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, 2003
--------------
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 [x] No [ ].
The number of shares outstanding of the issuer`s common stock, par value $.001
per share, as of August 12, 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, 2003 (Unaudited) and September 30, 2002 ...................... 3
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months Ended June 30, 2003 and 2002 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2003 and 2002 (Unaudited) ................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited) ............................ 7
Item 2. Management`s Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................... 15
Item 4. Controls and Procedures ............................................................. 19
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 19
Item 2. Changes in Securities ............................................................... 20
Item 3. Default on Senior Securities ........................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders ................................. 21
Item 5. Other Information ................................................................... 21
Item 6. Exhibits and Reports on Form 8-K .................................................... 21
Signatures .............................................................................................. 22
Certifications .......................................................................................... 23
Exhibits .......................................................................................... 24
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
A.B. Watley Group Inc.
Condensed Consolidated Statements of Financial Condition
- ------------------------------------------------------------------------------------------------------------------
June 30, 2003 September 30, 2002
-------------- -----------------
(Unaudited)
Assets:
Cash and cash equivalents $ - $ 213,766
Restricted cash - 292,565
Receivable from clearing brokers - 1,028,588
Securities owned at market value 2,978,917 2,145,472
Secured demand note receivable 5,000,000 -
Property and equipment, net of accumulated depreciation
of $5,984,880 and $5,317,435 1,804,917 2,889,711
Loans receivable from related party 258,226 258,226
Security deposits 159,296 132,001
Other assets 125,534 76,291
------------ ------------
Total Assets $10,326,890 $7,036,620
============ ============
Liabilities and Stockholders` Deficit:
Accounts payable and accrued liabilities $ 9,864,315 $ 8,409,141
Payable to clearing broker 2,336,279 -
Accrued liabilities to LLC Class B Members 2,370,253 2,492,310
Securities sold and not yet purchased 169,987 -
Notes payable - other 3,082,826 3,282,826
Notes payable to former officer 700,000 700,000
Lease obligations and other 1,306,848 1,524,195
Subordinated borrowings - other 5,167,517 350,000
Subordinated borrowings from officer 180,000 180,000
----------- ------------
$25,178,025 $16,938,472
----------- ------------
Series A redeemable convertible preferred stock $0.01 par value, 690 shares
authorized and 630 and 0 issued and outstanding at June 30, 2003 and
September 30, 2002 and accrued dividends
(liquidation preference - $6,300,000) 6,867,001 6,926,487
------------ ------------
Stockholders` Deficit:
Preferred Stock $0.01 par value, 1,000,000 shares authorized and none issued and
outstanding at June 30, 2003 and September 30, 2002 - -
Common stock, $0.001 par value, 20,000,000 shares authorized at June 30, 2003
and September 30, 2002, and 12,508,852 issued and
outstanding at June 30, 2003 and September 30, 2002 12,509 12,509
Additional paid-in capital 46,911,886 45,819,569
Option costs (13,996) (32,663)
Accumulated deficit (68,628,535) (62,627,754)
------------ ------------
Total Stockholders` Deficit $(21,718,136) $(16,828,339)
------------ ------------
Total Liabilities and Stockholders` Deficit $10,326,890 $ 7,036,620
============ ============
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,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Commissions $1,716,675 $2,441,796 $4,409,349 $14,641,927
Maintenance and data service fees 46,130 121,722 62,336 383,059
Sale of Software Income - 1,191,000 - 1,191,000
Principal transactions 2,669,454 155,433 6,624,125 1,156,191
Interest income 310,381 1,410,433 994,258 2,834,470
Other Income 17 - 327,006 -
------------ ------------ ------------ ------------
Total revenues 4,742,657 5,320,384 $12,417,074 20,206,647
Interest expense 218,836 304,263 577,022 2,538,506
Interest expense - related parties 82,864 127,625 149,201 387,591
------------ ------------ ----------- ------------
Net revenues 4,440,957 4,888,496 $11,690,851 17,280,550
------------ ------------ ------------ ------------
Expenses and other charges:
Commissions, floor brokerage and clearing charges 1,678,542 1,914,415 4,213,913 10,221,360
Employee compensation and related costs 2,461,346 2,276,615 6,326,377 8,868,357
Communications 189,546 934,107 1,014,473 2,667,109
Business development 70,018 16,509 198,268 428,087
Professional services 356,311 1,043,127 1,371,860 2,363,628
Occupancy and equipment costs 336,741 1,195,684 1,821,825 5,813,973
Depreciation and amortization 138,369 1,480,383 1,098,062 5,194,649
Other expenses 214,914 387,349 1,562,570 1,417,417
Loss on Investments - - 84,287 -
Impairment of intangibles - 2,146,000 - 7,870,110
Abandonment of leaseholds - 618,028 - 618,028
Minority interest applicable to LLC Class B members - (487,374) - (899,869)
------------ ------------ ----------- ------------
Total Expenses 5,445,787 11,524,843 17,691,635 44,562,849
------------ ------------ ----------- ------------
Loss before income taxes and extraordinary item (1,004,830) (6,636,347) (6,000,784) (27,282,299)
Income tax provision - - - (4,150)
------------ ------------ ----------- ------------
Loss before extraordinary item (1,004,830) (6,636,347) (6,000,784) (27,286,449)
Extraordinary loss on extinguishment of debt - - - (250,000)
------------ ------------ ----------- ------------
Net loss $(1,004,830) $(6,636,347) $(6,000,784) $(27,536,449)
============ ============ =========== ============
Basic and diluted loss per common share:
Loss before extraordinary item $ (1,004,830) $(6,636,347) $(6,000,784) $(27,286,449)
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 (63,000) (94,500) (252,000) (220,500)
------------ ------------ ------------ ------------
Loss before extraordinary item attributable to
common shareholders (1,067,830) (7,319,579) (6,252,784) (30,518,478)
Extraordinary loss on extinguishment of debt - - - (250,000)
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $(1,067,830) $(7,319,579) $(6,252,784) $(30,768,478)
============ ============ ============ ============
Loss before extraordinary item $ (0.09) $ (0.59) $ (0.50) $ (2.44)
Extraordinary item $ (0.00) $ - $ (0.00) $ (0.02)
Basic and diluted loss per share $ (0.09) $ (0.59) $ (0.50) $ (2.46)
Weighted average shares outstanding 12,508,852 12,508,852 12,508,852 12,508,852
============ ============ ============= =============
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,
-------------------------------------
2003 2002
------------ ------------
Cash flows provided by (used in) operating activities:
Net loss $(6,000,784) $(27,536,449)
Adjustments to reconcile net loss to net cash
provided by (used in) Operating
activities:
Non-cash compensation and service costs - 200,568
Options costs 18,672 225,801
Sale of software - (1,191,000)
Penalties-preferred stock 759,107 311,487
Issuance of warrants 91,240 1,390,569
Minority interest applicable to LLC
Class B members (87,019) (899,869)
Depreciation and amortization 1,098,062 5,328,023
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 292,565 70,758
Receivables from clearing brokers 1,028,588 (1,242,901)
Securities owned ( 833,445) 4,880,475
Loans receivable from related party - 4,670
Security deposits (27,295) 1,297,104
Other assets (49,243) 439,295
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities 1,455,173 2,323,822
Payable to clearing broker 2,336,279 -
Securities sold, not yet purchased 169,987 (3,720,537)
Lease obligations and other (217,347) (60,152)
------------ -------------
Net cash provided by (used in) operating activities $34,540 $(9,440,198)
------------ --------------
Cash flows (used in) provided by investing
activities:
Purchases of property and equipment (13,268) (216,798)
Proceeds of sale of software license - 1,771,210
------------ --------------
Net cash (used in) provided by investing
activities $ (13,268) $1,554,412
------------ --------------
Cash flows from financing activities:
Proceeds from sale of preferred stock - 3,324,291
Proceeds from notes payable 250,000 3,779,686
Proceeds from notes payable to officer - 900,000
Repayment of notes payable (450,000) -
Capital contribution from Class B members - 446,307
Capital distribution to LLC Class B members (35,038) (1,005,670)
------------ --------------
Net cash (used in) provided by financing activities $ (235,038) $7,444,614
------------ --------------
Net decrease in cash and cash equivalents (213,766) (441,172)
Cash and cash equivalents at beginning of period 213,766 508,053
------------ --------------
Cash and cash equivalents at end of period $ _ $ 66,881
============ ==============
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,
---------------------------------
2003 2002
----------- ----------
Supplemental non-cash financing activities
and disclosure of cash flow information:
Forgiveness of penalties on Preferred Stock $1,070,593 $ -
=========== ==========
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 $ 252,000 $ 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
=========== ==========
Borrowings under secured demand note collateral agreement $5,000,000 $ -
=========== ==========
Debt discount issued relating to the warrants issued in
connection with the borrowings under the secured demand note $ 273,723 $ -
=========== ==========
7
Settlements of Minority Interests $ 87,019 $ -
=========== ==========
Cash paid for:
Interest $ 188,131 $ 179,897
=========== ==========
Taxes $ - $ -
=========== ==========
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") A.B. Watley Direct, Inc.
("Direct" and formerly Integrated Clearing Solutions, Inc.).
A.B. Watley and Direct 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,
institutional block trading as well as equity and fixed income trading. Direct
is an introducing broker-dealer conducting sales of mutual funds to
institutional clients. A.B. Watley and Direct clear all transactions through
clearing brokers on a fully disclosed basis. Accordingly, A.B. Watley and Direct
are exempt from Rule 15c3-3 of the Securities Exchange Act of 1934.
2. Basis of Presentation and Accounting Policies
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.
Certain amounts in the prior years financial statements have been
reclassified to conform with the current years presentation.
The Financial Accounting Standards Board "FASB" issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This standard requires companies
to recognize costs associated 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.
During the current Fiscal Year, the Company adopted Statement of Financial
Accounting Standard No. 148, "Accounting for Stock-based Compensation-Transition
and Disclosure." This statement amended Statement No. 123, "Accounting for
Stock-based Compensation." As permitted under Statement No. 123, the Company
continues to apply the Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." As required under Statement No. 148, the
following table presents pro forma net income and basic and diluted earnings per
share as if the fair value-based method had been applied to all awards.
7
THREE MONTHS NINE MONTHS
------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ -------------- -------------
Periods ended June 30,
Net loss $(1,004,830) $ (7,319,579) $(6,189,784) $(30,768,478)
Stock-based employee
compensation cost, net
of tax effect, under
fair value accounting 148,326 35,160 333,732 365,565
----------- ------------ ----------- -------------
Pro forma net loss under
Fair Value Method $(1,153,156) $ (7,354,739) $(6,523,516) $(31,134,043)
----------- ------------ ----------- -------------
Loss per share
basic and diluted $ (0.08) $ (0.59) $ (0.49) $ (2.46)
Per share stock-based
employee compensation
cost, net of tax effect,
under fair value
accounting 0.01 - 0.03 0.03
----------- ------------ ----------- -------------
Pro forma loss per
share - basic and diluted $ (0.09) $ (0.59) $ (0.52) $ (2.49)
----------- ------------ ----------- -------------
The weighted average exercise price of options granted as of June 30, 2003
and 2002 was $0.35 and $0.10 , respectively. The fair value of each option grant
was estimated at the date of grant using the Black-Scholes option valuation
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Because the Company`s stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management`s opinion, the existing models do not
necessarily provide a reliable single measure of the fair value estimate of its
stock options. In calculating the fair values of the stock options, the
following assumptions were used:
2003 GRANTS 2002 GRANTS
----------- -----------
Dividend yield 0% 0%
Weighted average expected life:
Employee 5 Years 5 years
Non-employee -- --
Weighted average risk-free interest rate 4.21 3.88
Expected volatility 239% 50%
At June 30, 2003 and 2002, the Company had warrants outstanding of
7,037,036 and 4,124,405 , respectively, with exercise prices ranging between
$0.00 and $19.47 and expirations extending through March 2012. The Company
adopted the above pronouncements during the current fiscal year and there was no
material effect on the Company`s condensed consolidated financial statements.
8
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.
Managements plans with respect to these matters includes continuing to
streamline operations, expanding its customer base and seeking to raise
additional capital.
4. Net Capital Requirements
A.B. Watley and Direct 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. Direct is required to maintain minimum net
capital of $5,000 or 6-2/3% of aggregate indebtedness as defined.
As of June 30, 2003, A.B. Watley and Direct`s net capital in excess of
minimum requirements was $1,096,175 and $56,870, respectively.
As of September 30, 2002, A.B. Watley had a net capital deficit of
$301,523. This deficiency was cured in October 2002.
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 issuable
upon the conversion of the shares of Preferred Stock, and the 1,629,069 shares
of Common Stock subject to purchase upon exercise of the warrants. The Company
has not yet filed a Registration Statement and will not be able to have the
Registration Statement filed and declared effective within the period required.
A penalty of 2% of the liquidation preference value of the Preferred Stock for
each thirty-day period accrues to each holder of Preferred Stock and is added to
the liquidation preference amount until cured. As of June 30, 2003 the holders
of the Preferred Stock waived their rights to all penalties through July 31,
2004. Penalties accrued through June 30, 2003 in the amount of $1,070,593 have
been reversed and recorded as additional paid-in-capital.
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, 2003 the holders of the Preferred Stock have waived
their rights to all future dividends during the period June 1, 2003 through May
31, 2004. For the nine-month periods ended June 30, 2003 and 2002, dividends of
$252,000 and $220,500 were accrued for the Preferred Stock.
9
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 Rights through July 31, 2004.
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.
As of June 30, 2003 and 2002, the dilutive effect of the conversion of
preferred stock and accumulated penalties and dividends would result in the
issuance of 2,327,797 and 2,347,962 shares respectively.
7. Notes and Loans Payable
The Company`s outstanding obligation under notes and loans payable as of
June 30, 2003 and September 30, 2002 was as follows:
June 30, September 30,
2003 2002
---------- ----------
Borrowings under line of credit $3,082,826 $3,082,826
Notes payable to former officers 700,000 700,000
Loans payable - other - 200,000
---------- ----------
$3,782,826 $3,982,826
========== ==========
As of June 30, 2003 and September 30, 2002, interest payable on the
Company`s borrowings totaled $586,566 and $275,000, respectively. The Company
recognized interest expense of $311,566 and $41,917 for the nine month periods
ending June 30, 2003 and 2002, respectively. Included in interest expense for
the nine months ended June 30, 2002 is the amortization of the warrants issued
in connection of the borrowing under the line of credit that occurred in March
2002. The value of such warrants were amortized over the term of the loan as a
component of interest expense.
On December 31, 2002, the Company borrowed $250,000 from a third party. The
associated promissory note bears interest at 15% per annum and was repaid 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 were 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.
10
In February 2002, the Company borrowed $200,000 from a third party with
interest payable at 10% per annum. The loan was repaid on October 26, 2002.
8. Subordinated Borrowings
Subordinated borrowings as of June 30, 2003 and September 30, 2002 are as
follows:
Subordinated Notes: June 30, 2003 September 30, 2002
-------------- ------------------
Non-interest bearing, due October 31, 2003 $ 55,000 $ 55,000
12%,due October 31, 2003 125,000 125,000
----------- -----------
$ 180,000 $ 180,000
=========== ===========
13%,due October 31, 2003 $ 150,000 $ 150,000
15%,due October 31, 2003 200,000 200,000
----------- -----------
$ 350,000 $ 350,000
Secured Subordinated Demand Notes:
7% due June 30, 2004 $5,000,000 --
Less debt discount relating to the warrants
issued in connection with the Secured
Subordinated Demand Note (182,482) --
----------- -----------
$4,817,512 --
----------- -----------
$5,167,518 $ 350,000
=========== ===========
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.
The Company recorded a debt discount of $273,723 which will be amortized to
interest expense over the life of the secured demand note. Interest expense
relating to the warrants was $45,621 for the period ending June 30, 2003.
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 both at June
30, 2003 and September 30, 2002, are from an officer and stockholder of the
Company, respectively.
11
9. Commitments and Contingencies
Lease Agreements
- -----------------
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.
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 with respect to several of these suits.
A suit seeking damages of $31,400,000 had been brought by Akro Investicni
Spolecnost, A.S. and Bozena Konvalinkova, as Czech Receiver of Private
Investors, against A.B. Watley. Approximately $950,000 of that amount was
alleged to represent AKRO`s claims, with the balance representing claims brought
by the Receiver. The suit alleged 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. On March 12, 2003, the Court dismissed the
claims brought by the Receiver, and the parties have settled all outstanding
claims which did not materially impact the financial statements.
In August 2003, a claimant brought an arbitration with the National
Association of Securities Dealers against A.B. Watley, Inc. for breach of a
separation agreement. Claimant is seeking $875,000 in damages, securities
and bonus compensation in an amount to be determined at hearing, plus
interest and attorney`s fees. The Company denies any liability in its
entirety.
In August 2003, a claimant brought an arbitration with the National
Association of Securities Dealers against A.B. Watley, Inc. the National
Association of Securities Dealers for breach of a separation agreement.
Claimant is seeking $709,166.60 in damages, securities and bonus
compensation in an amount to be determined at hearing, plus interest and
attorney`s fees. The Company denies any liability in its entirety.
In March 2003, the holder of the $5 million secured demand note demanded
repayment of the note. On March 31, 2003, ABW filed a NASD Arbitration Demand
and a Statement of Claims with the NASD Dispute Resolution office. The
arbitration seeks to enforce the provisions of the secured demand note agreement
and to prevent premature withdrawal by the lender. A date for the arbitration
hearing has not yet been determined. The financial statements do not include any
adjustments for fees and penalties associated with the litigation.
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. Income taxes
The Company has net operating loss carryforwards ("NOL`s") for federal
income tax purposes approximating $66,208,000 as of March 31, 2003. 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. Accounting Developments
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB").
In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. Interpretation 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity`s activities or
entitled to receive a majority of the entity`s residual returns or both. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established.
In April 2003, Financial Accounting Standards Board, "FASB" issued
Statement of Financial Accounting Standard, SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. This Statement is effective for contracts entered into or
12
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise, is effective at the
beginning of the first interim period beginning after June 15, 2003.
Management has not yet determined the effect of the adoption of any of these
pronouncements and the effect on the Company`s condensed
consolidated financial statements.
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.
This Form 10-Q contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company`s financial
position, business strategy and plans and objectives of the Company`s management
for future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of the Company`s management, as well as
assumptions made by and information currently available to the Company`s
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect," "intend," and words or phrases of similar import, as they
relate to the Company or Company management, are intended to identify
forward-looking statements. Such statements (the "cautionary statements")
reflect the current view of the Company`s management with respect to future
events and are subject to risks, uncertainties, and assumptions related to
various factors including, without limitation, competitive factors, general
economic conditions, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision, seasonality,
product introductions and acceptance, technological change, changes in industry
practices, and one-time events. Although the Company believes that expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected, or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements. The Company does not assume any responsibility to
publicly update any of its forward-looking statements regardless whether factors
change as a result of new information, future events, or for any other reason.
The Company advises you to review any additional disclosures made in its 10-Q,
8-K, and 10-K reports filed with the Commission.
Results of Operations
Three Months Ended June 30, 2003 Compared to the Three Months Ended June 30,
2002
Revenues. Total revenues for the quarter ended June 30, 2003 were
$4,742,657, a decrease of $577,727 or 11%, as compared to revenues of $5,320,384
for the quarter ended June 30, 2002.
Commissions. For the three month period ending June 30, 2003, the Company
earned commission revenues of $1,716,675 representing a 30% decrease as compared
to the commission revenues of $2,441,796 for the corresponding period in 2002.
The $725,121 decrease in commission revenues is largely due to loss of the
On-Site direct access business.
13
Maintenance and Data Service Fees. Our revenues from maintenance and data
service fees decreased by $75,592 or 62% from $121,722 for the three months
ended June 30, 2002 to $46,130 for the three months ended June 30, 2003. This
decrease is due to the migration of customers from third party software to
UltimateTrader II for which no fees are charged as well as the loss of direct
access customer accounts for which maintenance fees are charged.
Sale of Software Income for the three month period ending June 30, 2002 AB
Watley received proceeds of $1,191,000 from the sale of software to E*Trade in
April 2002. For the three month period ending June 30, 2003 there was no sale of
software.
Principal Transaction. Revenues from proprietary securities transactions
increased by $2,514,021 or 1,617%. We earned $2,669,454 from such transactions
ending June 30, 2003 as compared to $155,433 for the three month period June 30,
2002. This increase is primarily due to favorable overall market conditions and
an increase in the value securities owned.
Interest Income. Interest income decreased by $1,100,052, or 78%, from
$1,410,433 for the quarter ended June 30, 2002, to $310,381 for the quarter
ended June 30, 2003. This decrease is largely due to the decrease in margin
interest that was earned by the Company on the retail accounts and proprietary
businesses acquired from On-Site that were closed in the quarter ended June
2002.
Interest Expense. Interest expense and interest expense - related parties
decreased by $130,188 or 30%,from $431,888 for the three months ending June 30,
2002 to $301,700 for the three months ended June 30, 2003. Included in interest
expense for the three months ended June 30, 2002 is the amortization of the
warrants issued in connection with the borrowing under the line of credit that
occurred in March 2002. The value of such warrants were amortized over the term
of the loan as a component of interest expense. Included in interest income for
the three months ended June 30, 2003 is interest expense related to the
$5,000,000 secured demand note.
Net Revenues. As a result of the foregoing, net revenues decreased by
$447,539, or 9%, from $4,888,496 for the quarter ended June 30, 2002, to
$4,440,957 for the quarter ended June 30, 2003. 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 June 30, 2003 were $5,445,787, a
decrease of $6,079,056 or 53%, as compared to expenses of $11,524,843 for the
quarter ended June 30, 2002.
Commissions, Floor Brokerage, and Clearing Charges. For the three month
period ending June 30, 2003, the Company incurred $1,678,542 of commissions,
floor brokerage and clearing charges, a 12% decrease as compared $1,914,415 to
the corresponding period in 2002. These costs represent payments to our clearing
and floor brokers who facilitate securities transactions for both our customers
and our own proprietary accounts. This decrease of $235,873 is largely due to
the June 2002 closing of the On-Site business, which had been acquired in
October 2001. In addition, our institutional sales division had lower volumes as
compared to the corresponding period in 2002.
Employee Compensation and Related Costs. Employee compensation and related
costs increased by $184,731, or 8%, from $2,276,615 for the quarter ended June
30, 2002, to $2,461,346 for the quarter ended June 30, 2003. This increase is
attributable to favorable market conditions and in increase in securities owned
which, in turn, led to increased proprietary trading revenues and, consequently,
increased trader compensation costs.
Communications. Communications expense for the three month period ending
June 30, 2003 amounted to $189,546, a 80% decrease as compared to the $934,107
for the corresponding three month period ending June 30, 2002. This $744,561
decrease is largely due to the June 2002 closing of the On-Site business and to
the communication costs related to the software that was sold in July 2002.
Business Development. Business development costs consist of advertising
costs, which have mostly been for print, media, trade shows and meetings to
obtain new clients. These expenses increased by $53,509, or 324%, from $16,509
for the quarter ended June 30, 2002, to $70,018, for the quarter ended June 30,
2003.
Professional Services. Professional services primarily consist of legal,
and accounting costs in addition to the cost of external consultants. For the
three month period ending June 30, 2003 our professional services amounted to
$356,311 as compared to $1,043,127 for the three month period June 30, 2002, a
decrease of 66%. This decrease was partially due to a decrease in accounting
fees, legal fees and consulting fees related to the sale of the software and the
conversion of notes payable during the three months ended June 30, 2002.
14
Occupancy and Equipment Costs. Occupancy and Equipment costs decreased
$858,943, or 72%, from $1,195,684 for the three-month period ending June 30,
2002 to $336,741 for the three-month period ending June 30, 2003. 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. The surrender of these leases resulted in a
write-off of leasehold improvements of $ 618,028. 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, the Company no longer has branch
offices in Great Neck, New York and Boca Raton, Florida.
Depreciation and Amortization. Depreciation and amortization decreased by
$1,342,014, or 91%, when comparing the $1,480,383 for the three-months ending
June 30, 2002 to the $138,369 for the three-month period ending June 30, 2003,
which was primarily due to the disposal or surrender of assets subject to such
depreciation and amortization. The Company sold software to an affiliate of our
clearing broker and wrote-off intangible assets recognized as a result of the
On-Site acquisition. In addition, the Company surrendered leasehold improvements
at our 40 Wall Street office and at former offices in Great Neck, New York and
Boca Raton, Florida.
Other Expenses. Other expenses decreased by $172,435 or 45% from $387,349
for the three months ended June 30, 2002 to $214,914 for the three months ended
June 30, 2003.
Impairment of Intangibles. The impairment of intangibles of $2,146,000 in
the three month period ending June 30, 2002 represents the write off of
intangible assets (customer lists) acquired in the On-Site acquisition.
Abandonment of Leaseholds. The abandonment of leaseholds of $618,028
incurred during the three months ended June 30, 2002 represents the write-off
leasehold improvements at the Company`s offices at 40 Wall Street, New York,
Great Neck, New York and Boca Raton, Florida, all of which were surrendered.
Minority Interest Applicable to LLC Class B Members. Minority Interest of
$487,374 represents the trading losses of the Class B non-voting members of the
LLC that occurred in the nine month period ending June 30, 2002. The LLC was
closed in June 2002.
Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002
Revenues. Total revenues for the nine months ended June 30, 2003 were
$12,417,074, a decrease of $7,789,573 or 39%, as compared to revenues of
$20,206,647 for the nine months ended June 30, 2002.
15
Commissions. For the nine month period ending June 30, 2003, the Company
earned commission revenues of $4,409,349 representing a 70% decrease as compared
to the commission revenues of $14,641,927 for the corresponding period in 2002.
This $10,232,578 decrease in commission revenues is largely due to loss of the
On-Site customers from the direct access business that was acquired in October
2001, lower sales volume from our institutional sales division and the reduction
in the overall trading volume.
Maintenance and Data Service Fees. Our revenues from maintenance and data
service fees decreased by $320,723, or 84%, from $383,059 for the nine months
ended June 30, 2002 to $62,336 for the nine months ended June 30, 2003. This
decrease is due the migration of customers from third party software to
UltimateTrader II for which no fees are charged as well as the loss of direct
access customer accounts for which maintenance fees are charged.
Sale of Software Income. For the three month period ending June 30, 2002
the Company received proceeds of $1,191,000 from the sale of software to E*Trade
in April 2002. For the nine month period ending June 30, 2003, there was no
sale of software.
Principal Transactions. Revenues from proprietary securities transactions
increased by $5,467,934 or 473%. The Company earned $6,624,125 from such
transactions for the nine month period ending June 30, 2003 as compared to
$1,156,191 for the nine month period June 30, 2002. This increase is primarily
due to favorable overall market conditions and an increase in the value
securities owned.
Interest Income. Interest income decreased $1,840,212 or 65%, from
$2,834,470 for the nine months ending June 30, 2002, to $994,258 for the nine
months ended June 30, 2003. This decrease is largely due to the decrease in
margin interest that was earned by the Company on the retail accounts and
proprietary businesses acquired from On-Site that were closed in the quarter
ended June 2002.
Other Income. Other income of $327,006 or the nine months ending June 30,
2003 primarily relates to proceeds from the World Trade Center relief program
affiliated with the SBA related to September 11th, 2001 fund.
Interest Expense. Interest expense and Interest expense - related parties
decreased by $2,199,874 or 75%, $2,926,097 for the nine months ended June 30,
2002, to $726,223 for the nine months,ended June 30,2003. Included in interest
expense for the nine months ended June 30, 2002 is the amortization of the
warrants issued in connection with the borrowing under the line of credit that
occurred in March 2002. The value of such warrants were amortized over the term
of the loan as a component of interest expense. Included in interest income for
the three months ended June 30, 2003 is interest expense related to the
$5,000,000 secured demand note.
Net Revenues. As a result of the foregoing, net revenues decreased by
$5,589,699, or 32%, from $17,280,550 for the nine months ended June 30, 2002 to
$11,690,851 for the nine months ended June 30, 2003. Customers in the United
States generated the majority of the revenues and no single customer or group of
customers accounted for 10% or more of the revenues.
Expenses. Total expenses decreased by $26,871,214, or 60%, from $44,562,849
for the nine months ended June 30, 2002, to $17,691,635 for the nine months
ended June 30, 2003.
Commissions, Floor Brokerage, and Clearing Charges: For the nine month
period ending June 30, 2003, we incurred $4,213,913 of commissions, floor
brokerage and clearing charges, a 59% decrease as compared to $10,221,360 the
corresponding nine-month period in 2002. 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 sales division had lower volumes as
compared to the corresponding period in 2002.
Employee Compensation and Related Costs. Employee compensation and related
costs of $6,326,377 for the nine month period ending June 30, 2003 reflects a
29% decrease as compared to $8,868,357 incurred for such costs during the nine
month period ending June 30, 2002. This decrease is attributable to the
reduction in the number of employees related to the On-site business that was
closed in June 2002 and employees that were involved in the development and
maintenance of our software, which was sold in July 2002. In addition, lower
compensation was paid to the institutional sales division as a result of
declining revenues.
16
Communications. Communications expense for the nine month period ending
June 30, 2003 amounted to $1,014,473, a 62% decrease as compared to the
$2,667,109 for the corresponding period in 2002. This decrease is largely due to
the June 2002 closing of the On-Site business and the communication costs
related to the software that was sold in July 2002.
Business Development. 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 $229,819, or 54%, from $428,087 for the
nine months ended June 30, 2002, to $198,268 for the nine month ended June 30,
2003, as the Company decreased such expenditures as a part of its cost reduction
program.
Professional Services. Professional services primarily consist of legal,
and accounting costs in addition to the cost of external consultants. For the
nine month period ending June 30, 2003 our professional services amounted to
$1,371,860 as compared to $2,363,628 for the nine month period June 30, 2002, a
decrease by $991,768 or 42%. This decrease was largely due to a decrease in
accounting fees and legal fees associated with the On-Site acquisition, the sale
of the software and the conversion of notes payable during the three months
ended June 30, 2002.
Occupancy and Equipment Costs. Occupancy and equipment costs decreased
$3,992,148, or 69%, from $5,813,973 for the nine month period ending June 30,
2002 to $1,821,825 for the nine-month period ending June 30, 2003. 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. The surrender of these leases resulted in a
write-off of leasehold improvements of $ 618,028. 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 branch offices
in Great Neck, New York and Boca Raton, Florida.
Depreciation and Amortization. Depreciation and Amortization decreased by
$4,096,587, or 79%, when compared to the $5,194,649 for the nine-months ending
June 30, 2002 to the $1,098,062 for the nine-month period ending June 30, 2003,
primarily due to the disposal or surrender of assets subject to such
depreciation and amortization. The Company sold software to an affiliate of our
clearing broker and wrote-off intangible assets recognized as a result of the
On-Site acquisition. In addition, the Company surrendered leasehold improvements
at our 40 Wall Street office and at former offices in Great Neck, New York and
Boca Raton, Florida.
Other Expenses. Other Expenses increased by $145,153 or 10% from $1,417,417
for the nine months ended June 30, 2002 to $ 1,562,570 for the nine months ended
June 30, 2003. This increase is due largely due to the 2% penalty on the Series
A Convertible Preferred Stock. The 2% penalty began to accrue in late December
2002 for failure to file a registration statement in accordance with the terms
of the Series A Convertible Preferred Stock agreement. This increase was
partially offset by a reduction in general operating expenses as part of our
overall cost cutting initiatives.
Impairment of Intangibles. The impairment of intangibles of $ 7,870,110
represents the write-off of intangible assets (customer lists) acquired in the
On-Site acquisition.
Abandonment of Leaseholds. The abandonment of leaseholds of $618,028
incurred during the three months ended June 30, 2002 represents the write-off
leasehold improvements at the Company`s offices at 40 Wall Street, New York,
Great Neck, New York and Boca Raton, Florida, all of which were surrendered.
Minority Interest Applicable to LLC Class B Members. Minority interest of
$899,869 represents the trading losses of the Class B non-voting members of the
LLC that occurred in the nine month period ending June 30, 2002. The LLC was
closed in June 2002.
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.
17
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. There can be no assurance
that any of these alternatives will be successful.
Cash provided by operating activities during the nine months ended June 30,
was a increase $34,540 as compared to cash utilized by operating activities of
$9,440,198 for the nine months ended June 30, 2002. Cash was principally used to
fund the net loss of $6,000,784 net of non-cash items including depreciation and
amortization of $1,098,062, penalties related to the issuance of preferred stock
of $759,107, non-cash compensation/service costs of $18,672, issuance of
warrants of $91,240. In addition, cash was principally impacted by the return of
$292,565 in cash to the Company that was previously held as a security deposit,
a decrease in receivables from clearing brokers of $1,028,588 offset by an
increase in securities owned of $833,445, an increase in accounts payable and
accrued liabilities of $1,455,173, an increase in payable to clearing broker of
$2,336,279 and a decrease in lease obligations and other of $217,347.
Cash used in investing activities was $13,268 during the nine months ended
June 30, 2003, compared to cash provided by investing activities of $1,554,412
during the nine months ended June 30, 2002. Uses of cash during the nine months
ended June 30, 2003, primarily related to the purchase of furniture and
equipment.
Cash used in financing activities was $235,038 during the nine months ended
June 30,2003 compared to cash provided by financing of $7,444,614 during the
nine months ended June 30, 2002. Cash provided by financing activities during
the nine months ended June 30, 2003, principally consisted of net payments of
notes payable of $200,000.
Net Operating Loss Carryforwards
The Company`s net operating loss carryforwards begin to expire in the year
2013. The issuance of additional equity securities, together with the Company`s
financing 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, which may be limited as a result of any change in
ownership.
Relevant Accounting Standards
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB").
In January 2003, the FASB issued Interpretation 46, Consolidation of
VariableInterest Entities. In general, a variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. Interpretation 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity`s activities or
entitled to receive a majority of the entity`s residual returns or both. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established.
18
In April 2003, Financial Accounting Standards Board, "FASB" issued
Statement of Financial Accounting Standard, SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise, is effective at the
beginning of the first interim period beginning after June 15, 2003.
Management has not yet determined the effect of the adoption of any of
these pronouncements and the effect on the Company`s condensed consolidated
financial statements.
Investment Considerations and Risk Factors
The following factors and other information in this filing 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 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.
19
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.
In addition, our mode of operation and profitability may be directly affected
by:
20
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 September 30, 2002, A.B. Watley had a net capital deficit of
$301,523. This deficiency was cured in October 31, 2002. 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.
21
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.
22
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.
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, 2003.
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, 2003.
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 with respect to several of these
suits.
A suit seeking damages of $31,400,000 had been brought by Akro Investicni
Spolecnost, A.S. and Bozena Konvalinkova, as Czech Receiver of Private
Investors, against A.B. Watley . Approximately $950,000 of that amount was
alleged to represent AKRO`s claims, with the balance representing claims brought
by the Receiver. The suit alleged 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. On March 12, 2003, the Court dismissed the
claims brought by the Receiver, and the parties are currently in the process of
arriving at a settlement of the remaining claims.
In August 2003, a claimant brought an arbitration with the National
Association of Securities Dealers against A.B. Watley, Inc. for breach of a
separation agreement. Claimant is seeking $875,000 in damages, securities
and bonus compensation in an amount to be determined at hearing, plus
interest and attorney`s fees. The Company denies any liability in its
entirety.
In August 2003, a claimant brought an arbitration with the National
Association of Securities Dealers against A.B. Watley, Inc. the National
Association of Securities Dealers for breach of a separation agreement.
Claimant is seeking $709,166.60 in damages, securities and bonus
compensation in an amount to be determined at hearing, plus interest and
attorney`s fees. The Company denies any liability in its entirety.
In March 2003, the holder of the $5 million secured demand note demanded
repayment of the note. On March 31, 2003, ABW filed a NASD Arbitration Demand
and a Statement of Claims with the NASD Dispute Resolution office. The
arbitration seeks to enforce the provisions of the secured demand note agreement
and to prevent premature withdrawal by the lender. A date for the arbitration
hearing has not yet been determined. The financial statements do not include any
adjustments for fees and penalties associated with the litigation.
We are a defendant in an action relating to the lease of equipment in which
the plaintiff has asserted breach of contract and damages in the amount of
$195,000. This such action is pending before the Supreme Court of New York, New
York.
We are a defendant in two actions relating to the lease of equipment in
which the plaintiffs have asserted breach of contract claims against us. In May
2003, judgments were entered against us by the Supreme Court of New York, New
York in the aggregate amount of approximately $618,000 in connection with these
two matters. We are in discussions with the plaintiffs
regarding potential settlement of these matters, however no assurances can be
provided that we will be able to settle these matters.
23
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 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.
In connection with the settlement of the following actions, we have paid or are
required to pay an aggregate of approximately $476,000:
- We settled an action pending before the AAA in connection with our
failure to maintain a registration statement in which the plaintiffs
asserted breach of contract and damages in the amount of approximately
$84,000;
- We settled 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 was 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 settled an action pending before the Supreme Court of New York, New
York in connection with a construction contract in which the
plaintiffs asserted breach of contract and damages in the aggregate
amount of approximately $234,000;
- We settled an action pending before the Supreme Court of New York, New
York in connection with an advertising contract in which the
plaintiffs asserted breach of contract and damages in the aggregate
amount of approximately $29,000;
- We settled an action relating to collection of an existing account
payable in which a judgment has been entered against the Company
totaling approximately $24,000; and
- We settled an action in which the plaintiffs filed a claim against us
requesting damages in the amount of approximately $274,658. The
settlement agreement required that we make eight monthly payments to
the plaintiff in the amount of $15,625 totaling $125,000. As of the
date hereof, we have made two payments in the aggregate amount of
$31,250. We have failed to continue to make further payments under
this settlement agreement and we are not able to determine how our
failure to make these payments will impact the Company in the near
future.
The foregoing settled matters represented claims for an aggregate of
approximately $738,658. As stated above, we have entered into settlement
agreements with respect to these matters, which agreements provide for payment
of an aggregate of approximately $321,000. Such settlements require partial
payment and are expected to be completed between now and July 27, 2004. We
intend to make any required partial payments from the cash flow generated from
operations and/or from additional funds received from future financings, if any.
Should any of these payments not be made in a timely manner or at all, we may be
required to pay the balance of the liabilities.
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.
24
Item 2. Changes in Securities
In August 2003, the Company entered into a Consent, Waiver and Amendment
to Series A Convertible Preferred Stock (the "Consent") and the related
Registration Rights Agreement dated November 29, 2001 with the holders of at
least seventy five percent (75%) of the shares of Series A Convertible Preferred
Stock (the "Holders"). Pursuant to the Consent, the Holders agreed to waive any
triggering event as a result of the Company's failure to file a registration
statement registering the Series A Convertible Preferred Stock or from the
Company's delisting from the OTCBB. Further, the Holders agreed terminate the
right to receive all dividend payments payable during the period commencing on
June 1, 2003 through and including May 31, 2004. Finally, the Holders waived all
their right to all penalties that have accrued and no penalties will accrue
through July 31, 2004.
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.
In August 2003, the Company entered into a Consent, Waiver and Amendment
to Series A Convertible Preferred Stock (the "Consent") and the related
Registration Rights Agreement dated November 29, 2001 with the holders of at
least seventy five percent (75%) of the shares of Series A Convertible Preferred
Stock (the "Holders"). Pursuant to the Consent, the Holders agreed to waive any
triggering event as a result of the Company's failure to file a registration
statement registering the Series A Convertible Preferred Stock or from the
Company's delisting from the OTCBB. Further, the Holders agreed terminate the
right to receive all dividend payments payable during the period commencing on
June 1, 2003 through and including May 31, 2004. Finally, the Holders waived all
their right to all penalties that have accrued and no penalties will accrue
through July 31, 2004.
In November 2001, the Company entered into a financing arrangement pursuant
to a Preferred Stock Purchase Agreement, and in structuring this transaction,
the Company determined that it could potentially exceed its authorized capital.
Management has not provided a liability for any contingencies associated with
any penalties that may arise from issuing shares over their authorized
limit. The Company has filed a preliminary information statement with the SEC
seeking stockholder approval to increase the authorized common stock and
authorize the financing transactions that may exceed its authorized capital.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Reports on Form 8-K.
Exhibits
31.1 Certification of the Chief Executive Officer of A.B. Watley Group Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal Financial Officer of A.B. Watley Group Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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
25
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: August 12, 2003
A.B. WATLEY GROUP INC. (Registrant)
By: /s/ John J. Amore
--------------------------------
John J. Amore
Chief Executive Officer
By: /s/ Robert Malin
--------------------------------
Robert Malin
Principal Financial Officer
26