Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number: 1-14897
A.B. Watley Group Inc.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3911867
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Wall Street, New York, NY 10005
----------------------------------
(Address of principal executive offices)
(Zip Code)
(212) 422-1100
--------------
(Registrant`s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ X ].
The number of shares outstanding of the issuer`s common stock, par value $.001
per share, as of February 21, 2003 was 12,508,852.
A.B. Watley Group Inc.
Index
PART I-- FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition
As of June 30, 2002 (Unaudited) and September 30, 2001 ....................... 3
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended June 30, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2002 and 2001 (Unaudited) ................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited) ............................ 7
Item 2. Management`s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................... 17
Item 4. Controls and Procedures ............................................................. 19
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 19
Item 2. Changes in Securities ............................................................... 19
Item 3. Default on Senior Securities ........................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders ................................. 19
Item 5. Other Information ................................................................... 19
Item 6. Exhibits and Reports on Form 8-K .................................................... 19
Signatures .............................................................................................. 20
Certifications .......................................................................................... 21
-2-
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
A.B. Watley Group Inc.
Condensed Consolidated Statements of Financial Condition
June 30, September 30,
2002 2001
------------ -----------
(Unaudited)
Assets:
Cash and cash equivalents $ 66,881 $ 508,053
Restricted cash 429,576 500,334
Receivables from clearing brokers 3,449,534 2,294,533
Securities owned at market value 13,937 343,434
Property and equipment, net of accumulated depreciation
of $10,777,843 and $8,659,868 6,134,157 14,806,945
Loans receivable from related party 252,527 257,197
Receivable from E*Trade 3,228,790 --
Security deposits 147,376 1,444,480
Other assets 509,594 1,377,700
------------ ------------
Total Assets $ 14,232,372 $ 21,532,676
============ ============
Liabilities and Stockholders` Equity:
Accounts payable and accrued liabilities 10,337,497 7,953,542
Accrued liabilities to LLC Class B Members 2,499,037 --
Securities sold not yet purchased 10,591 372,545
Notes payable - other 6,874,627 3,437,323
Notes payable to officers 3,100,000 4,350,000
Lease obligations and other 1,896,924 1,957,075
Subordinated borrowings - other 350,000 350,000
Subordinated borrowings from officer 180,000 180,000
------------ ------------
25,248,676 18,600,485
------------ ------------
Series A redeemable convertible preferred stock $0.01 par value, 690 shares authorized
and 630 and 0 issued and outstanding at June 30, 2002 and September 30, 2001 and
accrued dividends (liquidation preference - $6,300,000) 6,244,102 --
------------ ------------
Stockholders` (Deficit) Equity:
Preferred Stock $0.01 par value, 1,000,000 shares authorized and none issued and
outstanding at June 30, 2002 and September 30, 2001 -- --
Common stock, $0.001 par value, 20,000,000 shares authorized at June 30, 2002
and September 30, 2001, respectively, 12,508,852 and 10,995,796 issued
and outstanding at June 30, 2002 and September 30, 2001 12,509 10,996
Additional paid-in capital 44,140,954 37,224,984
Option costs (41,997) (267,798)
Deferred compensation costs (258,995) (459,563)
Accumulated deficit (61,112,877) (33,576,428)
------------ ------------
Total Stockholders` (Deficit) Equity (17,260,406) 2,932,191
------------ ------------
Total Liabilities and Stockholders` (Deficit) Equity $ 14,232,372 $ 21,532,676
============ ============
See accompanying notes to condensed consolidated financial statements.
-3-
A.B. Watley Group Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Commissions $2,441,796 $4,125,864 $14,641,927 $15,527,928
Data service fees 121,722 273,797 383,059 1,081,482
Sale of Software Income 1,191,000 -- 1,191,000 --
Principal transactions 155,433 500,871 1,156,191 2,636,557
Interest and other income 1,410,433 605,756 2,834,470 1,645,207
------------ ------------ ------------ ------------
Total revenues 5,320,384 5,506,288 20,206,647 20,891,174
Interest expense 304,263 182,319 2,538,506 443,709
Interest expense - related parties 127,625 111,873 387,591 286,894
------------ ------------ ------------ ------------
Net revenues 4,888,496 5,212,096 17,280,550 20,160,571
Expenses and other charges:
Commissions, floor brokerage and clearing charges 1,914,415 2,633,426 10,221,360 8,325,695
Employee compensation and related costs 2,276,615 2,893,108 8,868,357 9,314,660
Communications 934,107 489,803 2,667,109 1,537,397
Business development 16,509 531,698 428,087 1,988,220
Professional services 1,043,127 1,437,920 2,363,628 2,571,164
Occupancy and equipment costs 1,195,684 1,558,622 5,813,973 4,430,818
Depreciation and amortization 1,480,383 1,435,468 5,194,649 3,997,009
Other expenses 387,349 262,830 1,417,417 736,949
Loss on investments -- 571,112 -- 703,614
Impairment of intangibles 2,146,000 -- 7,870,110 --
Abandonment of leasehold improvements 618,028 -- 618,028 --
Minority interest applicable to LLC Class B members (487,374) -- (899,869) --
------------ ------------ ------------ ------------
Total expenses 11,524,843 11,813,987 44,562,849 33,605,526
------------ ------------ ------------ ------------
Loss before income taxes and extraordinary item (6,636,347) (6,601,891) (27,282,299) (13,444,955)
Income tax provision -- (5,000) (4,150) (19,961)
------------ ------------ ------------ ------------
Loss before extraordinary item (6,636,347) (6,606,891) (27,286,449) (13,464,916)
Extraordinary loss on extinguishment of debt -- -- (250,000) --
------------ ------------ ------------ ------------
Net loss $(6,636,347) $(6,606,891) $27,536,449) $13,464,916)
============ ============ ============ ============
Basic and diluted loss per common share:
Loss before extraordinary item $(6,636,347) $(6,606,891) $(27,286,449) $(13,464,916)
Deemed dividend to preferred shareholders
- - beneficial conversion (1,639,797)
Deemed dividend to preferred shareholders
- - accretion of redemption (588,732) (1,371,732)
Preferred stock dividends (94,500) (220,500)
------------ ------------ ------------ ------------
Loss before extraordinary item attributable to
common shareholders (7,319,579) (6,606,891) (30,518,478) (13,464,916)
Extraordinary loss on extinguishment of debt (250,000)
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (7,319,579) $ (6,606,891) $ (30,768,478) $(13,464,916)
============ ============ ============ ============
Loss before extraordinary item $ (0.59) $ (0.61) $ (2.44) $ (1.41)
Extraordinary item $ - $ - $ (0.02) $ -
Basic and diluted loss per share $ (0.59) $ (0.61) $ (2.46) $ (1.41)
Weighted average shares outstanding 12,508,852 10,908,084 12,508,852 9,515,476
See accompanying notes to condensed consolidated financial statements.
-4-
A.B. Watley Group Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
June 30,
---------------------------
2002 2001
------------ ------------
Cash flows used in operating activities:
Net loss $(27,536,449) $(13,464,916)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Non-cash compensation and service costs 200,568 21,000
Options costs 225,801 --
Sale of Software (1,191,000) --
Penalties - preferred stock 311,487 --
Issuance of warrants 1,390,569 --
Minority interest applicable to LLC
Class B Members (899,869) --
Loss on investments -- 703,614
Depreciation and amortization 5,328,023 3,997,009
Loss on impairment of intangibles 7,870,110 --
Loss on extinguishment of debt 250,000 --
Loss on disposal of leasehold
improvements 618,028 --
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash 70,758 38,462
Receivables from clearing brokers (1,242,901) (123,358)
Securities owned 4,880,475 191,839
Loans receivable from related party 4,670 3,478
Security deposits 1,297,104 --
Other assets 439,295 2,087
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities 2,323,822 (1,905,370)
Securities sold, not yet purchased (3,720,537) (163,140)
Lease obligations and other (60,152) 33,571
------------ ------------
Net cash used in operating activities (9,440,198) (10,665,724)
------------ ------------
Cash flows from (used in) investing activities:
Purchases of property and equipment, net (216,798) (1,709,541)
Proceeds of sale of software license 1,771,210 --
Investments -- (30,000)
------------ ------------
Net cash provided by ( used in) investing
activities 1,554,412 (1,739,541)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 10,012,127
Proceeds from sale of preferred stock 3,324,291 --
Proceeds from exercised stock options -- 987,290
Proceeds (repayment) of notes payable 3,779,686 (938,928)
Proceeds from notes payable to officer 900,000 975,000
Payment of capital lease obligations -- (451,672)
Capital contribution by LLC Class B members 446,307 --
Capital distribution to LLC Class B members (1,005,670) --
Repayment of bank loan -- (3,333)
------------ ------------
Net cash provided by financing activities
7,444,614 10,580,484
------------ ------------
Net decrease in cash and cash equivalents (441,172) (1,824,781)
Cash and cash equivalents at beginning of period 508,053 5,090,083
------------ ------------
Cash and cash equivalents at end of period $66,881 $3,265,302
============ ============
See accompanying notes to condensed consolidated financial statements.
-5-
A.B. Watley Group Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited), Continued
Nine Months Ended
June 30,
-----------------------
2002 2001
------------- --------
Supplemental non-cash financing activities
and disclosure of cash flow information:
Exchange of property and equipment in payment of operating expenses $ -- $317,802
============= ========
Receivable from E*Trade $ 3,809,000 $ --
============= ========
Issuance of notes payable in payment of operating
expenses $ 225,714 $ --
============= ========
Notes payable assigned to clearing broker $ 2,150,000 $ --
============= ========
Preferred stock dividends $ 220,500 $ --
============= ========
Exchange of subordinated debt for preferred stock $ 2,500,000 $ --
============= ========
Deemed dividend to preferred shareholders -beneficial
conversion $ 1,639,797 $ --
============= ========
Deemed dividend to preferred shareholders -accretion of
redemption feature $ 1,371,732 $ --
============= ========
Net assets of On-Site acquired by the issuance of
common stock $ 5,703,000 $ --
============= ========
Cash paid for:
Interest $ 179,897 $458,442
============= ========
Taxes $ -- $ 14,961
============= ========
See accompanying notes to condensed consolidated financial statements.
-6-
A.B. Watley Group Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
A.B. Watley Group Inc. ("ABWG" or the "Company") is a U.S. public
corporation. The Company conducts business primarily through its principal
subsidiaries, A.B. Watley, Inc. ("A.B. Watley") and ABW TRADING, LLC ("LLC"),
which operate as one integrated business segment. LLC ceased operations on June
18, 2002. ABWG is a Delaware corporation organized on May 15, 1996.
A.B. Watley is a registered broker-dealer with the Securities and Exchange
Commissions ("SEC"), and is a member of the National Association of Securities
Dealers, Inc. ("NASD"). A.B. Watley is an introducing broker-dealer, conducting
business in electronic trading, information and brokerage services, as well, as
institutional block trading. A.B. Watley clears all transactions through three
clearing brokers on a fully disclosed basis. Accordingly, A.B. Watley is exempt
from Rule 15c3-3 of the Securities and Exchange Act of 1934.
LLC is a registered broker-dealer and a member of the Philadelphia Stock
Exchange and was acquired by the Company in November 2001. ABWG is the Class A
managing member of LLC. LLC was formed as a means for registered professionals
to engage in proprietary trading utilizing LLC`s funds. As the managing member,
ABWG manages the operations of LLC and receives trading fees from the Class B
members, who are the registered professionals. LLC clears all transactions
through a clearing broker. Accordingly, LLC is also exempt from Rule 15c3-3 of
the Securities and Exchange Act of 1934. On May 9, 2002, the Company notified
the LLC Class B members that it had elected to cease the proprietary trading
business operations.
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 NASDAQ 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").
2. Liquidity and Capital Resources
As indicated by the accompanying unaudited condensed consolidated financial
statements, the Company has continued to incur substantial 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 financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Trading volume has significantly decreased and the Company has lost
customers in its direct access business. To respond to its liquidity and capital
resource needs management has implemented various cost cutting initiatives
including renegotiating its clearing agreements at more favorable rates,
restructuring its software license with E*Trade Group, Inc. and the sale of its
software programs known as Ultimate Trader II, Ultimate Trader III, Watley
Trader and related intellectual property. The Company is also looking into more
traditional lines of business such as fixed income and equity capital markets,
as well as, the feasibility of expanding its existing business to attract active
traders and hedge funds. As a further fund raising alternative, the management
of ABWG may seek to raise 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 accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principals generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals considered
necessary for a fair presentation have been included. Operating results for
interim periods are not necessarily indicative of the results that may be
expected for a full year. For further information, refer to the consolidated
financial statements and footnotes thereto for the fiscal year ended September
30, 2001, included in the Company`s Annual Report on Form 10-K/A.
-7-
The condensed consolidated financial statements include the accounts of
ABWG and its wholly owned subsidiaries, A.B. Watley and LLC. All significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year`s presentation.
"Securities owned at market value" and "Securities sold not yet purchased"
represent the trading inventory of A.B. Watley and LLC. The Company`s ability to
use these securities for general corporate purposes is significantly restricted
by its clearing agreements and net capital requirements. Accordingly, the
Company believes these securities are generally not available to satisfy the
general cash flow needs of the Company.
4. 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 361,944) of its Common Stock to
On-Site. Of these shares, 937,500 shares were delivered at closing and 106,806
shares ("Escrow Shares") are being held in escrow to be released to the sellers
of On-Site at a later date. The remaining 468,750 shares are being held in
escrow and are deliverable on a pro rata basis upon the Company achieving
certain post-acquisition levels of revenues, as defined in the agreement. As of
June 30, 2002, approximately 200,000 of such shares have been earned by On-Site.
The final purchase price reflects the issuance of 1,513,057 shares at a
purchase price of $3.41 per share. The $3.41 per share price was determined by
calculating the weighted average share price of the Company`s Common Stock for
the 3 days prior and 3 days subsequent to the date of the acquisition of
On-Site. The excess purchase price of $8,584,000 over the fair value of the net
liabilities acquired of $2,881,000 was allocated to "Intangibles" representing
the customer lists acquired (for the retail business). The customer lists are
being amortized on a straight-line basis over a period of thirty-six months.
Amortization expense for the nine-month period ending June 30, 2002, was
approximately $715,000.
The purchase price of $5,703,000, including expenses of $543,000, was
allocated to the net assets acquired as follows:
Securities owned, at market value................... $4,551,000
Intangibles......................................... 8,584,000
Other assets........................................ 265,000
----------
Total assets........................................ 13,400,000
----------
Securities sold, but not yet purchased.............. 3,358,000
Other liabilities................................... 381,000
Accrued liabilities to LLC Class B members.......... 3,958,000
----------
Total liabilities................................... 7,697,000
----------
Net assets acquired................................. $5,703,000
==========
-8-
The following pro forma information for the three and nine months ended
June 30, 2001, gives effect to the Company`s acquisition of certain assets of
On-Site, primarily customer lists and its interest in the broker-dealer
subsidiary; the assumption of certain liabilities of the business; and the
issuance of Common Stock, as if it occurred on October 1, 2000. Pro forma
information for the three and nine months ended June 30, 2002 is not required
since the Company became the introducing broker for On-Site as of October 1,
2001 and as such, the Condensed Consolidated Statements of Operations for the
2002 periods reflect the associated commission revenues and expenses related to
the On-Site acquisition.
Three Months Nine Months
------------ -----------
June 30, 2001
-------------
Net revenues $14,948,000 $ 53,112,000
=========== ============
Net loss applicable to common stockholders ($6,864,000) ($16,109,000)
=========== ============
Weighted average number of shares outstanding 12,421,140 11,028,532
=========== ============
Per share:
Net loss applicable to common stockholders ($0.55) ($1.46)
=========== ============
This pro forma information does not purport to be indicative of what would
have occurred had the acquisition been completed as of October 1, 2000, or the
results which may occur in the future.
During the quarter ended June 30, 2002, the acquired customer base, of
On-Site, continued to deteriorate significantly. This led to a decrease in
On-Site`s revenues and operating cash flows. Management believes the
deterioration is attributable to many causes including weakening market
conditions, as well as the loss and closing of branch operations which resulted
in a permanent impairment in the value of the customer lists acquired.
Therefore, the Company recorded an impairment loss of $2,146,000 during the
quarter ended June 30, 2002 related to the customer list acquired which reduced
the carrying value of such customer list to $0 at June 30, 2002. The customer
list acquired from On-Site has been determined to have minimal future value. For
the quarters ended December 31, 2001, March 31, 2002, June 30, 2002 and
September 30, 2002 net commissions earned from the retail and proprietary
businesses were $925,000, $901,000, $228,000 and $88,000, respectively.
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 ceased trading activities. The remaining liability to
the LLC Class B members as of March 31, 2002, was approximately $3,524,000 and
is included in the accompanying Condensed Consolidated Statement of Financial
Condition as "Accrued Liabilities to LLC Class B Members".
5. 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 is convertible into 3,390 shares of the Company`s Common
Stock at a conversion price of $2.95 per common share. 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 shares of Common Stock issuable upon the
conversion of the shares of Preferred Stock in the amount of 2,135,700 shares,
and the exercise of warrants to purchase shares of Common Stock in the amount of
1,629,069. 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
-9-
of Preferred Stock and is added to the liquidation preference amount until
cured. As of June 30, 2002, liquidated damages of approximately $311,000 were
accrued to the preferred holders.
The Preferred Stock includes a liquidation preference of $10,000 per share
and bears a cumulative dividend at an initial 6% annual rate, which increases to
a 15% annual rate after eighteen months, payable twice a year in shares of
Common Stock. As of June 30, 2002, dividends of $220,500 were accrued for the
Preferred Stock. The holders of Preferred Stock may elect to convert their
shares into the Company`s Common Stock at any time, just as they may choose to
exercise their related warrants at any time. The holders of Preferred Stock also
have the right to require the Company to redeem all of the Preferred Stock for
cash equal to the greater of the liquidation preference amount plus any accrued
but unpaid dividends and penalties or the aggregate of the market value of the
shares of the Common Stock into which such shares of the Preferred Stock are
then convertible, upon certain triggering events, as defined in the Agreement.
Since the holders of the Preferred Stock may require the Company to redeem all
of the Preferred Stock upon the occurrence of certain events, the Company has
excluded the Preferred Stock from Stockholders` Deficit in the accompanying
Condensed Consolidated Statement of Financial Condition. The holders of the
Preferred Stock have waived their Redemption Right and have agreed to amend the
Certificate to provide that the Company has until September 30, 2002 to (a) file
the Registration Statement and (b) to be listed on any of the NASDAQ National
Market, the NASDAQ SmallCap Market, the OTC Bulletin Board, the New York Stock
Exchange, Inc. or the American Stock Exchange, Inc. Although, the waiver has not
been amended or extended, to date, no redemption notice has been received by the
Company from any of the Preferred stockholders.
The aggregate purchase price of the Preferred Stock and the warrants of
$6,300,000 were allocated to the Preferred Stock with a value of $4,340,383 and
the balance of $1,959,617 was attributed to the fair market 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. The premium of $250,000 was recorded as an
extraordinary loss on the extinguishment of debt in December 2001. The discount
associated with the value of the warrants is being accreted over a ten-month
period through September 30, 2002, the date the redemption waiver expires. For
the nine months ended June 30, 2002 amortization of the discount totaled
$1,371,731.
The Company recorded a deemed dividend of $1,639,797, in the first quarter
of 2002, relating to the beneficial conversion feature of the Preferred Stock,
after taking into account the value of the warrants issued. The deemed dividend
increases the loss applicable to common stockholders in the calculation of basic
and diluted net loss per common share and is included in stockholders` deficit
as offsetting charges and credits to additional paid-in capital. In recognition
of the redemption features of the Preferred Stock, the Company excluded the
Preferred Stock from stockholders` deficit in the accompanying condensed
consolidated financial statements.
The holders are not subject to any limitations on the number of conversions
of Preferred Stock or subsequent sales of the corresponding Common Stock that
they can 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.
6. Net Capital Requirement
A.B. Watley is subject to the Securities and Exchange Commission`s Uniform
Net Capital Rule ("Rule 15c3-1"). In accordance with this rule, A.B. Watley is
required to maintain defined minimum net capital to the greater of $100,000 or
6-2/3% of aggregate indebtedness as defined.
As of February 28, 2002, March 31, 2002, and April 30, 2002, A.B. Watley
had a net capital deficit as defined, of $520,836, $1,487,966, and $637,141,
respectively, which is a violation of Rule 15c3-1. In addition, as of September
30, 2002, A.B. Watley had a net capital deficit of $301,523. These deficiencies
were cured through additional funding through outside sources and funds
generated from operations.
Currently, A.B. Watley is required to report net capital on a weekly basis.
These reports may be subject to further examination and review by the SEC and
the NASD.
7. Stockholders` Equity - Stock Options and Warrants
At June 30, 2002, the company had outstanding 772,000 options and 4,124,000
warrants with exercise prices ranging between $0.92 and $ 22.00 and expirations
extending through September 2012.
-10-
8. Notes and Loans Payable
a) Notes Payable - Officers
------------------------
As at June 30, 2002, notes payable to officers consisted of the following:
Principal Interest
Effective Date Maturity Date Amount Rate
-------------- ------------- ----------- ------------
11/30/00 11/29/03 $ 300,000 7%
2/25/01 2/25/03 950,000 10%
2/25/01 2/25/03 950,000 10%
10/01/01 10/01/02 500,000 10%
02/02/02 On demand 200,000 10%
10/01/01 10/01/02 200,000 10%
-----------
$ 3,100,000
===========
As of June 30, 2002, accrued interest payable related to the above notes
payable to officers totaled $637,000. The notes payable to officers are
subordinated to the lines of credit granted by the holders of the company`s
Preferred Stock.
In September 2002, in consideration of the forgiveness of notes payable to
officers aggregating $2,400,000, the Company issued warrants to purchase
1,479,486 and 923,145 shares of Common Stock to officers, exercisable at $0 and
$1.80 per share respectively. The warrants are immediately exercisable and will
expire in September 2007.
b) Loans Payable - Other
---------------------
In February 2002, one of the Company`s lenders notified the Company that it
was accelerating its remaining loan balance of approximately $350,000 on a
$400,000 loan originally made to the Company. As of June 30, 2002, the loan
balance was approximately $173,000. Subsequently, the lender agreed to rescind
the notice of acceleration in return for a prepayment of $150,000 and security
interest in the Company`s proprietary software. The $150,000 payment was made in
August 2002.
In March 2002, one of the holders of the Company`s Preferred Stock led a
group that granted a line of credit of $2,500,000 to the Company. Borrowings
under the line of credit are payable on demand after June 18, 2002, and interest
is payable at 10% per annum. The proceeds of the loans will be used for working
capital purposes. Additionally, one member of the group was granted warrants to
purchase 1,000,000 shares of the Company`s 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 the
Company`s Common Stock at an exercise price of $.918 a share. The fair value of
the warrants was recorded as interest expense. In April 2002 and May 2002, the
line of credit was increased to $2,700,000 and $4,350,000, respectively. As of
June 30, 2002, the Company has borrowed $4,350,000 under this commitment. The
line of credit is collateralized by certain assets of the Company.
In April 2002, $2,150,000 of notes-payable to officers was assigned to one
of the Company`s clearing brokers. Interest is payable at a rate of 10% per
annum. The loans expire through March 2003. In July 2002, this amount was
subsequently forgiven as part of the sale of the Company`s software.
9. Commitments and Contingencies
Late Filings
- ------------
The Company did not file required reports with the SEC on a timely basis.
Specifically, the quarterly reports on Form 10-Q for the quarters ended March
31, 2002, June 30, 2002, and December 31, 2002 and the annual report on Form
10-K for the year ended September 30, 2002 were filed in April of 2003. The
Company`s financial statements do not reflect a reserve for any potential fines
or penalties that may result from such late filings.
Lease Agreement
- ---------------
The company has entered into certain lease agreements for office space
under non-cancelable operating lease agreements that expire at various dates
through June 2009. The leases contain various rent escalation provisions. In
addition, the Company has operating leases and capital leases for furniture and
computer equipment that expire at various dates through October 2005.
-11-
The aggregate minimum future rental payments required are as follows:
Fiscal Year Ended Operating Leases Capital Leases Total
---------------- -------------- -----------
2003 $ 1,466,075 $ 1,896,924 $ 3,362,999
2004 1,151,277 - 1,151,277
2005 925,694 - 925,694
2006 939,764 - 939,764
2007 938,272 - 938,272
Thereafter 1,641,974 - 1,641,974
---------------- -------------- -----------
$ 7,063,056 $ 1,896,924 $ 8,959,980
=============== ============= ===========
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 Condensed Consolidated Financial Statements.
Litigation
- ----------
The Company is a party to various suits alleging breach of contract (i) due
to non-payment for services or goods provided, and (ii) the minority interest of
the Class B members of the LLC. The Company is defending these suits and has
commenced settlement negotiations as to certain of such suits.
In addition, a suit has been brought by Akro Investicni Spolecnost, A.S.
and Bozena Konvalinkova, as Czech Receiver of Private Investors, as against A.B.
Watley. The plaintiffs allege violations of New York common law and federal
securities law by A.B. Watley arising from an agreement between Private
Investors, a Czech broker-dealer, and A.B. Watley. Plaintiffs seek damages of
$31,400,000 (of which approximately $950,000 is alleged to represent the
damages) plus punitive damages. The Company believes it has a meritorious
defense against this suit and intends to fight it vigorously and although there
can be no assurance, the Company believes the majority of the claims if
successful, will be substantially less than the amount of the damage claims and
will be covered by insurance.
In the opinion of management, after consultation with independent counsel,
the Company is unable to predict the ultimate outcome of these matters;
accordingly, no adjustment has been made in the accompanying condensed
consolidated financial statements for any potential losses.
10. Sale of Software
In April 2002, the Company agreed to grant E*TRADE a non-exclusive
perpetual license of the Company`s proprietary software for a one-time flat fee
of $5,000,000, payable in cash ($2.6 million) and E*TRADE stock ($2.4 million).
The Company has subsequently received the $2,6000,000 million in cash and the
474,500 shares of E*TRADE stock. All of the E*trade stock has been sold with the
proceeds used for working capital purposes. Of the total proceeds, $3,809,000
has been recorded in the Condensed Consolidated Statement of Financial
Condition, as a reduction of property and equipment in accordance with Statement
of Position 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. The remaining balance of proceeds of $1,191,000 has
been recorded in the Condensed Consolidated Statement of Operations as Sale of
Software Income.
11. Subsequent Event
In July 2002, the Company sold its software programs known as Ultimate
Trader II, Ultimate Trader III, Watley Trader and related intellectual property,
to an affiliate of one of its clearing brokers. The sale included all
proprietary software that displays market quotation, news, and other information
analysis; order entry including the initiation and transmission of trading
orders and position management and any applications that provide real time and
historical market prices. In consideration for the trading technology software,
the Company`s clearing broker, agreed to forgive $2,716,720 (including interest
of $566,720) of indebtedness owed by the Company to the clearing broker that had
previously been assigned to the clearing broker by the Company`s officers in
April 2002. As part of the agreement, the Company obtained a perpetual
nonexclusive, license to continue to use the software,
-12-
including the right to sublicense the software. Under the terms of the
agreement, the Company was granted the right to use the software royalty free
until July 31, 2005, and for a nominal per user per month fee thereafter, as
defined. The Company also received a more favorable clearing agreement, which
will remain in effect until July 31, 2007. The asset purchase agreement also
provides for a future reduction of indebtedness of approximately $2,100,000 from
its clearing broker provided that over a 36-month period beginning after July
31, 2002, that the Company has paid its clearing broker $5,000,000 in clearing
fees or raised at least $4,000,000 in new equity capital. In order for the new
capital to be considered towards the reduction in indebtedness, the agreement
requires that there be no cash payments or mandatory redemptions affecting the
principal amount prior to 18-months after July 31, 2002. In the September 30,
2002 financial statements, all of the proceeds from the sale of software have
been recorded in the Condensed Consolidated Statement of Operations as Sale of
Software Income.
In January 2003, the Company entered into two office space leases requiring
security deposits of approximately $21,000 and aggregate minimum rents of
$15,173 payable monthly. The lease expires in 2004.
On January 15, 2003, A.B. Watley Inc. entered into a secured demand note
agreement for $5,000,000 with a maturity date of June 30, 2004. The loan bears
an annual interest rate of 7% per annum payable monthly. In connection with the
agreement, the Company issued warrants to purchase 500,000 shares of Common
Stock at $0.75 per share. The warrants are immediately exercisable and will
expire in January 2008. The loan has been approved by NASD and is included for
the purposes of computing net capital under Rule 15c3-1. The holder of the
secured demand note has the option to convert all the collateral into A.B.
Watley stock within five business days after the thirteen-month anniversary of
the date of the issuance of the note at a discount of 5% of the average price
per share based on the 10-day period prior to conversion. The holder may also
elect to convert the collateral within 5 business days after 18 months at $1.80.
In no event shall the conversion result in the holder of the secured demand note
owning more than 15% of A.B. Watley stock.
12. Accounting Developments
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB").
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This statement principally
addresses implementation issues of SFAS No. 121, including developing a single
accounting model for long-lived assets to be disposed of by sale. The provisions
of this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively.
SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections as of April 2002" primarily
provides guidance for reporting gains and losses from extinguishment of debt and
sale-leaseback transactions. The provisions of this Statement shall be applied
in fiscal years beginning after May 15, 2002 with early adoption encouraged.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". This standard required companies to recognize costs associates with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 replaces the existing
guidance provided by EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs incurred in a Restructuring)." SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Management does not believe that the adoption of any of these
pronouncements will have a material effect on the condensed consolidated
financial statements.
-13-
Item 2. Management`s Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company`s Annual Report
on Form 10-K. The results of operations for interim periods are not necessarily
indicative of the results for the entire fiscal year.
Results of Operations
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Revenues. Total revenues for the quarter ended June 30, 2002 were
$5,320,384 a decrease of 3.38%, as compared to revenues of $5,506,288 for the
quarter ended June 30, 2001. Revenues from commissions decreased from $4,125,864
for the quarter ended June 30, 2001, to $2,441,796 for the quarter ended June
30, 2002. Overall trading volume has significantly decreased and the Company has
lost customers in its direct access business. Data service revenues decreased by
$152,075 or 55.54%, from $273,797 for the quarter ended June 30, 2001, to
$121,722 for the quarter ended June 30, 2002, due to the migration of customers
from third party software to the Company`s proprietary software, UltimateTrader
II for which no fees are charged. Revenues from principal transactions decreased
by $345,438 or 68.97%, from $500,871 for the quarter ended June 30, 2001, to
$155,433 for the quarter ended June 30, 2002, mainly as a function of the lower
volume of business related to institutional sales and losses incurred by
minority interests in LLC. Interest and other income increased $804,677 or
132.84% from $605,756 for the quarter ended June 30, 2001, to $1,410,433 for the
quarter ended June 30, 2002. This increase is largely due to the increased
margin interest and interest earned on the additional retail accounts acquired
from On-Site and interest income earned in the LLC. Also included in interest
income and other income is a World Trade Center Business Recovery Grant of
$150,000.
Interest expense increased from $182,319 for the quarter ended June 30,
2001 to $304,263, for the quarter ended June 30, 2002, as a result of increased
borrowings in connection with lines of credit.
As a result of the foregoing, net revenues decreased by $323,600 or 6.2%,
from $5,212,096 for the quarter ended June 30, 2001, to $4,888,496, for the
quarter ended June 30, 2002. Customers in the United States generated the
majority of revenues and no single customer or group of customers accounted for
10% or more of our revenues.
Expenses. Total expenses decreased by $289,144 or 2.45%, from $11,813,987,
for the quarter ended June 30, 2001, to $11,524,843 for the quarter ended June
30, 2002. Commissions, floor brokerage, and clearing charges represent payments
to our clearing and floor brokers who facilitate our clients` transactions,
payments for data and software from third party vendors, and payouts to non
business branch locations. These expenses decreased by $719,011 or 27.3%, from
$2,633,426 for the quarter ended June 30, 2001 to $1,914,415 for the quarter
ended June 30, 2002 primarily due to closing of the On-Site business . In
addition, our online software licenses fees and data services fees decreased.
Employee compensation and related costs decreased by $616,493, or 21.31%, from
$2,893,108 for the quarter ended June 30, 2001, to $2,276,615 for the quarter
ended June 30, 2002, principally due to the reduction in the number of
employees.
Communications expense increased by $444,304 or 90.71%, from $489,803 for
the quarter ended June 30, 2001, to $934,107, for the quarter ended June 30,
2002, as a function of adding a back-up site, as well as data and communication
costs relating to the On-Site branch locations.
Business development costs consist of advertising costs, which have mostly
been for print, media and trade shows to obtain new clients. These expenses
decreased by $515,189, or 96.90%, from $531,698 for the quarter ended June 30,
2001, to $16,509, for the quarter ended June 30, 2002, as the Company decreased
such expenditures as a part of its cost reduction program.
Professional services decreased by $394,793, or 27.46%, from $1,437,920 for
the quarter ended June 30, 2001 to $1,043,127 for the quarter ended June 30,
2002, primarily related to decreased usage of external software consultants.
Occupancy and equipment costs decreased by $362,938, or 23.29%, from
$1,558,622 for the quarter ended June 30, 2001, to $1,195,684 for the quarter
ended June 30, 2002, primarily due to penalties associated with early
termination of leases.
-14-
Depreciation and amortization increased by $44,915, or 3.13%, from
$1,435,468 for the quarter ended June 30, 2001 to $1,480,383 for the quarter
ended June 30, 2002, due to the implementation of our proprietary direct access
trading platform and the related amortization of capitalized software, the
amortization of capitalized leases, and the amortization of intangibles.
Other expenses increased by $124,519, from $262,830 for the quarter ended
June 30, 2001 to $387,349 for the quarter ended June 30, 2002. Loss on
impairment, of $2,146,000 represents the write off of intangible assets
(customer lists) acquired in the On-Site acquisition.
The abandonment of leasehold improvements of $618,028 primarily relates to
the surrender and termination of leases assumed in the On-Site acquisition.
Minority interest of $487,374 represents the trading losses of the Class B
non-voting members of the LLC.
Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001
Revenues. Total revenues for the nine months ended June 30, 2002 were
$20,206,647; a decrease of 3.28%, as compared to revenues of $20,891,174 for the
nine months ended June 30, 2001. Revenues from commissions decreased by
$886,001, or 5.71%, from $15,527,928 for the nine months ended June 30, 2001, to
$14,641,927 for the nine months ended June 30, 2002. Data service revenues
decreased by $698,423, or 64.58%, from $1,081,482 for the nine months ended June
30, 2001, to $383,059 for the nine months ended June 30, 2002, due to the
migration of customers from third party software to the Company`s proprietary
software, Ultimate Trader II for which no fees are charged. Revenues from
principal transactions decreased by $1,480,366 or 56.15%, from $2,636,557 for
the nine months ended June 30, 2001, to $1,156,191 for the nine months ended
June 30, 2002, mainly as a function of the lower volumes of business related to
institutional sales and losses incurred by minority interests in LLC. Interest
and other income increased $1,189,263 or 72.29% from $1,645,207 for the nine
months ended June 30, 2001, to $2,834,470 for the nine months ended June 30,
2002.
Interest expense increased from $443,709 for the nine months ended June 30,
2001, to $2,538,506 for the nine months ended June 30, 2002, as a result of
increased borrowings in connection with lines of credit. The Company issued
warrants in connection with certain borrowings. The value of such warrants were
amortized over the term of the loan as a component of interest expense. Interest
expense relating to the amortization of the warrants issued in connection of the
financing during the nine-months ended June 30, 2002 was approximately
$1,600,000.
Expenses. Total expenses increased by $10,957,323 or 32.61%, from
$33,605,526 for the nine months ended June 30, 2001, to $44,562,849 for the nine
months ended June 30, 2002. Commissions, floor brokerage, and clearing charges
represent payments to our clearing and floor brokers who facilitate our clients`
transactions, payments for data and software from third party vendors, and
payouts to our branch locations. As a result of the increase in the volume of
business due to the acquisition of On-Site accounts with a lower gross margin
than our historical online client base, these expenses increased by $1,895,665
or 22.77%, from $8,325,695 for the nine months ended June 30, 2001 to
$10,221,360, for the nine months ended June 30, 2002. Employee compensation and
related costs decreased by $446,303, or 4.79%, from $9,314,660 for the nine
months ended June 30, 2001, to $8,868,357 for the nine months ended June 30,
2002.
Communications expense increased by $1,129,712 or 73.48%, from $1,537,397
for the nine months ended June 30, 2001, to $2,667,109, for the nine months
ended June 30, 2002, as a function of adding a back-up site, as well as
communication costs relating to the On-Site branch locations.
Business development costs consist of advertising costs, which have mostly
been for print, media and trade shows to obtain new clients. These expenses
decreased by $1,560,133, or 78.47%, from $1,988,220 for the nine months ended
June 30, 2001, to $428,087, for the nine months ended June 30, 2002, as the
Company decreased such expenditures as a part of its cost reduction program.
Professional services decreased $207,536, or 8.07%, from $2,571,164 for the
nine months ended June 30, 2001 to $2,363,628 for the nine months ended June 30,
2002, primarily due to decreased usage of external software consultants.
-15-
Occupancy and equipment costs increased by $1,383,155, or 31.22%, from
$4,430,818 for the nine months ended June 30, 2001, to $5,813,973 for the nine
months ended June 30, 2002, primarily due to penalties associated with early
termination of leases.
Depreciation and amortization increased by $1,197,640 or 29.96%, from
$3,997,009 for the nine months ended June 30, 2001 to $5,194,649 for the nine
months ended June 30, 2002, due to the implementation of our proprietary direct
access trading platform and the related amortization of capitalized software,
the amortization of capitalized leases and the amortization of intangibles.
Other expenses increased by $680,468 from $736,949 for the nine months
ended June 30, 2001 to $1,417,417 for the nine months ended June 30, 2002. Loss
on impairment, of $7,870,110 represents the write off of intangible assets (the
customer lists) acquired in the On-Site acquisition.
The abandonment of leasehold improvements of $618,028 primarily relates to
the surrender and termination of leases assumed in the On-Site acquisition.
Minority interest of $899,869 represents the trading losses of the Class B
non-voting members of the LLC.
Liquidity and Capital Resources
As indicated by the accompanying unaudited condensed consolidated financial
statements, 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 financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Trading volume has significantly decreased and the Company has lost
customers in its direct access business. To respond to its liquidity and capital
resource needs management has implemented various cost cutting initiatives
including renegotiating its clearing agreements at more favorable rates, the
restructuring of its software license with E*Trade Group, Inc. and the sale of
its software programs known as Ultimate Trader II and Watley Trader. The Company
is also looking into more traditional lines of business such as fixed income and
equity capital markets, as well as, the feasibility of expanding its existing
business to attract active traders and hedge funds. As a further fund raising
alternative the management of ABWG may seek to raise 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.
Cash used in operating activities during the nine months ended June 30,
2002 was $9,440,198 as compared to $10,665,724 for the nine months ended June
30, 2001. Cash was principally used to fund the net loss of $27,536,449 net of
non-cash items including depreciation and amortization of $5,328,023, loss on
impairment of intangibles of $7,870,110, penalties related to the issuance of
preferred stock of $311,487, non-cash compensation/service costs of $200,568,
option costs of $225,801, minority interest of $899,869, issuance of warrants of
$1,390,569, write-off of leasehold improvements of $618,028 and the
extraordinary loss on extinguishment of debt of $250,000. In addition, cash was
impacted by the decrease in other assets of $439,295, a decrease in security
deposits of $1,297,104, a decrease in securities owned of $4,880,475, an
increase in receivables from clearing brokers of $1,242,901, an increase in
accounts payable and accrued liabilities of $2,323,822 and a decrease in the
liability for securities sold, not yet purchased of $3,720,537.
Cash provided by investing activities was $1,554,412 during the nine months
ended June 30, 2002, compared to cash used in investing activities of $1,739,541
during the nine months ended June 30, 2001. Cash flows provided during the nine
months ended June 30, 2002, related to the sale of software.
Cash provided by financing activities was $7,444,614 during the nine months
ended June 30, 2002 compared to $10,580,484 during the nine months ended June
30, 2001. Cash provided by financing activities during the nine months ended
June 30, 2002,
-16-
principally consisted of net proceeds from the sale of Preferred Stock of
$3,324,291, notes payable to officers of $900,000 and notes payable-other of
$3,779,686.
Net Operating Loss Carryforwards
The Company`s net operating loss carryforwards begin to expire beginning in
the year 2013. The issuance of additional equity securities, together with the
Company`s recent financing and public offering, could result in an ownership
change and thus could limit our use of the Company`s net operating losses. If
the Company achieves profitable operations, any significant limitation on the
utilization of our net operating losses would have the effect of increasing our
tax liability and reducing net income and available cash reserves. We are unable
to determine the availability of these net operating losses since this
availability is dependent upon profitable operations, which we have not achieved
in recent periods.
-17-
Relevant Accounting Standards
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This statement principally
addresses implementation issues of SFAS No. 121, including developing a single
accounting model for long-lived assets to be disposed of by sale. The provisions
of this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively.
SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections as of April 2002" primarily
provides guidance for reporting gains and losses from extinguishment of debt and
sale-leaseback transactions. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after May 15, 2002 with
early adoption encouraged.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". This standard required companies to recognize costs associates with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 replaces the existing
guidance provided by EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs incurred in a Restructuring)." SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. The provisions of this
Statement are effective for fiscal years beginning after December 15, 2003.
Management does not believe that the adoption of any of these
pronouncements had, or will have, a material effect on the Company`s
consolidated financial statements.
Forward Looking Statements
Certain statements contained in this report, including statements regarding
the development of services and markets and future demand for services and other
statements regarding matters that are not historical facts, discuss future
expectations or other forward-looking information. Those statements are subject
to known and unknown risks, uncertainties and other factors that could cause our
actual results to differ materially from those contemplated by the statements.
Factors that might cause a difference include, but are not limited to, customer
trading activity, loss of one or more significant customers, changes in
technology, shifts in competitive patterns, ability to manage growth
effectively, risks associated with acquisitions including integration risks,
risks associated with strategic partnerships, various project-associated risks,
substantial competition, general economic and securities markets conditions,
risks associated with intellectual property rights, risks associated with
international operations and other risk factors listed from time to time in the
Company`s filings and reports with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our primary financial instruments are cash in banks and money market
instruments. We do not believe that these instruments are subject to material
potential near-term losses in future earnings from reasonably possible near-term
changes in market rates or prices. We do not have derivative financial
instruments for speculative or trading purposes. In the normal course of
business, our customers enter into transactions where the risk of potential loss
due to market fluctuations or failure to perform exceeds the amount reported for
the transaction. We have established policies, procedures and internal processes
governing our management of market risk in the normal course of our business
operations. We, along with our clearing brokers, continuously monitor our
exposure to market and counter party risk through the use of a variety of
financial, position and credit exposure reporting and control procedures. In
addition, we review the creditworthiness of each customer and/or other counter
party with which we conduct business. We are not currently exposed to any
material currency exchange risk because the risk is borne by international
customers and our international partners, and we do not hold any assets or incur
any liabilities denominated in foreign currency.
-18-
Risk Factors
You should carefully consider the following factors and other information
in this Form 10-Q when considering the Company and its stock.
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 capital and
liquidity needs for the remainder of the year. 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 the business,
financial condition and operating results.
Traditional and online financial services industries 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
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.
Employee misconduct could harm us and is difficult to detect and deter.
-19-
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
Securities and Exchange Commission ("SEC"), state regulators, and the National
Association of Securities Dealers ("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.
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.
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/or expand, which could have a material adverse
effect on our business, financial condition and operating results.
-20-
As of February 28, 2002, March 31, 2002, and April 30, 2002, the Company
had a net capital deficit as defined, of $520,836, $1,487,966, and $637,141,
respectively, in violation of the Net Capital Rule. These deficiencies were
cured through additional funding and through funds generated from operations.
While the Company is presently in compliance with net capital requirements,
there can be no assurance that we 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 firm may make
margin loans to our customers in connection with their securities transactions.
We are required by contract to indemnify that firm 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 obligated to redeem our Series A Preferred Stock at a point in
the future, which could impair our ability to raise additional capital as we
would more than likely not be able to repay such redemption.
The holders of our Series A Preferred Stock have the right to have their
shares redeemed for cash equal to the greater of (i) the price we received when
we sold them the stock ($10,000 per share) plus any accrued and unpaid dividend
payments and (ii) the aggregate value of the shares of Common Stock into which
such shares of Series A Preferred Stock are then convertible (based upon the
closing bid price), in any of the following situations:
o if our Common Stock is not tradable on the NYSE, the AMEX, the NASDAQ
National Market or the NASDAQ SmallCap market for a period of five
consecutive days.
o if we fail to register with the Securities and Exchange Commission (or
maintain such registration of) the Common Stock into which the Series
A Preferred Stock converts.
o if we fail to honor requests for conversion, or if we notify any
holder of Series A Preferred Stock of our intention not to honor
future requests for conversion.
o if the holders of more than 30 percent of the outstanding shares of
our Common Stock sell or exchange their stock.
o if we commit a material breach under, or otherwise materially violate
the terms of, the transaction documents entered into in connection
with the issuance of the Series A Preferred Stock and the warrants.
In April of 2002, our Common Stock was delisted from the NASDAQ Stock
Market. In addition, we have not registered the Common Stock into which the
Series A Preferred Stock converts. We have not received a redemption notice from
any of the holders of our Series A Preferred Stock. Redemption of the Series A
Preferred Stock in any event described above would require us to expend a
significant amount of cash that likely will exceed our ability to make such
payment or raise additional capital.
Our stockholders could experience substantial dilution as a result of the
issuance of and terms of our Series A Preferred Stock and the related warrants.
The 630 shares of Series A Preferred Stock that were sold in the private
placement are initially convertible into approximately 2,135,700 shares of
Common Stock. The warrants granted in connection with the sale of Series A
Preferred Stock are initially exercisable for 1,629,069 shares of Common Stock,
at an exercise price of $2.95 per share.
Under the terms of the Series A Preferred Stock, we are also obligated to
issue additional shares of Common Stock every six months to the holders of the
Series A Preferred Stock as preferred stock dividends. Initially, these
dividends will be payable at the rate of six percent for the first 18 months
following issuance of the Series A Preferred Stock and fifteen percent after
that initial 18 month period. The number of shares of Common Stock will be
determined by dividing the dividend payment by the market price for our Common
Stock on the day before such dividend is payable. Because these shares are
issueable as a dividend, we will receive no additional consideration in
connection with their issuance.
We may also be required to issue shares of Common Stock without additional
consideration in the event that we fail to redeem any shares of Series A
Preferred Stock when required.
All of the foregoing issuances of Common Stock are likely to be
substantially dilutive to the outstanding shares of Common Stock, especially
where, as described above, the shares of Common Stock are issued without
additional consideration. Moreover, any increase in the number of shares of
Common Stock we are required to issue resulting from anti-dilution protection,
penalties or other
-21-
adjustments to the conversion or exercise prices of the Series A Preferred Stock
and/or the warrants described above will further increase the anticipated
dilution to the outstanding holders of our Common Stock. We cannot predict
whether or how many additional shares of our Common Stock will become issuable
due to these provisions.
Any such dilution, potential dilution, or increase in dilution or potential
dilution, may result in a decrease in the value of the outstanding shares of our
Common Stock. Such a decrease in value, the risk of dilution, any actual
dilution, or any increase in potential dilution may cause our stockholders to
sell their shares, which would contribute to a downward movement in the price of
our Common Stock. This could prevent us from sustaining a per share price
sufficient to enable us to maintain an active trading market on the NASDAQ
National Market or SmallCap Market if our stock is re-listed. In addition, any
downward pressure on the trading price of our Common Stock could encourage
investors to engage in short sales, which would further contribute to a downward
pricing of our Common Stock.
We may be required to obtain the consent of the holders of Series A
Preferred Stock before taking corporate actions, which could harm our business.
Our charter documents require us to obtain the consent of the holders of
the Series A Preferred Stock before we may issue securities that have senior or
equal rights as the Series A Preferred Stock or take other actions with respect
to the Series A Preferred Stock or securities that have fewer rights than the
Series A Preferred Stock. We are also required to obtain the consent of the
holders of the Series A Preferred Stock before we amend or modify our
certificate of incorporation or bylaws, whether by merger, consolidation or
otherwise to change any of the rights of the holders of Series A Preferred
Stock. While these obligations may deter a potential acquirer from completing a
transaction with us, they may also prevent us from taking corporate actions that
would be beneficial to the holders of our Common Stock and the Company, such as
raising capital to operate our business or maintain our capitalization or per
share price in attempts to maximize stockholder volume and liquidity.
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.
Item 4. Controls and Procedures
During the quarter, an evaluation was performed under the supervision and
with the participation of the Company`s management, including the Principal
Executive Officer and the Principal Financial Officer, of the effectiveness of
the design and operation of the Company`s disclosure controls and procedures.
Based on that evaluation, the Company`s management, including the Principal
Executive Officer and the Principal Financial Officer, concluded that the
Company`s disclosure controls and procedures were effective as of June 30, 2002.
There have been no significant changes in the Company`s internal controls or in
other factors that could significantly affect internal controls subsequent to
June 30, 2002.
-22-
Part II - OTHER INFORMATION
Item 1. 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 and our principals are, 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.
The Company is a party to various suits alleging breach of contract (i) due
to non-payment for services or goods provided, and (ii) for the minority
interest of the Class B members of theLLC. The Company is defending these suits
and has commenced settlement negotiations as to certain of such suits.
In addition, a suit has been brought by Akro Investicni Spolecnost, A.S.
and Bozena Konvalinkova, as Czech Receiver of Private Investors, as against A.B.
Watley. The plaintiffs allege violations of New York common law and federal
securities law by A.B. Watley arising from an agreement between Private
Investors, a Czech broker-dealer, and A.B. Watley. Plaintiffs seek damages of
$31,400,000 (of which approximately $950,000 is alleged to represent the
damages) plus punitive damages. The Company believes it has a meritorious
defense against this suit and intends to fight it vigorously and although there
can be no assurance, the Company believes the majority of the claims if
successful, will be substantially less than the amount of the damage claims and
will be covered by insurance.
We are a defendant in four actions relating to the lease of equipment in
which the plaintiffs have asserted breach of contract and damages in the
aggregate amount of approximately $683,000. Three of such actions are pending
before the Supreme Court of New York, New York, and the remaining action is
pending before the District Court, 4th Judicial District, Hennepin County,
Minnesota.
We are a defendant in an action pending before the American Arbitration
Association ("AAA") in which the plaintiffs have asserted breach of fiduciary
duties. The plaintiff in this action seeks an accounting and unspecified
damages.
We are a defendant in an action pending before the AAA in connection with
our failure to maintain a registration statement in which the plaintiffs have
asserted breach of contract and damages in the amount of approximately $84,000.
We are a defendant in a breach of contract action pending before the
Supreme Court, Nassau County, New York arising out of an employment dispute. The
plaintiff in this action is seeking compensatory damages of $93,000, as well as
liquidated damages, under New York`s Labor Law, in the amount of 25% of the
compensatory damages.
We are a defendant in an action pending before the Supreme Court of New
York, New York in connection with a construction contract in which the
plaintiffs have asserted breach of contract and damages in the aggregate amount
of approximately $234,000.
We are a defendant in an action pending before the Supreme Court of New
York, New York in connection with an advertising contract in which the
plaintiffs have asserted breach of contract and damages in the aggregate amount
of approximately $29,000.
We are a defendant in an action pending before the National Association of
Securities Dealers ("NASD") in which the claimants have asserted breach of
contract and damages in the aggregate amount of approximately $147,000.
There is one action that relates to collection of an existing account
payable in which a judgment has been entered against the Company totaling
approximately $24,000.
-23-
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. The Company is not currently involved in any proceeding by a
governmental agency or self-regulatory organization, the outcome of which is
expected to have a material adverse effect on our business. There can be no
assurance that one or more future disciplinary actions, if decided adversely to
the Company, would not have a material adverse effect on the Company`s business,
financial condition and results of operations.
Item 2. Changes in Securities
None.
Item 3. Default upon Senior Securities
On November 29, 2001, the Company entered into a Series A Convertible
Preferred Purchase Agreement whereby it issued 630 shares of Series A
Convertible Preferred Stock, par value $.01 ("Preferred Stock") in a private
placement. Each share is 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 shares of Common Stock issuable upon the
conversion of the shares of Preferred Stock in the amount of 2,135,700 shares,
and the exercise of warrants to purchase shares of Common Stock in the amount of
1,629,069. As of the date hereof, the Company has not filed a Registration
Statement and will not be able to have the Registration Statement filed and
declared effective within the period required. As a result, the Company is 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 accrues to each holder of Preferred Stock and is added to the
liquidation preference amount until cured. As of June 30, 2002, liquidated
damages of approximately $311,000 has been accrued to the preferred holders.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company currently has authorized capital stock consisting of 20,000,000
common shares, $.001 par value, of which 12,508,852 shares are issued and
outstanding and 1,000,000 preferred shares, $.001 par value, of which 630 Series
A Redeemable Convertible Preferred Stock are issued and outstanding. Since March
2002, the Company issued warrants that may potentially require an issuance of
shares greater than the number of shares that the Company is currently
authorized to issue. By issuing these securities, the Company has exhausted its
20,000,000 authorized shares of common stock and cannot meet any equity-based
obligations entered into after March 2002 without shareholder approval for an
increase in the number of authorized shares. The Company intends to seek
approval of the transactions that require the issuance of these warrants that
potentially may require an issuance of shares greater than the number of shares
that the Company is currently authorized to issue as well as approval for an
increase in the number of authorized shares of common stock of the Company from
20,000,000 to 50,000,000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Master Subordination, Waiver, Release and Indemnification
Agreement entered on March 27, 2002.
10.2 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
10.3 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
10.4 First Amendment to Promissory Note entered between A.B. Watley
Group LLC and Penson Financial Services Inc. dated April 2002.
10.5 Second Amendment to Promissory Note entered between A.B. Watley
Group LLC and Penson Financial Services Inc. dated May 2002.
10.6 Non-Exclusive Perpetual License of proprietary software between
E*Trade and the Company dated April 2002.
10.7 First Amendment to Master Agreement and First Amendment to
Software Security Agreement dated as of April 2002
10.8 Second Amendment to the Master Subordination, Waiver, Release and
Indemnification Agreement, dated as of May 2002.
10.9 Third Amendment to the Master Subordination, Waiver, Release and
Indemnification Agreement, dated as of May 2002.
99.1 Certification by Steven Malin, Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Robert Malin, Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports
None.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 15, 2003
A.B. WATLEY GROUP INC.
(Registrant)
By: /s/ Steven Malin
--------------------
Steven Malin
Chairman
By: /s/ Robert Malin
--------------------
Robert Malin
Vice-Chairman
-25-
CERTIFICATION
I, Steven Malin, the Principal Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of A.B. Watley Group
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant`s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant`s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant`s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant`s auditors and the audit
committee of registrant`s board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant`s ability to record,
process, summarize and report financial data and have identified for the
registrant`s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant`s internal
controls; and
6. The registrant`s other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Steven Malin
----------------------------------
Principal Executive Officer
Date: April 15, 2003
-26-
CERTIFICATION
I, Robert Malin, the Principal Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of A.B. Watley Group
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant`s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant`s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant`s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant`s auditors and the audit
committee of registrant`s board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant`s ability to record,
process, summarize and report financial data and have identified for the
registrant`s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant`s internal
controls; and
6. The registrant`s other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Robert Malin
----------------------------------
Principal Financial Officer
Date: April 15, 2003
-27-