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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: December 31, 2002
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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.
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(Exact name of registrant as specified in its charter)
Delaware 13-3911867
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Wall Street, New York, NY 10005
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(Address of principal executive offices)
(Zip Code)
(212) 422-1100
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(Registrant`s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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
Consolidated Statements of Financial Condition
As of December 31, 2002 (Unaudited) and September 30, 2002 ................... 3
Consolidated Statements of Operations
For the Three Months Ended December 31, 2002 and 2001 (Unaudited) ............ 4
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 2002 and 2001 (Unaudited) ............ 5
Notes to Consolidated Financial Statements (Unaudited) ...................................... 6
Item 2. Management`s Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................... 13
Item 4. Controls and Procedures ............................................................. 14
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 15
Item 2. Changes in Securities ............................................................... 16
Item 3. Default on Senior Securities ........................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders ................................. 16
Item 5. Other Information ................................................................... 16
Item 6. Exhibits and Reports on Form 8-K .................................................... 16
Signatures .............................................................................................. 17
Certifications .......................................................................................... 18
-2-
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
A.B. Watley Group Inc.
Consolidated Statements of Financial Condition
December 31, September 30,
2002 2002
------------ ------------
(Unaudited)
Assets:
Cash and cash equivalents $ 830,476 $ 213,766
Restricted cash 63,091 292,565
Receivables from clearing brokers 1,257,887 1,028,588
Securities owned at market value 2,006 2,145,472
Property and equipment, net of accumulated depreciation
of $5,816,842 and $5,317,435 2,390,303 2,889,711
Loans receivable from related party 258,226 258,226
Security deposits 129,296 132,001
Other assets 103,624 76,291
------------ ------------
Total Assets $ 5,034,909 $ 7,036,620
============ ============
Liabilities and Stockholders` Equity:
Accounts payable and accrued liabilities 7,849,260 8,409,141
Accrued liabilities to LLC Class B Members 2,492,272 2,492,310
Notes payable 3,332,826 3,282,826
Notes payable to former officers 700,000 700,000
Lease obligations and other 1,316,788 1,524,195
Subordinated borrowings 350,000 350,000
Subordinated borrowings from officer 180,000 180,000
------------ ------------
16,221,146 16,938,472
------------ ------------
Series A Redeemable Convertible Preferred Stock $0.01 par value, 690 shares
authorized and 630 issued and outstanding at December 31, 2002 and
September 30, 2002, respectively, and accrued dividends
(liquidation preference - $6,300,000) 7,402,094 6,926,487
------------ ------------
Stockholders` Deficit:
Preferred Stock $0.01 par value, 1,000,000 shares authorized and
none issued and outstanding at December 31, 2002 and September 30, 2002 -- --
Common stock, $0.001 par value, 20,000,000 shares authorized at December 31, 2002 and
September 30, 2002 and 12,508,852 issued and outstanding at December 31, 2002 and
September 30, 2002 12,509 12,509
Additional paid-in capital 45,725,069 45,819,569
Option costs (23,329) (32,663)
Accumulated deficit (64,302,580) (62,627,754)
------------ ------------
Total Stockholders` Deficit (18,588,331) (16,828,339)
------------ ------------
Total Liabilities and Stockholders` Deficit $ 5,034,909 $ 7,036,620
============ ============
See notes to consolidated financial statements
-3-
A.B. Watley Group Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
December 31,
------------
2002 2001
------------ ------------
Revenues:
Commissions $1,477,976 $6,963,713
Data service fees 16,897 136,333
Principal transactions 1,945,306 367,360
Interest income 35,698 582,894
Other income 703,823 238,401
------------ ------------
Total revenues 4,179,700 8,288,701
Interest expense 146,893 884,494
Interest expense - related parties -- 132,216
------------ ------------
Net revenues 4,032,807 7,271,991
------------ ------------
Expenses and other charges:
Commissions, floor brokerage and clearing charges 1,015,216 4,343,278
Employee compensation and related costs 1,807,785 3,376,391
Communications 282,448 847,499
Business development 21,699 262,343
Professional services 399,024 454,913
Occupancy and equipment costs 1,091,539 1,779,373
Depreciation and amortization 499,407 2,218,979
Other expenses 506,229 540,707
Loss on investments 84,287 --
Minority interest applicable to LLC Class B members -- (396,503)
------------ ------------
Total expenses 5,707,634 13,426,980
------------ ------------
Loss before income taxes and extraordinary item (1,674,827) (6,154,989)
Income tax provision -- (2,634)
------------ ------------
Loss before extraordinary item (1,674,827) (6,157,623)
Extraordinary loss on extinguishment of debt -- (250,000)
------------ ------------
Net loss $ (1,674,827) $ (6,407,623)
============ ============
Basic and diluted loss per common share:
Loss before extraordinary item $ (1,674,827) $ (6,157,623)
Deemed dividend to preferred shareholders - beneficial conversion (1,639,797)
Deemed dividend to preferred shareholders - accretion of redemption -
Preferred stock dividends (94,500) (78,750)
------------ ------------
Loss before extraordinary item attributable to common shareholders (1,769,327) (7,876,170)
Extraordinary loss on extinguishment of debt (250,000)
------------ ------------
Net loss attributable to common shareholders $ (1,769,327) $ (8,126,170)
============ ============
Loss before extraordinary item $ (0.14) $ (0.66)
Extraordinary item $ - $ (0.02)
Basic and diluted loss per share $ (0.14) $ (0.68)
Weighted average shares outstanding 12,508,852 11,966,125
See notes to consolidated financial statements
-4-
A.B. Watley Group Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
December 31,
--------------
2002 2001
----------- -----------
Cash flows used in operating activities:
Net loss ($1,674,827) ($6,407,623)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Non-cash compensation and service costs 9,334 558,915
Options costs -- 46,265
Penanties-preferred stock 381,107 --
Software license fees received -- 77,573
Minority interest applicable to LLC Class B
Members -- (396,503)
Depreciation and amortization 499,408 2,218,979
Loss on extinguishment of debt -- 250,000
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash 229,474 (9,504)
Receivables from clearing brokers (229,299) (1,764,393)
Securities owned 2,143,466 1,827,844
Loans receivable from related party -- (70,500)
Security deposits 2,705 (9,012)
Other assets (27,332) 209,588
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities (559,881) 493,657
Securities sold, not yet purchased -- (1,004,447)
Lease obligations and other (207,407) 9,514
----------- -----------
Net cash provided by (used in) operating activities $ 566,748 ($3,969,647)
----------- -----------
Cash flows from (used in) investing activities:
Purchases of property and equipment, net -- (115,419)
----------- -----------
Net cash used in investing activities -- (115,419)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock -- 3,324,291
Proceeds of notes payable 250,000 --
Repayment of notes payable (200,000) (185,983)
Proceeds from notes payable to former officer -- 700,000
Payment of capital lease obligations -- (168,289)
Capital (distribution to) contribution by LLC Class B
members (38) 232,914
----------- -----------
Net cash provided by financing activities 49,962 3,902,933
----------- -----------
Net increase (decrease) in cash and cash equivalents 616,710 (182,311)
Cash and cash equivalents at beginning of period 213,766 508,053
----------- -----------
Cash and cash equivalents at end of period $ 830,476 $ 325,742
=========== ===========
Supplemental non-cash financing activities
and disclosure of cash flow information:
Exchange of subordinated debt for preferred stock -- $ 2,750,000
----------- -----------
Cash paid for:
Interest $ 52,268 $ 132,655
----------- -----------
Taxes -- $ 2,634
----------- -----------
See notes to consolidated financial statements
-5-
A.B. Watley Group Inc.
Notes to 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 Integrated Clearing
Solutions, Inc. ("Integrated").
A.B. Watley and Integrated are registered broker-dealers with the
Securities and Exchange Commissions ("SEC"), and are members 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. Integrated is an
introducing broker-dealer conducting sales of mutual funds to institutional
clients. A.B. Watley and Integrated clear all transactions through clearing
brokers on a fully disclosed basis. Accordingly, A.B. Watley and Integrated are
exempt from Rule 15c3-3 of the Securities Exchange Act of 1934.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) and reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented. Pursuant to the rules and
regulations of the SEC, certain footnote disclosures, which are normally
required under GAAP, have been omitted. It is recommended that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements included in the Company`s Annual Report on
Form 10-K for the year ended September 30, 2002. The results of operations for
any interim period are not necessarily indicative of results for the full year.
The consolidated financial statements include the accounts of ABWG and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform to the current period`s presentation. The preparation of
the financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. Liquidity and Capital Resources
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.
4. Net Capital Requirements
A.B. Watley and Integrated are subject to the SEC`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. Integrated is required to maintain minimum
net capital of $5,000 or 6-2/3% of aggregate indebtedness as defined.
As of December 31, 2002, A.B. Watley and Integrated`s net capital in excess
of minimum requirements was $81,131 and $13,400, respectively.
-6-
5. Financial Instruments with Off Balance Sheet Risk and Concentrations of
Credit Risk
Pursuant to clearance agreements, the clearing and depository operations
for the Company and its customers` securities transactions are provided by
clearing broker-dealers. The Company has agreed to indemnify its clearing
brokers for losses that the clearing brokers may sustain from the customer
accounts introduced by the Company and maintains deposits with such clearing
brokers to collateralize such indemnification obligations. Such deposits are
reflected on the consolidated statement of financial condition, net of unsecured
customer receivables for which the Company is ultimately responsible.
The Company, through its clearing brokers, seeks to control the risks
associated with these activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal company policy
guidelines. The clearing brokers monitor required margin levels daily and,
pursuant to such guidelines, request customers to deposit additional collateral
or reduce securities positions when necessary.
6. 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 an exercise price of $2.95. The purchasers of the Preferred Stock were
issued warrants, expiring in 5 years from the date of issuance, to purchase an
additional 1,629,069 shares of Common Stock at an exercise price of $2.95.
Pursuant to the Purchase Agreement and the Registration Rights Agreement
(the "Registration Agreement"), the Company was required to file a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission registering for resale the 2,135,700 shares of Common Stock issueable
upon the conversion of the shares of Preferred Stock, and the 1,629,069 shares
of Common Stock subject to purchase upon exercise of the warrants. The Company
has not yet filed a Registration Statement and will not be able to have the
Registration Statement filed and declared effective within the period required.
A penalty of 2% of the liquidation preference value of the Preferred Stock for
each thirty-day period accrues to each holder of Preferred Stock and is added to
the liquidation preference amount until cured. As of December 31, 2002,
liquidated damages of approximately $692,594 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. For the three-month periods ended December 31, 2002 and 2001,
dividends of $94,500 and $78,750 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. Such
triggering events have occurred. The holders of the Preferred Stock waived their
Redemption Right through September 30, 2002. Although, the waiver has not been
amended or extended, to date, no redemption notice has been received by the
Company from any of its Preferred Stockholders.
The $6,300,000 aggregate purchase price of the Preferred Stock and the
warrants was allocated $4,340,383 to the Preferred Stock and the balance of
$1,959,617 was attributed to the fair value of the warrants. In connection with
this transaction, the Company issued Preferred Stock and received cash proceeds
of $3,324,291 (net of issue costs) and exchanged a note payable in the amount of
$2,500,000 ("Senior Subordinated Demand Note") for $2,750,000 plus accrued
interest. The 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 was accreted over a ten-month period through September 30, 2002,
the date the redemption waiver expired.
Since the holders of the Preferred Stock may require the Company to redeem
all of the Preferred Stock, the Company has excluded the Preferred Stock from
Stockholders` Deficit in the accompanying consolidated statement of financial
condition.
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.
-7-
7. Notes and Loans Payable
The Company`s outstanding obligation under notes and loans payable as of
December 31, 2002 and September 30, 2002 was as follows:
December 31, September 30,
2002 2002
---------- ----------
Borrowings under line of credit $3,082,826 $3,082,826
Notes payable to former officers 700,000 700,000
Loans payable - other 250,000 200,000
---------- ----------
$4,032,826 $3,982,826
========== ==========
As of December 31, 2002 and September 30, 2002, interest payable on the
Company`s borrowing was $373,000 and $275,000, respectively. The Company
recognized interest expense of $108,071 and $128,465 for the three month periods
ending December 31, 2002 and 2001, respectively.
On December 31, 2002, the Company borrowed $250,000 from a third party. The
associated promissory note bears interest at 15% per annum and matures on
January 14, 2003.
In March 2002, one of the holders of the Company`s Preferred Stock led a
group that granted a line of credit of $4,200,000 to the Company. Borrowings
under the line of credit are payable on demand after June 18, 2002, with
interest payable at 10%. The proceeds of the loans were used for working
capital. Additionally, one member of the group was granted warrants to purchase
1,000,000 shares of the Company`s Common Stock at an exercise price of $0.918 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 $0.918 a share. The loan is
collateralized by the assets of the Company as defined in the loan agreement.
In February 2002, the Company borrowed $200,000 from a former officer of
the Company, due on demand. The Company also borrowed $500,000 from the same
party in October 2001 with a stated maturity of October 1, 2002. Both notes bear
interest at 10% per annum. The loan due in October 2002 has not been repaid.
In February 2002, the Company borrowed $200,000 from a third party with
interest payable at 10% per annum. The loan matured on October 26, 2002.
In August 30, 2001, the Company obtained a $2,500,000 loan (the "Senior
Subordinated Demand Note") bearing interest at an annual rate of 6% due on
demand. The loan was redeemed and converted to Series A Convertible Preferred
Stock (see Note 6) on November 29, 2001.
In January 1999, the Company borrowed $400,000 from New York Community
Investment Company, L.L.C. ("NYCIC"). At September 30, 2002, the loan of
$360,000 was repaid in full.
8. Subordinated Borrowings
Subordinated borrowings as of December 31, 2002 and September 30, 2002 are
as follows:
December 31, 2002 September 30, 2002 Interest Rate Scheduled Maturity
- ----------------- ------------------ ------------- ------------------
$125,000 $125,000 12% October 31, 2003
$55,000 $55,000 0% October 31, 2003
$200,000 $200,000 15% October 31, 2003
$150,000 $150,000 13% October 31, 2003
- ------------------- -----------------
$530,000 $530,000
=================== =================
-8-
Subordinated borrowings are covered by agreements approved by the NASD and
are included by A.B. Watley for purposes of computing net capital under the Net
Capital Rule. To the extent that such subordinated borrowings are required for
A.B. Watley`s continued compliance with minimum net capital requirements, they
may not be repaid. The subordinated borrowings in the amounts of $125,000 and
$55,000 were originally scheduled to mature on October 31, 2002. Such borrowings
were renewed with a new maturity date of October 31, 2003.
Of the total subordinated borrowings, $180,000 and $350,000 as of December
31, 2002 and September 30, 2002, respectively, are from an officer and
stockholder of the Company, respectively.
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.
Litigation
- ----------
The Company is a party to various suits alleging breach of contract due to
non-payment for services or goods provided, and for the minority interests 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
with the balance represents 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 consolidated
financial statements for any potential losses.
10. Income taxes
The Company has net operating loss carryforwards ("NOL`s") for federal
income tax purposes approximating $61,643,000 as of December 31, 2002. The NOL`s
are scheduled to expire no sooner than September 30, 2013.
The ultimate realization of the deferred tax asset is primarily dependent
upon the generation of future taxable income prior to the expiration of the
NOL`s. In assessing the realizability of deferred tax assets resulting from such
NOL`s, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Management has
established a 100% valuation allowance for such deferred tax asset, since the
Company has not yet generated taxable net income.
11. Subsequent Events
On January 15, 2003, A.B. Watley entered into a secured demand note
agreement for $5,000,000 with a maturity date of June 30, 2004. The loan bears
an 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 the 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 of the collateral into Common
Stock of the Company within five business days after February 15, 2004, 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 five
business days after June 30, 2004 at $1.80. In no event shall the conversion
result in the holder of the secured demand note owning more than 15% of the
Company`s Common Stock.
In January 2003, the Company entered into two leases for office space
requiring security deposits of approximately $21,000 and aggregate minimum
monthly rents of $15,173. The leases expire in 2004.
-9-
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 December 31, 2002 Compared to the Three months Ended December
31, 2001
Revenues. Total revenues for the quarter ended December 31, 2002 were
$4,179,700 - a decrease of 50%, as compared to revenues of $8,288,701 for the
quarter ended December 31, 2001.
Commissions. For the three-month period ending December 31, 2002, we earned
commission revenues of $1,477,976, representing a 79% decrease as compared to
commission revenues of $6,963,713 for the corresponding period in 2001. This
$5,485,737 decrease in commission revenues resulted from both significant
reductions in overall trading volume and the loss of the On-Site customers from
our direct access business that was acquired in October 2001.
Data Service Fees. Our revenues from data service fees for the three-month
period ending December 31, 2002 also dropped substantially as compared to the
corresponding period in 2001. The $16,897 of current period revenues represents
an 88% decrease from the three-month period ending December 31, 2001. This
decrease was caused by the loss of customers and the migration of remaining
customers from third party software to the UltimateTrader II software for which
no fees are charged.
Revenues from Principal Transactions. Revenues from proprietary security
transactions increased by 430%. We earned $1,945,306 from such transactions
during the three-month period ending December 31, 2002 as compared to $367,360
for the three-month period ending December 31, 2001.
Interest Income. Interest and for the three-month period ending December
31, 2002 was $35,698 representing a 94% decrease as compared to $582,894 for the
three-month period ending December 31, 2001. The decrease was primarily due the
loss of additional accounts acquired from the On-Site retail accounts acquired
in October 2001 that had generated margin interest income.
Other Income. Other income of $703,823 for the three-month period ending
December 31, 2002 represents a $465,422 increase as compared to the three months
ended December 31, 2001.Such increase primarily relates to settlements with
vendors for which the Company was the beneficiary.
Interest Expense. Interest expense decreased from $1,016,710 for the
three-months ending December 31, 2001 to $146,893 for the three-months ended
December 31, 2002. The value of the warrants issued in August 2001 in connection
with the $2,500,000 borrowing under the Senior Subordinated Demand Note was
recognized as interest expense prior to the Note`s conversion to Preferred Stock
in November 2001. During the three-month period ending December 31, 2001,
$552,000 of such interest expense was recognized. Also contributing to the
decrease in interest expense was the conversion of debt to equity.
Net Revenues. As a result of the foregoing, net revenues decreased by
$3,239,184 or 45%, from $7,271,991 for the quarter ended December 31, 2001, to
$4,032,807 for the quarter ended December 31, 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 for the quarter ended December 31, 2002 were
$5,707,634 - a 57% decrease as compared to total expenses of $13,426,980 for the
three-month period ending December 31, 2001.
Commissions, Floor Brokerage and Clearing Charges: For the three-month
period ending December 31, 2002, we incurred $1,015,216 of Commissions, Floor
Brokerage and Clearing Charges - a 77% decrease as compared to the corresponding
three-month period in 2001. These costs represent payments to our clearing and
floor brokers who facilitate security transactions for both our customers and
our own proprietary accounts. This decrease is largely due to the June 2002
closing of the On-Site business which had been acquired in October 2001. In
addition, our institutional sale division had lower volumes as compared to the
previous period.
-10-
Employee Compensation and Related Costs. Our Employee Compensation and
Related Costs of $1,807,785 for the three-month period ending December 31, 2002
reflect a 46% decrease as compared to $3,376,391 incurred for such costs during
the three-month period ending December 31, 2001. This decrease is attributable
to both the reduction in the number of employees and to lower compensation paid
to the institutional sales division as a result of declining profits.
Communications. Communications expense for the three-month period ending
December 31, 2002 amounted to $282,448, a 67% decrease as compared to $847,499
for the corresponding period in 2001. This decrease is largely due to the June
2002 closing of the On-Site business.
Business Development. As a result of our substantial curtailment of
promotional expenditures, our Business Development costs decreased 92% from
$262,343 for the three months ending December 31, 2002 to $21,699 for the three
months ending December 31, 2001.
Professional Services. Professional Services primarily consists of legal
and accounting costs in addition to the cost of external software consultants.
For the three-month period ending December 31, 2002, our professional services
amounted to $399,024 as compared to $454,913 for the three-month period ending
December 31, 2001 - a decrease of 12%.
Occupancy and Equipment. Occupancy and Equipment decreased $687,834 or 39%
from $1,779,373 for the three-month period ending December 31, 2001 to
$1,091,539 for the three-month period ending December 31, 2002. Such costs,
primarily consisting of lease costs for both office space and equipment, dropped
due to our August 2002 surrender and termination of the 25th and 28th floor
office leases at 40 Wall Street. These leases were terminated as part of our
overall cost cutting initiatives. In addition, as part of the closing of the
On-Site business in June 2002, we no longer have the branch offices in Great
Neck, New York and Boca Raton, Florida.
Depreciation and Amortization. Depreciation and Amortization decreased by
$1,719,572 or 77% when comparing the $2,218,979 for the three-months ending
December 31, 2002 to the $499,407 for the three-month period ending December 31,
2002, primarily due to the disposal or surrender of assets subject to such
depreciation and amortization. We had sold software to an affiliate of our
clearing broker and had written off intangible assets recognized as a result of
the On-Site acquisition. In addition, we had surrendered leasehold improvements
at our 40 Wall Street office and at former offices in Great Neck and Boca Raton
Other Expenses. For the three-month period ending December 31, 2002, we
incurred $506,229 of Other Expenses, as compared to $540,707 for the three
month-period ending December 31, 2001. Other expenses decreased as part of our
overall cost cutting initiatives.
Loss before Income Taxes and Extraordinary Item. As a result of the
aforementioned factors, our Loss before Income Taxes and Extraordinary Item
decreased from $6,154,989 for the three-month period ending December 31, 2001 to
$1,674,827 for the three-month period ending December 31, 2002.
Liquidity and Capital Resources
As indicated by the accompanying unaudited consolidated financial
statements, 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.
-11-
Cash provided by operating activities during the three months ended
December 31, 2002 was $566,748, as compared to cash utilized by operating
activities of $3,969,647 for the three months ended December 31, 2001. Cash was
principally provided by decrease in securities owned of $2,143,466. Cash was
principally used to fund the net loss of $1,293,720 net of non-cash items
including depreciation and amortization of $499,408 and non-cash
compensation/service costs of $9,334. In addition, cash was used to lower
liabilities for accounts payable, accrued liabilities, and lease obligations by
$767,288.
No cash was provided by investing activities during the three months ended
December 31, 2002, compared to cash used in investing activities of $115,419
during the three months ended December 31, 2001.
Cash provided by financing activities was $49,962 during the three months
ended December 31, 2002 compared to $3,905,933 during the three months ended
December 31, 2001. Cash provided by financing activities during the three months
ended December 31, 2002, principally consisted of a net increase in outstanding
notes payable.
Net Operating Loss Carryforwards
The Company`s net operating loss carryforwards are scheduled to expire
beginning in the year 2013. The issuance of additional equity securities,
together with the Company`s recent financing and public offering, could be
deemed to 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.
Relevant Accounting Standards
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 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.
-12-
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.
Investment Considerations and Risk Factors
The following factors and other information in this Form 10-K should
carefully be considered when evaluating the Company and its stock.
o 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.
o 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.
o We may not be able to adapt with rapid technological change in a cost
effective manner.
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
-13-
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.
o 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 were to not 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.
o Employee misconduct could harm us and is difficult to detect and
deter.
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct by
employees could bind us to transactions that exceed authorized limits or present
unacceptable risks, or hide from us unauthorized or unsuccessful activities. In
either case, this type of conduct could result in unknown and unmanaged risks or
losses. Employee misconduct could also involve the improper use of confidential
information, which could result in regulatory sanctions and serious reputational
harm. It is not always possible to deter employee misconduct, and the
precautions we take to prevent and detect this activity may not be effective in
all cases.
o The securities industry in which we will 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.
-14-
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.
o 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.
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. In addition, as of September
30, 2002, the Company had a net capital deficit of $301,523. 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.
o 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.
o We may be obligated to redeem our Series A Preferred Stock at a point
in the future.
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.
-15-
o 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.
o 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 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.
o 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.
o 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.
-16-
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 December 31,
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 December 31, 2002.
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 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.
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.
-17-
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.
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 upon 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 December 31, 2002,
liquidated damages of approximately $692,594 has been accrued to the preferred
holders.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
-18-
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification by John J. Amore, Chief 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.
-19-
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/ John J. Amore
--------------------------------
John J. Amore
Chief Executive Officer
By: /s/ Robert Malin
--------------------------------
Robert Malin
Vice-Chairman
-20-
CERTIFICATION
I, John J. Amore, the Chief 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
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Chief Executive Officer
Date: April 15, 2003
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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
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Robert Malin
Principal Financial Officer
Date: April 15, 2003
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