying presently outstanding stock options.
(25) Includes 458,333 shares underlying presently exercisable stock options.
Excludes 866,667 shares underlying stock options that are not exercisable
within the next 60 days and 1,700,000 shares owned by Onsite Trading Inc.
Liquidating Trust, an entity in which Mr. Mednick is an affiliate.
(25A) Includes 458,333 shares underlying presently exercisable stock options and
866,667 shares underlying stock options that are not exercisable within
the next 60 days. Excludes 1,700,000 shares owned by Onsite Trading Inc.
Liquidating Trust, an entity in which Mr. Mednick is an affiliate.
16
(26) Includes 500,000 shares underlying presently exercisable stock options in
the name of Mr. Picone. Excludes 1,400,000 shares underlying presently
outstanding stock options owned by Worth Consulting LLC, a company which
Mr. Picone owns, 533,333 of which are presently exercisable.
(27) Pamela Luteran is the wife of Steven Malin. Includes 433,333 shares
underlying presently exercisable options. Excludes 866,667 shares
underlying stock options that are exercisable within the next 60 days.
(27A) Includes 433,333 shares issuable upon exercise of presently exercisable
stock options and 866,667 shares underlying stock options that are not
exercisable within the next 60 days.
PLAN OF DISTRIBUTION
GENERAL
The Selling Stockholders are offering the common shares for their accounts and
not for our account. We will not receive any proceeds from the sale of common
shares by the Selling Stockholders. The Selling Stockholders may be deemed
statutory underwriters within the meaning of the Securities Act of 1933, as
amended, in connection with such sales of common shares and may be deemed to be
acting as underwriters in their resales of the common shares under this
prospectus. We will pay the costs of registering the shares under this
prospectus, including legal fees. The Selling Stockholders will pay any
underwriting discounts and brokerage commissions associated with these sales.
Unless otherwise permitted, the commission or discount which may be received by
any member of the National Association of Securities Dealers, Inc. in connection
with these sales will not be greater than 8%.
To enable the Selling Stockholders to resell the common shares owned by them and
covered by this prospectus, we agreed to register those shares and to maintain
that registration.
Shares of common stock offered through this prospectus may be sold from time to
time by the Selling Stockholders or by their respective pledgees, donees,
transferees or other successors in interest. We will supplement this prospectus
to disclose the names of any pledges, donees, transferees, or other successors
in interest that intend to offer common stock through this prospectus.
Sales may be made in the over-the-counter market, any exchange on which the
shares are then listed, or otherwise, at prices and at terms then prevailing or
at prices related to the then current market price, in negotiated private
transactions, or in a combination of these methods. The Selling Stockholders
will act independently of us in making decisions with respect to the form,
timing, manner and size of each sale. We have been informed by the Selling
Stockholders that there are no existing arrangements between them and any other
stockholder, broker, dealer, underwriter or agent relating to the distribution
of the shares offered by this prospectus.
The common shares may be sold in one or more of the following manners: a block
trade in which the broker or dealer so engaged will attempt to sell the shares
as agent, but may position and resell a portion of the block as principal to
facilitate the transaction; purchases by a broker or dealer for its account
under this prospectus; privately negotiated transactions or ordinary brokerage
transactions and transactions in which the broker solicits purchases; any
combination of these methods; or any other method permitted by applicable law.
17
Any common shares covered by this prospectus that qualify for sale pursuant to
Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. We
will not receive any of the proceeds from the sale of these common shares,
although we have paid the expenses of preparing this prospectus and the related
registration statement of which it is a part.
The Selling Stockholders are subject to the applicable provisions of the
Exchange Act, and the rules and regulations thereunder which may restrict
certain activities of, and limit the timing of purchases and sales of securities
by, Selling Stockholders and other persons participating in a distribution of
securities. There can be no assurance that the Selling Stockholders will sell
any or all of the shares of common stock offered by them hereunder.
We have agreed to use our best efforts to keep such registration statement
effective until such time as all registrable securities under the registration
statement have been sold. In connection with any such registration, we will have
no obligation to assist or cooperate with the Selling Stockholders in the
offering or disposition of such shares; to indemnify or hold harmless the
holders of any such shares, other than the Selling Stockholders or any
underwriter designated by such holders; or to obtain a commitment from an
underwriter relative to the sale of any such shares.
We will assume no obligation or responsibility whatsoever to determine a method
of disposition for such shares or to otherwise include such shares within the
confines of any registered offering other than the registration statement of
which this prospectus is a part.
We will use our best efforts to file, during any period during which we are
required to do so one or more post-effective amendments to the registration
statement of which this prospectus is a part to describe any material
information with respect to the plan of distribution not previously disclosed in
this prospectus or any material change to such information in this prospectus.
This obligation may include, to the extent required under the Securities Act of
1933, that a supplemental prospectus be filed, disclosing: the name of any
broker-dealers; the number of common shares involved; the price at which the
common shares are to be sold; the commissions paid or discounts or concessions
allowed to broker-dealers, where applicable; that broker-dealers did not conduct
any investigation to verify the information set out or incorporated by reference
in this prospectus, as supplemented; and any other facts material to the
transaction.
LEGAL PROCEEDINGS
Our business involves substantial risks of liability, including exposure to
liability under federal and state securities laws in connection with claims by
dissatisfied clients for fraud, unauthorized trading, churning, mismanagement,
and breach of fiduciary duty, as well as in connection with the underwriting or
distribution of securities. In recent years, there has been an increasing
incidence of litigation involving the securities industry, including class
actions which generally seek rescission and substantial damages.
In the ordinary course of business, we are, and may become, a party to legal
proceedings or arbitration. Except as described below, we are not a party to any
material legal proceedings or arbitrations.
18
In Summer 2004, we learned that the Securities and Exchange Commission staff was
conducting a formal order investigation. While the exact scope of the SEC
investigation is uncertain, it appears that the Commission is investigating
trading activities that may have occurred on our premises. We, along with our
Vice Chairman, and the Chief Compliance Officer of our subsidiary, A.B. Watley
Direct, Inc., have been subpoenaed by the Commission in connection with the
investigation. We have produced documents. The Chief Compliance Officer of A.B.
Watley Direct, Inc. has produced documents and has provided testimony. It is
anticipated that the Vice Chairman and others will provide testimony in 2005. We
and our officers, directors and subsidiaries will continue to cooperate with the
Commission's investigation. At this time, we are unable to determine the outcome
of the investigation.
We are a defendant in an action titled Michael Fielman v. A.B. Watley, Inc. and
A.B. Watley Group Inc., that was filed in the Supreme Court of the State of New
York, County of Nassau, Index No. 012082/02. This is an action for unpaid wages
seeking $28,657, plus statutory damages, costs, and attorneys' fees. This matter
has been settled in the amount of $34,658 payable on an installment basis of
eight (8) months (a provision has been provided for in our consolidated
financial statements). We are in default of our settlement agreement.
We were a defendant in an action titled General Electric Capital Corp., as
Assignee of Sun Microsystems, Inc. v. A.B. Watley Group Inc. f/k/a Internet
Financial Services, Inc., Supreme Court of the State of New York, County of New
York, Index No. 117675/02. This was a breach of contract action in connection
with the lease of equipment, which sought compensatory damages of $195,356 plus
interest, costs and attorney's fees (a provision has been provided for in our
consolidated financial statements). In November 2004, we settled this matter for
$30,000, full payment of which has been made.
Our former legal counsel, has filed a complaint against us. The title of the
action is Hartman & Craven LLP v. A.B. Watley, Inc. and A.B. Watley Group Inc.,
which was filed in the Supreme Court of the State of New York, County of New
York, Index No.: 109502/03. Plaintiff has filed a Complaint against, amongst
others, A.B. Watley Group Inc. and A.B. Watley, Inc. for damages in the amount
of $352,574, plus accrued interest thereon, for unpaid legal fees (a provision
has been provided for in our consolidated financial statements). A.B. Watley
Group Inc. and A.B. Watley, Inc. deny liability, in part, and have asserted a
counterclaim for malpractice and breach of contract for unspecified damages. At
this point, it is difficult to determine the amount, if any, that A.B. Watley
Group Inc. and A.B. Watley Inc. will be held liable for. Plaintiff has filed a
motion for summary judgment, which has been fully submitted and briefed before
the Court. The Court granted the motion in part and denied the motion in part.
The parties are awaiting an executed judgment and are conducting pre-trial
discovery.
We are defendant in an action titled Hyperfeed Technologies, Inc. v. A.B. Watley
Group Inc., filed in the Supreme Court of the State of New York, County of New
York, Index No. 111538/03. Plaintiff has obtained a consent judgment order
against A.B. Watley Group Inc. in the amount of $180,503 (a provision has been
provided for in our consolidated financial statements). Currently, Plaintiff is
conducting post-judgment discovery.
19
We are respondent in an arbitration filed in or about July 2003 titled John W.
Donavan and Bettina H. Wolff v. A.B. Watley, Inc. Claimants are seeking damages
of approximately $94,800 relating to the suitability of Claimants' investments
(a provision has been provided for in our consolidated financial statements).
The Company denies all wrongdoing in connection with this matter asserting that
it acted in accordance with its customer agreement as well as applicable federal
securities law. The parties have settled this matter in its entirety.
We are respondent in an arbitration titled Steven Messina, Brian Kelly, and
Thomas Messina v. A.B. Watley, Inc., NASD Arbitration No. 02-04649. Claimants
filed this claim against A.B. Watley, Inc. in August 2002 seeking damages for
unpaid commissions of approximately $147,000 (a provision has been provided for
in our consolidated financial statements) plus legal fees and costs in the
amount of $4,025 for arbitration fees and disbursements. A.B. Watley, Inc.
denies all wrongdoing in connection with this matter, and has counterclaimed for
$608,000 against Claimants for breach of contract and fiduciary duty. A.B.
Watley, Inc. intends to vigorously defend this matter and prosecute its
counterclaim.
We are defendant in an action titled Pentech Financial Services, Inc. v. A.B.
Watley Group Inc., Supreme Court of the State of New York, County of New York,
Index No. 02-126759. Plaintiff has filed a complaint against A.B. Watley Group
Inc. for an alleged breach of a lease agreement. On May 28, 2003, Plaintiff
obtained a judgment in the amount of $465,584 plus interest accrued thereon (a
provision has been provided for in our consolidated financial statements). A.B.
Watley Group Inc. executed a settlement agreement with Plaintiff for a total
settlement of $522,584 payable on an installment basis. As of February 24, 2004
A.B. Watley Group Inc. is in default of the settlement agreement.
Our principal offices were formerly located at 40 Wall Street, New York, New
York at an annual cost of approximately $920,000 per year, plus escalations. Our
previous landlord, 40 Wall Street, LLC, commenced two separate landlord/tenant
proceedings seeking money judgments and orders of eviction against us. Both
proceedings have been settled whereby we vacated a portion of the premises in
March 2004 and the remaining portion in June 2004. We have signed a confession
of judgment for $609,441 (a provision has been provided for in our consolidated
financial statements) and the landlord is seeking a money judgment for all rent
arrears.
Our former landlord, W.B. Wood & Co. Inc. filed a Notice of Petition for
Non-Payment against us in the District Court of the County of Suffolk for
failure to pay amounts owed in connection with our lease of our Melville, New
York office space. We did not respond to the action and our former landlord
obtained a judgment against us in the amount of $17,019, which is presently owed
(a provision has been provided for in our consolidated financial statements).
We are defendant in an action titled Siemens Financial Services, Inc. f/k/a
Siemens Credit Corporation v. A.B. Watley Group Inc., Supreme Court of the State
of New York, County of New York, Index No. 603769/2002. Plaintiff filed a
complaint alleging breach of contract. Plaintiff has a judgment against A.B.
Watley Group Inc. in the amount of $179,883 with interest accrued thereon from
July 10, 2003 (a provision has been provided for in our consolidated financial
statements). Plaintiff is presently conducting post-judgment discovery.
20
We are respondent in an arbitration titled Jeffrey Spittel v. A.B. Watley, Inc.,
NASD Arbitration No. 03-08076. Claimant has submitted this claim to arbitration
claiming breach of contract, respondeat superior, and misappropriation and
conversion, in the amount of $7,500 plus punitive damages, costs, disbursements
and reasonable attorneys' fees. A.B. Watley, Inc. filed an answer on January 12,
2004. A hearing had been scheduled for November 23-24, 2004 in New York, but was
adjourned at the Claimants request. The NASD has not advised the parties of the
rescheduled hearing date. A.B. Watley, Inc. denies all wrongdoing in connection
with this matter and intends to vigorously defend this matter.
We are defendant in an action titled Peter Wigger v. A.B. Watley Group Inc.,
Supreme Court of the State of New York, County of New York, Index No. 604124/02.
Plaintiff filed a complaint alleging breach of a commission agreement and unpaid
wages due and owing. Plaintiff seeks damages in the amount of $398,750 plus
interest accrued thereon. Plaintiff has filed a motion for summary judgment on
his claims. On or about April 23, 2004, the parties reached a settlement, which
contemplates a total payment of $174,000 to Plaintiff over the course of two (2)
years (a provision has been provided for in our consolidated financial
statements). We have paid $42,000 of this amount. However, the parties are
litigating whether we are in default of the settlement agreement.
We are defendant in an action titled Lehr Construction Corp. v. A.B. Watley
Group Inc., Supreme Court of New York, County of New York, Index No. 600276/02.
This action is for damages arising out of the alleged breach of a construction
contract. Plaintiff sought damages of approximately $233,794. On March 6, 2003,
the parties reached a settlement in which we consented to a judgment in the
amount of $295,857, less any payments made by us, and the parties simultaneously
entered into a Forbearance Agreement, which set forth a payment schedule for us.
We have paid $65,000 pursuant to the Forbearance Agreement. On December 17,
2003, Plaintiff issued us a Notice of Default under the Forbearance Agreement,
which we have failed to cure. Under the Forbearance Agreement, Plaintiff may
execute on the outstanding balance of the judgment in the amount of $158,794
without further notice to us (a provision has been provided for in our
consolidated financial statements). Plaintiff has made efforts to seek
information to collect upon the judgment.
We were the defendant in an action titled A.B. Watley Group Inc./John Martinez,
Case No. 2-4173-03-36 Section 806 Sarbanes-Oxley Act Complaint. On July 11,
2003, the U.S. Department of Labor ("DOL") gave us notice that John Martinez, a
former officer of ours, had filed a complaint against us under Section 806 of
the Sarbanes-Oxley Act of 2002 (the "Act"). On March 9, 2004, the Department of
Labor gave notice that it had completed its investigation and dismissed the
complaint. Complainant appealed. This matter was settled for $20,000, full
payment of which has been made.
We were the respondent in an arbitration titled MCI Worldcom Communications,
Inc. v. A.B. Watley Group Inc., JAMS Arbitration, Reference # 1410003356. On
September 16, 2003, claimant filed this arbitration against us asserting a
breach of contract claim in the amount of $135,644. On January 26, 2004, we
submitted our answer denying all material allegations and asserting several
affirmative defenses. On March 22, 2004, the Arbitrator held a Preliminary
Conference and issued a Preliminary Hearing Order directing the parties to
submit a brief addressing the arbitrability of one of Claimant's claims and our
statute of limitations defense. On April 28, 2004, JAMS informed the parties the
Arbitrator had resigned due to illness. A new Arbitrator was assigned to the
matter, but we objected to the Arbitrator appointment. This matter was settled
for $30,000, full payment of which has been made (a provision has been provided
for in our consolidated financial statements).
21
In March 2003, the holder of our $5 million secured demand note (the
"Noteholder") demanded repayment of the note. On March 31, 2003, we filed a NASD
Arbitration Demand and a Statement of Claim with the NASD Dispute Resolution
office. The arbitration sought to enforce the provisions of the secured demand
note agreement and to prevent premature withdrawal by the lender. In April 2004,
the parties agreed to discontinue the arbitration without prejudice pursuant to
a settlement agreement that provided for the repayment of approximately $2.9
million (which was repaid in April 2004) of the $5 million original secured
demand note. The remaining principal balance payable at September 30, 2004, as
set forth in our consolidated financial statements, is $2,441,260. The
Noteholder agreed that as long as we were not in default of any of our
obligations under the settlement agreement, not to commence any litigation with
respect to the outstanding balance due on the secured demand note prior to
December 20, 2004. On June 4, 2004 the Noteholder sent us a notice of default
alleging that we did not meet certain of our obligations under the terms of the
settlement agreement. On June 2004, the note matured and we have not paid the
remaining balance or received an extension of the maturity date.
We are plaintiff in an action titled A.B. Watley Group Inc. v. John J. Amore, et
al., Supreme Court of the State of New York, County of New York, Index No.
602993/03. We have sued our former CEO who has filed a counterclaim against us.
We are unable at this time to provide a opinion as to the likely outcome, nor
the potential expense to be incurred.
We are defendant in an action titled John J. Amore v. Steven Malin and A.B.
Watley, Inc., Supreme Court of the State of New York, County of New York, Index
No. 603833/03. Plaintiff filed a complaint alleging breach of a contract against
A.B. Watley, Inc. seeking damages in the amount of $500,000 and slander against
Steven Malin, our Chairman, seeking damages in the amount of $5,000,000. We have
filed an answer denying all wrongdoing. We deny all wrongdoing in connection
with this matter and intend to vigorously defend this matter.
We were the respondent in an arbitration titled William Frymer v. A.B. Watley,
Inc., NASD Arbitration No. 03-05524. The claimant, a former employee of ours
commenced this arbitration claiming breach of contract and violation of New York
labor laws. The Claimant sought unpaid salary and bonus, stock options,
liquidated damages and punitive damages. The Parties agreed to a settlement of
$75,000, which has been provided for in our consolidated financial statements
and subsequently paid in full.
On December 9, 2004, A.B. Watley, Inc. was notified of an award rendered by an
NASD arbitration panel against A.B. Watley, Inc. for compensatory damages in the
amount of $811,927 (a provision has been provided for in our consolidated
financial statements) to claimant, James B. Fellus, in the case encaptioned
James B. Fellus vs. A.B. Watley, Inc. (NASD Arbitration No.: 03-05526). All
other relief sought by claimant (including an award against A.B. Watley Direct,
Inc. and/or A.B. Watley Group, Inc., and for attorneys fees and punitive
damages) was expressly denied. The arbitration involved claims by a former
employee of A.B. Watley, Inc. for alleged breach of contract (all other claims
having been withdrawn by the former employee). The amount awarded presumably
represented damages for alleged non-payment of contractual salary. A.B. Watley,
Inc. intends to move to vacate the award by asserting, among other things, that
the panel manifestly disregarded the undisputed facts and applicable,
well-settled law.
22
We are the respondent in an action titled Dover Limited et al v. A.B. Watley,
Inc. et al., Index No.: 04 Civ. 7366. Plaintiffs filed this complaint against,
among others, us, our president, and two employees alleging six causes of action
sounding in securities fraud, common law fraud, conspiracy to commit fraud,
breach of contract and breach of implied covenant of good faith and fair
dealing, and negligent misrepresentation. Plaintiffs are seeking compensatory
damages of $2,994,598 plus punitive damages of $5,000,000, including costs,
interest and attorney's fees. We deny all wrongdoing in connection with this
matter and intend to vigorously defend this matter.
In addition to the foregoing, in the ordinary course of business, we and our
principals are, and may become, a party to legal or regulatory proceedings
commenced by the NASD, the SEC or state securities regulators relating to
compliance, trading and administrative problems that are detected during
periodic audits and inspections or reported by dissatisfied customers. Such
matters, if pursued by such entities, could rise to the level of disciplinary
action. Except as set forth in this Prospectus, we are not currently involved in
any proceeding by a governmental agency or self-regulatory organization, the
outcome of which could have a material adverse effect on our business. There can
be no assurance that one or more disciplinary actions, if decided adversely us,
would not have a material adverse effect on our business, financial condition
and results of operations.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors serve until the next annual meeting of the stockholders; until their
successors are elected or appointed and qualified, or until their prior
resignation or removal. Officers serve for such terms as determined by our board
of directors. Each officer holds office until such officer's successor is
elected or appointed and qualified or until such officer's earlier resignation
or removal. Steven Malin and Robert Malin, our Chairman and Vice Chairman
respectively, are brothers.
The following table sets forth certain information, as of January 17, 2005 with
respect to our directors and executive officers.
23
Date of Election
or Appointment
Name Positions Held Age as Director
- ---- -------------- --- ---------------
Steven Malin Chairman of Board 46 May 1996
Robert Malin President, Vice Chairman of Board 39 May 1996
The following is a brief account of the business experience of each of our
directors and executive officers during the past five years or more.
Steven Malin co-founded the Company in May 1996 and has been our Chairman of the
Board since inception. Mr. Malin also served as Chief Executive Officer from May
1996 to September 2002. From August 1993 to December 1996, Mr. Malin served as a
consultant to the Company. From 1987 to 1993, he was a Senior Foreign Exchange
Options Broker for Tullett and Tokyo Forex, Inc., a global inter-bank money
brokering firm with its primary offices located in London, New York and Tokyo.
Mr. Malin attended the Fletcher School of Law and Diplomacy from 1982 to 1984.
He received a bachelor of arts degree from Vassar College in 1980.
Robert Malin is a co-founder of the Company and has served as a director since
inception. He has been associated with the Company since August 1993, initially
as General Securities Principal and director of day-to-day operations and, most
recently, serving as President. His earlier experience includes managing equity
trading, client services and brokerage operations.
BOARD OF DIRECTORS
Our Board of Directors may designate from among its members an executive
committee and one or more other committees. No such committees have been
appointed to date. Accordingly, we do not have an audit committee financial
expert.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total compensation
paid or accrued by us during the three fiscal years ended September 30, 2004 to
(i) all individuals that served as our chief executive officer or acted in a
similar capacity for us at any time during the fiscal year ended September 30,
2004 and (ii) all individuals that served as executive officers of ours at any
time during the fiscal year ended September 30, 2004 that received annual
compensation during the fiscal year ended September 30, 2004 in excess of
$100,000.
24
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION AWARDS
------------------- ------
LONG TERM COMPENSATION
----------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND COMPENSATION AWARDS OPTIONS/
PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) ($) ($) SARS (#)
- ------------------- ---- ---------- --- --- --- --------
Steven Malin, 2004 150,000 0 0 0 1,300,000(1)
Chairman 2003 150,000 0 0 0 0
2002 17,212 0 0 0 800,000
Robert Malin, 2004 201,461(2) 0 0 0 1,300,000
Vice Chairman, President 2003 198,539(2) 0 0 0 0
and Director 2002 88,846 0 0 0 1,300,000
Gary Mednick, 2004 250,000 0 0 0 0
President 2003 250,000 0 0 0 0
A.B. Watley Direct, Inc. 2002 250,000 50,000 0 0 25,000
SUMMARY COMPENSATION TABLE
PAYOUTS
LTIP ALL OTHER
NAME AND PAYOUTS COMPEN-
PRINCIPAL POSITIONS ($) SATION ($
- ------------------- --- ---------
Steven Malin, 0 0
Chairman 0 0
0 0
Robert Malin, 0 0
Vice Chairman, President 0 0
and Director 0 0
Gary Mednick, 0 0
President 0 0
A.B. Watley Direct, Inc. 0 0
(1) Represents options issued to the wife of Steven Malin.
(2) $118,128 and $26,459 of this amount for the years ended September 30, 2004
and 2003, respectively, was received in the capacity of a consultant.
Under the consulting agreement Mr. Malin provided general managerial and
business development services. The agreement had no term and was
cancelable by the Company at any time. All amounts paid to Mr. Malin under
the consulting agreement were deducted from the amount due under his
employment agreement so he may not receive total compensation in excess in
of that provided for in his employment agreement.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning options granted to executive
officers named in the Summary Compensation Table during the fiscal year ended
September 30, 2004:
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE
NAME (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
Steven Malin 1,300,000 23.7% $.20 July 29, 2014
Robert Malin 1,300,000 23.7% $.20 July 29, 2014
Gary Mednick 0 N/A N/A N/A
25
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
Number of Securities
Underlying Value of Unexercised
Shares Unexercised In-the-Money
Acquired Options/SARs Options/SARs
On Value at Fiscal Year End (#) at Fiscal Year End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- ---------------------- --------- -------- --------------- -------------
Steven Malin N/A N/A 933,333/1,166,667 30,000/18,000
Robert Malin N/A N/A 1,463,333/1,166,667 60,000/18,000
Gary Mednick N/A N/A 25,000/0 N/A
LONG TERM INCENTIVE PLAN AWARDS
We made no long-term incentive plan awards to the named executive officers
during the fiscal year ended September 30, 2004.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
On September 9, 2002, we entered into three-year employment agreements with
Steven Malin and Robert Malin, both of which are automatically renewable for
additional one-year terms. The employment agreements provide for annual base
compensation of $150,000 for Steven Malin and $200,000 for Robert Malin. Each
agreement provides for a discretionary bonus based upon performance, payable
semi-annually, as may be approved by our board of directors or a committee of
the board.
Each of the employment agreements requires the officer to devote his full time
and efforts to our business and contains non-competition and non-disclosure
covenants of the officer for the term of his employment and for a period of two
years thereafter. Each employment agreement provides that we may terminate the
agreement for cause. In addition, each employment agreement provides for
termination by either party without cause upon at least 180 days written notice
prior to the end of the original term or any renewal term. In the event that
either Steven Malin or Robert Malin terminate their employment agreement for
good reason or we terminate the employment agreement without cause, then the
applicable officer is entitled to the following:
o annual base salary accrued and a prorated annual bonus prior to the
date of termination;
o annual base salary multiplied by the greater of two (2) (the
"Applicable Factor") or the number of years remaining in the
employee's employment agreement;
o annual bonus multiplied by the greater of Applicable Factor or the
number of years remaining in the employee's employment agreement;
o continuing health benefits; and
o all outstanding options and other equity shall vest and become
immediately exercisable.
26
In the event that Steven Malin or Robert Malin is terminated within six (6)
months of a change of control within the Company, then the Applicable Factor
shall be three (3).
On October 1, 2001 we entered into an employment agreement with Gary Mednick
pursuant to which Mr. Mednick agreed to serve as our Executive Vice
President-Business Development. The agreement provided for a base annual salary
of $250,000, guaranteed bonus payments of $50,000, and stock options, the amount
of which was to be determined based upon Company revenues during the employment
period. The employment agreement expired on September 30, 2003. On October 1,
2003, we entered into a month to month verbal employment agreement with Mr.
Mednick whereunder we pay Mr. Mednick an annual salary of $250,000. Since
February 2004, Mr. Mednick has served as the president of A.B. Watley Direct
Inc.
DIRECTORS' COMPENSATION
All directors are reimbursed for their reasonable expenses incurred in attending
meetings of the board of directors and its committees. Directors who are
employees receive no additional compensation for service as members of the board
of directors or committees. Non-employee directors are compensated annually for
their services at $1,000 and granted non-qualified options to acquire 1,500
shares of our common stock at the end of each year of service.
REPORT ON REPRICING OF OPTIONS/SARS
During the fiscal year ended September 30, 2004 we did not adjust or amend
the exercise price of any stock options or SARs issued to the named executives.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
our common stock as of January 17, 2005. The information in this table provides
the ownership information for:
o each person known by us to be the beneficial owner of more than 5%
of our common stock;
o each of our directors;
o each of our executive officers; and
o our executive officers, directors and director nominees as a group.
The percentages in the table have been calculated on the basis of treating as
outstanding for a particular person, all shares of our common stock outstanding
on such date and all shares of our common stock issuable to such holder in the
event of exercise of outstanding options, warrants, rights or conversion
privileges owned by such person at said date which are exercisable within 60
days of such date. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all shares of our common stock
owned by them, except to the extent such power may be shared with a spouse.
27
- ---------------------------------------------------------------------------------------------------------------
Name of Beneficial Number of Shares Percentage
Owner Title of Class Beneficially Owned Outstanding(1)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Steven Malin Common Stock, $.001 par value 3,783,702(2)(3) 17.7%
- ---------------------------------------------------------------------------------------------------------------
Penson Financial Services Common Stock, $.001 par value 3,041,890(4) 13.2%
Inc.
- ---------------------------------------------------------------------------------------------------------------
Penson Worldwide Inc. Common Stock, $.001 par value 3,041,890(4) 13.2%
- ---------------------------------------------------------------------------------------------------------------
Onsite Trading Inc. Common Stock, $.001 par value 1,700,000 8.3%
Liquidating Trust
- ---------------------------------------------------------------------------------------------------------------
Robert Malin Common Stock, $.001 par value 3,370,933(2)(5) 14.1%
- ---------------------------------------------------------------------------------------------------------------
Eric Steinberg Common Stock, $.001 par value 1,586,815(6) 6.7%
- ---------------------------------------------------------------------------------------------------------------
Gary Mednick Common Stock, $.001 par value 2,158,000(7) 9.4%
- ---------------------------------------------------------------------------------------------------------------
Linda Malin Common Stock, $.001 par value 2,207,400(2)(8) 9.4%
- ---------------------------------------------------------------------------------------------------------------
Kentan Ltd. Common Stock, $.001 par value 2,500,000 11.1%
- ---------------------------------------------------------------------------------------------------------------
Yanzu Inc. Common Stock, $.001 par value 2,500,000 11.1%
- ---------------------------------------------------------------------------------------------------------------
Highgate House Funds, Ltd. Common Stock, $.001 par value 2,140,909(9) 9.5%
- ---------------------------------------------------------------------------------------------------------------
Michael H. Ference Common Stock, $.001 par value 1,275,000(10) 5.7%
- ---------------------------------------------------------------------------------------------------------------
Richard A. Friedman Common Stock, $.001 par value 1,275,000(10) 5.7%
- ---------------------------------------------------------------------------------------------------------------
All Executive Officers and Common Stock, $.001 par value 7,158,635(2)(3)(5) 30.2%
Directors as a Group (2
persons)
- ---------------------------------------------------------------------------------------------------------------
28
(1) The percentages computed in this column of the table are based upon
22,512,138 shares of common stock issued and outstanding on January 17,
2005 plus the number of securities that can be acquired by the named
person or persons within 60 days from January 17, 2005 upon the exercise
of options, warrants, or convertible securities.
(2) The number of shares beneficially owned by Steven, Linda and Robert Malin
include shares held in irrevocable family and charitable trusts for which
they are trustees. In addition, the number of shares held by Robert Malin
and Steven Malin includes shares held by a family partnership for which
Robert Malin and Steven Malin are general partners.
(3) The number of shares beneficially owned by Steven Malin includes 933,333
shares of common stock issuable upon exercise of options, including
433,333 options owned by his wife, but does not include 1,166,667 shares
of common stock issuable upon exercise of options including 866,667
options owned by his wife which are not exercisable within the next 60
days.
(4) The number of shares beneficially owned by Penson Financial Services, Inc.
and Penson Worldwide, Inc. are aggregated since such entities are
affiliates and includes 2,682,798 shares of common stock issuable upon the
exercise of currently exercisable warrants owned by Penson Worldwide Inc.
(5) The number of shares beneficially owned by Robert Malin includes 1,433,333
shares of common stock issuable upon exercise of presently exercisable
options but does not include 1,166,667 shares of common stock issuable
upon exercise of options which are not exercisable within the next 60
days.
(6) The number of shares beneficially owned by Eric Steinberg includes
1,100,415 shares issuable upon exercise of outstanding warrants.
29
(7) The number of shares beneficially owned by Gary Mednick includes 458,333
shares issuable upon exercise of presently exercisable stock options, and
1,700,000 shares owned by Onsite Trading Inc. Liquidating Trust an entity
in which he is an affiliate, but does not include 866,667 shares of common
stock issuable upon exercise of options which are not exercisable within
the next 60 days.
(8) The number of shares beneficially owned by Linda Malin includes 857,772
shares of common stock issuable upon exercise of outstanding warrants.
(9) Excludes 100,000 shares owned by Jackson Steinem, Inc. an affiliated
entity. Excludes 4,400,158 shares underlying warrants not exercisable
within the next 60 days.
(10) Includes 1,000,000 shares owned by Sichenzia Ross Friedman Ference LLP, a
partnership in which the shareholder is a partner.
The address of all of the foregoing parties is c/o our company at 90 Park
Avenue, New York, NY 10016 except for On-Site Trading Inc. Liquidating Trust,
Inc. whose address is c/o Robinson Brog, 1345 Avenue of Americas, New York, NY
10105, Michael H. Ference and Richard A. Friedman, each with an address at 1065
Avenue of the Americas, New York, NY 10018 and Highgate House Funds, Ltd. whose
address is Walker House, Mary Street, P.O. Box 908, Georgetown, Grand Cayman,
Cayman Islands.
CHANGES IN CONTROL
Not Applicable.
DESCRIPTION OF SECURITIES
Our authorized capital consists of fifty one million (51,000,000) shares of,
which fifty million (50,000,000) shares are designated as common stock, par
value $.001 per share and one million (1,000,000) shares are designated as
preferred stock, par value $.0001 per share. 690 shares of the authorized
preferred shares have been designated as Series A Preferred Stock. As of January
17, 2005 we had 22,512,138 shares of common stock and no shares of preferred
stock issued and outstanding.
COMMON STOCK.
Each holder of our common stock is entitled to one vote for each share owned of
record on all matters voted upon by our shareholders. In the event of a
dissolution of our company, the holders of our common stock are entitled to
share equally and ratably in our assets, if any, remaining after the payment of
all of our debts and liabilities with each other and with the holders of our
Preferred Stock, if any.
Our common stock has no cumulative voting rights, and no redemption, sinking
fund, or conversion privileges. Since the holders of our common stock do not
have cumulative voting rights, holders of more that 50% of our total outstanding
common can elect all of our directors, and holders of the remaining shares, by
themselves, cannot elect any of our directors. Holders of our common stock are
entitled to receive dividends if, as, and when declared by our board of
directors out of funds legally available for such purpose.
30
Our common stock is presently listed on the Over-the-Counter Bulletin Board
under the symbol ABWG.
PREFERRED STOCK
The shares of preferred stock are undesignated preferred stock and may be issued
from time to time in one or more series pursuant to a resolution or resolutions
providing for such issuance and duly adopted by our board of directors. Our
board of directors is further authorized to determine or alter the rights,
preferences, privileges, qualifications, limitations, and restrictions granted
to or imposed upon any wholly unissued series of preferred stock and to fix the
number of shares of any series of preferred stock and the designation of any
such series of preferred stock. Our board of directors, within the limits and
restrictions stated in any resolution or resolutions of the board of directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares in any such series then
outstanding) the number of shares of any series subsequent to the issuance of
shares of that series.
COMMON STOCK PURCHASE WARRANTS
As at January 17, 2005 we had an aggregate of 10,347,178 common stock purchase
warrants issued and outstanding, each exercisable for the purchase of one share
of our common stock. All but 4,400,158 of the warrants are presently
exercisable. The warrants have exercise prices ranging from $0 to $3.69 per
share and have various expiration dates that extend through June 2, 2011. The
average exercise price for the outstanding warrants is $.26 per share.
STOCK OPTIONS
As at January 17, 2005 we had an aggregate of 8,835,250 stock options issued and
outstanding. 4,651,917 of which were fully vested. Each option is exercisable,
upon vesting, for the purchase of one share of our common stock.
The options have exercise prices ranging from $.10 to $17.50 per share and have
various expiration dates that extend through January 12, 2015. The average
exercise price for the outstanding options is $.23 per share.
DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
Section 203 of the Delaware General Corporation Law ("DGCL") prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person become an interested stockholder unless:
o prior to the date of the business combination, the transaction is
approved by the board of directors of the corporation;
31
o upon consummation of the transaction which resulted in a stockholder
becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock, or
o on or after such date the business combination is approved by the
board of directors and by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own), 15% or more of the corporation's voting stock.
The restrictions of Section 203 do not apply, among other things, if a
corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or by-laws expressly electing not to be governed by
Section 203, provided that, in addition to any other vote required by law, such
amendment to the certificate of incorporation or by-laws must be approved by the
affirmative vote of a majority of the shares entitled to vote. Moreover, an
amendment so adopted is not effective until twelve months after its adoption and
does not apply to any such corporation on or prior to such adoption. Our
Certificate of Incorporation and By-laws do not currently contain any provision
election not to be governed by Section 203 of the DGCL. The provisions of
Section 203 of the DGCL may have a depressive effect on the market price of our
common stock because they could impede any merger, consolidating takeover or
other business combination involving or discourage a potential acquirer from
making a tender off or otherwise attempting to obtain control of us.
Under our By-laws, any vacancy on our board of directors, including a vacancy
resulting from an enlargement of our board of directors, may be filled by vote
of a majority of the directors then in office, making it more difficult for a
third party to acquire, or discourage a third party from acquiring, control of
us.
Our Certificate of Incorporation and By-Laws contain provisions permitted under
the DGCL statute relating to the limitation of liability of directors. These
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, except in circumstances involving wrongful acts, such as the
breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. Further, our Certificate
of Incorporation contains provisions to indemnify our directors and officers to
the fullest extent permitted by the DGCL statute. We believe that these
provisions will assist us in attracting and retaining qualified individuals to
serve as our directors.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is our transfer agent and the registrar
for our common stock. Its telephone number is (718) 921-8360.
32
SHARES ELIGIBLE FOR FUTURE SALE
We presently have issued and outstanding 22,512,138 shares of our common stock,
options to purchase 8,835,250 shares of our common stock at an average exercise
price of $.23 per share, and warrants to purchase 10,347,128 shares of our
common stock at an average exercise price of $.26 per share. With the exception
of shares held by affiliates which may be subject to resale limitations, most of
our issued and outstanding shares of common stock are eligible to be sold at any
time. Market sales of large amounts of our common stock, or the potential for
those sales even if they do not actually occur, may have the effect of
depressing the market price of our common stock. In addition, if our future
financing needs require us to issue additional shares of common stock or
securities convertible into common stock, the supply of common stock available
for resale could be increased which could stimulate trading activity and cause
the market price of our common stock to drop, even if our business is doing
well.
EXPERTS
The financial statements included in this prospectus and in the registration
statement have been audited by Marcum & Kliegman LLP, Independent Registered
Public Accounting Firm, to the extent and for the period set forth in their
report appearing elsewhere herein and in the registration statement, and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Gottbetter & Partners, LLP, 488 Madison Avenue, 12th Floor, New York, New York
10022.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our articles of incorporation limit the liability of directors to the maximum
extent permitted by law. Our bylaws provide that we shall indemnify our officers
and directors to the fullest extent provided by law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the Act) may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by the Selling
Stockholders being offered pursuant to this prospectus, nor will any of the
proceeds be available for our use or otherwise for our benefit. All proceeds
from the sale of the shares will be for the accounts of the Selling
Stockholders.
33
We will however, receive the exercise price of the options and warrants
overlying certain of the shares to be offered and sold by the Selling
Stockholders if, and when any are exercised by Selling Stockholders. Assuming
exercise of all the Selling Stockholders' stock options and warrants overlying
shares being offered pursuant to this prospectus, the gross proceeds to us would
be approximately $4,684,194. We intend to use any proceeds from the exercise of
options and warrants for working capital and general corporate purposes.
DESCRIPTION OF BUSINESS
General
We are a publicly-held financial services holding company incorporated in the
state of Delaware on May 15, 1996. We presently conduct our business activities
primarily through our subsidiary A.B. Watley Direct, Inc. ("Direct"). Direct is
a U.S. registered broker-dealer that engages in direct-access and web-based
online trading for retail customers. Direct also provides execution services for
institutional customers. A former operating subsidiary, A.B. Watley, Inc., also
a U.S. registered broker-dealer, ceased operations in January 2004. In February
2004, A.B. Watley, Inc. withdrew its registration as a broker-dealer. Another
former operating subsidiary, A.B. Watley Futures, Inc., an introducing
broker-dealer registered with the National Futures Association which conducted
futures trading activity for customers, was sold by us on June 30, 2004.
As of January 17, 2005, Direct had approximately 3,300 customers. We have
historically devoted significant resources to the development of proprietary
software. However, in July 2002, our business activities were reorganized and we
sold our software programs know as Ultimate Trader and Watley Trader, including
all related intellectual property rights, to a subsidiary of one of our clearing
brokers. We no longer consider software licensing to be a core revenue source.
The sale of the software programs provided us with working capital and reduced
our expense base. Pursuant to the terms of the sale, we maintain a perpetual,
non-exclusive license to use and sublicense the software.
To respond to our liquidity and capital resource needs, we have instituted
various cost cutting initiatives and raised additional capital. Our cost cutting
initiatives include reductions in workforce, reductions in capital expenditures
and renegotiation of clearing corporation agreements at more favorable rates.
On-Site Acquisition
On October 1, 2001, we acquired the customer lists and certain other assets of
On-Site Trading, Inc. ("On-Site") and assumed up to $1.8 million in liabilities.
This acquisition included On-Site's client base including 1,700 accounts
representing client assets (account balances and securities) of $84 million,
On-Site Trading LLC (the "LLC"), two branches owned by On-Site, and agreements
with 12 non-business branch locations. LLC, a broker-dealer subsidiary (the
proprietary trading business) was subsequently renamed ABW Trading, LLC. We
acquired these assets for 1.875 million shares of our common stock. In
connection with the acquisition of On-Site, we also assumed up to $1.8 million
in liabilities of On-Site owed to the Class B Members of the LLC. We reclaimed
175,000 shares of common stock in connection with the On-Site acquisition and
assumed additional obligations of $1,050,000 in excess of the $1,800,000 that we
had originally agreed to assume.
34
The LLC was formed as a means for registered professionals to engage in
proprietary trading utilizing the LLC's funds. Such registered professionals
were Class B members of the LLC, while we were the Class A member. The LLC was a
registered broker-dealer and a member of the Philadelphia Stock Exchange,
operated in 12 states and engaged exclusively in proprietary trading and did not
conduct business with the public. An initial capital contribution was required
to become a Class B member. On May 9, 2002, we notified the Class B members that
we had elected to cease the proprietary trading business as a result of
declining revenues. We continued to operate the On-Site retail business, however
the customer base had deteriorated significantly since the acquisition and
revenues from operations had declined. Management believes that the
deterioration was attributable to many factors including weakening market
conditions, as well as the loss and closing of branch operations. On June 18,
2002, the LLC withdrew its broker dealer registration and ceased trading
activities.
Online Brokerage Services
Our industry has experienced a series of changes led by electronic and online
commerce. These changes have created significant market opportunities for us
along with other similar brokerage firms. Favorable market trends have resulted
from the following:
o growing market acceptance of online brokerage services;
o pronounced market segmentation;
o a complementary regulatory environment; and
o disparity in the scalability and quality of competing trading
technologies.
Historically, individual investors accessed the financial markets through
full-commission brokers, who offered investment advice and placed trades. With
deregulation of brokerage commissions in 1975 and the resulting unbundling of
brokerage services, investors began to realize that they could separate
financial advisory services from securities trading. This brought about the
advent and subsequent proliferation of discount brokerage firms, which provided
an alternative investment approach by completing trades at a reduced cost.
The emergence of electronic brokerage services has provided investors with
further access to unbundled services and costs typically charged by
full-commission and traditional discount brokerage firms. Further, while
full-commission and discount brokerage firms are able to offer electronic
trading services, their continued reliance on personnel, branch offices and
associated infrastructure prevents them from capturing the same operating
efficiencies that are achievable by electronic trading.
We conduct our brokerage activities through a global communications network and
sophisticated computerized information systems over which we receive and
transmit current market information.
35
Our services are delivered to our customers through Ultimate Trader, a client
server direct access software application and Watley Trader, a web-based
direct-access platform. Benefits of the products for the retail market include:
o Direct Access to Exchanges & ECNs Allows investors to execute
independently of third party
market makers for more efficient
executions. Provides ability to
act as "market maker" on par with
institutional traders.
o Order Routing Discretion Enables investors to actively
determine venue for order
execution among variety of
alternatives (Island, Instinet,
other ECNs, NASDAQ, specific
market makers, NYSE DOT, our
Company block trade desk).
Provides critical added ability
to trade at the best price.
o NASDAQ Level II Data Enables access to complete range
of bid/ask, volume and market
depth for variety of execution
markets.
o Realtime Data Analytics Provides best available retail
package of real time, streaming
market data, charts and technical
analysis. This suite of content
includes intra-day charting, a
variety of analytical studies
(e.g., RSI, moving averages,
MACD), time and sales, option
quote chains, regional exchange
quotes and news.
o High Utilization Capacity Affords access to technology
platform by entire client base on
simultaneous basis. Critical
given consistent high level of
concurrent utilization and spikes
in utilization due to highly
volatile market movements and
shifts in market liquidity.
Client Services
Client services for all levels of our online services, including trading,
administrative, and technical support, are among our highest priorities. Based
on our experience in the industry and based on client feedback, providing an
effective client service team to handle client needs is critical to our success.
Our client service department helps clients get online, handles product and
services inquiries and addresses all brokerage and technical questions. The
client service department also conducts various surveys to verify the
satisfaction of our clients and to learn more about client preferences and
requirements.
36
We provide live client support from Monday through Friday between the hours of
7:00 AM and 6:30 PM EST. Our client services department operates on a one-stop
shopping basis, meaning that clients do not typically have to be transferred
between departments to receive answers to their various inquiries. All of our
Client Service personnel are registered representatives and are available to
accept and execute client orders, research past trades, discuss account
information, and provide detailed technical support. A separate technical
support team helps clients with potentially serious or persistent technical
issues.
Account Security
We use a combination of proprietary and industry standard security measures to
protect our clients` assets. Clients are assigned unique account numbers, user
identifications and passwords that must be used each time they log on to the
system. In accordance with standard industry practices, telephone orders require
authentication via personal identification number/password and/or other personal
information. In addition, the trade processing system we use is designed to
compare our accounts database with the clearing firm's account information on a
daily basis to detect any discrepancies.
We rely on encryption and authentication technology, including public key
cryptography technology licensed from other parties, to provide the security and
authentication necessary to effect the secure exchange of information.
Proprietary Trading
Prior to February 2004, we took proprietary positions through the trading of
U.S. equities in an attempt to realize gains. Our proprietary trading activities
required the commitment of capital and created an opportunity for profits and
risk of loss due to trading strategies and market fluctuations. We ceased all
proprietary trading activity in January 2004.
Institutional Sales
Our institutional sales and trading desk specializes in facilitating and
executing large-block transactions in equity securities and servicing
institutional clients. These services are provided to clients who often require
that their purchases or sales of large positions remain anonymous, with average
trades ranging in the 10,000 to 100,000 share size. We match institutional
buyers and sellers to minimize the impact on the market and to prevent our
client's positions from being disclosed to competing firms. Our institutional
sales clients primarily include hedge funds, corporations and independent funds.
Operations, Clearing and Order Processing
37
We do not hold client funds or securities, nor do we generally execute and
directly process either our own or our clients` securities transactions. Since
October 1996, we have cleared all transactions for retail clients, on a fully
disclosed basis, with Penson Financial Services, Inc. ("Penson"). Institutional
accounts are cleared through Sterne Agee Capital Markets, Inc. ("Sterne")
Our agreements with such clearing brokers provide that the clearing brokers
process all securities transactions for our account and the accounts of our
clients for a fee. Services of the clearing brokers include billing and credit
control and receipt, custody and delivery of securities, for which we pay a per
ticket charge. We have agreed to indemnify our clearing brokers for losses they
may sustain from customer accounts introduced by us, which could be material in
amount. Our clearing agreements may be terminated by either party, upon 60 days
written notice for Penson, and 120 days written notice for Sterne. We depend on
the operational capacity and the ability of the clearing brokers for the orderly
processing of transactions. As a result of engaging the processing services of
clearing brokers, we are exempt from certain reserve requirements imposed by
federal securities laws.
Clients' securities transactions are effected on either a cash or margin basis.
In connection with margin transactions, credit is extended by the clearing
broker to a client, collateralized by securities and cash in the client's
account, for a portion of the purchase price. The client is charged interest by
the clearing broker for margin financing. We receive a portion of such interest
from the clearing brokers.
Margin lending is subject to the margin rules of the Board of Governors of the
Federal Reserve System. Margin lending subjects us to the risk of a market
decline that would reduce the value of the collateral below the client's
indebtedness before the collateral can be sold. Under applicable rules, in the
event of a decline in the market value of the securities in a margin account,
the client is required to deposit additional securities or cash in the account.
Marketing and Advertising
In connection with our cost-cutting initiatives, we have significantly reduced
our marketing and advertising expenditures.
Competition
The market for electronic brokerage services is highly competitive and rapidly
changing. We believe that we compete on the basis of speed of order execution,
processing and confirmation, quality of client service, ease of use, amount and
timeliness of information provided, price and reliability of the trading systems
which we utilize. Our competitors may have greater financial, technical and
marketing resources than us. We expect that our ability to compete will be
affected by our ability to introduce new services and enhancements to existing
services into the market on a timely basis.
We believe our competition consists of large and small brokerage firms utilizing
the Internet to transact retail brokerage business. Among these competitors are
E*TRADE Securities LLC.; Charles Schwab & Co., Inc.; TD Waterhouse Investor
Services, Inc.; Fidelity Brokerage Services LLC; and Ameritrade, Inc. We also
face competition for clients from full commission brokerage firms.
38
Securities Regulation
Direct is a broker-dealer registered with the Securities and Exchange Commission
("SEC") and National Association of Securities Dealers ("NASD") and licensed in
the states in which it does business. Direct is licensed in forty-seven (47)
states with approvals pending in Alabama, Nebraska and New Hampshire.
The securities industry in the United States is subject to extensive regulation
under federal and state laws. In addition, the SEC, NASD, other self-regulatory
organizations, such as the various stock exchanges, and other regulatory bodies,
such as state securities commissions, require strict compliance with their rules
and regulations. As a matter of public policy, regulatory bodies are charged
with safeguarding the integrity of the securities and other financial markets
and with protecting the interests of clients participating in those markets, and
not with protecting the interests of our stockholders.
Broker-dealers are subject to regulations covering all aspects of the securities
business, including sales methods, trade practices among broker-dealers, use and
safekeeping of clients funds and securities, capital structure, record keeping
and the conduct of directors, officers and employees. Because of the number of
complaints by online traders, the SEC, NASD and other regulatory organizations
may adopt more stringent regulations for online firms and their practices. If we
fail to comply with any laws, rules or regulations we could be censured, fined,
suspended, or expelled.
In addition, significant changes in Direct's current business or practices,
require NASD and other regulatory approval.
To expand our services internationally, we would have to comply with regulatory
controls of each specific country in which we conduct business. The brokerage
industry in many foreign countries is heavily regulated. The varying compliance
requirements of these different regulatory jurisdictions and other factors may
limit our ability to expand internationally. We presently do not have any plans
to expand internationally.
All marketing activities by Direct are regulated by the NASD. The NASD can
impose penalties, including censure, fine, suspension of all advertising, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer and its officers or employees for violations of the NASD`s
advertising regulations.
Net Capital Requirements
The SEC, NASD and various other regulatory agencies have stringent rules
requiring the maintenance of specific levels of net capital by securities
brokers, including the SEC`s Uniform Net Capital Rule which governs Direct. Net
capital is defined as assets minus liabilities, plus other allowable credits and
qualifying subordinated borrowings less mandatory deductions that result from
excluding assets that are not readily convertible into cash and from valuing
other assets, such as a firm`s positions in securities, conservatively. Among
these deductions are adjustments in the market value of securities to reflect
the possibility of adverse market movement prior to disposition.
39
If Direct fails to maintain the required net capital, Direct may be subject to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies, which ultimately could require Direct's
liquidation. In addition, a change in the net capital rules, the imposition of
new rules, a significant operating loss, or any unusually large charge against
net capital could limit our operations that require the intensive use of capital
and could limit our ability to expand our business. The net capital rules also
could restrict our ability to withdraw capital from Direct, which could limit
our ability to pay dividends, repay debt and repurchase shares of our
outstanding stock.
Personnel
As of January 17, 2005 we employed a total of 14 persons, of whom 2 are engaged
in executive management, 2 are engaged in information technology, 5 are engaged
in client services and 2 are engaged in sales and marketing. The other 3
employees perform administrative and back office work. We believe our relations
with our employees are generally good and we have no collective bargaining
agreements with any labor unions. During the fiscal years ended September 30,
2004 and 2003 we completed a reduction in our work force.
Our registered representatives are required to take examinations administered by
the NASD and state authorities to be qualified to transact business, and are
required to enter into agreements with us obligating them to adhere to our
supervisory procedures. Our agreements with registered representatives do not
obligate these representatives to be associated with us for any length of time.
Financing Transactions
On December 31, 2004, the holder of 2,050,000 common stock purchase warrants,
each exercisable for one share of our common stock at an exercise price of $.01
per share, exercised these warrants resulting in proceeds of $20,500. The same
holder entered into a Warrant Amendment Agreement with us on December 31, 2004
whereby the holder paid us $44,002, and agreed to terminate 311,497 warrants
held by it with exercise prices ranging from $2.9333 to $3.686 in exchange for
our revising the terms of the 4,400,158 remaining warrants held by the holder.
The revisions included a reduction in the exercise price of the warrants from
$.01 to $.001 and the addition of restrictions related to the timing and amount
of warrants that the holder could exercise.
Effective October 12, 2004 we retained Sichenzia Ross Friedman Ference LLP to
represent us in the action titled Dover Limited and Wendy Sui Cheng Yap v. A.B.
Watley Inc., Robert Malin, Keith Sorrentino, John Coakley, Alain Assemi and John
J. Amore (Case No.: 04 CV 7366) as filed in the United States District Court,
Southern District of New York. In connection therewith, we paid Sichenzia an
initial retainer of $10,000 and issued an aggregate of 1,000,000 shares of our
common stock to designated partners of Sichenzia. In the event we pay all
Sichenzia invoices related to this matter within 30 days of issuance, the
1,000,000 shares will be returned to us for cancellation. If we fail to do so,
the shares will be retained and the proceeds from sales thereof will be applied
to all of the outstanding and current balances due by us to them. Any excess
will be applied to additional fees incurred, if any. Any remaining proceeds
after that will be retained by the share recipients.
In October 2004 we issued an aggregate of 300,000 shares of our common stock to
three persons with respect to legal and other services rendered and 100,000
shares to an affiliate of our legal counsel in return for services provided in
connection with a debt conversion.
In July 2004, holders of 70 shares of our Series A Redeemable Convertible
Preferred Stock exchanged their preferred stock including dividends and interest
for warrants to purchase 780,342 shares of our common stock. The exercise price
for each of the common shares to be received upon exercise of the warrants is
$.01. The warrants have a term of 10 years and expire in June 2014.
40
In July 2004, we sold 5,000,000 shares of common stock for $2,000,000 in a
private placement transaction. As of January 17, 2005 we have received
approximately $1,070,000 towards the purchase of the shares, with the remaining
balance to be received in installments through April 1, 2005. The payment
obligation is represented by promissory notes of the subscribers.
In July 2004, we and an affiliate of our clearing broker reached an agreement to
exchange notes payable, including accrued interest, in the amount of $2,621,815
in return for warrants to purchase 1,000,000 shares of our common stock. The
exercise price for each of the common shares to be received upon exercise of the
warrants is $.19. In addition we agreed to amend an existing warrant agreement,
for 1,000,000 shares of our common stock, held by the noteholder to reflect a
decrease in the exercise price from $.918 to $.01. The warrants have a term of
seven years.
In June 2004, certain noteholders agreed to exchange notes payable, including
accrued interest, in the amount of $1,102,500 for warrants to purchase 987,771
shares of our common stock. The exercise price for each of the common shares
received upon exercise of the warrants is $.01. The warrants have a term of
seven years.
In June 2004, holders of 560 shares of our Series A Redeemable Convertible
Preferred Stock exchanged their preferred stock for warrants to purchase
5,462,387 shares of our common stock. The exercise price for each of the common
shares to be received upon exercise of the warrants is $.01. The warrants have a
term of seven years and expire in June 2011.
On December 23, 2003, we borrowed $1,800,000 from a third party at the rate of
20% per annum. On January 16, 2004 we repaid the $1,800,000. Subsequently,
during January and February 2004, we borrowed an additional $388,620, including
accrued interest, from the same third party at the rate of 20% per annum. The
loan is due on demand.
On October 8, 2003, we borrowed $150,000 from a third party lender at the rate
of 12% per annum and issued 250,000 shares of our common stock, which
represented a finance charge of $87,500. The loan was payable in fourteen equal
monthly installments. As of April 30, 2004, we repaid the loan, and accrued
interest, through $21,000 in cash payments and offset $139,150 against
commissions owed to us by the lender.
On January 15, 2003, we entered into a Secured Demand Note Collateral Agreement
(the "SDN"), whereby a subordinated lender agreed to deposit $5,000,000 worth of
collateral in accounts to be held by us to secure a subordinated loan for the
same amount. The loan, which bore interest at the rate of 7% per annum, had been
approved by the NASD and was included for the purposes of computing net capital
under Rule 15c3-1. During the term of the SDN, we liquidated approximately $2.4
million of the SDN Collateral. This cash was used by us to support our
operations. In connection with the SDN, we issued warrants to the lender to
purchase 500,000 shares of our common stock at a price of $.75 per share at any
time through January 15, 2008. In March 2004, the holder of the SDN (the
"Noteholder") demanded repayment of the note and commenced arbitration
proceedings. In April 2004, the parties agreed to discontinue the arbitration
without prejudice pursuant to a settlement agreement that provided for the
repayment of approximately $2.9 million of principal and interest (which was
repaid in April 2004) of the $5 million outstanding principal balance of the
secured demand note. On June 4, 2004 the Noteholder sent us a notice of default
alleging that we did not meet certain of our obligations under the terms of the
settlement, including making payment on the balance of the note. As of December
20, 2004, $2,441,260 in principal remained due and outstanding on the note. (See
"Legal Proceedings").
41
In July 2002, we sold our software programs known as Ultimate Trader and Watley
Trader, including all related intellectual property, to a subsidiary of one of
our clearing brokers. In consideration for the software, our clearing broker
agreed to forgive $2,716,720 (including interest of $566,720) of indebtedness
owed by us to the clearing broker.
In April 2002, we granted a non-exclusive perpetual license of our proprietary
software to E*Trade for a one time-time flat fee of $5,000,000, which was
payable in cash ($2.6 million) and E*Trade stock ($2.4 million). The E*Trade
stock was subsequently sold for cash.
In March 2002, one of the holders of our Preferred Stock led a group that
granted a line of credit of $4,200,000 to us. Borrowings under the line of
credit are payable on demand with interest payable at 10%. The proceeds of the
loans were used for working capital. Additionally, one member of the group was
granted warrants to purchase 1,000,000 shares of our common stock at an exercise
price of $.918 a share in connection with the loan facility and a consultant
retained by a member of the group was also granted warrants to purchase 50,000
shares of our common stock at an exercise price of $.918 a share. The fair value
of the warrants were amortized and recorded as interest expense.
In February 2002, we borrowed $200,000 from a former officer of ours, due on
demand. We also borrowed $500,000 from the same party in October 2001. Interest
of 10% was payable on both loans. As of December 20, 2004, we have made
approximately $75,000 in payments to the former officer.
In February 2002, we borrowed $200,000 from a third party with interest payable
thereon at 10%. During fiscal 2003, the loan was repaid in full.
On November 29, 2001, we entered into a Series A Convertible Preferred Purchase
Agreement whereby we issued 630 shares of Series A Convertible Preferred Stock,
par value $.01 ("Preferred Stock") in a private placement in which we raised
$6,300,000 on an aggregate basis. Each share was convertible into 3,390 shares
of our common stock at an exercise price of $2.95 per share. The purchasers of
the Preferred Stock also were issued warrants, expiring in 5 years from the date
of issuance, to purchase an additional 1,629,069 shares of our common stock at
an exercise price of $2.95. Pursuant to the Purchase Agreement and the
Registration Rights Agreement (the "Registration Agreement"), we were required
to file a registration statement (the "Registration Statement") with the
Securities and Exchange Commission registering for resale the 2,135,700 shares
of common stock issuable upon the conversion of the shares of Preferred Stock,
and the 1,629,069 upon the exercise of the related warrants. We were unable to
file the Registration Statement within the required time frame. As a result, we
were in default of the Purchase Agreement and the Registration Agreement. A
penalty of 2% of the liquidation preference value of the Preferred Stock for
each thirty-day period accrued to each holder of Preferred Stock and was added
to the liquidation preference amount until cured. As of June 30, 2003 the
holders of the Preferred Stock executed an agreement which waived their rights
to all penalties through July 31, 2004. Penalties accrued through June 30, 2003
in the amount of $1,070,593 were reversed and recorded as additional paid in
capital. During June and July 2004 all of the outstanding Preferred Stock and
accumulated dividends were exchanged for warrants.
42
REPORTS TO SECURITY HOLDERS
We file annual and quarterly reports with the Securities and Exchange Commission
(SEC). In addition, we file additional reports for matters such as material
developments or changes within us. These filings are a matter of public record
and any person may read and copy any materials filed with the SEC at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that
contains reports, proxy and other information statements, and other information
regarding issuers that file electronically with the SEC which internet site can
be found at http://www.sec.gov.
DESCRIPTION OF PROPERTY
Until June 30, 2004 our principal offices were located at 40 Wall Street, New
York, NY, where we occupied approximately 28,500 square feet at an annual cost
of approximately $920,000 per year , plus escalations. The initial term of the
lease for such office space was set to expire in June 2009. On January 16, 2003,
we entered into a sixteen-month lease agreement for approximately 2,750 square
feet in San Francisco, California, at an annual cost of $114,000. This lease
agreement was terminated as of November 30, 2003. On December 15, 2002, the
Company entered into an eighteen-month lease agreement for approximately 2,568
square feet in Melville, NY, at an annual cost of $68,078. We no longer occupy
the Melville property and the landlord, W.B. Wood & Co. Inc., has obtained a
judgment in the amount of $17,019 against us. Accordingly, the Melville lease
has been terminated. See "Legal Proceedings".
Our landlord at the 40 Wall Street location, 40 Wall Street, LLC, commenced two
separate landlord/tenant proceedings seeking money judgments and orders of
eviction against us. Both proceedings have been settled whereby we vacated a
portion of the premises in March 2004 and vacated the remaining portion of the
premises in June 2004. The landlord reserved the right to seek a money judgment
for all rent arrears after we vacated the premises. See "Legal Proceedings".
We presently occupy approximately 8,500 square feet at 90 Park Avenue, 26th
Floor, New York, NY 10016 pursuant to an arrangement we have with RFM Advisors,
LLC, the lessee of the space. The term of the lease expires on May 31, 2014. RFM
Advisors LLC is a New York limited liability corporation owned by Robert and
Steven Malin. AB Watley Direct Inc. has guaranteed the full and timely
performance of all obligations of RFM Advisors LLC under the lease. The lease
provides for the payment of an annual base rental, together with lessee's
proportionate share of building operating expenses including taxes. The base
annual rental for years 1 through 3, 4 through 6, and 7 through 10 is $366,376,
$411,056, and $464,672, respectively. Under the arrangement, we occupy
approximately 95% of the leased space and pay a proportionate amount of the
lease payments.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and
notes thereto appearing in this prospectus.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2004 ("FISCAL 2004") COMPARED TO FISCAL YEAR
ENDED SEPTEMBER 30, 2003 ("FISCAL 2003")
Total revenues for fiscal 2004 were $9,515,055, a decrease of $5,733,827, or
37.6% as compared to revenues of $15,248,882 for fiscal 2003. This is
attributable to the following factors:
Commissions: Revenues from commissions increased by $41,177, or 0.7%, from
$5,690,227 for fiscal 2003 to $5,731,404 for fiscal 2004 as retail commissions
were comparable during these fiscal years.
Data Service Fees: Data service fees decreased by $50,882, or 50.0%, from
$101,821 for fiscal 2003 to $50,939 for fiscal 2004 due to the increasing number
of accounts migrating to Ultimate Trader from other licensed software providers
available through our services. We charge our customers a data service fee for
using other software providers and do not charge for Ultimate Trader.
Principal Transactions: Revenues from principal transactions decreased by
$5,492,285, or 70.0%, from $7,848,918 for fiscal 2003 to $2,356,633 for fiscal
2004. We ceased proprietary trading in January 2004 and no longer engage in
principal trading.
Interest and Other Income: Interest and other income decreased by $231,837 or
14.4%, from $1,607,916 for fiscal 2003 to $1,376,079 for fiscal 2004. This
decrease is largely due to a one-time business recovery grant of approximately
$312,000 received in fiscal 2003.
Interest Expense: Interest expense increased by $73,460 or 8.8%, from $834,184
for fiscal 2003 to $907,644 for fiscal 2004 as a result of increased borrowings
during the year. The increase in interest expense resulted from an increase in
our borrowings.
Net Revenues: As a result of the foregoing, net revenues decreased by
$5,807,287, or 40.3%, from $14,414,698 for fiscal 2003 to $8,607,411 for fiscal
2004. 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.
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Total expenses decreased by $8,250,898 or 38.6%, from $21,394,418 for fiscal
2003 to $13,143,520 for fiscal 2004. This is attributable to the following
factors:
Commissions, Floor Brokerage and Clearing Charges: Commissions, floor brokerage
and clearing charges represent payments to our clearing and floor brokers who
facilitate our clients` transactions. These expenses decreased $1,515,374 or
26.2%, from $5,793,530 for fiscal 2003 to $4,278,156 for fiscal 2004. This was
primarily due to the discontinuance of proprietary trading.
Employee Compensation and Related Costs: Employee compensation and related costs
decreased by $3,909,480 or 45.6%, from $8,570,003 for fiscal 2003 to $4,660,523
for fiscal 2004. This decrease is attributable to both the reduction in the
number of administrative personnel and the elimination of compensation paid to
proprietary traders, as we no longer engage in proprietary trading.
Communications: Communications expense decreased by $554,594 or 47.5%, from
$1,168,418 for fiscal 2003 to $613,824, for fiscal 2004. This decrease was due
to canceling certain data lines and renegotiating new rates with our vendors.
Business Development: Business development costs consist primarily of attending
and exhibiting at trade shows to obtain new clients. These expenses decreased by
$105,656, or 36.2%, from $291,868 for fiscal 2003 to $186,212 for fiscal 2004 as
we decreased our advertising and promotional efforts due to limited financial
resources.
Professional Fees: Professional fees consist primarily of legal and accounting
costs in addition to external administrative consultants. Professional fees
decreased by $54,699 or 6.6%, from $829,139 for fiscal 2003 to $774,440 for
fiscal 2004. Fees for audit and quarterly reviews have decreased due to improved
efficiencies in financial reporting but were partially offset by legal fees for
outstanding litigation and the exchange of preferred stock and debt for
warrants.
Occupancy and Equipment: Occupancy and equipment costs decreased by $898,020 or
43.5%, from $2,063,645 for fiscal 2003 to $1,165,625 for fiscal 2004. Rent for
fiscal 2004 decreased due to a settlement with our previous landlord at 40 Wall
Street, New York, NY which resulted in our surrendering the 26th floor and part
of the 27th floor in March 2004, which we had previously occupied. We continue
to accrue rent on the portion of the 27th Floor we vacated in June 2004 although
we no longer occupy any space at 40 Wall Street, New York, NY after we relocated
to 90 Park Avenue, New York, NY. The 40 Wall Street leases were terminated as
part of our overall cost cutting initiatives.
Depreciation and Amortization: Depreciation and amortization decreased by
$966,054 or 76.9%, from $1,256,599 for fiscal 2003 to $290,545 for fiscal 2004
primarily due to the disposal or surrender of assets subject to such
depreciation and amortization.
Other Expenses: Other expenses decreased by $860,431 or 60.4%, from $1,423,948
for fiscal 2003 to $563,517 for fiscal 2004. This decrease is a reduction in
general operating expenses as part of our overall cost cutting initiatives.
45
Abandonment of Leasehold Improvements: For fiscal 2004, the abandonment of
leasehold improvements of $610,678 primarily relates to the surrender and
termination of the 26th and 27th floors office leases at 40 Wall Street, New
York, NY, that occurred in March and June 2004. These leases were terminated as
part of our overall cost cutting initiatives. There was no abandonment of
leasehold improvements for fiscal 2003.
Loss on Investments: Loss on investments of $84,287 for fiscal 2003 represents
the loss of the value of the stock acquired from E*Trade in April 2002.
Minority Interest applicable to LLC Class B Members: Minority interest
applicable to LLC Class B Members for fiscal 2003 was $87,019 was primarily for
the settlement of liabilities.
Net Loss: As a consequence of the foregoing, our operating loss before income
taxes and extraordinary items decreased $2,443,611 or 35.0% from $6,979,720 for
fiscal 2003, to a loss of $4,536,109 for fiscal 2004.
Preferred Stock Dividends: During fiscal 2003, we had preferred dividends of
$252,000. There were no dividends on Preferred Stock for fiscal 2004. As of
September 30, 2004, all of the preferred stock was exchanged for warrants to
purchase shares of our common stock.
Net Loss Applicable to Common Stockholders: As a consequence of the foregoing,
our net loss applicable to common shareholders decreased $2,695,611 or 37.3%
from $7,231,720 in fiscal 2003 to $4,536,109 in fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
To respond to our liquidity and capital resource needs, we have taken, and are
taking, a variety of steps to offset the cash used in operating activities. Such
steps include the sale of five million shares of ABWG commons stock in July 2004
for $2 million over two years, cost cutting initiatives, the pursuit of
additional revenue producing activities, and efforts to raise additional funds
through the issuance of debt or equity securities.
Our cost cutting initiatives include reductions in workforce, office relocation
to less costly facilities and closures of branch offices, reductions in capital
expenditures, and renegotiating clearing corporation agreements at more
favorable rates. We are pursuing more traditional lines of business including
attracting active traders and hedge funds. However, in order to expand our
business, respond to competitive pressures and expand into additional products
and services, we have needed to raise additional funds through the issuance of
debt or the sale of common stock. When funds are raised through the issuance of
equity securities or financial instruments that are convertible into equity
securities, our existing shareholders may experience dilution in their ownership
percentage or book value. In addition, such securities may have rights,
preferences and privileges senior to those of the holders of our Common Stock.
There can be no assurances that the additional financing will be available when
needed and on terms satisfactory to us.
We may not be able to receive distributions from its regulated broker-dealer
subsidiaries due to capital withdrawal restrictions placed on the regulated
entities by the SEC's Uniform Net Capital rule.
46
For the year ended September 30, 2004 ("fiscal 2004"), we incurred consolidated
losses of approximately $4.5 million and used cash in our operating activities
of approximately $1.5 million. These losses and use of cash are in addition to
the approximately $7.0 million of losses and $1.5 million of cash used in
operating activities during the year ended September 30, 2003 ("fiscal 2003").
The market conditions during fiscal 2004 continue to be very challenging for
brokerage firms such as Direct as well as for the brokerage industry in general.
Increased competition has put pricing and margin pressures on us.
There was no cash provided by investing activities during fiscal 2004. Cash used
in investing activities was $64,950 during fiscal 2003. The most significant
uses of cash used in investing activities were purchases of property and
equipment.
Cash provided by financing activities was $1,659,367 during fiscal 2004. Cash
provided by investing activities consisted of $735,891 of payments received from
the sale of five million shares of ABWG common stock. Cash provided by financing
activities during fiscal 2004 also included proceeds from notes payable of
$2,319,869 and proceeds from secured demand note receivable of $643,260 offset
by payments of notes payable of $150,000, notes payable - other of $1,800,000
and capital distributions to LLC Class B Members of $89,653. Cash provided by
financing activities was $1,392,962 during fiscal 2003 and consisted primarily
of net proceeds from the secured demand note of $1,798,000 offset by net
payments of notes payable of $200,000 and distributions to the Class B Members
of the LLC of $205,038.
Subordinated borrowings as of September 30, 2004 and 2003 were as follows:
September 30, 2004 September 30, 2003 Interest Rate Maturity
------------------ ------------------ ------------- ----------------
$ 2,441,260 $ 5,000,000 7% Matured
125,000 125,000 12% October 31, 2006
55,000 55,000 0% October 31, 2006
200,000 200,000 15% October 31, 2006
150,000 150,000 13% October 31, 2006
----------- -----------
$2,971,260 $ 5,530,000
=========== ===========
Direct is currently required to maintain minimum net capital such that the ratio
of aggregate indebtedness to net capital both as defined shall not exceed 15 to
1 under the SEC`s net capital rule. Such rule also prohibits "equity capital",
including the subordinated loans, from being withdrawn or cash dividends from
being paid if our net capital ratio would exceed 10 to 1 or if we would have
less than our minimum required net capital. Accordingly, our ability to repay
the subordinated loans may be restricted under the net capital rule.
RECENT ACCOUNTING DEVELOPMENTS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. However, in December 2003, FASB
deferred the latest date by which all public entities, which meet the definition
of small business issuer under SEC Regulation S-B ("Public SBs"), must apply FIN
46 to the first interim or annual reporting period ended after December 15,
2004. We adopted the above pronouncement during the current year and there was
no material effect on our consolidated financial statements.
47
OFF BALANCE SHEET ARRANGEMENTS
LEASES
As of September 30, 2004, we had off balance sheet arrangements related to our
lease obligations. We are obligated under such lease arrangements for $6,437,012
through June 2014.
CLEARING AGREEMENTS
Pursuant to clearance arrangements, the clearing and depository operations for
us and our customers' securities transactions are provided by two clearing
broker-dealers. We earn commissions as an introducing broker for the
transactions of its customers. In the normal course of business, our customer
activities involve the execution and settlement of various customer securities
transactions. These activities may expose us to off-balance-sheet risk in the
event the customer or other broker is unable to fulfill its contracted
obligations and we have to purchase or sell the security underlying the contract
at a loss. Our customer securities are transacted on either a cash or margin
basis. In margin transactions, the clearing broker extends the credit to our
customer, subject to various regulatory margin requirements, collateralized by
cash and securities in the customers' accounts. However, we are required to
contact the customer and to either obtain additional collateral or to sell the
customer's position if such collateral in not forthcoming. We are responsible
for any losses on such margin loans, and has agreed to indemnify its clearing
brokers for losses that the clearing brokers may sustain from the customer
accounts introduced by us.
CRITICAL ACCOUNTING POLICIES AND PROCEDURES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosure of contingent assets and
liabilities (see Note 2 to the consolidated financials). The discussion of our
financial condition and results of operations should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this report.
ACCOUNTS RECEIVABLE
48
Accounts receivable consist primarily of amounts due to us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected uncollectibility of accounts receivable based on past collection
history and specific risks identified among uncollected accounts.
SECURITIES TRANSACTIONS, REVENUE, AND RELATED EXPENSES
Securities transactions and related revenue and expenses, including commissions,
revenues and expenses, are recorded on a trade date basis. Data service revenues
are recorded as the services are provided.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In January 2005 we issued 1,300,000 stock options to Gary Mednick, each
exercisable for the purchase of one share of our common stock at a price of $.20
per share.
On July 29, 2004 we issued 1,300,000 stock options with an exercise price of
$.20 per share to each of Robert Malin and Pamela Luteran, the wife of Steven
Malin, as retention incentives and in consideration of services rendered.
In July 2004 we sold 2,500,000 shares of common stock at a price of $.40 per
share in a private placement to each of Kentan Ltd. and Yanzu Inc.
On June 3, 2004 we issued an aggregate of 1,682,798 common stock purchase
warrants to Penson Worldwide, Inc. in exchange for Preferred Stock of the
Company. 1,000,000 of these warrants have an exercise price of $.19 per share
and 682,798 of these warrants have an exercise price of $.01 per share.
On June 3, 2004 we issued 1,968,014; 1,172,431; and 139,578 common stock
purchase warrants to DMG Legacy International Ltd., DMG Legacy Institutional
Fund LLC and DMG Legacy Fund LLC, respectively, in exchange for Preferred Stock
of the Company. All of the warrants have an exercise price of $.01 per share.
On October 1, 2003 we entered into a month to month verbal employment agreement
with Gary Mednick whereunder Mr. Mednick serves as the president of A.B. Watley
Direct, Inc. and receives an annual salary of $250,000. See "Executive
Compensation - Employment Contracts, Termination of Employment, and
Change-in-Control Arrangements."
On September 1, 2003 we entered into a renewable one year consulting agreement
with Worth Consulting LLC, a company owned by Michael Picone which was renewed
for an additional one year term effective September 1, 2004. Pursuant to the
consulting agreement, Worth Consulting LLC provides us with general financial
and operating services on a continual and regular basis. In consideration of the
consulting services, we agreed to pay Worth Consulting LLC annual compensation
of $250,000, and 100,000 fully vested stock options with an exercise price of
$.30 per share each year the agreement is in effect. The first issuance was due
and paid on September 1, 2004. The compensation payable to Worth Consulting LLC
under the agreement is subject to periodic review but under no circumstances can
the annual compensation be reduced below $250,000 per year.
49
On August 31, 2003 we issued 500,000 stock options with an exercise price of
$3.5 per share to Michael Picone pursuant to the Termination of Employment
Agreement and General Release related to his 2002 employment agreement.
On December 2, 2002 we entered into a 4 year employment agreement with Michael
Picone to serve as an executive officer. The agreement provided for an initial
annual base salary of $175,000, a guaranteed annual bonus of $25,000 and
participation in a bonus pool with other members of senior management. It
further provided for the issuance of 500,000 stock options with an exercise
price of $.35 per share. Effective August 31, 2003 the employment agreement was
terminated pursuant to a Termination of Employment Agreement and General
Release.
On September 9, 2002 we entered into a 3 year employment agreement with Steven
Malin to serve as an executive officer. The agreement contains renewal
provisions and provides for an initial base salary of $150,000 per annum. It
also provides for the issuance of 800,000 stock options and performance based
bonus payments. See "Executive Compensation - Employment Contracts, Termination
of Employment, and Change-in-Control Arrangements."
On September 9, 2002 we entered into a 3 year employment agreement with Robert
Malin to serve as an executive officer. The agreement contains renewal
provisions and provides for an initial base salary of $200,000 per annum. It
also provides for the issuance of 1,300,000 stock options and performance based
bonus payments. See "Executive Compensation - Employment Contracts, Termination
of Employment, and Change-in-Control Arrangements."
In September 2002, in consideration of the forgiveness of notes payable to
Anthony Huston, Linda Malin and Eric Steinberg, former officers of ours,
aggregating $2,400,000, we issued warrants to purchase 1,479,486 and 923,145
shares of common stock, exercisable at $0 and $1.80 per share, respectively. The
warrants expire in September 2007.
In April 2002, $2,150,000 of notes payable to officers were assigned to Penson
Financial Services, Inc. ("Penson"). Interest was payable on these notes at a
rate of 10% per annum and the notes matured through March 2003. In July 2002,
these amounts were subsequently forgiven as part of the sale of our proprietary
software programs (the "Software") and related intellectual property, to
Integrated Trading Solutions, Inc. ("Integrated"), an affiliate of Penson,
pursuant to an Asset Purchase Agreement dated July 31, 2002 (the "Agreement").
Pursuant to the Agreement, we sold to Integrated, and Integrated purchased and
assumed from us all of the Software, certain related intellectual property and
contract rights and certain other assets in exchange for the following
consideration:
o an immediate reduction of $3,418,015 of debt owed by us to Penson;
o a contingent reduction of additional debt owed by us to Penson of up
to $2,150,994 on the earlier of: (a) the date that Penson receives
no less than $5,000,000 in revenues under its clearing agreement
with us (provided that such revenues are received during the
thirty-six months after the closing date of the Agreement), or (b)
in the event that we raise at least $4,000,000 in new equity
capital, which may include forgiveness of various types of debt;
50
o the assumption of certain additional identified and to be identified
liabilities of ours by Integrated;
o the granting of a license by Integrated to us that allows us to
utilize the Software at favorable rates. The license also provides
for us to receive a percentage of future royalties from the
licensing of the Software; and
o an amendment to our clearing agreement with Penson.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
We currently have authorized capital stock consisting of 50,000,000 common
shares, $.001 par value, of which 22,512,138 shares are issued and outstanding
and 1,000,000 preferred shares, $.01 par value of which none are issued and
outstanding. 690 of the preferred shares have been designated as Series A
Redeemable Convertible Preferred Stock.
From August 21, 2002 until October 12, 2004 when our common stock returned to
trading on Over-the-Counter Bulletin Board, our common stock traded on the pink
sheets under the symbol ABWG. From April 4, 2002 through August 20, 2002 our
common stock was traded on the Over-The-Counter Bulletin Board under the same
symbol. From April 23, 1999 until May 19, 2000 our common stock also traded on
the Boston Stock Exchange. From April 11, 2000 through April 3, 2002 our common
stock traded on the NASDAQ National Market. From April 23, 1999 until April 11,
2000 our common stock traded on the NADSAQ Small Cap Market. Our common stock
traded under the symbol IFSX from April 23, 1999 until September 1, 1999 when it
was changed to ABWG in conjunction with our name change from Internet Financial
Services, Inc. to A.B. Watley Group Inc.
The following table sets forth the range of high and low sales prices for our
common stock for our last two completed fiscal years.
Fiscal 2004: High Low
------------------ ------ -----
10/1/03 - 12/31/03 $0.35 $0.15
1/01/04 - 3/31/04 $0.37 $0.18
4/01/04 - 6/30/04 $0.35 $0.19
7/01/04 - 9/30/04 $0.27 $0.16
Fiscal 2003: High Low
------------------ ------ -----
10/1/02 - 12/31/02 $0.75 $0.10
1/01/03 - 3/31/03 $0.65 $0.35
4/01/03 - 6/30/03 $0.50 $0.25
7/01/03 - 9/30/03 $0.72 $0.35
51
The number of record holders, exclusive of holders for whom shares are being
held in the name of brokerage houses and clearing agencies, of our common stock
was 111 on December 21, 2004.
We have never paid cash dividends on our common stock. We do not expect to
declare or pay any dividends on our common stock in the foreseeable future, but
instead intend to retain all earnings, if any, to invest in our operations. The
payment of future dividends is within the discretion of our board of directors
and will depend upon our future earnings, our capital requirements, financial
condition and other relevant factors.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We granted options to purchase shares of our common stock to our employees,
officers, directors and consultants. The following table summarizes information
regarding our stock option plans as of January 17, 2005.
- ------------------------------------------------------------------------------------------------------------------------
Plan category Number of shares to be Weighted-average exercise Number of options
issued upon exercise of price of outstanding remaining available for
outstanding options options future issuance under
equity compensation plans
(a) (b) (excluding securities
reflected in column
(a))
(c)
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 35,250(1) $9.68 5,220,977(3)
approved by security holders
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 6,175,000(2) $.20 325,000
- ------------------------------------------------------------------------------------------------------------------------
Total 6,210,250 5,545,977
- ------------------------------------------------------------------------------------------------------------------------
(1) Includes 35,250 shares underlying 35,250 options issued under the
2000 Stock Option Plan.
(2) Represents shares issuable upon exercise of 6,175,000 options issued
under the 2004 Stock Option Plan. Excludes 2,625,000 options to
purchase 2,625,000 shares issued outside of equity compensation
plans.
(3) Represents 331,500; 536,527; 788,200; 1,564,750; and 2,000,000
options remaining available for future issuance under the 1997,
1998, 1999, 2000 and 2003 Stock Option Plans, respectively.
STOCK OPTION PLANS
1997, 1998 and 1999 Stock Option Plans
52
On January 27, 1997, our board of directors and stockholders adopted our 1997
Stock Option Plan, on March 16, 1998, our board of directors and stockholders
adopted our 1998 Stock Option Plan and on November 1, 1999 and March 14, 2000,
our board of directors and stockholders, respectively, adopted our 1999 Stock
Option Plan. We reserved 400,000 shares of common stock for issuance upon
exercise of options granted from time to time under the 1997 stock option plan
and 800,000 shares of common stock for issuance upon exercise of options granted
from time to time under each of the 1998 and 1999 stock option plans. The 1997,
1998 and 1999 Stock Option Plans are intended to assist us in securing and
retaining key employees, directors and consultants by allowing them to
participate in our ownership and growth through the grant of incentive and
non-qualified options.
Under each of the stock option plans we may grant incentive stock options only
to key employees and employee directors, or we may grant non-qualified options
to our employees, officers, directors and consultants. Each of the 1997, 1998
and 1999 Stock Option Plans are presently administered directly by our board of
directors. The 1997 Stock Option Plan may be administered by a committee
appointed by our board, consisting of from one to three directors.
Subject to the provisions of each of the stock option plans, either the board or
the committee, if applicable, will determine who shall receive options, the
number of shares of common stock that may be purchased under the options, the
time and manner of exercise of options and exercise prices. The term of options
granted under each of the stock option plans may not exceed ten years or five
years for an incentive stock option granted to an optionee owning more than 10%
of our voting stock. The exercise price for incentive stock options shall be
equal to or greater than 100% of the fair market value of the shares of the
common stock at the time granted; provided that incentive stock options granted
to a 10% holder of our voting stock shall be exercisable at a price equal to or
greater than 110% of the fair market value of the common stock on the date of
the grant. The exercise price for non-qualified options are set by the board or
the committee, in its discretion. The exercise price of options granted under
each of these plans may be payable in cash or, with the approval of the board or
the committee, by delivery of shares or by a combination of cash and shares.
Shares of common stock received upon exercise of options granted under each of
the plans will be subject to restrictions on sale or transfer.
As of January 17, 2005, we have issued options to purchase an aggregate of
2,233,950 shares of common stock under our 1997, 1998, and 1999 Stock Options
Plans at an exercise price ranging from $.10 to $21.50 per share. All of such
issuances involved grants of non-qualified stock options. 271,300 options were
issued under the 1997 Stock Option Plan, 68,500 of which were exercised and
202,800 of which were forfeited. 794,650 options were issued under the 1998
Stock Option Plan, 263,473 of which were exercised and 531,177 of which were
forfeited. 540,500 options were issued under the 1999 Stock Option Plan, 11,800
of which were exercised and 528,700 of which were forfeited.
2000 Stock Option Plan
On October 24, 2000 and July 17, 2001, our board of directors, and stockholders,
respectively, adopted our 2000 Stock Option Plan. We have reserved 1,600,000
shares of common stock for issuance upon exercise of options granted from time
to time under the 2000 Stock Option Plan. The 2000 stock option plan is intended
to assist us in securing and retaining key employees, directors and consultants
by allowing them to participate in our ownership and growth through the grant of
incentive and non-qualified options.
53
Under the 2000 Stock Option Plan we may grant incentive stock options only to
key employees and employee directors, or we may grant non-qualified options to
our employees, officers, directors and consultants. The 2000 Stock Option Plan
is administered directly by our board of directors.
Subject to the provisions of the 2000 Stock Option Plan, the board determines
who shall receive options, the number of shares of common stock that may be
purchased under the options, the time and manner of exercise of options and
exercise prices. The term of options granted under the 2000 Stock Option Plan
may not exceed ten years or five years for an incentive stock option granted to
an optionee owning more than 10% of our voting stock. The exercise price for
incentive stock options is equal to or greater than 100% of the fair market
value of the shares of the common stock at the time granted; provided that
incentive stock options granted to a 10% holder of our voting stock shall be
exercisable at a price equal to or greater than 110% of the fair market value of
the common stock on the date of the grant. The exercise price for non-qualified
options is set by the board, in its discretion. The exercise price may be
payable in cash or, with the approval of the board, by delivery of shares or by
a combination of cash and shares. Shares of common stock received upon exercise
of options granted under the 2000 Stock Option Plan are subject to restrictions
on sale or transfer.
As of January 17, 2005 we have issued options to purchase an aggregate of
627,500 shares of common stock under our 2000 Stock Option Plan at exercise
prices ranging from $6.00 to $12.23. All of such issuances involved grants of
non-qualified stock options. None of the issued options have been exercised and
592,250 of these options have been forfeited.
2003 Stock Option Plan
Our board of directors and stockholders have approved the 2003 Employee Stock
Option Plan (the "2003 Plan") and authorized 2,000,000 shares of common stock
for issuance thereunder. The following is a summary of principal features of the
2003 Plan.
General
Under the Plan, options may be granted which are intended to qualify as
Incentive Stock Options ("ISOs") under Section 422 of the Internal Revenue Code
of 1986 (the "Code") or which are not ("Non-ISOs") intended to qualify as
Incentive Stock Options thereunder.
The 2003 Plan and the right of participants to make purchases thereunder are
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"). The 2003 Plan is not
a qualified deferred compensation plan under Section 401(a) of the Internal
Revenue Code and is not subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA").
54
Purpose
The primary purpose of the 2003 Plan is to attract and retain the best available
personnel for us in order to promote the success of our business and to
facilitate the ownership of our stock by employees.
Administration
The 2003 Plan is administered by our board of directors, as the board of
directors may be composed from time to time. Notwithstanding the foregoing, the
board of directors may at any time, or from time to time, appoint a committee of
at least two members of the board of directors, and delegate to the committee
the authority of the board of directors to administer the 2003 Plan.
Members of the board of directors who are eligible employees are permitted to
participate in the 2003 Plan, provided that any such eligible member may not
vote on any matter affecting the administration of the 2003 Plan or the grant of
any option pursuant to it, or serve on a committee appointed to administer the
2003 Plan. In the event that any member of the board of directors is at any time
not a "disinterested person", as defined in Rule 16b-3(c)(3)(i) promulgated
pursuant to the Securities Exchange Act of 1934, the 2003 Plan shall not be
administered by the board of directors, and may only by administered by a
committee, all the members of which are disinterested persons, as so defined.
Eligibility
Under the 2003 Plan, options may be granted to our key employees, officers,
directors or consultants, as provided in the 2003 Plan.
Terms of Options
The terms of each option granted under the 2003 Plan are contained in stock
option agreements between us and the optionee and such terms are determined by
the board of directors consistent with the provisions of the 2003 Plan,
including the following:
Purchase Price. The purchase price of the common shares subject to each ISO
shall not be less than the fair market value (as set forth in the 2003 Option
Plan), or in the case of the grant of an ISO to a principal stockholder, not
less that 110% of fair market value of such common shares at the time such
Option is granted. The purchase price of the common shares subject to each
Non-ISO is determined at the time such Option is granted, but in no case less
than 85% of the fair market value of such common shares at the time such option
is granted.
Vesting. The dates on which each option (or portion thereof) shall be
exercisable and the conditions precedent to such exercise, if any, are fixed by
the board of directors, in its discretion, at the time such option is granted.
55
Expiration. The expiration of each option is fixed by the board of directors, in
its discretion, at the time such option is granted; however, unless otherwise
determined by the board of directors at the time such option is granted, an
option is exercisable for ten (10) years after the date on which it was granted.
Each option is subject to earlier termination as expressly provided in the 2003
Plan or as determined by the board of directors, in its discretion, at the time
such option is granted.
Transferability. No option is transferable, except by will or the laws of
descent and distribution, and any option may be exercised during the lifetime of
the optionee only by him. No option granted under the 2003 Plan is subject to
execution, attachment or other process.
Option Adjustments. The aggregate number and class of shares as to which options
may be granted under the 2003 Plan, the number and class shares covered by each
outstanding option and the exercise price per share thereof (but not the total
price), and all such options, are each proportionately adjusted for any increase
or decrease in the number of issued common shares resulting from split-up
spin-off or consolidation of shares or any like capital adjustment or the
payment of any stock dividend.
Except as otherwise provided in the 2003 Plan, any option granted hereunder
shall terminate in the event we engage in a merger, consolidation, acquisition
of property or stock, separation, reorganization or liquidation. However, the
optionee shall have the right immediately prior to any such transaction to
exercise his option in whole or in part notwithstanding any otherwise applicable
vesting requirements.
Termination, Modification And Amendment. The 2003 Option Plan (but not options
previously granted under the Plan) terminates ten (10) years from the earlier of
the date of its adoption by the board of directors or the date on which the 2003
Plan was approved by the affirmative vote of the holders of a majority of our
outstanding shares of capital stock entitled to vote thereon, and no option
shall be granted after termination of the Plan. Subject to certain restrictions,
the 2003 Plan may at any time be terminated and from time to time be modified or
amended by the affirmative vote of the holders of a majority of the outstanding
shares of our capital stock present, or represented, and entitled to vote at a
meeting duly held in accordance with the applicable laws of the State of
Delaware.
As of January 17, 2005 we had issued options to purchase an aggregate of
2,000,000 shares of our common stock under our 2003 Stock Option Plan, each with
an exercise price of $.20 per share. All of such issuances involved grants of
non-qualified stock options. 1,000,000 of these options had vested but none of
them had been exercised. Effective January 10, 2005 all of the 2,000,000 options
granted under the 2003 Stock Option Plan were forfeited and cancelled.
2004 Stock Option Plan
On July 29, 2004 our board of directors adopted our 2004 Non-Statutory Stock
Option Plan (the "2004 Plan"). We are authorized to issue up to 6,500,000
options under the 2004 Plan and have reserved a like number of shares of common
stock for issuance upon exercise of options issuable under the 2004 Plan.
Eligible participants under the 2004 Plan include employees, non-employee
directors, consultants and advisors. The 2004 Plan is presently administered by
our board of directors but may, in the future, be administered by a committee
formed for that purpose. Each option granted under the 2004 Plan is evidenced by
a stock option agreement which specifies, among other things, the number of
shares of common stock as to which any option is granted, the period during
which the option is exercisable and the option price per share. As of January
17, 2005 we have issued an aggregate of 6,175,000 stock options under the 2004
Plan to purchase a like number of shares of our common stock, 6,075,000 of which
have an exercise price of $.20 per share and 100,000 of which have an exercise
price of $.30 per share.
56
Other Option Issuances
During the period August 31, 2001 through August 31, 2003 we issued an aggregate
of 2,625,000 non-statutory options to four persons outside of any of our stock
option plans. All of the options have a ten year term. 2,100,000 of the options
have an exercise price of $.10 per share, 500,000 of the options have an
exercise price of $.35 per share and 25,000 of the options have an exercise
price of $2.8984 per share.
As of January 17, 2005 there were 8,835,250 options outstanding.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On October 10, 2002, Israeloff, Trattner & Co., P.C. ("Israeloff") resigned as
our Independent Public Accounting Firm. Israeloff did not issue any reports on
our financial statements and, therefore, no report contained an adverse opinion
or disclaimer of opinion, or was modified as to uncertainty, audit scope, or
accounting principle. Furthermore, during the two most recent fiscal years and
any subsequent interim period, there were no disagreements with Israeloff within
the meaning of Instruction 4 to Item 304 of Regulation S-B under the Securities
Exchange Act of 1934 on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Israeloff, would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement in connection with any report they might have issued.
On October 21, 2002, we engaged Marcum & Kliegman LLP as our Independent
Registered Public Accounting Firm. Prior to such appointment, we had no
discussions with Marcum & Kliegman LLP on any matter, including but not limited
to:
o the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements; or
o any matter that was either the subject matter of a disagreement or a
reportable event.
57
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission at 450 Fifth Street
N.W., Washington, D.C. 20549, a registration statement on Form SB-2 with respect
to us and the securities offered hereby. Reference is made to the registration
statement and the exhibits filed as part of the registration statement, which
may be examined without charge at the public reference facilities maintained by
the commission at 450 Fifth Street N.W., Washington, D.C. 20549. Prospective
investors may direct questions to the officers of the Company with respect to
the offering and may obtain additional information from our SEC filings
including our annual reports on Form 10-KSB, our quarterly reports on Form
10-QSB and our current reports on Form 8K. Prospective investors may direct
questions to our officers with respect to the offering or our business and may
obtain additional information, to the extent we possess such information or can
acquire it without unreasonable effort or expense, as may be necessary to verify
the accuracy of the information furnished in this prospectus. Any document
relating to us in our possession or which may be obtained by us without
unreasonable effort, may be inspected at our offices by any prospective investor
or his advisor upon advance notice.
58
A.B. WATLEY GROUP INC.
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
- Marcum & Kleigman LLP ............................... .........................F-1
Consolidated Statement of Financial Condition as of September 30, 2004.............F-2
Consolidated Statements of Operations for the Years ended
September 30, 2004 and 2003.......................... ...........................F-3
Consolidated Statements of Changes in Stockholders' Deficit
for the Years ended September 30, 2004 and 2003..................................F-4
Consolidated Statements of Cash Flows for the Years ended
September 30, 2004 and 2003......................................................F-5
Note to Consolidated Financial Statements.......................................F-6-21
59
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of A.B. Watley Group Inc.:
We have audited the accompanying consolidated statement of financial condition
of A.B. Watley Group Inc. as of September 30, 2004, and the related consolidated
statements of operations, changes in stockholders` deficit, and cash flows for
the years ended September 30, 2004 and September 30, 2003. 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 audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated 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
audit provides 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 A.B. Watley Group
Inc. as of September 30, 2004, and the results of its operations and its cash
flows for the year ended September 30, 2004 and September 30, 2003, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a working capital deficiency and has negative cash flows
from operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
New York, New York
December 3, 2004
F-1
A.B. Watley Group Inc.
Consolidated Statement of Financial Condition
September 30, 2004
Assets:
Cash and cash equivalents $ 182,929
Receivables from clearing brokers 314,374
Loans receivable from related party 258,227
Other assets 22,600
------------
Total Assets $ 778,130
============
Liabilities and Stockholders' Deficit:
Accounts payable and accrued liabilities 9,854,571
Accrued liabilities to LLC Class B Members 1,910,600
Payable to clearing broker 135,412
Notes payable to former officer 700,000
Notes payable - other 369,869
Subordinated borrowings 2,791,260
Subordinated borrowings from officer 180,000
------------
15,941,712
------------
Stockholders' Deficit:
Series A Redeemable Convertible Preferred Stock, $0.001 par value, 1,000,000
shares authorized and none issued and outstanding --
Common stock, $0.001 par value, 50,000,000 authorized and 19,062,138 issued and
outstanding 19,062
Additional paid-in capital 60,326,668
Subscription receivable (1,264,109)
Deferred compensation (101,620)
Accumulated deficit (74,143,583)
------------
Total Stockholders' Deficit ($15,163,582)
------------
Total Liabilities and Stockholders' Deficit $ 778,130
============
See notes to consolidated financial statements.
F-2
A.B. Watley Group Inc.
Consolidated Statements of Operations
Years Ended September 30,
----------------------------
2004 2003
------------ ------------
Revenues:
Commissions $ 5,731,404 $ 5,690,227
Data service fees 50,939 101,821
Principal transactions 2,356,633 7,848,918
Interest and other income 1,376,079 1,607,916
------------ ------------
Total revenues 9,515,055 15,248,882
Interest expense 907,644 834,184
------------ ------------
Net revenues 8,607,411 14,414,698
------------ ------------
Expenses and other charges:
Commissions, floor brokerage and clearing charges 4,278,156 5,793,530
Employee compensation and related costs 4,660,523 8,570,003
Communications 613,824 1,168,418
Business development 186,212 291,868
Professional fees 774,440 829,139
Occupancy and equipment 1,165,625 2,063,645
Depreciation and amortization 290,545 1,256,599
Other expenses 563,517 1,423,948
Loss on abandonment of leasehold improvements, net
of deferred rent incentives 610,678 --
Loss on investments -- 84,287
Minority interest applicable to LLC Class B members -- (87,019)
------------ ------------
Total expenses 13,143,520 21,394,418
------------ ------------
Net loss ($ 4,536,109) ($ 6,979,720)
Preferred stock dividends -- (252,000)
------------ ------------
Net loss applicable to common stockholders ($ 4,536,109) ($ 7,231,720)
============ ============
Basic and diluted loss per common share $ (0.31) $ (0.57)
============ ============
Weighted average shares outstanding 14,459,535 12,578,995
============ ============
See notes to consolidated financial statements.
F-3
A.B. Watley Group Inc.
Statement of Changes in Stockholders` Deficit
Additional Unamortized
Paid-in Deferred Subscription Option Accumulated
Common Stock Issued Capital Compensation Receivable Costs Deficit Total
------------------- ------------ --------- ----------- -------- ------------ ------------
Par
Shares Value
----------- -------
Balance at September 30,
2002 12,508,852 $12,509 $ 45,819,569 -- -- ($32,663) ($62,627,754) ($16,828,339)
Dividends accrued on
preferred stock -- -- (252,000) -- -- -- -- (252,000)
Stock issued in On-Site
settlement 278,286 278 199,722 -- -- -- -- 200,000
Amortization of warrants
issued in connection
with subordinated
borrowings -- -- 273,724 -- -- -- -- 273,724
Preferred stock penalties
waived -- -- 1,070,593 -- -- -- -- 1,070,593
Option costs - net -- -- -- -- -- 18,667 -- 18,667
Net loss -- -- -- -- -- -- (6,979,720) (6,979,720)
---------- ------- ------------ --------- ----------- -------- ------------ ------------
Balance at September 30,
2003 12,787,138 $12,787 $ 47,111,608 -- -- ($13,996) ($69,607,474) ($22,497,075)
========== ======= ============ ========= =========== ======== ============ ============
Options issued to
consultant -- -- $ 179,078 ($101,620) -- -- -- $ 77,458
Common stock issued in
settlement of accounts
payable 175,000 175 260,760 -- -- -- -- 260,935
Sale of common stock 5,000,000 5,000 1,995,000 -- (1,264,109) -- -- 735,891
Common stock issued in
connection with
financing 250,000 250 87,250 -- -- -- -- 87,500
Adjustment for shares in
On-Site transaction 100,000 100 (100) -- -- -- -- --
Exchange of notes payable
for warrants -- -- 3,826,821 -- -- -- -- 3,826,821
Exchange of Series A
Redeemable Preferred
Stock for warrants -- -- 6,867,001 -- -- -- -- 6,867,001
Option cost - net -- -- -- -- -- 13,996 -- 13,996
Shares issued as
collateral for accounts
payable 750,000 750 (750) -- -- -- -- --
Net loss -- -- -- -- -- -- (4,536,109) (4,536,109)
---------- ------- ------------ --------- ----------- -------- ------------ ------------
Balance at September 30,
2004 19,062,138 $19,062 $ 60,326,668 ($101,620) ($1,264,109) -- ($74,143,583) ($15,163,582)
========== ======= ============ ========= =========== ======== ============ ============
See notes to consolidated financial statements.
F-4
A.B. Watley Group Inc.
Consolidated Statements of Cash Flows
For the Years Ended September 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss ($ 4,536,109) ($ 6,979,720)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash compensation and service costs
Options costs 13,996 18,667
Amortization of debt discount in connection
with
issuance of warrants and subordinated debt 136,862 136,862
Amortization of finance charge in connection
with
notes payable 87,500 --
Penalties - preferred stock -- 759,107
Deferred compensation costs 77,458 --
Minority interest applicable to LLC Class B members -- (87,019)
Depreciation and amortization 290,545 1,256,599
Loss on abandonment of leasehold improvements 1,407,518 --
Write-off of deferred rent incentives (796,840) --
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash -- 292,565
Receivables from clearing brokers (90,818) 805,032
Securities owned 1,309,145 836,327
Loans receivable from related party 14,500 (14,501)
Security deposits 175,000 (42,999)
Other assets (2,706) 56,397
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities 1,886,580 (163,576)
Payable to clearing broker (1,462,355) 1,597,767
Securities sold, not yet purchased (28,010) 28,010
------------ ------------
Net cash used in operating activities (1,517,734) (1,500,482)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment -- (64,950)
------------ ------------
Net cash provided by (used in) investing activities -- (64,950)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable - other 2,319,869 250,000
Repayment of notes payable - other (1,800,000) (450,000)
Repayment of notes payable (150,000) --
Proceeds from secured demand note receivable 643,260 1,798,000
Capital distribution to LLC Class B members (89,653) (205,038)
Sale of common stock 735,891 --
------------ ------------
Net cash provided by financing activities 1,659,367 1,392,962
------------ ------------
Net increase (decrease) in cash and cash equivalents $ 141,633 ($ 172,470)
Cash and cash equivalents at beginning of period 41,296 213,766
------------ ------------
Cash and cash equivalents at end of period $ 182,929 $ 41,296
============ ============
Supplemental non-cash financing activities and disclosure of cash flow
information:
Cash paid for:
Interest $ 97,467 $ 303,385
Taxes -- --
Supplemental non-cash financing activities and disclosure of cash flow
information:
Subscription receivable for sale of common stock $ 1,264,109 --
Issuance of warrants to consultant $ 179,078 --
Conversion of Series A Preferred Stock for warrants $ 6,867,001 --
Issuance of stock in payment of liability $ 260,935 --
Liquidation of secured demand note $ 2,616,767 --
Exchange of notes payable for warrants - principal and interest $ 3,826,821 --
Forgiveness of penalties on preferred stock -- $ 1,070,593
Preferred stock dividends -- $ 252,000
Issuance of secured demand note -- $ 5,000,000
Issuance of subordinated borrowing -- $ 5,000,000
Debt discount in connection with issuance of warrants and subordinated debt -- $ 273,724
Settlements of minority interests -- $ 87,019
Issuance of stock in payment of liability to On-Site -- $ 200,000
See notes to consolidated financial statements.
F-5
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements
1. Organization and Business
A.B. Watley Group Inc. ("ABWG" or the "Company") is a U.S. public
corporation organized as a Delaware corporation on May 15, 1996 under the name
Internet Financial Services, Inc. On August 27, 1999 we changed our name to A.B.
Watley Group Inc. We presently conduct our business primarily through our
subsidiary A.B. Watley Direct, Inc. ("Direct"). Direct is a registered
broker-dealer with the Securities and Exchange Commission, and a member of the
National Association of Securities Dealers, Inc. Direct is an introducing
broker-dealer, conducting business in electronic trading, information and
brokerage services and institutional trading. Direct clears all transactions
through clearing brokers on a fully disclosed basis. Accordingly, Direct is
exempt from Rule 15c3-3 of the Securities and Exchange Act of 1934.
Until June 30, 2004 when the Company sold its then wholly owned
subsidiary A.B. Watley Futures Corp. ("ABW Futures") to a third party, the
Company also operated through ABW Futures. While owned by the Company, ABW
Futures was an introducing broker/dealer registered with the National Futures
Association that conducted futures trading activity for customers. ABW Futures
cleared all of its business through clearing brokers on a fully disclosed basis.
Until January 2004, when it ceased operations as a result of net
capital deficiencies the Company also operated an introducing broker-dealer
through its wholly owned subsidiary, A.B. Watley, Inc. In February 2004, A.B.
Watley, Inc. withdrew its registration as a broker-dealer.
On April 3, 2002, the Company received a determination letter from the
NASD Listing Qualifications Panel that the Company's request for continued
listing on the NASD National Market was denied. In accordance with such denial,
the Company's Common Stock was delisted from the NASDAQ Stock Market effective
with the open of business, April 4, 2002 (the "Delisting Date"). On October 12,
2004 the Company was relisted on the OTC Bulletin Board.
2. Going Concern
The Company has continued to incur consolidated net losses and negative
cash flows from operations. Additionally, the Company has significant deficits
in both working capital and stockholders` equity. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
To respond to its liquidity and capital resource needs management has
implemented various cost cutting initiatives. Management plans also include
raising additional capital from time to time to fund operations through private
placements of equity or debt instruments. There can be no assurance that any of
these alternatives will be successful.
3. Basis of Presentation
The consolidated financial statements include the accounts of ABWG and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts reflect
reclassifications to conform to the current year's presentations.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid instruments with
original maturities of less than three months held by one global financial
institution.
Securities Transactions, Revenues, and Related Expenses
Securities transactions and related revenues and expenses, including
commissions, revenues and expenses, are recorded on a trade date basis. Data
service revenues are recorded as the services are provided.
Securities owned and Securities Sold, Not Yet Purchased
Securities owned and securities sold, not yet purchased are stated at
market or fair values, with resulting unrealized gains and losses reflected in
F-6
the statement of operations. Market value is generally based on listed market
prices. If listed market prices are unattainable, fair values are determined
based on other relevant factors including broker or dealer price quotes. During
January 2004, the Company ceased its proprietary trading activities and
liquidated its open positions. As of September 30, 2004, there were no
securities owned or securities sold, not yet purchased.
Equipment and Leasehold Improvements
Computer equipment, software, and furniture and fixtures are carried at
cost and depreciated or amortized on a straight-line basis over their estimated
useful lives, generally three to five years. Leasehold improvements are carried
at cost and are amortized on a straight-line basis over the lesser of the life
of the improvement or the term of the lease.
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities is comprised of the following:
September 30,
2004
----------
Commissions, floor brokerage and clearing costs $1,809,805
Communications 1,533,294
Information technology 1,236,425
Occupancy, equipment and leases 1,133,243
Employee compensation and related costs 1,089,776
Professional fees 978,933
Legal 600,000
Accrued interest 429,516
Business development 87,690
Other 955,889
----------
$9,254,571
==========
Use of Estimates:
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Equity-Based Compensation
As permitted by FASB Statement No. 123, Accounting for Stock Based
Compensation ("FAS 123"), which establishes a fair value based method of
accounting for equity-based compensation plans, the Company has elected to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees ("APB 25") for recognizing equity-based compensation expense for
financial statement purposes. Under APB 25, no compensation expense is
recognized at the time of option grant if the exercise price of the employee
stock option is fixed and equals or exceeds the fair market value of the
underlying common stock on the day of grant and the number of shares to be
issued pursuant to the exercise of such options are known and fixed at the grant
date.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure ("FAS 148"). This standard
amends the disclosure requirements of FAS 123 for fiscal years ending after
December 15, 2002 to require prominent disclosure in both annual and interim
financial statements about the method used and the impact on reported results.
The Company follows the disclosure-only provisions of FAS 123 which requires
disclosure of the pro forma effects on net income (loss) as if the fair value
method of accounting prescribed by FAS 123 had been adopted, as well as certain
other information.
The following table summarizes relevant information as to reported
results under the Company's intrinsic value method of accounting for stock
F-7
awards, with supplemental information as if the fair value recognition
provisions of FAS 123 had been applied for the following years ended September
30, 2004 and 2003 as follows:
YEAR ENDED SEPTEMBER 30,
-----------------------------
2004 2003
------------- -------------
Net loss ($4,536,109) ($6,979,720)
Stock-based employee compensation
cost, net of tax effect, under
fair value accounting 335,951 313,811
------------- -------------
Pro forma net loss under
Fair Value Method ($4,872,060) ($7,293,531)
------------- -------------
Loss per share basic and ($0.31) ($0.55)
diluted
Per share stock-based employee
compensation cost, net of tax
effect, under fair value accounting 0.02 0.02
------------- -------------
Pro forma loss per share - basic and
diluted ($0.33) ($0.57)
============= =============
Loss Per Share
Basic loss per share was computed using the weighted average number of
outstanding common shares. Diluted per share amounts when applicable include the
effect of dilutive common stock equivalents from the assumed exercise of
options, warrants and the convertible preferred stock. Dilutive per share
amounts are computed excluding common stock equivalents since their inclusion
would be anti-dilutive. Total shares issuable upon the exercise of options,
warrants and the conversion of preferred stock for the years ended September 30,
2004 and 2003 were 22,243,925 and 13,494,505 respectively.
Fair Value of Financial Instruments:
Substantially all of the Company's financial instruments are carried at
fair value or at amounts approximating fair value.
Business Development:
The Company expenses all promotional costs as incurred. Advertising
production costs are expensed when the initial advertisement is run. Costs of
advertising are expensed as the services are received. Substantially all
business development costs relate to trade show attendance and exhibits. There
was no advertising expense for the years ended September 30, 2004 and 2003.
Income Taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Interest and Other Income:
Included in interest and other income for the years ended September 30,
2004 and September 30, 2003 are $132,376 and $105,110 respectively, for
settlements with vendors for which the Company was the beneficiary.
F-8
Accounting Developments:
In January 2003, as revised in December 2003, the FASB issued
Interpretation No. 46 ("FIN46"), "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51." FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after March 15, 2004. The Company
adopted the above pronouncement during the current year and there was no
material effect on the Company's consolidated financial statements.
4. Net Capital Requirement
Direct is subject to the SEC`s Uniform Net Capital Rule ("Rule
15c3-1"). In accordance with this rule, Direct is required to maintain minimum
net capital equal to the greater of $5,000 or 6-2/3% of aggregate indebtedness
as defined. As of September 30, 2004, Direct had net capital of $40,118 which
was $10,813 in excess of its minimum requirement of $29,305.
5. Financial Instruments with Off Balance Sheet Risk and Concentrations of
Credit Risk
Pursuant to clearance agreements, the clearing and
depository operations for the Company and its customers' securities
transactions are provided by two clearing broker-dealers. The Company
earns commissions as an introducing broker for the transactions of its
customers. In the normal course of business, the Company's customer
activities involve the execution and settlement of various customer
securities transactions. These activities may expose the Company to
off-balance-sheet risk in the event the customer or other broker is
unable to fulfill its contracted obligations and the Company has to
purchase or sell the security underlying the contract at a loss.
The Company's customer securities are transacted on either a
cash or margin basis. In margin transactions, the clearing broker
extends the credit to the Company's customers, subject to various
regulatory margin requirements, collateralized by cash and securities
in the customers' accounts. However, the Company is required to contact
the customer and to either obtain additional collateral or to sell the
customer's position if such collateral is not forthcoming. The Company
is responsible for any losses on such margin loans, and has agreed to
indemnify its clearing brokers for losses that the clearing brokers may
sustain from the customer accounts introduced by the Company.
The Company seeks to control the risks associated with these activities
by reviewing the credit standing of each customer and counterparty with which it
does business. Further, working with the clearing brokers, it requires customers
to maintain margin collateral in compliance with various regulatory and internal
company policy guidelines. The clearing brokers monitor required margin levels
daily and, pursuant to such guidelines, request customers to deposit additional
collateral or reduce securities positions when necessary. The Company's exposure
to these risks becomes magnified in volatile markets. As of September 30, 2004,
the Company has provided a reserve for uncollectible receivables from clearing
brokers in the amount of $1,166,777. Total bad debt expense incurred by the
Company which is included in commissions, floor brokerage, and clearing charges
in the Consolidated Statement of Operations amounted to approximately $274,000
and $343,000 during the years ended September 30, 2004 and 2003, respectively.
The Company at times maintained positions in equity securities on both
a long and short basis. While long positions represent the Company's ownership
of securities, short positions represent obligations of the Company.
Accordingly, both long and short positions may result in gains or losses to the
Company as market values of securities fluctuate. The Company no longer engages
in proprietary trading.
6. Equipment and Leasehold Improvements
In connection with the Company's relocation of its corporate offices
from 40 Wall Street, New York, NY to 90 Park Avenue, New York, NY in fiscal
2004, the Company abandoned leasehold improvements with a net book value of
$1,407,518 which was partially offset by a write-off of deferred rent incentives
of $796,840, resulting in a net expense of $610,678. As of September 30, 2004,
all of the Company's equipment and leasehold improvements were written off.
Depreciation and amortization expense for the years ended September 30,
2004 and 2003 was $290,545 and $1,256,599, respectively.
F-9
7. Acquisition of On-Site Trading, Inc.
In an effort to increase its customer base and to achieve greater
economies of scale, the Company entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with On-Site Trading, Inc. ("On-Site"). On October
1, 2001, the Company acquired the customer lists and certain other On-Site
assets and liabilities (the retail business), including its 100% voting interest
in On-Site Trading LLC, a broker-dealer subsidiary (the proprietary trading
business) which was subsequently renamed ABW TRADING, LLC. Since the
acquisition, the retail business and proprietary trading business have operated
as one reporting unit. The acquisition was accounted for under the purchase
method of accounting. Pursuant to the terms of the Asset Purchase Agreement, the
Company issued 1,875,000 shares, which was later reduced by 175,000 of its
Common Stock to On-Site.
On May 9, 2002, the Company notified the LLC Class B members that it
had elected to cease the proprietary trading business's operations as a result
of declining revenues. On June 18, 2002, LLC withdrew its broker dealer
registration and therefore was unable to continue trading activities. The
remaining liability to the LLC Class B members as of September 30, 2004 was
$1,910,600 and is included in the accompanying Consolidated Statement of
Financial Condition as "Accrued Liabilities to LLC Class B Members".
8. Series A Redeemable Convertible Preferred Stock
On November 29, 2001, the Company entered into the Series A Convertible
Preferred Stock Purchase Agreement (the "Purchase Agreement") to issue and sell,
in a private placement, an aggregate of 630 (690 shares authorized, par value
$.01) shares of Series A Redeemable Convertible Preferred Stock ("Preferred
Stock"). Each share was convertible into 3,390 shares of the Company's Common
Stock at an exercise price of $2.95. The purchasers of the Preferred Stock were
issued warrants, expiring in 5 years from the date of issuance, to purchase an
additional 1,629,069 shares of Common Stock at an exercise price of $2.95.
Pursuant to the Purchase Agreement and the Registration Rights
Agreement (the "Registration Agreement"), the Company was required to file a
registration statement (the "Registration Statement") with the Securities and
Exchange Commission registering for resale the 2,135,700 shares of Common Stock
issuable upon the conversion of the shares of Preferred Stock, and the 1,629,069
shares of Common Stock subject to purchase upon exercise of the warrants. The
Company has not yet filed a Registration Statement and will not be able to have
the Registration Statement filed and declared effective within the period
required. A penalty of 2% of the liquidation preference value of the Preferred
Stock for each thirty-day period accrues to each holder of Preferred Stock and
is added to the liquidation preference amount until cured. In June 2003 the
holders of the Preferred Stock executed an agreement which waived their rights
to penalties, dividends and stock issuances during the period June 1, 2003
through May 31, 2004. For the year ended September 30, 2003, penalties accrued
through June 30, 2003 in the amount of $1,070,593 were reversed and recorded as
additional paid-in-capital.
The Preferred Stock included a liquidation preference of $10,000 per
share and bore a cumulative dividend at an initial 6% annual rate, which
increased to a 15% annual rate after eighteen months, payable twice a year in
shares of Common Stock. In June 2003 the holders of the Preferred Stock executed
an agreement which waived their rights to penalties, dividends and stock
issuances.
The $6,300,000 aggregate purchase price of the Preferred Stock and the
warrants was allocated $4,340,383 to the Preferred Stock and the balance of
$1,959,617 was attributed to the fair value of the warrants. In connection with
this transaction, the Company issued Preferred Stock and received cash proceeds
of $3,324,291 (net of issue costs) and exchanged a note payable in the amount of
$2,500,000 ("Senior Subordinated Demand Note") for $2,750,000 plus accrued
interest.
The holders of the Preferred Stock were not subject to any limitations
on the number of conversions of Preferred Stock or subsequent sales of the
corresponding Common Stock that they could effect, other than a prohibition on
any holder acquiring a beneficial ownership of more than 4.95% of the
outstanding shares of the Company's Common Stock.
In June 2004, holders of 560 shares of the Preferred Stock which was
recorded at $6,008,625 including dividends and interest, exchanged their
preferred stock into warrants to purchase 5,462,387 shares of common stock of
the Company. The exercise price for each of the common shares to be received
upon exercise of the warrants was $0.01. The warrants have a term of seven years
and expire in June 2011. As of September 30, 2004, the impact of the preferred
stock conversion and the issuance of warrants was to decrease Series A Preferred
Stock by $6,008,625 and to increase Additional Paid-in Capital by the same
amount.
In July 2004, holders of remaining 70 shares of the Preferred Stock
outstanding recorded at $858,376 including dividends and interest, agreed to
exchange their preferred stock into warrants to purchase 780,342 shares of
common stock of the Company. As of September 30, 2004, the impact of the
F-10
preferred stock conversion and the issuance of warrants was to decrease Series A
Preferred Stock by $858,376 and to increase Additional Paid-in Capital by the
same amount.
9. Notes and Loans Payable
The Company's outstanding obligation under notes and loans payable as
of September 30, 2004 was as follows:
Notes Payable - Former Officer
Principal Interest
Effective Date Maturity Date Amount rate
---------------- --------- -------- --------
October 1, 2001 On Demand $500,000 10%
February 2, 2002 On Demand 200,000 10%
--------
$700,000
========
As of September 30, 2004, accrued interest on these notes payable -
former officer amounted to $218,472, which is included in accounts payable and
accrued liabilities in the accompanying Consolidated Statement of Financial
Condition.
On October 8, 2003, the Company borrowed $150,000 from a third party
lender at the rate of 12% per annum and issued 250,000 shares of the Company's
common stock, which represented a finance charge of $87,500. The loan was
payable in fourteen equal monthly installments. During the three months ended
March 31, 2004, the Company made principal payments in the amount of $25,000.
During April 2004, the Company repaid the loan and accrued interest, through
$21,000 in cash payments and offset $139,150 against commissions owed to the
Company by the lender.
On December 23, 2003, the Company borrowed $1,800,000 from a third
party at the rate of 20% per annum. On January 16, 2004 the Company repaid the
$1,800,000. Subsequently, during January and February 2004, the Company borrowed
an additional $369,969 from the same third party at the rate of 20% per annum.
The note is due on demand. As of September 30, 2004, $40,619 of interest has
accrued on this note and is included in Accounts Payable and Accrued Liabilities
in the accompanying Consolidated Statement of Financial Condition.
In June 2004, certain note holders agreed to forgive notes payable,
including accrued interest, in the amount of $1,102,500 in exchange for warrants
to purchase 987,771 shares of common stock of the Company. The exercise price
for each of the common shares to be received upon exercise of the warrants is
$0.01. The warrants have a term of seven years. The impact of the forgiveness of
the notes payable and the issuance of warrants was to decrease Notes Payable by
$900,000, decrease Accrued Liabilities, for accrued interest, by $202,500 and to
increase Additional Paid-in Capital $1,102,500.
In July 2004, the Company and certain note holders reached an agreement
to forgive notes payable, including accrued interest, in the amount of
$2,725,321 in exchange for warrants to purchase 1,000,000 shares of common stock
of the Company. The exercise price for each of the common shares to be received
upon exercise of the warrants is $0.19. In addition the Company agreed to amend
an existing warrant agreement, for 1,000,000 shares of common stock of the
Company, held by the note holder to reflect a decrease in the exercise price
from $0.918 to $0.01. The warrants will have a term of seven years. There was no
financial statement impact for the amendment to the warrant exercise price. The
impact of the forgiveness of the notes payable and the issuance of warrants was
to decrease Notes Payable by $2,182,826, decrease Accrued Liabilities, for
accrued interest, by $542,495 and to increase and to increase Additional Paid-in
Capital $2,725,321.
10. Secured Demand Note and Subordinated Borrowings
Secured Demand Note
On January 15, 2003, the Company entered into a Secured Demand Note
Collateral Agreement (the "SDN"), whereby a subordinated lender agreed to
deposit $5,000,000 worth of collateral in accounts to be held by the Company to
secure a subordinated loan for the same amount. The loan had been approved by
the NASD and was included for the purposes of computing net capital under Rule
15c3-1.
F-11
During the term of the SDN, the Company liquidated approximately $2.4
million of the SDN Collateral. This cash was used by the Company to support its
operations. This transaction is reflected in the accompanying Consolidated
Statements of Financial Condition as a reduction of the principal amount of the
SDN. As of September 30, 2004, in connection with the Company's repayment of
approximately $2.9 million of principal and interest, the remaining balance of
the SDN was reduced to $-0-.
Subordinated Borrowings
At September 30, 2004, subordinated borrowings consisted of $5,530,000
of subordinated notes payable to general creditors, of which $5,000,000 bearing
interest at 7% was due on June 30, 2004, $200,000 bearing interest at 15%,
$150,000 bearing interest at 13%, and the balance of $180,000 bearing interest
at 12% are due on October 31, 2006. In connection with the issuance of the
$5,000,000 subordinated borrowing the Company issued warrants to the lender to
purchase 500,000 shares of ABWG common stock at an exercise price of $0.75 per
share.
The Company recorded a debt discount in the amount of $273,724 which
was amortized to interest expense over the life of the subordinated loan.
Interest expense relating to the warrants was $136,862 for each of the years
ended September 30, 2004 and September 30, 2003. On January 22, 2004, the NASD
rescinded its approval of the Subordinated Borrowing Agreement. A.B. Watley Inc.
ceased operations in January 2004. In February 2004, A.B. Watley Inc. withdrew
its registration as a broker/dealer. Of the total subordinated borrowings,
$180,000 is from an officer and shareholder of the Company. Interest expense of
approximately $328,000 and $316,000 was incurred on subordinated borrowings
during the years ended September 30, 2004 and 2003, respectively.
Subordinated borrowings as of September 30, 2004 and 2003 are
as follows:
September 30, 2004 September 30, 2003 Interest Rate Maturity
------------------ ------------------ ------------- ----------------
$ 2,441,260 $ 5,000,000 7% Matured
125,000 125,000 12% October 31, 2006
55,000 55,000 0% October 31, 2006
200,000 200,000 15% October 31, 2006
150,000 150,000 13% October 31, 2006
------------------ ------------------
$2,971,260 $ 5,530,000
================== ==================
In March 2003, the holder of the $5 million secured demand note
demanded repayment of the note. In April 2004, the parties agreed to discontinue
the arbitration without prejudice pursuant to a settlement agreement that
provided for the repayment of approximately $2.9 million of principal and
interest (which was repaid in April 2004) of the $5 million outstanding
principal of the secured demand note (see Legal Proceedings). In June 2004, the
note matured and the Company has not paid the remaining balance and has not
received an extension of the maturity date. As of September 30, 2004, principal
in the amount of $2,441,260 and accrued interest of $105,342 remains due and
outstanding.
11. Stockholders' Deficit
On October 8, 2003, in connection with the issuance of a $150,000 note
payable from a third party lender, the Company issued 250,000 shares of the
Company's common stock, which represented a finance charge of $87,500. This
charge was amortized to interest expense over the life of the note. During April
2004, the Company repaid the loan and accrued interest and the remaining
unamortized finance charge was charged to interest expense at this time. The
impact of the recordation of this finance charge was to increase Interest
Expense by $87,500 and to increase Common Stock by $250 and to increase
Additional Paid-In Capital by $87,250.
In June 2004, certain note holders agreed to forgive notes payable,
including accrued interest, in the amount of $1,102,500 in exchange for warrants
to purchase 987,771 shares of common stock of the Company. The exercise price
for each of the common shares to be received upon exercise of the warrants is
$0.01. The warrants have a term of seven years. The impact of the forgiveness of
the notes payable and the issuance of warrants was to decrease Notes Payable by
$900,000, decrease Accrued Liabilities, for accrued interest, by $202,500 and to
increase Additional Paid-in Capital by $1,102,500.
In July 2004, the Company and certain note holders reached an agreement
to forgive notes payable, including accrued interest, in the amount of
$2,725,321 in return for warrants to purchase 1,000,000 shares of common stock
of the Company. The exercise price for each of the common shares to be received
F-12
upon exercise of the warrants is $0.19. In addition the Company agreed to amend
an existing warrant agreement, for 1,000,000 shares of common stock of the
Company, held by the note holder to reflect a decrease in the exercise price
from $0.918 to $0.01. The warrants will have a term of seven years. There was no
financial statement impact for the amendment to the warrant exercise price. The
impact of the forgiveness of the notes payable and the issuance of warrants was
to decrease Notes Payable by $2,182,826, decrease Accrued Liabilities, for
accrued interest, by $542,495 and to increase and to increase Additional Paid-in
Capital $2,725,321.
As described in Note 8, Series A Redeemable Convertible Preferred
Stock, during June 2004 and July 2004, the holders of the 630 shares of the
Preferred Stock outstanding which was recorded at $6,867,001 including dividends
and interest, agreed to exchange their preferred stock into warrants to purchase
an aggregate of 6,242,729 shares of common stock of the Company. The exercise
price for each of the common shares to be received upon exercise of the warrants
was $0.01. The warrants have a term of seven years and expire in June and July
2011. As of September 30, 2004, the impact of the preferred stock conversion and
the issuance of warrants was to decrease preferred stock by $6,867,001 and to
increase Additional Paid-in Capital by the same amount.
In July 2004, the Company sold 5,000,000 shares of common stock for
$2,000,000 in a private placement transaction. As of September 30, 2004, the
Company has received $735,891 in cash payments and rebate commissions applied
towards the purchase of the shares, with the remaining balance to be received in
installments through April 1, 2005. As of September 30, 2004, the impact of the
sale of the common stock was to increase common stock by $5,000, to increase
Additional Paid-In Capital by $1,995,000 and to set up a contra-equity account,
Subscription Receivable in the amount of $1,264,109.
During July 2004, the Company issued 1,300,000 options to a consultant
for financial services to be performed over the next two years. The options
vested 1/3 on the date of grant and 1/3 on the one (1) year anniversary of the
grant and the remaining 1/3 on the second (2)year anniversary of the grant. At
the time of the grant of the options to the consultant, the Company determined
that the fair value of the options was $179,078, which is being amortized over
the service period.
In August 2004, the Company issued 175,000 shares of its common stock
to settle outstanding vendor debt in the amount of $260,935. The impact of this
settlement was to decrease Accounts Payable by $260,935, increase Common Stock
by $175 and increase Additional Paid-In Capital by $260,760.
Effective August 9, 2004, the Company reached an agreement with their
legal counsel, Sichenzia Ross Friedman Ference LLP ("Sichenzia") with respect to
an outstanding invoice to Sichenzia which amounted to approximately $141,000
(the "Outstanding Balance") as of June 30, 2004. The agreement provided for the
payment of the Outstanding Balance in various installments, of which $80,000 has
been paid as of November 8, 2004. The remaining installments are as follows: (i)
$10,000 is due on or before November 30, 2004,(ii) $10,000 is due on or before
December 31, 2004, and (iii) the remaining balance of $29,365 is due on or
before January 15, 2005. As an alternative to the January 15, 2005 payment, the
Company can make aggregate payments of $41,365 in monthly installments over a
four-month period commencing January 31, 2005. In consideration of the foregoing
settlement, the Company issued an aggregate of 550,000 shares of common stock to
designated partners in Sichenzia. Sichenzia agreed that 450,000 of these shares
will be returned to the Company in the event that the Company pays the
Outstanding Balance in full and does not at any time prior to the share
surrender allow the current balance due to Sichenzia exceed $30,000 for a period
of more than 45 days. In the event that the Company does not satisfy these
conditions, Sichenzia can retain the 450,000 shares and apply the proceeds
received from the sale of these shares against the remaining Outstanding Balance
and/or any other sums then due by the Company to Sichenzia. The remaining
100,000 shares of common stock issued to Sichenzia are considered to be a
financing charge for the settlement agreement and accordingly are not returnable
to the Company.
As of September 30, 2004, the Company has issued a former attorney
200,000 shares of common stock of the Company as collateral for the timely
payment of all amounts due under a settlement agreement entered into between the
Company and their former legal counsel. The impact of this issuance of
restricted common stock as collateral was to increase Common Stock by $200 and
decrease Additional Paid-In Capital by the same amount.
During the year ended September 30, 2004, the Company recorded
amortization of Option Costs in the amount of $13,996 which resulted in an
increase to Employee Compensation and Related Costs by $13,996 and the increase
to Unamortized Option Costs by $13,996. At September 30, 2004, there were no
remaining Unamortized Option Costs.
F-13
During the year ended September 30, 2004, the Company
reclaimed 100,000 shares of common stock that had previously been issued to
On-Site. The Company is currently in the process of obtaining this share
certificate so that these shares may be retired.
12. Commitments and Contingencies
Late Filings
Prior to the quarter ended June 30, 2004 the Company did not file
certain required reports with the SEC on a timely basis. Specifically , the
annual report on Form 10-K for the year ended September 30, 2003 and the
quarterly reports on Form 10-Q for the quarters ended December 31, 2003 and
March 31, 2004. The Company's financial statements do not reflect a reserve for
any potential fines or penalties that may result from such late filings. In
addition, the Company has not filed its tax returns for the years ended
September 30, 2004, 2003, 2002 & 2001.
Lease Agreements
During the majority of the year ended September 30, 2004, the Company's
principal offices were located at 40 Wall Street, New York, NY at an annual cost
of approximately $920,000 per year, plus escalations. The initial term of the
lease for such office space expired in June 2009. The Company's previous
landlord, 40 Wall Street, LLC, commenced two separate landlord/tenant
proceedings seeking money judgments and orders of eviction against the Company.
Both proceedings have been settled whereby the Company vacated a portion of the
premises in March 2004 and the remaining portion in June 2004. The Company has
signed a confession of judgment for $609,441 and the landlord is seeking a money
judgment for all rent arrears (a provision has been provided in the consolidated
financial statements). In connection with Company's relocation of its
headquarters from 40 Wall Street, New York, NY to 90 Park Avenue, New York, NY,
for the year ended September 30, 2004, the Company abandoned leasehold
improvements with a net book value of $1,407,518 which was partially offset by a
write-off of deferred rent incentives of $796,840, resulting in a net expense of
$610,678, which is included in Loss on Abandonment of Leasehold Improvements,
Net of Deferred Rent Incentive, in the Consolidated Statement of Operations.
The Company is in default of making the minimum payments required under
certain of its capital lease agreements. The Company is in the process of
negotiating settlements with such vendors which is not expected to have a
material effect on the consolidated financial statements.
The Company presently occupies approximately 8,500 square feet at 90
Park Avenue, 26th Floor, New York, NY 10016 pursuant to an arrangement with the
lessee, a related party (principals) to the Company, of the space. The term of
the lease expires on May 31, 2014. AB Watley Direct Inc. has guaranteed the full
and timely performance of all obligations of the lessee under the lease. The
lease provides for the payment of an annual base rental, together with lessee's
proportionate share of building operating expenses including taxes. The base
annual rental for years 1 through 3, 4 through 6, and 7 through 10 is $366,376,
$411,056, and $464,672, respectively. Under the arrangement, the Company
occupies approximately 95% of the leased space and pays a proportionate amount
of the lease payments.
The aggregate minimum future rental payments, including a provision for a
portion of the lease payment associated with 40 Wall Street, are as follows:
Fiscal Year Ended
2005 $ 889,642
2006 859,550
2007 858,057
2008 900,503
2009 773,003
Thereafter 2,156,257
----------
$6,437,012
==========
Rent expense for the years ended September 30, 2004 and 2003 was $1,013,027 and
$1,365,051, respectively.
F-14
Employment Agreements
During the year ended September 30, 2002, the Company entered into four
employment agreements with certain key executives. The terms of the agreements
ranged from two to four years and provided for annual compensation of $850,000.
The agreements also provided for a discretionary bonuses based upon the
performance of the Company. During the year ended September 30, 2003, two of
these executives employment were terminated. The termination of these employers
is not expected to have a material effect on the consolidated financial
statements. Total annual compensation under the two remaining employment
agreements is as follows:
Annual
Fiscal Year Ended Compensation
---------------- -------------
2005 $350,000
2006 330,000
------------
$680,000
============
Litigation
The Company's business involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with claims by dissatisfied clients for fraud, unauthorized trading,
churning, mismanagement, and breach of fiduciary duty, as well as in connection
with the underwriting or distribution of securities. In recent years, there has
been an increasing incidence of litigation involving the securities industry,
including class actions which generally seek rescission and substantial damages.
In the ordinary course of business, the Company is, and may become, a
party to legal proceedings or arbitration. Except as described below, the
Company is not a party to any material legal proceedings or arbitrations.
In Summer 2004, the Company learned that the Securities and Exchange
Commission staff was conducting a formal order investigation. While the exact
scope of the SEC investigation is uncertain, it appears that the Commission is
investigating trading activities that may have occurred on the Company's
premises. The Company, along with its Vice Chairman, and the Chief Compliance
Officer of its subsidiary, A.B. Watley Direct, Inc., has been subpoenaed by the
Commission in connection with the investigation. The Company has produced
documents. The Chief Compliance Officer of A.B. Watley Direct, Inc. has produced
documents and has provided testimony. It is anticipated that the Vice Chairman
and others will provide testimony in 2005. The Company and its officers,
directors and subsidiaries will continue to cooperate with the Commission's
investigation. At this time, the Company is unable to determine the outcome of
the investigation.
The Company is a defendant in an action titled Michael Fielman v. A.B.
Watley, Inc. and A.B. Watley Group Inc., that was filed in the Supreme Court of
the State of New York, County of Nassau, Index No. 012082/02. This is an action
for unpaid wages seeking $28,657, plus statutory damages, costs, and attorneys'
fees. This matter has been settled in the amount of $34,658 payable on an
installment basis of eight (8) months (a provision has been provided for in the
consolidated financial statements). The Company is in default of the settlement
agreement.
The Company is a defendant in an action titled General Electric Capital
Corp., as Assignee of Sun Microsystems, Inc. v. A.B. Watley Group Inc. f/k/a
Internet Financial Services, Inc., Supreme Court of the State of New York,
County of New York, Index No. 117675/02. This was a breach of contract action in
connection with the lease of equipment, which sought compensatory damages of
$195,356 plus interest, costs and attorney's fees (a provision has been provided
for in the consolidated financial statements). In November 2004, the Company
settled this matter for $30,000, full payment of which has been made.
The Company's former legal counsel, has filed a complaint against the
Company. The title of the action is Hartman & Craven LLP v. A.B. Watley, Inc.
and A.B. Watley Group Inc., which was filed in the Supreme Court of the State of
New York, County of New York, Index No.: 109502/03. Plaintiff has filed a
Complaint against, amongst others, A.B. Watley Group Inc. and A.B. Watley, Inc.
for damages in the amount of $352,574, plus accrued interest thereon, for unpaid
legal fees (a provision has been provided for in the consolidated financial
F-15
statements). A.B. Watley Group Inc. and A.B. Watley, Inc. deny liability, in
part, and have asserted a counterclaim for malpractice and breach of contract
for unspecified damages. At this point, it is difficult to determine the amount,
if any, that A.B. Watley Group Inc. and A.B. Watley Inc. will be held liable
for. Plaintiff has filed a motion for summary judgment, which has been fully
submitted and briefed before the Court. The Court granted the motion in part and
denied the motion in part. The parties are awaiting an executed judgment and are
conducting pre-trial discovery.
The Company is defendant in an action titled Hyperfeed Technologies,
Inc. v. A.B. Watley Group Inc., filed in the Supreme Court of the State of New
York, County of New York, Index No. 111538/03. Plaintiff has obtained a consent
judgment order against A.B. Watley Group Inc. in the amount of $180,503 (a
provision has been provided for in our consolidated financial statements).
Currently, Plaintiff is conducting post-judgment discovery.
The Company is respondent in an arbitration filed in or about July 2003
titled John W. Donavan and Bettina H. Wolff v. A.B. Watley, Inc. Claimants are
seeking damages of approximately $94,800 relating to the suitability of
Claimants' investments (a provision has been provided for in the consolidated
financial statements). The Company denies all wrongdoing in connection with this
matter asserting that it acted in accordance with its customer agreement as well
as applicable federal securities law. The parties have settled this matter in
its entirety.
The Company is respondent in an arbitration titled Steven Messina,
Brian Kelly, and Thomas Messina v. A.B. Watley, Inc., NASD Arbitration No.
02-04649. Claimants filed this claim against A.B. Watley, Inc. in August 2002
seeking damages for unpaid commissions of approximately $147,000 (a provision
has been provided for in the consolidated financial statements) plus legal fees
and costs in the amount of $4,025 for arbitration fees and disbursements. A.B.
Watley, Inc. denies all wrongdoing in connection with this matter, and has
counterclaimed for $608,000 against Claimants for breach of contract and
fiduciary duty. A.B. Watley, Inc. intends to vigorously defend this matter and
prosecute its counterclaim.
The Company is defendant in an action titled Pentech Financial
Services, Inc. v. A.B. Watley Group Inc., Supreme Court of the State of New
York, County of New York, Index No. 02-126759. Plaintiff has filed a complaint
against A.B. Watley Group Inc. for an alleged breach of a lease agreement. On
May 28, 2003, Plaintiff obtained a judgment in the amount of $465,584 plus
interest accrued thereon (a provision has been provided for in the consolidated
financial statements). A.B. Watley Group Inc. executed a settlement agreement
with Plaintiff for a total settlement of $522,584 payable on an installment
basis. As of February 24, 2004 A.B. Watley Group Inc. is in default of the
settlement agreement.
The Company's principal offices were formerly located at 40 Wall
Street, New York, New York at an annual cost of approximately $920,000 per year,
plus escalations. The Company's previous landlord, 40 Wall Street, LLC,
commenced two separate landlord/tenant proceedings seeking money judgments and
orders of eviction against the Company. Both proceedings have been settled
whereby the Company vacated a portion of the premises in March 2004 and the
remaining portion in June 2004. The Company has signed a confession of judgment
for $609,441 (a provision has been provided for in the consolidated financial
statements) and the landlord is seeking a money judgment for all rent arrears.
The Company's former landlord, W.B. Wood & Co. Inc. filed a Notice of
Petition for Non-Payment against the Company in the District Court of the County
of Suffolk for failure to pay amounts owed in connection with the lease of the
Company's Melville, New York office space. The Company did not respond to the
action and the former landlord obtained a judgment against the Company in the
amount of $17,019, which is presently owed (a provision has been provided for in
the consolidated financial statements).
The Company is defendant in an action titled Siemens Financial
Services, Inc. f/k/a Siemens Credit Corporation v. A.B. Watley Group Inc.,
Supreme Court of the State of New York, County of New York, Index No.
603769/2002. Plaintiff filed a complaint alleging breach of contract. Plaintiff
has a judgment against A.B. Watley Group Inc. in the amount of $179,883 with
interest accrued thereon from July 10, 2003 (a provision has been provided for
in the consolidated financial statements). Plaintiff is presently conducting
post-judgment discovery.
The Company is respondent in an arbitration titled Jeffrey Spittel v.
A.B. Watley, Inc., NASD Arbitration No. 03-08076. Claimant has submitted this
claim to arbitration claiming breach of contract, respondeat superior, and
misappropriation and conversion, in the amount of $7,500 plus punitive damages,
costs, disbursements and reasonable attorneys' fees. A.B. Watley, Inc. filed an
answer on January 12, 2004. A hearing had been scheduled for November 23-24,
2004 in New York, but was adjourned at the Claimants request. The NASD has not
advised the parties of the rescheduled hearing date. A.B. Watley, Inc. denies
all wrongdoing in connection with this matter and intends to vigorously defend
this matter.
F-16
The Company is defendant in an action titled Peter Wigger v. A.B.
Watley Group Inc., Supreme Court of the State of New York, County of New York,
Index No. 604124/02. Plaintiff filed a complaint alleging breach of a commission
agreement and unpaid wages due and owing. Plaintiff seeks damages in the amount
of $398,750 plus interest accrued thereon. Plaintiff has filed a motion for
summary judgment on his claims. On or about April 23, 2004, the parties reached
a settlement, which contemplates a total payment of $174,000 to Plaintiff over
the course of two (2) years (a provision has been provided for in the
consolidated financial statements). The Company has paid $42,000 of this amount.
However, the parties are litigating whether the Company is in default of the
settlement agreement.
The Company is defendant in an action titled Lehr Construction Corp. v.
A.B. Watley Group Inc., Supreme Court of New York, County of New York, Index No.
600276/02. This action is for damages arising out of the alleged breach of a
construction contract. Plaintiff sought damages of approximately $233,794. On
March 6, 2003, the parties reached a settlement in which the Company consented
to a judgment in the amount of $295,857, less any payments made by the Company,
and the parties simultaneously entered into a Forbearance Agreement, which set
forth a payment schedule for the Company. The Company has paid $65,000 pursuant
to the Forbearance Agreement. On December 17, 2003, Plaintiff issued the Company
a Notice of Default under the Forbearance Agreement, which the Company has
failed to cure. Under the Forbearance Agreement, Plaintiff may execute on the
outstanding balance of the judgment in the amount of $158,794 without further
notice to the Company (a provision has been provided for in the consolidated
financial statements). Plaintiff has made efforts to seek information to collect
upon the judgment.
The Company was the defendant in an action titled A.B. Watley Group
Inc./John Martinez, Case No. 2-4173-03-36 Section 806 Sarbanes-Oxley Act
Complaint. On July 11, 2003, the U.S. Department of Labor ("DOL") gave us notice
that John Martinez, a former officer of ours, had filed a complaint against us
under Section 806 of the Sarbanes-Oxley Act of 2002 (the "Act"). On March 9,
2004, the Department of Labor gave notice that it had completed its
investigation and dismissed the complaint. Complainant appealed. This matter was
settled for $20,000, full payment of which has been made.
The Company was the respondent in an arbitration titled MCI Worldcom
Communications, Inc. v. A.B. Watley Group Inc., JAMS Arbitration, Reference #
1410003356. On September 16, 2003, claimant filed this arbitration against the
Company asserting a breach of contract claim in the amount of $135,644. On
January 26, 2004, the Company submitted its answer denying all material
allegations and asserting several affirmative defenses. On March 22, 2004, the
Arbitrator held a Preliminary Conference and issued a Preliminary Hearing Order
directing the parties to submit a brief addressing the arbitrability of one of
Claimant's claims and our statute of limitations defense. On April 28, 2004,
JAMS informed the parties the Arbitrator had resigned due to illness. A new
Arbitrator was assigned to the matter, but we objected to the Arbitrator
appointment. This matter was settled for $30,000, full payment of which has been
made (a provision has been provided for in the consolidated financial
statements).
In March 2003, the holder of our $5 million secured demand note (the
"Noteholder") demanded repayment of the note. On March 31, 2003, the Company
filed a NASD Arbitration Demand and a Statement of Claim with the NASD Dispute
Resolution office. The arbitration sought to enforce the provisions of the
secured demand note agreement and to prevent premature withdrawal by the lender.
In April 2004, the parties agreed to discontinue the arbitration without
prejudice pursuant to a settlement agreement that provided for the repayment of
approximately $2.9 million (which was repaid in April 2004) of the $5 million
original secured demand note. The remaining principal balance payable in the
consolidated financial statements is $2,441,260. The Noteholder agreed that as
long as the Company was not in default of any of its obligations under the
settlement agreement, not to commence any litigation with respect to the
outstanding balance due on the secured demand note prior to December 20, 2004.
On June 4, 2004 the Noteholder sent the Company a notice of default alleging
that it did not meet certain of its obligations under the terms of the
settlement agreement. On June 2004, the note matured and the Company has not
paid the remaining balance or received an extension of the maturity date.
The Company is plaintiff in an action titled A.B. Watley Group Inc. v.
John J. Amore, et al., Supreme Court of the State of New York, County of New
York, Index No. 602993/03. The Company has sued its former CEO who has filed a
counterclaim against the Company. The Company is unable at this time to provide
a opinion as to the likely outcome, nor the potential expense to be incurred.
The Company is defendant in an action titled John J. Amore v. Steven
Malin and A.B. Watley, Inc., Supreme Court of the State of New York, County of
New York, Index No. 603833/03. Plaintiff filed a complaint alleging breach of a
contract against A.B. Watley, Inc. seeking damages in the amount of $500,000 and
slander against Steven Malin, our Chairman, seeking damages in the amount of
$5,000,000. The Company has filed an answer denying all wrongdoing. The Company
denies all wrongdoing in connection with this matter and intends to vigorously
defend this matter.
F-17
The Company was the respondent in an arbitration titled William Frymer
v. A.B. Watley, Inc., NASD Arbitration No. 03-05524. The claimant, a former
employee of the Company, commenced this arbitration claiming breach of contract
and violation of New York labor laws. The Claimant sought unpaid salary and
bonus, stock options, liquidated damages and punitive damages. The Parties
agreed to a settlement of $75,000, which has been provided for in the
consolidated financial statements and subsequently paid in full.
On December 9, 2004, A.B. Watley, Inc. was notified of an award
rendered by an NASD arbitration panel against A.B. Watley, Inc. for compensatory
damages in the amount of $811,927 (a provision has been provided for in the
consolidated financial statements) to claimant, James B. Fellus, in the case
encaptioned James B. Fellus vs. A.B. Watley, Inc. (NASD Arbitration No.:
03-05526). All other relief sought by claimant (including an award against A.B.
Watley Direct, Inc. and/or A.B. Watley Group, Inc., and for attorneys fees and
punitive damages) was expressly denied. The arbitration involved claims by a
former employee of A.B. Watley, Inc. for alleged breach of contract (all other
claims having been withdrawn by the former employee). The amount awarded
presumably represented damages for alleged non-payment of contractual salary.
A.B. Watley, Inc. intends to move to vacate the award by asserting, among other
things, that the panel manifestly disregarded the undisputed facts and
applicable, well-settled law.
The Company is the respondent in an action titled Dover Limited et al
v. A.B. Watley, Inc. et al., Index No.: 04 Civ. 7366. Plaintiffs filed this
complaint against, among others, the Company, its president, and two employees
alleging six causes of action sounding in securities fraud, common law fraud,
conspiracy to commit fraud, breach of contract and breach of implied covenant of
good faith and fair dealing, and negligent misrepresentation. Plaintiffs are
seeking compensatory damages of $2,994,598 plus punitive damages of $5,000,000,
including costs, interest and attorney's fees. The Company denies all wrongdoing
in connection with this matter and intends to vigorously defend this matter.
Effective August 9, 2004 we reached an agreement with legal counsel,
Sichenzia Ross Friedman Ference LLP ("Sichenzia") with respect to our
outstanding invoice to them of approximately $141,364 (the "Outstanding
Balance") as of June 30, 2004 (a provision has been provided for in the
consolidated financial statements). The agreement provides for the payment of
the Outstanding Balance in installments, $90,000 of which has been paid as at
November 8, 2004. The remaining installments are due on or before December 31,
2004 ($10,000) and on or before January 15, 2005 ($29,364). As an alternative to
the January 15, 2005 payment, the Company can make payment of an aggregate of
$41,364 in installments over a period of four months commencing January 31,
2005. In consideration of the foregoing, the Company also issued an aggregate of
550,000 shares of our common stock to designated partners in Sichenzia.
Sichenzia has agreed that 450,000 of such shares will be returned to the Company
for cancellation in the event that it pays the Outstanding Balance in full and
does not at any time prior thereto allow the current balance due to them to
exceed $30,000 for a period of more than 45 days. In the event the Company does
not satisfy these conditions, Sichenzia can retain the 450,000 shares and apply
the sale proceeds against the Outstanding Balance and any other sums then due by
the Company to them.
In addition to the foregoing, in the ordinary course of
business, the Company and its principals are, and may become, a party to legal
or regulatory proceedings commenced by the NASD, the SEC or state securities
regulators relating to compliance, trading and administrative problems that are
detected during periodic audits and inspections or reported by dissatisfied
customers. Such matters, if pursued by such entities, could rise to the level of
disciplinary action. Excpet as seth forth herein, the Company is not currently
involved in any proceeding by a governmental agency or self-regulatory
organization, the outcome of which could have a material adverse effect on our
business. There can be no assurance that one or more disciplinary actions, if
decided adversely us, would not have a material adverse effect on our business,
financial condition and results of operations.
13. Stock Options
Under the Company's Stock Option Plans (collectively, the "Plans"),
employees, non-employee directors, officers, and consultants are generally
granted options (both incentive stock options and nonqualified stock options) to
purchase shares of Common Stock at prices not less than the estimated fair
market value of the Common Stock on the date the option is granted. The options
are exercisable at either the date of grant, in ratable installments or
otherwise, generally over a period of one to three years from the date of grant.
F-18
The options generally expire within ten years after the date of grant. The
number of shares delivered in the aggregate under the 2004, 2003, 2000, 1999,
1998 and 1997 Plans cannot exceed 6,500,000, 2,000,000, 1,600,000, 800,000,
800,000 and 400,000 shares, respectively, (12,100,000 shares in total).
A summary of the Company's stock option activity and related
information for the years ended September 30, 2004 and 2003 is as follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Outstanding at September 20, 2002 3,579,387 $ 2.12
Granted 500,000 $ 0.35
Exercised -- --
Forfeited (1,386,687) $ 15.23
---------- ----------
Outstanding at September 30, 2003 2,692,700 $ 6.37
Granted 6,875,000 $ 0.20
Exercised -- --
Forfeited (32,450) $ 8.58
---------- ----------
Outstanding at September 30, 2004 9,535,250 $ 0.23
---------- ----------
Exercisable at September 30, 2002 2,614,913 $ 0.39
Exercisable at September 30, 2003 1,699,430 $ 6.94
Exercisable at September 30, 2004 4,693,592 $ 0.27
Included in the table above are non-employee option grants of 1,400,000
and -0- shares for the years ended September 30, 2004 and September 30, 2003,
respectively. Compensation expense related to these stock options for the years
ended September 30, 2004 and 2003 was $77,458 and $0, respectively.
During the year ended September 30, 2004 the Company issued options to
purchase 6,875,000 shares of its common stock to certain of its employees and
consultants. The weighted average exercise price of the options awarded was $.20
and with an average expiration term of ten years. Additionally, during the year
ended September 30, 2004, options to purchase 30,000 shares of the Company's
common stock were voluntary forfeited and 2,450 were forfeited due to
termination of employment.
The weighted average fair value of options granted during the years
ended September 30, 2004 and 2003, was $0.20 and $0.35, respectively. The fair
value of each option grant was estimated at the date of grant using the
Black-Scholes option valuation model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value estimate of
its stock options. In calculating the fair values of the stock options, the
following assumptions were used:
Years Ended September 30,
2004 Grants 2003 Grants
----------- ------------
Dividend yield 0% 0%
Weighted average expected life:
Employees: 10.0 years 10.0 years
Non-employees 10.0 years --
Weighted average risk-free interest rate 4.52% 4.21%
Expected volatility 416% 109%
F-19
Additional information regarding options outstanding as of September
30, 2004 is as follows:
Options Outstanding Options Exercisable
------------------- ----------------------------------
Range of Number of Weighted Average Weighted Average Number Exercisable Weighted
Exercisable Outstanding Remaining Exercise as of 9/30/04 Exercise Price
Prices as of 9/30/04 Contractual Life in years Price
- ------------------------------------------------------------------------------------------------------------------
$0.10 - $ 0.35 9,475,000 9.29$ 0.19 4,641,667 $ 0.18
$2.90 - $ 6.13 45,000 6.68$ 4.33 36,675 $ 4.66
$0.19 - $17.50 15,250 5.49$ 14.34 15,250 $14.34
--------- ----------
9,535,250 4,693,592
========= ==========
14. Stock Warrants
A summary of the Company's warrant activity and related information for
the year ended September 30, 2004 is as follows:
Number of Range of
Shares Exercise Prices
----------- -----------
Outstanding at September 30, 2003 7,037,036 $0 - $19.47
Issued in exchange for Series A
Preferred Stock 6,242,728 $ .01
Issued in exchange of debt 1,987,771 $ .01
Expired (929,791) $6.75 -$19.47
Forfeited with exchange of Series A
Preferred Stock (1,629,069) $ 2.95
-----------
Outstanding at September 30, 2004 12,708,675 $0 - $3.69
-----------
15. Income taxes
The Company has no income tax liability for Federal, State, and Local
income tax purposes. The Company is subject only to minimum taxes based on
capital and the provision for income taxes for each of the years ending
September 20, 2004, and 2003 amounted to $0.
Years Ended September 30,
2004 2003
-------- --------
Tax benefit at federal statutory rate (34.0%) (34.0%)
State taxes, net of federal tax effect 0.1 0.1
Increase in valuation allowance on deferred tax assets 33.9 33.9
Other 0.1 0.1
-------- --------
Effective tax rate 0.1% 0.1%
======== ========
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The effects of temporary
differences that give rise to deferred tax assets at September 30, 2004, are
principally the result of net operating carryforwards. At September 30, 2004,
the Company had a net operating loss carry forward for federal, state and local
tax purposes of approximately $74,000,000 that will begin to expire no sooner
than September 30, 2013.
F-20
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the reversal of deferred tax assets, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
period for which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will not realize the benefits of these
deductible differences, and thus a 100% valuation allowance of theses benefits
($29,600,000) was established. The valuation allowance increased by $3.6 million
from the year ended September 30, 2003 as compared to the year ended September
30, 2004. Certain of such net operating loss benefits may be limited as a result
of a change of control.
16. Subsequent Events
Effective October 12, 2004 we retained Sichenzia to represent us in the
action titled Dover Limited and Wendy Sui Cheng Yap v. A.B. Watley Inc., Robert
Malin, Keith Sorrentino, John Coakley, Alain Assemi and John J. Amore (Case No.:
04 CV 7366) as filed in the United States District Court, Southern District of
New York. In connection therewith, we paid Sichenzia an initial retainer of
$10,000 and issued an aggregate of 1,000,000 shares of our common stock to
designated partners of Sichenzia. In the event we pay all Sichenzia invoices
related to this matter within 30 days of issuance, the 1,000,000 shares will be
returned to us for cancellation. If we fail to do so, the shares will be
retained and the proceeds from sales thereof will be applied to all of the
outstanding and current balances due by us to them. Any excess will be applied
to additional fees incurred, if any. Any remaining proceeds after that will be
retained by the share recipients.
In October 2004 we issued an aggregate of 300,000 shares of our common stock to
three persons with respect to legal and other services rendered and 100,000
shares to an affiliate of our legal counsel in return for services provided in
connection with a debt conversion.
F-21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Articles Eighth and Ninth of our Certificate of Incorporation provides
for the indemnification of our directors and officers to the fullest extent
permitted by law.
Other Expenses of Issuance and Distribution
We estimate that the expenses payable by us in connection with this
offering described in the Registration Statement will substantially as follows:
Item Amount Payable by the Company
SEC Registration Fee $ 994.91
Printing and Edgarizing Expenses $ 10,000
Legal Fees and Expenses $ 37,500
Accounting Fees and Expenses $ 15,000
Miscellaneous Expenses $ 10,000
---------------
Total $ 73,494.91
Recent Sales of Unregistered Securities
In January 2005 we issued 1,300,000 stock options to the president of our
subsidiary, A.B. Watley Direct, Inc. Each option has an exercise price of $.20
per share.
In January 2005 we issued 2,050,000 shares of our common stock to 1 person in
connection with the exercise of 2,050,000 common stock purchase warrants.
In October 2004 we issued an aggregate of 400,000 shares of our common stock to
3 persons with respect to services rendered and a debt conversion.
Effective August 9, 2004 we reached an agreement with legal counsel, Sichenzia
Ross Friedman Ference LLP ("Sichenzia") with respect to our outstanding invoice
to them of approximately $141,000 (the "Outstanding Balance") as of June 30,
2004 (a provision has been provided for in our consolidated financial
statements). The agreement provides for the payment of the Outstanding Balance
in installments, $90,000 of which has been paid as at December 20, 2004. The
remaining installments are due on or before December 31, 2004 ($10,000) and on
or before January 15, 2005 ($29,364). As an alternative to the January 15, 2005
payment, we can make payment of an aggregate of $41,364 in installments over a
period of four months commencing January 15, 2005. In consideration of the
foregoing, we also issued an aggregate of 550,000 shares of our common stock to
60
designated partners in Sichenzia. Sichenzia has agreed that 450,000 of such
shares will be returned to us for cancellation in the event that we pay the
Outstanding Balance in full and o not any time prior thereto allow the current
balance die to them to exceed $30,000 for a period of more than 45 days. In the
event we do not satisfy these conditions, Sichenzia can retain the 450,000
shares and apply the sale proceeds against the Outstanding Balance and any other
sums then due by us to them.
Effective October 12, 2004 we retained Sichenzia to represent us in the action
titled Dover Limited and Wendy Sui Cheng Yap v. A.B. Watley Inc., Robert Malin,
Keith Sorrentino, John Coakley, Alain Assemi and John J. Amore (Case No.: 04 CV
7366) as filed in the United States District Court, Southern District of New
York. In connection therewith, we paid Sichenzia an initial retainer of $10,000
and issued an aggregate of 1,000,000 shares of our common stock to Sichenzia. In
the event we pay all Sichenzia invoices related to this matter within 30 days of
issuance, the 1,000,000 shares will be returned to us for cancellation. If we
fail to do so, the shares will be retained and the proceeds from sales thereof
will be applied to all of the outstanding and current balances due by us to
them. Any excess will be applied to additional fees incurred, if any. Any
remaining proceeds after that will be retained by the share recipients.
On September 1, 2004 we granted 100,000 stock options to a consultant for
services rendered. Each option has an exercise price of $.30 per share and
vested upon grant. The options expire 10 years from the date of grant.
In August 2004 we issued 175,000 shares of our common stock to a former auditor
of ours in settlement of outstanding liabilities.
In August 2004 we issued an aggregate of 550,000 shares of our common stock to
two designees of legal counsel in consideration of legal services.
In August 2004 we issued 200,000 shares of our common stock to legal counsel in
settlement of outstanding liabilities.
On July 29, 2004 we granted an aggregate of 4,775,000 stock options pursuant to
our 2004 Stock Option Plan to 13 persons. Each option has an exercise price of
$.20 per share and vests over a period of two years. 1/3 of the options vested
on the date of grant with 1/3 of the options vesting on each of the first and
second anniversaries of the date of grant. Notwithstanding the forgoing, the
options vest immediately upon a change in control. The options expire 10 years
from the date of grant.
In July 2004, we and holders of 70 shares of our Series A Redeemable Convertible
Preferred Stock reached an agreement to exchange their preferred stock for
warrants to purchase 780,342 shares of our common stock.
In July 2004, we and an affiliate of our clearing broker reached an agreement to
forgive notes payable, including accrued interest, in the amount of $2,725,321
in exchange for warrants to purchase 1,000,000 shares of our common stock. The
exercise price for each of the common shares to be received upon exercise of the
warrants is $.19. In addition we agreed to amend an existing warrant agreement,
for 1,000,000 shares of our common stock held by the noteholder to reflect a
decrease in the exercise price from $.918 to $.01. The warrants have a term of
seven years.
61
In July 2004, we sold 5,000,000 shares of common stock for $2,000,000 in a
private placement transaction to two persons. As of December 20, 2004, we have
received $1,000,000 towards the purchase of the shares, with the remaining
balance to be received in quarterly installments through April 1, 2005. The
sales made pursuant to the private placement offering were private transactions
without registration in reliance on the exemption provided by Section 4(2), Rule
506 of Regulation D and Regulation S of the Securities Act of 1933, as amended.
During the period August 30, 2001 through June 3, 2004 we issued an aggregate of
12,708,675 warrants to 15 persons, each exercisable for the purchase of one
share of our common stock at exercise prices ranging from $0 to $3.69 per share.
The average exercise price is $.29 per share. The warrants expire on dates
ranging from August 30, 2006 through and including June 2, 2011.
In June 2004, holders of 560 shares of our Series A Redeemable Convertible
Preferred Stock (the "Holders") exchanged their preferred stock for warrants to
purchase 5,462,387 shares of our common stock. The exercise price for each
warrant is $.01. The warrants have a term of seven years and expire in June
2011.
In June 2004, certain of our noteholders reached an agreement to exchange notes
payable, including accrued interest thereon, in the amount of $1,102,500 into
warrants to purchase 987,771 shares of our common stock. The exercise price for
each of the warrants is $.01. The warrants have a term of seven years, expire in
June 2011 and entitle the holders to cash and stock dividends in the event we
declare such.
On February 13, 2004, we issued 250,000 shares of common stock to a third party
in connection with a $150,000 loan. The loan was payable in fourteen equal
monthly installments. As of April 30, 2004, we repaid the loan.
On January 15, 2004 we granted an aggregate of 2,000,000 stock options pursuant
to our 2003 Stock Option Plan to four employees. Each option has an exercise
price of $.20 per share. 1,000,000 of the options vested upon grant. 250,000 of
the options vest on each of the first, second, third and fourth anniversaries of
the date of grant. The options expire 10 years from the date of grant.
Except or otherwise provided, each of the above transactions were exempt from
registration under the Securities Act by reason of Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, as transactions by an
issuer not involving a public offering.
62
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
3.1 Restated Certificate of Incorporation of the Company and form of
amendment thereto.(1)
3.2 By-Laws of the Company, as amended. (1)
4.1 Specimen Common Stock Certificate. (1) 4.2 Form of Underwriter's
Warrant Agreement, including Form of Warrant Certificate. (1)
5 Opinion of Counsel
10.1 1997 Stock Option Plan. (1)
10.2 Second Amended and Restated 1998 Stock Option Plan. (1)
10.3 Employment Agreement dated as of May 1, 1997 between the Company and
Steven Malin and Amendment to Employment Agreement dated as of
October 1, 1998 between the Company and Steven Malin. (1)
10.4 Employment Agreement dated as of January 1, 1999 between the Company
and Robert Malin. (1)
10.5 Office lease dated as of June 20, 1997 between 40 Wall Development
Associates, LLC, as Landlord and the Company as Tenant for premises
located at 40 Wall Street, New York, New York. (1)
10.6 Fully Disclosed Clearing Agreement dated October 3, 1996 and
Amendment dated June 8, 1998 between Penson Financial Services, Inc.
and A.B. Watley, Inc. (1)
10.7 Master Lease Agreement dated December 17, 1998 between General
Electric Capital Corporation and the Company. (1)
10.8 Security Agreement dated December 17, 1998 between General Electric
Capital Corporation and the Company. (1)
10.9 Letter of Credit Agreement dated December 17, 1998 between General
Electric Capital Corporation and the Company. (1)
10.10 1999 Stock Option Plan.(2)
10.11 2000 Stock Option Plan. (3)
10.12 Agreement, dated November 1, 2001, by and among A.B. Watley Group
Inc. and On-Site Trading, Inc. (3)
63
10.13 Employment Agreement, dated as of November 2, 2001, between the
Company and Gary Mednick. (6)
10.14 Series A Convertible Preferred Stock Purchase Agreement dated
November 2001 for the sale of 630 shares of Series A Redeemable
Convertible Preferred Stock. (6) 10.15 Master Subordination, Waiver,
Release and Indemnification Agreement entered on March 27, 2002. (4)
10.16 Promissory Note in the amount of $1,600,000 entered between A.B.
Watley Group Inc. and Penson Financial Services, Inc. dated March
27, 2002. (4)
10.17 Promissory Note in the amount of $900,000 entered between A.B.
Watley Group Inc. and DMG legacy Institutional Fund LLC and DMG
Legacy Fund LLC dated March 27, 2002. (4)
10.18 First Amendment to Promissory Note entered between A.B. Watley Group
LLC and Penson Financial Services Inc. dated April 2002. (4)
10.19 Second Amendment to Promissory Note entered between A.B. Watley
Group LLC and Penson Financial Services Inc. dated May 2002. (4)
10.20 Non-Exclusive Perpetual License of proprietary software between
E*Trade and the Company dated April 2002. (4)
10.21 Asset Purchase Agreement entered into with Integrated Trading
Solutions, Inc. dated July 2002. (6)
10.22 License Agreement entered into Integrated Trading Solutions, Inc
dated July 2002. (6)
10.23 Senior Subordinated Demand Note entered into with SDS Merchant Fund,
L.P. whereby the Company borrowed $2,500,000 dated August 30, 2001.
(6)
10.24 Equity line entered into with investment group dated September 6,
2000 in the amount of $3,000,000. (5)
10.25 Employment Agreement entered with Steven Malin dated September 2002.
(6)
10.26 Employment Agreement entered with Robert Malin dated September 2002.
(6)
10.27 Amendment to the Fully Disclosed Clearing Agreement between Penson
Financial Services, Inc. and A.B. Watley, Inc. (6)
10.28 Amended and Restated Promissory Note between A.B. Watley Group Inc.
and Penson Financial Services, Inc. dated July 2002. (6)
64
10.29 First Amendment to Master Agreement and First Amendment to Software
Security Agreement dated as of April 2002. (4)
10.30 Second Amendment to the Master Subordination, Waiver, Release and
Indemnification Agreement, dated as of May 2002. (4)
10.31 Third Amendment to the Master Subordination, Waiver, Release and
Indemnification Agreement, dated as of May 2002. (4)
14 Code of Ethics (7)
21 Subsidiaries of Registrant.
23.1 Independent Registered Public Accounting Firm's Consent.
(1) Filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-71783) and hereby incorporated by
reference herein.
(2) Filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-35340) and hereby incorporated by
reference herein.
(3) Filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333- 67014) and hereby incorporated by
reference herein.
(4) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 and hereby
incorporated by reference herein.
(5) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002 and hereby
incorporated by reference herein.
(6) Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended September 30, 2002 and hereby
incorporated by reference herein.
(7) Filed as an exhibit to the Company's Annual Report on From
10-KSB for the year ended September 30, 2004 and hereby
incorporated by reference herein.
Undertakings
We hereby undertake:
(a)(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the formation set forth in the registration statement; and
65
(iii) To include any additional or changed material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(a)(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(a)(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
66
SIGNATURES
In accordance with the Securities Act of 1933, the registrant certifies that it
has reasonable grounds to believe that it meets all of the requirements of
filing on Form SB-2 and authorized this registration statement to be signed on
its behalf by the undersigned, in the City of New York, State of New York on
January 21, 2005.
A.B. WATLEY GROUP INC.
By: /s/ Robert Malin
---------------------------------------------
Name: Robert Malin
Title: President
In accordance with the requirement of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
Signature and Title
/s/ Robert Malin
- --------------------------------------------------
Robert Malin - President, Vice Chairman, Principal Dated: January 21, 2005
Financial and Accounting Officer and Director
/s/ Steven Malin
- --------------------------------------------------
Steven Malin - Chairman of the Board and Dated: January 21, 2005
Principal Executive Officer
67