<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
------------------------------------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _____ to ______
Commission file number: 1-14897
A.B. Watley Group Inc.
----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3911867
---------------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
40 Wall Street, New York, N.Y.10005
-----------------------------------
(Address of principal executive offices)
(212) 422-1100
--------------
(Issuer's telephone number)
--------------
(Former name, former address and former fiscal year, if changed since last
report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Outstanding at
Class of Common Stock February 7, 2000
--------------------- ----------------
$.001 par value 7,981,745
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]
<PAGE>
A. B. Watley Group Inc.
Index
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Consolidated Statements of Financial
Condition December 31, 1999 (Unaudited) and
September 30, 1999 3
Consolidated Statements of Operations
Three months ended December 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows
Three months ended December 31, 1999
and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
or Plan of Operation 8
PART II - OTHER INFORMATION
Item 2. Changes in Securities. 13
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures 14
2
<PAGE>
A. B. Watley Group Inc.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,1999 September 30, 1999
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,355,045 $ 9,298,822
Restricted cash 520,479 513,753
Securities owned at market value 195,120 214,381
Receivables from clearing brokers 998,068 626,288
Property and equipment at cost, net of accumulated depreciation
and amortization of $1,434,348 and $1,183,774 at December 31, 1999 and
September 30, 1999, respectively 13,904,065 10,852,956
Loans receivable from related party 115,323 121,891
Deferred offering costs 20,417 21,667
Other assets 2,070,645 1,595,196
------------ ------------
Total assets $ 25,179,162 $ 23,244,954
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated borrowings $ 350,000 $ 350,000
Subordinated borrowings from officer 180,000 180,000
Securities sold, not yet purchased 30,525 56,192
Notes payable, net of unamortized discount of $187,771 and $221,697 1,993,001 2,213,748
at December 31, 1999 and September 30,1999, respectively
Bank loan 30,000 40,000
Deferred rent incentives 1,298,425 752,512
Accounts payable and accrued liabilities 6,166,888 3,561,563
Other liabilities 321,407 247,952
------------ ------------
Total liabilities 10,370,246 7,401,967
------------ ------------
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized
7,931,745 issued and outstanding 7,932 7,932
Additional paid-in capital 18,678,984 18,661,749
Option costs, net (116,664) (121,331)
Accumulated deficit (3,761,336) (2,705,363)
------------ ------------
Total stockholders' equity 14,808,916 15,842,987
------------ ------------
Total liabilities and stockholders' equity $ 25,179,162 $ 23,244,954
============ ============
</TABLE>
3
<PAGE>
A. B. Watley Group Inc.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Commissions $ 6,643,623 $ 2,475,661
Data service revenues 513,046 275,604
Principal transactions 1,040,694 378,659
Interest and other income 345,178 48,564
Interest income - related party 1,545 1,545
----------- -----------
Total revenues 8,544,086 3,180,033
Interest expense 64,621 104,753
Interest expense - related party 3,750 3,750
----------- -----------
Net revenues 8,475,715 3,071,530
----------- -----------
Expenses:
Commissions, floor brokerage, and clearing charges 3,292,256 1,369,610
Employee compensation and related costs 2,346,089 852,342
Communications 451,456 203,348
Business development 1,348,940 203,695
Professional services 554,190 198,571
Occupancy and equipment costs 1,131,439 215,149
Depreciation and amortization 236,221 114,911
Other 160,537 139,180
----------- -----------
Total expenses 9,521,128 3,296,806
----------- -----------
Loss before income taxes (1,045,413) (225,276)
Income tax provision 10,560 4,150
----------- -----------
Net loss $(1,055,973) $ (229,426)
=========== ===========
Basic and diluted earnings per common share $ (.13) $ (.04)
==== ====
Weighted average common shares outstanding - basic and diluted 7,931,745 5,291,080
=========== ===========
</TABLE>
4
<PAGE>
A. B. Watley Group Inc.
Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 31,1999 December 31, 1998
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,055,973) $ (229,426)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciations and amortization 236,221 114,911
Non-cash compensation/service cost 21,902 71,983
Deferred rent incentives 565,209 --
Subscriptions receivable 4,999
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Restricted cash (6,726) (406,861)
Securities owned 19,261 89,548
Receivables from clearing brokers (371,780) 57,187
Loans receivable from related party 6,568 (1,545)
Other assets (480,392) (81,775)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (25,667) (13,311)
Accounts payable and accrued liabilities 573,655 362,344
Other liabilities 73,455 --
----------- -----------
Net cash used in operating activities (444,267) (31,946)
----------- -----------
Cash flows from investing activities --
Purchases of property and equipment, net (1,270,013) (984,097)
----------- -----------
Cash flows from financing activities
Proceeds from exercise of stock options -- 2,500
Proceeds from/(Repayment of) notes payable (220,747) 500,000
Deferred offering costs 1,250 (195,968)
Repayment of bank loan (10,000) (10,000)
----------- -----------
Net cash provided by (used in) financing activities (229,497) 296,532
----------- -----------
Net decrease in cash and cash equivalents (1,943,777) (719,511)
Cash and cash equivalents at beginning of period 9,298,822 970,308
----------- -----------
Cash and cash equivalents at end of period $ 7,355,045 $ 250,797
=========== ===========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
AND DISCLOSURE OF CASH FLOW INFORMATION
Accounts payable for purchases of property and equipment $ 2,031,670 --
Cash paid for:
Interest $ 59,954 $ 41,600
Taxes $ 40,141 --
</TABLE>
5
<PAGE>
A.B. Watley Group Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
1. Organization and Basis of Presentation
A.B. Watley Group Inc. ("ABWG" or the "Company"), which was formerly known as
Internet Financial Services Inc., 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. ABWG is a
Delaware corporation organized May 15, 1996.
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.
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 month period ended December 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended September 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto for the fiscal year
ended September 30, 1999 included in the Company's Annual Report on Form 10-KSB.
The consolidated financial statements include the accounts of ABWG and its
wholly-owned subsidiary, A.B. Watley. All significant intercompany balances and
transactions have been eliminated. Certain prior year amounts reflect
reclassifications to conform to current year's presentations.
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 December 31, 1999, A.B. Watley had net capital,
as defined, of $4,862,452 which was $4,651,729 in excess of its required net
capital of $210,723. The aggregate indebtedness to net capital ratio was .65 to
1.
6
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A.B. Watley Group Inc.
Notes to Consolidated Financial Statements
(UNAUDITED)
3. Stock Options
On November 1, 1999, the board of directors and shareholders owning greater than
50% of the outstanding shares of the company, (subject to formal stockholder
approval to be sought at the Company's annual meeting of stockholders to be held
on March) 14, 2000, adopted the Company's 1999 Stock Option Plan. The Company
has reserved 800,000 shares of common stock for issuance upon exercise of
options granted.
As of December 31, 1999 and subject to formal stockholder approval as described
above, the Company granted options to purchase 300,500 shares of common stock
under the 1999 stock option plan at an exercise price ranging from $9.81 to
$13.00 per share.
4. Earnings Per Share
Since the Company recognized a net loss for the three months ended December 31,
1999 and 1998, diluted earnings per common share is the same as basic earnings
per common share for both periods.
5. Subsequent Event
On January 3, 2000, New York Small Business Venture Fund LLC ("NYSB") exercised
50,000 warrants equal to 50,000 common shares which were issued as a result of a
$500,000 loan that the Company obtained in October 1998 and repaid from the
proceeds of the Company's initial public offering ("IPO"). The warrants were
exercised at the IPO price of $7.00 per share. NYSB continues to hold warrants
to purchase an additional 141,250 shares. These warrants expire October 2, 2003.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
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-KSB. The results of operations for the three months ended December 31, 1999
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending September 30, 2000.
Results of Operations
Three months ending December 31, 1999 compared to the quarter ending December
31, 1998
REVENUES. Total revenues for the quarter ending December 31, 1999 were
$8,544,086, an increase of 169%, as compared to revenues of $3,180,033 for the
quarter ending December 31, 1998. Revenues from commissions increased by
$4,167,962, or 168% from $2,475,661, for the December 1998 quarter to $6,643,623
for the December 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 December
31, 1999, the Company's online brokerage division had total billed transactions
of 304,173 and average billed transactions of 4,753 per day, an increase of 244%
compared to an average daily billed transaction rate of 1,405 per day during the
December 1998 quarter totaling 88,522 billed transactions. Data service revenues
increased by $237,442, or 86% from $275,604 for the December 1998 quarter to
$513,046 for the quarter ending December 31, 1999 due to the increase in the
number of online accounts. Revenues from principal transactions increased by
$662,035, or 175%, from $378,659 for the December 1998 quarter to $1,040,694 for
the quarter ending December 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 $48,564 for the December 1998 quarter to $345,178
for the quarter ending December 31, 1999.
Interest expense decreased from $104,753 for the December 1998 quarter to
$64,621 for the December 1999 quarter as result of decreased borrowings.
As a result of the foregoing, net revenues increased by $5,404,185, or 176%,
from $3,071,530 for the December 1998 quarter to $8,475,715 for the quarter
ending December 31, 1999. Nearly all of our revenues were generated by clients
in the United States and no single group of related clients accounted for 10% or
more of our revenues.
EXPENSES EXCLUDING INTEREST. Total expenses increased by $6,224,322, or 189%,
from $3,296,806 for the December 1998 quarter to $9,521,128 for the quarter
ending December 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 $1,922,646, or 140%, from $1,369,610 for the December 1999 quarter to
$3,292,256 for the quarter ending December 31, 1999. Employment compensation and
related costs increased by $1,493,747, or 175%, from $852,342 for the December
1998 quarter to $2,346,089 for the quarter ending December 31, 1999, largely due
to the hiring of 18 new employees to service the growth in our client base.
Communications expense increased by $248,108, or 122%, from $203,348 for the
December 1998 quarter to $451,456 for the quarter ending December 31, 1999 as a
function of the growth in our online client base. The Company expects that the
foregoing expenses will continue to increase as the Company expands its client
base.
Business development costs consist of advertising costs which have mostly been
for print and media advertising to obtain new clients. These expenses increased
by $1,145,245, or 562%, from $203,695 for the December 1998 quarter to
$1,348,940 for the quarter ending December 31, 1999 as the Company increased its
planned advertising and promotional efforts.
8
<PAGE>
Professional services increased from $198,571 for the December 1998 quarter to
$554,190 for the quarter ending December 31, 1999 due to the general growth in
our business. Occupancy and equipment costs increased by $916,290, or 426%, from
$215,149 for the December 1998 quarter to $1,131,439 for the quarter ending
December 31, 1999, primarily due to the relocation of our offices to a new,
19,000 square foot facility and the leasing of additional equipment to increase
our capacity and to facilitate the relocation efforts. Depreciation and
amortization increased by $121,310, or 106%, from $114,911 for the December 1998
quarter to $236,221 for the quarter ending December 31, 1999 for similar
reasons. Other expenses increased by $21,357, or 15%, from $139,180 for the
December 1998 quarter to $160,537 for the quarter ending December 31, 1999 due
to the Company's overall growth.
The income tax provision increased from $4,150 for the December 1998 quarter to
$10,560 for the quarter ending December 31, 1999.
As a consequence of the foregoing, our operating loss increased from a net loss
of $229,426 for the December 1998 quarter to a net loss of $1,055,973 for the
quarter ending December 31, 1999.
Liquidity and Capital Resources
Prior to our initial public offering ("IPO"), our capital requirements had
exceeded our cash flow from operations as we have been building our business.
Since the IPO, the proceeds from the IPO and cash flow from operations have been
able to satisfy our cash needs as we continue to build our business. Based on
our current assumptions underlying our business plan, we anticipate our capital
requirements will be satisfied by internal sources for at least nine months from
December 31, 1999. If our plans change or our assumptions prove to be
inaccurate, we may need to seek additional debt or equity financing sooner than
currently anticipated or curtail our operations. 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 used in operating activities during the three months ending December 31,
1999 was $444,267. The Company had a net loss of $1,055,973 and an increase in
accounts payable and accrued liabilities of $573,655, deferred Rent incentives
of $565,209, other assets of $480,392, receivables from clearing brokers of
$371,780, which was offset by an adjustment for depreciation and amortization of
$236,221 and an increase in other liabilities of $73,455.
Cash used in investing activities was $1,270,013 during the three months ended
December 31, 1999 compared to $984,097 during the three months ending December
31, 1998. Uses of cash in the three months ending December 31, 1999 related to
purchases of equipment, software 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 three months ended December 31, 1999, the
Company accrued accounts payable relating to purchases of property and equipment
and leasehold improvements of $2,031,670 during this period.
Cash used in financing activities was $229,497 during the three months ending
December 31, 1999 compared to cash provided by financing activities of $296,532
during the three months ended December 31, 1998. Cash used in financing
activities during the three months ending December 31, 1999 consisted primarily
of the payment of note payables to the Company's vendors.
Net Operating Loss Carryforward
The Company's net operating loss carryforward expires beginning in the year
2013. The issuance of additional equity securities, together with the Company's
recent financing and public offering, could result in an ownership change and
thus could limit our use of the Company's prior net operating losses. If the
Company achieves profitable operations, any significant limitation on the
utilization of our net operating losses would have the effect of increasing our
tax liability and reducing net income and available cash reserves. We are unable
to determine the availability of these net operating losses since this
availability is dependent upon profitable operations, which we have not achieved
in periods prior to the most recent two quarters.
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 generally
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
9
<PAGE>
value of the options or the related services provided and expensed over the
vesting period, if any.
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
transactions 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 fiscal 1999, the Company adopted SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." Under the new
standard, the Company is required to use the management approach to reporting
its segments. The management approach designates that the internal organization
that is used by management for making operating decisions and assessing
performance should be the source of the Company's segments. Based on this
approach, the Company has determined that it operates in one reporting segment.
Year 2000 Issues
The financial markets were essentially unaffected by the issues regarding Y2K,
reporting only a few minor technical problems. The Company and its
counterparties were not adversely affected. However, we will continue monitoring
our systems and those of our vendors to ensure that there is no material
disruption to the Company's operations due to Y2K issues.
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.
10
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
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.
From the effective date of the Registration Statement through the date hereof,
the Company (i) repaid indebtedness of approximately $776,800; (ii) used
approximately $2,175,000 for leasehold improvements; (iii) used approximately
$2,742,000 for equipment and software purchases; (iv) used approximately
$918,000 for working capital; and (v) invested most of the balance of
approximately $7,300,000 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 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit are filed as part of this report:
None
(b) No reports on Form 8-K were filed during the quarter ended December 31,
1999.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 14, 2000
A. B. WATLEY GROUP INC
By: /s/ Steven Malin
--------------------
Steven Malin
Chairman, Chief Executive Officer
By: /s/ Joseph M. Ramos, Jr.
----------------------------
Joseph M. Ramos, Jr.
Chief Financial Officer
12
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,355,045
<SECURITIES> 195,120
<RECEIVABLES> 998,068
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,068,712
<PP&E> 13,904,065
<DEPRECIATION> 1,434,348
<TOTAL-ASSETS> 25,179,162
<CURRENT-LIABILITIES> 6,488,295
<BONDS> 0
0
0
<COMMON> 7,932
<OTHER-SE> 14,800,984
<TOTAL-LIABILITY-AND-EQUITY> 25,179,162
<SALES> 8,544,086
<TOTAL-REVENUES> 8,544,086
<CGS> 9,521,128
<TOTAL-COSTS> 9,521,128
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,371
<INCOME-PRETAX> (1,045,413)
<INCOME-TAX> 10,560
<INCOME-CONTINUING> (1,055,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,055,973)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
