<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
1. (Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number:
Internet Financial Services Inc.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 13-3911867
- ------------------------------- -----------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
40 Wall Street, New York, N.Y.10005
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(Address of principal executive offices)
(212) 422-1100
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(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES NO X
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
Outstanding at
Class of Common Stock May 15, 1999
--------------------- ------------
$.001 par value 7,931,745
Transitional small business disclosure format (check one):
YES NO X
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Internet Financial Services Inc.
--------------------------------
Index
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Consolidated Statements of Financial
Condition March 31, 1999(Unaudited) and
September 30, 1998 3
Consolidated Statements of Operations
Three months and six months ended
March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows
Six months ended March 31, 1999
and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations 10-14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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Internet Financial Services Inc.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31,1999 September 30, 1998
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 999,279 $ 970,308
Restricted cash 507,280 -
Securities owned at market value 163,180 104,518
Receivables from clearing brokers 763,165 531,835
Property and equipment at cost, net of accumulated depreciation
of $896,316 and $530,892 at March 31, 1999 and
September 30, 1998, respectively 5,125,070 3,650,743
Loans receivable from related party 117,256 115,711
Deferred offering costs 559,108 75,235
Other assets 267,528 91,107
---------------- -------------
Total assets $ 8,501,866 $ 5,539,457
================ =============
Liabilities and stockholders' equity
Liabilities:
Subordinated borrowings $ 180,000 $ 180,000
Subordinated borrowings from officer 350,000 350,000
Securities, sold not yet purchased 109,874 19,137
Notes payable 1,150,000 250,000
Bank loan 60,000 80,000
Deferred rent incentives 791,104 803,968
Accounts payable and accrued liabilities 2,796,217 2,101,933
Other liabilities 84,582 -
---------------- -------------
Total liabilities 5,521,777 3,785,038
================ =============
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 and 10,000,000 shares
authorized at March 31, 1999 and September 30, 1998, respectively.
5,522,260 and 5,137,500 issued and outstanding at March 31, 1999
and September 30, 1998, respectively 5,522 5,138
Additional paid-in capital 5,341,346 3,758,333
Option costs, net (323,457) (100,292)
Subscriptions receivable - (4,999)
Accumulated deficit (2,043,322) (1,903,761)
---------------- -------------
Total stockholders' equity 2,980,089 1,754,419
---------------- -------------
Total liabilities and stockholders' equity $ 8,501,866 $ 5,539,457
================ =============
</TABLE>
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Internet Financial Services Inc.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 3,714,711 $ 1,787,485 $ 6,190,372 $ 2,974,972
Data service revenues 291,869 148,048 567,473 272,060
Principal transactions 721,136 277,223 1,099,795 391,081
Interest and other income 68,173 33,986 116,737 64,844
Interest income - related party 1,545 1,545 3,090 2,890
---------------------------------------------------------------------------
Total revenues 4,797,434 2,248,287 7,977,467 3,705,847
Interest expense 90,805 58,038 195,558 73,897
Interest expense - related party 3,750 3,750 7,500 7,500
---------------------------------------------------------------------------
Net revenues 4,702,879 2,186,499 7,774,409 3,624,450
---------------------------------------------------------------------------
Expenses:
Commissions, floor brokerage, and clearing charges 1,763,471 893,993 3,133,081 1,491,063
Employee compensation and related costs 1,211,450 510,589 2,063,792 890,629
Communications 336,556 199,606 539,904 344,338
Business development 218,447 232,324 422,142 600,426
Professional services 343,909 274,812 542,480 379,628
Occupancy and equipment costs 456,722 92,232 671,870 162,948
Depreciation and amortization 145,491 85,382 260,402 154,660
Other expenses 132,819 70,972 271,998 136,756
---------------------------------------------------------------------------
Total expenses 4,608,865 2,359,910 7,905,669 4,160,448
---------------------------------------------------------------------------
Income (loss) before income tax 94,014 (173,411) (131,260) (535,998)
Income tax provision 4,150 3,191 8,300 6,382
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Net income (loss) $ 89,864 $ (176,602) $ (139,560) $ (542,380)
===========================================================================
Basic earnings per common share $ 0.02 $ (0.03) $ (0.03) $ (0.11)
Diluted earnings per common share $ 0.02 $ (0.03) (0.03) (0.11)
Weighted average shares outstanding - basic 5,595,821 5,154,104 5,462,563 5,162,271
Weighted average shares outstanding - diluted 5,749,235 5,154,104 5,462,563 5,162,271
</TABLE>
<PAGE>
Internet Financial Services Inc.
Consolidated Statements of Cash Flow
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------
March 31,1999 March 31, 1998
<S> <C> <C>
Cash flows from operating activities
Net loss $ (139,560) $ (542,380)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 260,402 154,570
Amortization of option costs 124,085 -
Subscriptions receivable 4,999 -
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash (507,280) 113,569
Securities owned (58,662) (123,213)
Receivables from clearing brokers (231,330) (113,129)
Loans receivable from related party (1,545) (3,090)
Other assets (123,301) 9,951
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased 90,737 -
Accounts payable and accrued liabilities 520,484 799,879
Other liabilities 84,582 -
------------- --------------
Net cash provided by operating activities 23,611 296,157
------------- --------------
Cash flows used in investing activities
Purchases of property and equipment, net (1,443,267) (776,903)
------------- --------------
Cash flows from financing activities
Proceeds from sale of common stock, net 1,050,000 700,000
Proceeds from exercised stock options 2,500 -
Proceeds from subscriptions receivable - 65,870
Proceeds from notes payable 900,000 -
Deferred offering costs (483,873) -
Repayment of bank loan (20,000) (20,000)
------------- --------------
Net cash provided by financing activities 1,448,627 745,870
------------- --------------
Net increase in cash and cash equivalents 28,971 265,124
Cash and cash equivalents at beginning of period 970,308 702,693
------------- --------------
Cash and cash equivalents at end of period $ 999,279 $ 967,817
============= ==============
Supplemental non-cash financing activities
and disclosure of cash flow information
Accounts payable for purchases of property and equipment $ 222,500 $ 215,611
Cash paid for:
Interest $ 61,474 $ 45,663
</TABLE>
5
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Internet Financial Services Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
1. Organization and Basis of Presentation
Internet Financial Services Inc. ("IFSI" or the "Company") conducts business
primarily through its principal subsidiary, A.B. Watley, Inc. ("A.B. Watley").
A.B. Watley is a registered broker-dealer under the Securities Exchange Act of
1934 and is a member of the National Association of Securities Dealers, Inc.
A.B. Watley is an introducing broker-dealer which conducts business in
electronic trading, information and brokerage services, as well as
institutional block trading. A.B. Watley clears all transactions through two
clearing brokers on a fully disclosed basis. Accordingly, A.B. Watley is exempt
from the Securities and Exchange Commission's ("SEC") Rule 15c3-3.
IFSI is a Delaware corporation organized on May 15, 1996. During its fiscal
year ended September 30, 1997, all of the shares of capital stock of A.B.
Watley were acquired by IFSI. Since IFSI and A.B. Watley were under common
control, the acquisition has been accounted for under Accounting
Interpretations of the Accounting Principles Board Opinion No. 16, "Transfers
and Exchanges Between Companies Under Common Control," which requires the
assets and liabilities so transferred to be accounted for at historical cost in
a manner similar to that used in pooling of interests accounting. IFSI issued
431,538 shares of its common stock in consideration for the 99 shares of A.B.
Watley; additionally, the operating results of IFSI reflect the operating
results of A.B. Watley for the years presented.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ended September 30, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto for the year
ended September 30, 1998 included in the Company's Form SB-2 Registration
Statement.
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Internet Financial Services Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
2. Net Capital Requirement
A.B. Watley is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Net
Capital Rule") which requires A.B. Watley to maintain minimum net capital such
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. The Net Capital Rule also requires that equity capital may
not be withdrawn or cash dividends paid if A.B. Watley's resulting net capital
ratio would exceed 10 to 1. At March 31, 1999, A.B. Watley had net capital, as
defined, of $780,689 which was $680,689 in excess of its required net capital
of $100,000. The aggregate indebtedness to net capital ratio was 1.41 to 1.
3. Capital Stock
On January 14, 1999, the Board of Directors agreed to amend the Company's
certificate of incorporation to increase the authorized number of shares of
common stock to 20,000,000, and to authorize and delineate the terms under
which preferred stock may be issued. In addition, the Board agreed to issue,
subject to the effectiveness of the IPO, 70,771 additional shares of common
stock for nominal additional consideration to certain stockholders who
purchased private placement shares during the year ended September 30, 1998.
During January 1999, the Board of Directors approved the issuance of 221,500
shares of the Company's common stock in a private placement offering. The
common stock was issued at a price of $4.80 per share and was restricted with
regard to sale or disposition for a period of one year. This private placement
offering generated total gross proceeds of $1,063,200 and after related legal
and filing expenses of $13,200, the net proceeds were $1,050,000. Two employees
of the Company purchased an aggregate of 102,000 shares as part of this
offering.
4. Notes Payable
Effective January 28, 1999, the Company borrowed $400,000 from New York
Community Investment Company, L.L.C. ("NYCIC"), under the conditions that the
proceeds of the loan be used as working capital to further the corporate
purposes of the Company and not to repay any debt or redeem any equity
interests. The loan accrues interest at 12% per annum which is payable first in
24 monthly installments of $4,000 beginning March 1, 1999. Commencing March 1,
2001, the principal amount of the loan is payable in 35 monthly installment of
$6,667 plus interest on the unpaid balance, except
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Internet Financial Services Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
for the last installment, which shall be in the amount of $166,665 plus
interest on the unpaid balance.
As collateral for the loan, NYCIC received a security interest in the Company's
assets. Under the terms and conditions of the loan agreement, NYCIC received
warrants expiring January 28, 2004 to acquire 140,000 shares of the Company's
common stock at an exercise price equal to the IPO price. In the event there
has been no IPO within five years from the closing of the loan, the number of
shares to be acquired under the terms of the warrant are reduced to 80,000 and
NYCIC shall have the right to put its ownership interest at a price defined in
the warrant agreement and cause the Company to repurchase all or part of such
interest at any time thereafter. The fair value of the warrants (approximately
$140,000) has been accounted for as a debt servicing fee and is being amortized
over the life of the loan. The unamortized amount of the debt servicing fee is
included as "Option costs, net" in Stockholders' Equity.
5. Subordinated Borrowings
On January 13, 1999, the subordinated borrowings maturing on October 31, 1999
were amended to extend the maturity date to October 31, 2000.
6. Stock Options
On March 24, 1999, the Company amended its 1998 Stock Option Plan to increase
the number of shares covered thereunder to 800,000 shares. In addition, the
Company agreed to issue, as of the effective date of its IPO, options covering
an aggregate of 224,750 shares to certain employees at an exercise price of
$7.00 per share.
7. Earnings Per Share
In calculating diluted earnings per common share for the three month period
ending March 31, 1999, the Company assumed the average fair value of its common
stock during this period was $7.00 per share, its IPO price. Since the Company
recognized a net loss in the three month period ending March 31, 1998, and the
six month periods ending March 31, 1999 and March 31, 1998, diluted earnings per
common share is the same as basic earnings per common share.
8. Subsequent Events
8
<PAGE>
Internet Financial Services Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
On April 23, 1999, 2,300,000 shares of the Company's common stock (including
300,000 shares to cover over-allotments) were sold in the Company's Initial
Public Offering. The net proceeds from the offering of approximately
$13,250,000 will be used primarily to reduce outstanding indebtedness, expand
sales and marketing, expand and upgrade our computing, physical, and personnel
infrastructure and for working capital and general corporate matters.
9
<PAGE>
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
SB-2 for the fiscal year ended September 30, 1998. The results of operations for
the three and six months ended March 31, 1999 are not necessarily indicative of
the results for the entire fiscal year ending September 30, 1999.
Results of Operations
Quarter ended March 31, 1999 compared to the quarter ended March 31, 1998
NET REVENUES. Total revenues for the quarter ending March 31, 1999 were
$4,797,434, an increase of 113.4%, as compared to revenues of $2,248,287 for
the quarter ending March 31, 1998. Revenues from commissions increased by
$1,927,226, or 107.8% from $1,787,485, for the March 1998 quarter to $3,714,711
for the March 1999 quarter due primarily to the significantly increased number
of online trades executed as well as due to the growth in our third market
institutional sales division. During the quarter ending March 31, 1999, the
Company's online brokerage division had total billed transactions of 143,094
and average billed transactions of 2,345 per day, an increase of 262.4%
compared to an average daily billed transaction rate of 647 per day during
the March 1998 quarter totaling 39,453 billed transactions. Data Service
revenues also increased by $143,821, or 97.2% from $148,048 for the March 1998
quarter to $291,869 for the quarter ending March 31, 1999 due to the increase
in the number of online accounts. Revenues from principal transactions
increased by $443,913, or 160.1% from $227,223 for the March 1998 quarter to
$721,136 for the quarter ending March 31, 1999, mainly as a function of the
significantly higher volumes of business conducted by both the online brokerage
division's trading desk and the third-market institutional sales division.
Interest and other income increased from $33,986 for the March 1998 quarter to
$68,173 for the quarter ending March 31, 1999.
Interest expense increased from $61,788 for the March 1998 quarter to $94,555
for the March 1999 quarter as result of increased borrowings.
As a result of the foregoing, net revenues increased by $2,516,380, or 115.1%,
from $2,186,499 for the March 1998 quarter to $4,702,879 for the quarter ending
March 31,
10
<PAGE>
1999. Nearly all of our revenues were generated by clients in the United States
and no single client or group of related clients accounted for 10% or more of
our revenues.
EXPENSES EXCLUDING INTEREST. Total expenses increased by $2,248,955, or 95.3%,
from $2,359,910 for the March 1998 quarter to $4,608,865 for the quarter ending
March 31, 1999. Commissions, floor brokerage and clearing charges represent
payments to our clearing and floor brokers and to certain employees who
facilitate our clients' transactions. As a result of the large increase in the
volume of business conducted by our online clients, such expenses increased by
$869,478, or 97.3%, from $893,993 for the March 1998 quarter to $1,763,471 for
the quarter ending March 31, 1999. Employment compensation and related costs
increased by $700,861, or 137.3%, from $510,589 for the March 1998 quarter to
$1,211,449 for the quarter ending March 31, 1999, largely due to the hiring of
26 new employees to service the growth in our client base. Communications
expense increased by $136,950, or 68.6%, from $199,606 for the March 1998
quarter to $336,556 for the quarter ending March 31, 1999 as a function of the
growth in our online client base. We expect that the foregoing expenses will
continue to increase as we expand our client base.
Business development costs consist of advertising costs to obtain new clients,
which costs have mostly been for print and media advertising. These expenses
decreased by $13,877, or 6.%, from $232,324 for the March 1998 quarter to
$218,447 for the quarter ending March 31, 1999 as a result of increased
effectiveness of our marketing efforts and the resulting lower costs of client
acquisition.
Professional services increased from $274,812 for the March 1998 quarter to
$343,909 for the quarter ending March 31, 1999. Occupancy and equipment costs
increased by $364,490, or 395.2%, from $92,232 for the March 1998 quarter to
$456,722 for the quarter ending December 31,1998, primarily due to the
relocation of our offices to a new, 18,000 square foot facility and the
leasing of additional equipment to increase our capacity and to facilitate the
relocation efforts. Depreciation and amortization increased by $60,109, or
70.4%, from $85,382 for the March 1998 quarter to $145,491 for the quarter
ending March 31, 1999 for similar reasons. Other expenses increased by $61,847,
or 87.1%, from $70,972 for the March 1998 quarter to $132,819 for the quarter
ending March 31, 1999 for the same reasons.
The income tax provision increased from $3,191 for the March 1998 quarter to
$4150 for the quarter ending March 31,1999.
As a consequence of the foregoing, our operating results improved from a net
loss of $176,602 for the March 1998 quarter to net income of $89,864 for the
quarter ending March 31, 1999.
Six months ended March 31, 1999 compared to six months ended March 31, 1998
NET REVENUES. Total revenues for the six months ended March 31, 1999 were
$7,977,467, an increase of $4,271,620, or 115.3% as compared to revenues of
$3,705,847 for the six months ended March 31, 1998. Revenues from commissions
increased by $3,215,400, or 108.1% from $2,974,972 for the six months ended
March 31, 1998 to $6,190,372, due primarily to the significantly increased
number of online trades executed as well as the growth in our third market
institutional sales division. During the six months ending March 31, 1999, the
Company's online brokerage division had total billed transactions of 232,862
and average billed transactions of 1,862 per day, an increase of 252.7%
compared to an average daily billed transaction rate of 528 per day during
the six months ending March 31, 1998, totaling 66,026 billed transactions. Data
Service revenues also increased by $295,413, or 108.6% from $272,060 for the
six months ending March 31, 1998 to $567,473 for the six months ending March
31, 1999, due to the increase in the number of online accounts. Revenues from
principal transactions increased by $708,714, or 181.2% from $391,081 for the
six month period ending March 31, 1998 to $1,099,795 for the six months period
ending March 31, 1999, mainly as a function of the significantly higher
volumes of business conducted by both the online brokerage division's trading
desk and the third-market institutional sales division. Interest and other
income increased from $64,844 for the six month period ending March 31, 1998
to $116,737 for the six months period ending March 31, 1999.
Interest expense increased from $81,397 for the six months ended March 31, 1998
to $203,058 for the six months ending March 31, 1999 primarily as a result of
increased borrowings.
As a result of the foregoing, net revenues increased by $4,149,959, or 114.5%,
from $3,624,450 for the six months ending March 31, 1998 to $7,774,409 for the
six months period ending March 31, 1999. Nearly all of our revenues were
generated by clients in the United States and no single client or group of
related clients accounted for 10% or more of our revenues.
EXPENSES EXCLUDING INTEREST. Total expenses increased by $3,745,221, or 90.0%
from $4,160,448 for the six months ending March 31, 1998 to $7,905,669 for the
six months ending March 31, 1999. Commissions, floor brokerage and clearing
charges represent payments to our clearing and floor brokers and to certain
employees who facilitate our clients' transactions. As a result of the large
increase in the volume of business conducted by our online clients, such
expenses increased by $1,642,018, or 110.1% from $1,491,063 for the six months
ending March 31, 1998 to $3,133,081 for the six months ending March 31, 1999.
Employment compensation and related costs increased by $1,173,163, or 131.7%,
from $890,629 for the six months ending March 31, 1998 to $2,063,792 for the
six months ending March 31, 1999, largely due to the hiring of 40 new
employees to service the growth in our client base. Communications expense
increased by $195,566, or 56.8%, from $344,338 for the six months ending
March 31, 1998 to $539,904 for the six months ending March 31, 1999 as a
function of the growth in our online client base. We expect that the foregoing
expenses will continue to increase as we expand our client base.
Business development costs consist of advertising costs to obtain new clients,
which costs have mostly been for print and media advertising. These expenses
decreased by $178,284, or 29.7% from $600,426 for the six months ending March
31, 1998 to $422,142 for the six months ending March 31, 1999 as a result of
increased effectiveness of our marketing efforts and the resulting lower costs
of client acquisition.
Professional services increased from $379,628 for the six months ended March
31, 1998 to $542,480 for the six months ending March 31, 1999. Occupancy and
equipment costs increased by $508,922, or 312.3%, from $162,948 for the six
months ending March 31, 1998 to $671,870 for the six months ending March 31,
1999, primarily due to the relocation of our offices to a new 18,000 square
foot facility and the leasing of additional equipment to increase our capacity
and to facilitate the relocation efforts. Depreciation and amortization
increased by $105,742, or 68.4%, from $154,660 for the six months ending March
31, 1998 to $260,402 for the six months ending March 31, 1999 for similar
reasons. Other expenses increased by $135,242, or 98.9%, from $136,756 for the
six months ending March 31, 1998 to $271,998 for the six months ending March
31, 1999 for the same reasons.
The income tax provision increased from $6,382 for the six months ended March
31, 1998 to $8,300 for the six months ending March 31, 1999.
As a consequence of the foregoing, our operating results improved from a net
loss of $542,380 for the six months ending March 31, 1998 to a net loss of
$139,560 for the six months ending March 31, 1999.
Liquidity and Capital Resources
Our capital requirements have historically exceeded our cash flow from
operations as we have been building our business. As a result, we have depended
upon sales of our
11
<PAGE>
common stock and borrowings from officers, directors and stockholders and third
parties to finance our working capital requirements.
In December 1998, we obtained a $500,000 line of financing from General Electric
Capital Corporation which we use primarily for the purchase or leasing of
additional equipment and software. We are required to deliver to the lender a
letter of credit in the amount of 50% of any amount borrowed under this
financing. As of March 31, 1999, we borrowed approximately $311,208 under this
line of financing, which we used to purchase equipment. In connection with our
borrowing under this financing, we have granted the lender a security interest
in certain existing equipment as well as in all equipment purchased using funds
obtained under this financing.
In January 1999, we obtained a $400,000 loan from New York Community Investment
Company L.L.C., bearing interest at an annual rate of 12%, payable monthly. In
connection with this loan, we issued to the lender a $400,000 principal amount
promissory note and warrants to purchase 140,000 shares of our common stock at
an exercise price equal to the initial public offering price of our common
stock. We granted the lender a security interest in substantially all of our
assets to secure our obligations under the loan. We are using these funds for
marketing expenses and working capital.
In January 1999, we sold an aggregate of 221,500 shares of common stock to 12
investors in a private placement at a price of $4.80 per share for which we
received aggregate net proceeds of approximately $1,050,000. In connection with
this private placement:
o Anthony Huston, our Executive Vice President purchased 50,000 shares at a
price of $240,000;
o Leon Ferguson, Senior Vice President, purchased 52,000 shares at a price
of $249,600; and
o Mark Chambre, who is now a director, purchased 15,000 shares at a price
of $72,000.
On April 23, 1999 the Company consummated its initial public offering of common
stock. The Company sold 2,300,000 shares of at a gross offering price of $7 per
share, receiving net proceeds of approximately $13,250,000. The Company utilized
approximately $776,800 for the repayment of outstanding notes payable including
any accrued interest on these same notes payable. The Company also used $139,770
for certain leasehold improvements. Most of the balance of approximately
$12,315,000 has been invested in short-term money market funds. We will use the
proceeds of the initial public offering to expand our operations and finance our
future working capital requirements. Based upon our current plans and
assumptions relating to our business plan, we anticipate that the net proceeds
of this offering will satisfy our capital requirements for at least twelve
months following the closing. If our plans change or our assumptions prove to be
inaccurate, we may need to seek additional financing sooner than currently
anticipated or curtail our operations. We may seek additional debt or equity
financing to fund the cost of continued expansion. If we incur debt, we will
become subject to the risks that interest rates may fluctuate and cash flow may
be insufficient to make payments on the debt.
Cash provided by operating activities during the six months ending March 31,
1999 was $313,235 compared to $511,766 provided by operating activities during
the six months ending March 31, 1998.
Cash used in investing activities was $1,671,091 during the six months ended
March 31, 1999 compared to $992,514 during the six months ending March 31, 1998.
Uses of cash in the six months ending March 31, 1999 related to purchases of
equipment and leasehold improvements made in the Company's new facility at 40
Wall Street. In addition to the cash used in investing activities during the six
months ended March 31, 1999, the Company accrued accounts payable relating to
purchases of property and equipment and leasehold improvements of $222,500
during this period.
Cash provided by financing activities was $1,386,927 during the six months
ending March 31, 1999 compared to $745,870 during the six months ended March 31,
1998. Cash provided by financing activities during the six months ending
March 31, 1998 consisted primarily of proceeds from the sale of common stock.
Cash provided by financing activities during the six months ending March 31,
1999 consisted of proceeds from the sale of common stock in a private placement
in the amount of $1,063,200 and the issuance of notes payable to New York
Community Investment Company L.L.C. in the amount of $900,000. These proceeds
were partially offset by deferred offering costs of $558,873 and repayment of
bank loans amounting to $20,000.
Net Operating Loss Carryforwards
Our net operating loss carryforwards expire beginning in the year 2012. The
issuance of additional equity securities, together with our recent financing
and this offering, could result in an ownership change and, thus, could limit
our use of our prior net operating losses. If we achieve profitable operations,
any significant limitation on the utilization of our net operating losses would
have the effect of increasing our tax liability and reducing net income and
available cash reserves. We are unable to determine the availability of these
net operating losses since this availability is dependent upon profitable
operations, which we have not achieved in periods prior to the most recent
quarter.
Relevant Accounting Standards
We generally grant stock options to employees and consultants with an exercise
price not less than the fair market value at the date of grant. We account for
stock option grants to employees in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognize no compensation expense related to option grants. In cases where we
grant options below the fair market value of the stock at the date of grant the
difference between the strike price and the fair market value is treated as
compensation expense and amortized over the vesting period of the option, if
any. Stock options granted to consultants and others instead of cash
compensation are recorded based upon management's estimate of fair
12
<PAGE>
value of the options or the related services provided and expensed over the
vesting period, if any.
Pro forma information regarding net income (loss) is required under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and has been determined as if we had accounted all the 1998 and
1997 stock option grants on the fair value method.
We account for income taxes under the provisions of SFAS No. 109, "Accounting
for Income Taxes." We recognize the current and deferred tax consequences of
all transaction that have been recognized in the financial statements, using
the provisions of enacted tax laws. Deferred tax assets are recognized for
temporary differences that will result in deductible amounts in future years
and for tax loss carryforwards, if in the opinion of our management, it is more
likely than not that the deferred tax asset will be realized. SFAS No. 109
requires companies to set up a valuation allowance for the component of net
deferred tax assets which does not meet the more likely than not criteria for
realization. We have established this valuation allowance for our deferred tax
assets.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." The new rules are effective for both interim and annual
financial statements for the periods ending after December 15, 1997. SFAS No.
128 supersedes APB No. 15 to conform earnings per share with international
standards as well as to simplify the complexity of the computation under APB
No. 15. The previous primary earnings per share calculation is replaced with a
basic earnings per share calculation. The basic earnings per share differs from
the primary earnings per share calculation in that the basic earnings per share
does not include any potentially dilutive securities. Fully dilutive earnings
per share is replaced with diluted earnings per share and should be disclosed
regardless of dilutive impact of basic earnings per share. Accordingly, we have
adopted SFAS No. 128 effective September 30, 1998.
Year 2000 Issues
We have devised a plan and have substantially completed a review and assessment
of all hardware and software and believe that our hardware and software are
substantially year 2000 compliant so that the computer programs do not cease
functioning because of an inability to process on a date occurring from and
after January 1, 2000. Our review has not revealed any year 2000 issues that
cannot be remediated in a timely manner. We do not believe that any remediation
costs will be material.
We are highly dependent upon third-party financial information vendors,
telecommunications suppliers and our clearing brokers. We have sent letters to
a number of our vendors requesting assurances of their compliance. Such third
parties have generally advised us that their review of their operating systems
indicate that their operating systems are year 2000 compliant or will be year
2000 compliant in a timely
13
<PAGE>
manner. We are currently developing a contingency plan if any third parties
with which we do business have any material year 2000 compliance problems.
We would be materially adversely affected if there are any failures or
interruptions in service resulting from the inability of our computing systems
or any third-party's systems to recognize the year 2000. Moreover, since our
evaluation of these issues is continuing, we may discover additional issues
which could present a material risk of disruption to our operations.
Forward Looking Statements
Certain statements contained in this report, including statements regarding
the development of services and markets and future demand for services and
other statements regarding matters that are not historical facts, discuss
future expectations or other forward-looking information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause our actual results to differ materially from those contemplated by the
statements. Factors that might cause a difference include, but are not limited
to, customer trading activity, loss of one or more significant customers,
changes in technology, shifts in competitive patterns, ability to manage
growth effectively, risks associated with acquisitions including integration
risks, risks associated with strategic partnerships, various
project-associated risks, substantial competition, general economic and
securities markets conditions, risks associated with intellectual property
rights, risks associated with international operations and other risk factors
listed from time to time in the Company's filings and reports with the
Securities and Exchange Commission.
14
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On April 20, 1999, the Securities and Exchange Commission declared
the Company's Registration Statement on Form SB-2 (Reg. No. 333-71783) [the
"Registration Statement"] effective. The offering contemplated by the
Registration Statement (the "Offering") commenced on April 20, 1999. The
underwriter of the Offering was Whale Securities Co., L.P. The Offering was
consummated on April 23, 1999 with 2,300,000 shares of common stock, par value
$.001 per share, being registered and sold for the account of the Company. The
aggregate price of the shares offered and sold was $16,100,000.
From the effective date of the Registration Statement through the
date hereof, the Company incurred the following expenses in connection with the
Offering:
Underwriting discounts and commissions $1,495,000
Finders' fees $ 0
Expenses paid to or for underwriters $ 483,000
Other expenses $ 872,000
----------
Total expenses $2,850,000
A reasonable estimate for printing costs is included in Other
expenses. All of such payments were made to third parties.
From the effective date of the Registration Statement through the
date hereof, the Company (i) repaid indebtedness of approximately $776,800;
(ii) used $139,770 for working capital; and (iii) invested most of the balance
of approximately $12,275,000 in short-term money market funds. All of such
payments were made to third parties, except for the repayment of indebtedness of
$100,000 to the father of Eric Steinberg, an Executive Vice President of the
Company.
Item 4. Submission of Matters to Stockholders
-------------------------------------
On January 14, 1999 and March 24, 1999, the stockholders approved the
amendments to the 1998 Stock Option Plan increasing the number of shares to
600,000 and 800,000, respectively.
Item 6. Exhibits and Reports on Form S-8
--------------------------------
(a) The following exhibit was filed as part of this report:
Exhibit 11. Calculation of basic and diluted earnings per share
Exhibit 27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1999.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 24, 1999
INTERNET FINANCIAL SERVICES INC.
--------------------------------
(Registrant)
By: /s/ Steven Malin
--------------------------------------
Steven Malin
Chairman, Chief Executive Officer
By: /s/ Harry Simpson
--------------------------------------
Harry Simpson
President, Chief Financial Officer
[Chief Accounting Officer]
16
<PAGE>
Internet Financial Services Inc.
Computation of EPS - Treasurey Stock Method
Three Month Calculation
March 31, 1999
Diluted EPS
-----------
Weighted average number of common shares outstanding 5,595,821
Net income for the period $89,864
Average number of shares under options outstanding 266,200
Option price per share $2.00-$5.00
Proceeds upon exercise of options $789,500
Market price of stock: Assumed average $7.00
------------
Treasury shares that could be repurchased with proceeds
(Proceeds/Assumed Average Price) 112,786
Excess shares under option plan, over treasury shares
that could be repurchased 153,414
============
Common stock equivalent shares 153,414
Average number of common shares outstanding 5,595,821
Total average number of common and common
equivalent shares 5,749,235
============
Diluted EPS $0.02
============
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,506,559
<SECURITIES> 163,180
<RECEIVABLES> 763,165
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,113,648
<PP&E> 5,125,070
<DEPRECIATION> 896,316
<TOTAL-ASSETS> 8,501,866
<CURRENT-LIABILITIES> 3,691,305
<BONDS> 0
0
0
<COMMON> 5,522
<OTHER-SE> 2,974,567
<TOTAL-LIABILITY-AND-EQUITY> 8,501,866
<SALES> 7,977,467
<TOTAL-REVENUES> 7,977,467
<CGS> 7,905,669
<TOTAL-COSTS> 7,905,669
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,058
<INCOME-PRETAX> (131,260)
<INCOME-TAX> 8,300
<INCOME-CONTINUING> (139,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (139,560)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
