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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2000
Commission File Number 0-26225
------------------------
WIT CAPITAL GROUP, INC.
(exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3900397
(State or Other Jurisdiction (I.R.S. Employer Industrial
of Incorporation or Organization) Identification Number)
</TABLE>
826 BROADWAY, NEW YORK, NEW YORK 10003
(Address of Principal Executive Offices) (Zip Code)
(212) 253-4400
(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 of 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such filing
requirements for the past ninety days: Yes (X) No ( )
As of May 5(th), 2000, there were 78,408,011 shares of the Registrant's
common stock outstanding and 11,666,666 shares of the Registrant's Class B
Common Stock Outstanding.
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WIT CAPITAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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<S> <C> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1 -- Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition as
of March 31, 2000 and December 31, 1999..................... 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999.................. 4
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the three months ended March 31,
2000........................................................ 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999.................. 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3 -- Quantitative and Qualitative Disclosure about Market Risk... 14
PART II--OTHER INFORMATION
Item 1 -- Legal Proceedings........................................... 14
Item 2 -- Changes in Securities and Use of Proceeds................... 14
Item 3 -- Default upon Senior Securities.............................. 14
Item 4 -- Submission of Matters to a Vote of Security Holders......... 15
Item 5 -- Other Information........................................... 15
Item 6 -- Exhibits and Reports on Form 8-K............................ 16
Signatures.................................................................... 16
</TABLE>
2
<PAGE>
PART I
ITEM 1--CONSOLIDATED FINANCIAL STATEMENTS
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 62,898,235 $ 12,447,885
RECEIVABLE FROM CLEARING BROKER............................. 42,904,545 681,807
SECURITIES OWNED, at market or fair value................... 50,546,658 114,468,173
INVESTMENT BANKING FEES RECEIVABLE.......................... 50,636,727 3,570,176
INVESTMENTS................................................. 76,955,367 --
INVESTMENTS IN AFFILIATES................................... 15,261,179 17,511,403
INTANGIBLE ASSETS, net of accumulated amortization of
$2,749,400 at March 31, 2000
Goodwill.................................................. 198,687,744 --
Institutional client relationships........................ 64,520,834 --
Other..................................................... 9,899,442 --
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of
accumulated depreciation and amortization of $4,789,661
and $1,110,369 at March 31, 2000 and December 31, 1999,
respectively.............................................. 11,665,508 6,312,242
COMPUTER SOFTWARE, net of accumulated amortization of
$1,086,145 and $1,212,907 at March 31, 2000 and
December 31, 1999, respectively........................... 2,631,475 3,706,112
PREPAID EXPENSES............................................ 3,289,671 1,610,628
OTHER ASSETS................................................ 37,349,721 3,309,750
------------ ------------
Total assets.......................................... $627,247,106 $163,618,176
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Securities sold but not yet purchased, at market value.... $ 1,031,084 $ 39,234
Accounts payable and accrued expenses..................... 11,160,630 5,130,675
Accrued compensation...................................... 93,008,142 13,506,087
Deferred tax liabilities.................................. 32,000,720 --
Other liabilities......................................... 5,884,212 540,647
------------ ------------
Total liabilities..................................... 143,084,788 19,216,643
============ ============
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value, 30,000,000 shares
authorized, no shares outstanding at March 31, 2000 and
December 31, 1999....................................... -- --
Common Stock, $.01 par value, 500,000,000 shares
authorized, 78,256,233 and 61,629,828 shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively............................................ 782,562 616,298
Common Stock, Class B, $.01 par value, 75,000,000 shares
authorized, 11,666,666 shares issued and outstanding.... 116,667 116,667
Common Stock, Class C, $.01 par value, 159,000,000 shares
authorized, no shares issued and outstanding at March
31, 2000 and December 31, 1999.......................... -- --
Additional paid-in capital................................ 554,894,523 196,777,759
Notes receivable from stockholders........................ (23,074,732) (15,333,070)
Deferred compensation..................................... (21,592,975) (3,311,765)
Accumulated deficit....................................... (26,963,727) (34,464,356)
------------ ------------
Total stockholders' equity............................ 484,162,318 144,401,533
------------ ------------
Total liabilities and stockholders' equity............ $627,247,106 $163,618,176
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
2000 1999
------------ -----------
(UNAUDITED)
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REVENUES:
Investment banking........................................ $ 60,349,094 $ 3,122,420
Brokerage................................................. 36,524,953 434,207
Asset management fees..................................... 7,833,034 --
Interest and investment income............................ 1,819,213 191,670
Unrealized gains on investments........................... 61,880 154,824
------------ -----------
Total revenues........................................ 106,588,174 3,903,121
------------ -----------
EXPENSES:
Compensation and benefits................................. 64,942,356 6,558,126
Brokerage and clearance................................... 6,196,706 260,628
Marketing and business development........................ 3,047,030 212,339
Amortization of intangible assets and goodwill............ 2,749,400 --
Professional services..................................... 2,277,121 681,509
Data processing and communications........................ 1,772,263 299,611
Write-off of computer software and equipment.............. 1,339,772 --
Depreciation and amortization............................. 1,275,834 220,495
Technology development.................................... 1,042,801 335,795
Occupancy................................................. 792,115 90,007
Other..................................................... 1,334,292 144,777
------------ -----------
Total expenses........................................ 86,769,690 8,803,287
------------ -----------
Net income (loss) before equity in net loss of
affiliates............................................ $ 19,818,484 $(4,900,166)
Equity in net loss of affiliates............................ (1,709,689) --
------------ -----------
Net income (loss) before provision for income taxes..... 18,108,795 (4,900,166)
Provision for income taxes.................................. 10,608,166 --
------------ -----------
Net income (loss)....................................... $ 7,500,629 $(4,900,166)
============ ===========
Net income (loss) per share:
Basic..................................................... $ 0.10 $ (0.67)
Diluted................................................... $ 0.08 $ (0.67)
Weighted average shares used in the computation of net
income (loss) per share:
Basic..................................................... 72,997,204 7,266,428
Diluted................................................... 98,085,755 7,266,428
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
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WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
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<CAPTION>
NOTES
COMMON ADDITIONAL RECEIVABLE
COMMON STOCK PAID-IN ACCUMULATED FROM TREASURY DEFERRED
STOCK CLASS B CAPITAL DEFICIT STOCKHOLDERS STOCK COMPENSATION
-------- -------- ------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY, December 31,
1999............................. $616,298 $116,667 $196,777,759 $(34,464,356) $(15,333,070) $ -- $ (3,311,765)
Issuance of common stock......... 13,986 -- 2,320,483 -- -- -- --
Repurchase of common stock....... -- -- -- -- -- (250,000) --
Repurchase of common stock for
note receivable................ -- -- -- -- 50,000 (50,000) --
Reissuance of treasury stock..... -- -- 18,199 -- -- 300,000 --
Issuance of common stock in
SoundView merger............... 113,647 -- 290,889,835 -- -- -- --
Issuance of restricted stock
awards to employees............ 15,612 -- 20,084,491 -- -- -- (20,100,103)
Compensation expense on
restricted stock awards........ -- -- -- -- -- -- 1,153,255
Cancellation of restricted stock
awards......................... (517) -- (665,121) -- -- -- 665,638
Tax benefit from non-qualified
option exercises............... -- -- 6,515,891 -- -- -- --
Issuance of common stock for
notes receivable............... 4,750 -- 7,974,938 -- (7,979,688) -- --
Payments of notes receivable..... -- -- -- -- 188,026 -- --
Investment in enba plc........... 18,786 -- 30,978,048 -- -- -- --
Net income....................... -- -- -- 7,500,629 -- -- --
-------- -------- ------------ ------------ ------------ --------- ------------
STOCKHOLDERS' EQUITY, March 31,
2000 (unaudited)................. $782,562 $116,667 $554,894,523 $(26,963,727) $(23,074,732) $ -- $(21,592,975)
======== ======== ============ ============ ============ ========= ============
<CAPTION>
TOTAL
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STOCKHOLDERS' EQUITY, December 31,
1999............................. $144,401,533
Issuance of common stock......... 2,334,469
Repurchase of common stock....... (250,000)
Repurchase of common stock for
note receivable................ --
Reissuance of treasury stock..... 318,199
Issuance of common stock in
SoundView merger............... 291,003,482
Issuance of restricted stock
awards to employees............ --
Compensation expense on
restricted stock awards........ 1,153,255
Cancellation of restricted stock
awards......................... --
Tax benefit from non-qualified
option exercises............... 6,515,891
Issuance of common stock for
notes receivable............... --
Payments of notes receivable..... 188,026
Investment in enba plc........... 30,996,834
Net income....................... 7,500,629
------------
STOCKHOLDERS' EQUITY, March 31,
2000 (unaudited)................. $484,162,318
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 7,500,629 $(4,900,166)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Deferred tax expense.................................... 9,421,487 --
Depreciation and amortization........................... 4,025,234 220,495
Equity in net loss of affiliates........................ 1,709,689 --
Write-off of computer software and equipment............ 1,339,772 --
Compensation expense on restricted stock awards......... 1,153,255 --
(Increase) decrease in operating assets--
Receivable from clearing broker......................... (23,832,006) (357,903)
Securities owned........................................ 4,004,827 (23,334)
Investment banking fees receivable...................... (24,404,627) (927,175)
Investments............................................. (16,049,962) --
Prepaid expenses........................................ (914,761) (224,062)
Other assets............................................ (15,731,599) (3,016,693)
Increase (decrease) in operating liabilities--
Securities sold but not yet purchased................... 299,173 --
Accounts payable and accrued expenses................... (37,339,503) 1,326,144
Accrued compensation.................................... 79,502,055 --
Other liabilities....................................... (3,228,707) (221,743)
------------ -----------
Net cash used in operating activities................. (12,545,044) (8,124,437)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments, net.................. (18,936,773) --
Sale of short-term investments, net....................... 81,683,960 --
Acquisition of SoundView, net of cash received............ (6,773,571) --
Computer software purchased............................... (704,137) (7,794)
Payments for purchases of furniture, equipment and
leasehold improvements.................................. (1,124,689) (535,266)
------------ -----------
Net cash provided by (used in) investing activities... 54,144,790 (543,060)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes receivable from stockholders........................ 188,026 --
Repurchase of common stock issued......................... (250,000) --
Proceeds from issuance of common stock.................... 8,912,578 174,428
Net proceeds from issuance of preferred stock............. -- 31,576,529
------------ -----------
Net cash provided by financing activities............. 8,850,604 31,750,957
------------ -----------
Net increase in cash and cash equivalents............. 50,450,350 23,083,460
CASH AND CASH EQUIVALENTS, beginning of period.............. 12,447,885 18,110,146
------------ -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 62,898,235 $41,193,606
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest................................................ $ -- $ --
Taxes................................................... 7,376,833 18,000
NON-CASH TRANSACTIONS:
Issuance of common stock to stockholders for notes
receivable.............................................. 7,979,688 3,825,000
Repurchase of common stock for note receivable............ (50,000)
Investment in enba plc for common stock................... 30,996,834 --
Issuance of restricted stock to employees, net of
cancellations........................................... 19,434,465 --
Issuance of common stock for consulting services.......... -- 40,613
Acquisition of SoundView Technology Group, Inc.
Fair value of net assets acquired, net of cash received... 44,431,499 --
Intangible assets and goodwill............................ 275,857,420 --
Issuance of common stock.................................. 291,003,482 --
Deferred tax asset........................................ 16,770,000 --
Deferred tax liabilities.................................. 32,465,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
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WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Wit Capital Group, Inc. ("WCG" or the "Company") was incorporated on
March 27, 1996 and commenced operations in September 1997. The accompanying
unaudited consolidated financial statements include the accounts of WCG and its
wholly owned subsidiaries, Wit SoundView Corporation ("WSV", formerly SoundView
Technology Group, Inc.), Wit Capital Corporation ("WCC"), SoundView Asset
Management, Inc., SoundView Capital Management, Inc., BidPlus Corporation
("BidPlus") and Wit VC LLC. All material intercompany balances and transactions
have been eliminated in consolidation.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") and, in the
opinion of management, reflect all adjustments necessary for a fair presentation
of the results for the periods presented in conformity with accounting
principles generally accepted in the United States. These financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's Annual Report on Form 10-K filed with the SEC on
March 30, 2000. Results of the interim periods are not necessarily indicative of
results to be obtained for a full fiscal year.
2. MERGER
On January 31, 2000, the Company completed its merger with SoundView
Technology Group, Inc., a Connecticut-based private broker-dealer and investment
banking firm focused exclusively on technology. The total consideration was
$320 million consisting of Wit Capital Group, Inc. common stock and cash. The
merger was accounted for using the purchase method of accounting. The excess of
the purchase price over the estimated fair value of the net assets acquired was
allocated to certain identifiable intangible assets and goodwill, a total of
$275.9 million which will be amortized on a straight line basis over periods
between 3 and 20 years. Pro forma results for the three months ended March 31,
2000 are not presented as the merger closed on January 31, 2000, and the pro
forma results for the year ended December 31, 2000 will not be materially
different from the Company's actual results.
3. NET INCOME (LOSS) PER SHARE
The following table sets forth the calculation of shares used in the
computation of basic and diluted net income (loss) per share
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
Shares used in computations:
Weighted average common shares used in computation
of basic net income (loss) per share.............. 72,997,204 7,266,428
Dilutive effect of common stock equivalents......... 25,088,551 --
---------- ---------
Weighted average common shares used in computation
of diluted net income (loss) per share............ 98,085,755 7,266,428
========== =========
</TABLE>
Because the Company reported a net loss in the period ended March 31, 1999,
the calculation of diluted earnings per share in that period does not include
convertible preferred stock, options, warrants and common stock collateralizing
the notes receivable from stockholders, as they are anti-dilutive and would
result in a reduction of net loss per share. If the Company had reported net
income, there would have been an additional 24,991,082 shares as of March 31,
1999 included in the calculation of diluted earnings per share.
7
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WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTION PLAN
The Company has adopted a stock incentive plan (the "Plan") that permits the
granting of stock options, restricted stock and other awards to employees,
directors and certain consultants of the Company. The exercise price of any
share covered by an option granted to a person owning more than 10% of the
voting power of all classes of stock of WCG cannot be less than 110% of the fair
market value on the day of the grant. The exercise price of any share covered by
an option granted to any person cannot be less than 85% of the fair value on the
day of the grant. Options expire five or ten years from the date of grant, with
the majority of the options expiring in the year 2009.
As part of the Company's merger with SoundView, on January 31, 2000, the
Company adopted SoundView's Stock Option Plan, although no additional options to
purchase common stock will be granted under SoundView's plan.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") WCG has accounted
for options granted to employees using the intrinsic value method prescribed by
Accounting Practice Bulletin ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." WCG has granted options with exercise prices that are
equal to or greater than management's estimate of the fair value of such common
stock at the date of grant, and accordingly, the Company has recorded no related
compensation expense. For restricted stock issued with future service
requirements, compensation expense is recognized over the relevant vesting
period.
As of March 31, 2000, the Company has 18,007,174 outstanding options with a
range of exercise prices between $0.35 and $34.88 per share and a weighted
average exercise price of $4.63.
5. WARRANTS
The Company has 5,796,405 outstanding warrants as of March 31, 2000 with a
range of exercise prices between $1.43 and $5.57. These warrants are exercisable
for 159,110 shares of common stock and 5,637,295 shares of Class B common stock.
6. INVESTMENTS
In connection with the Company's investment in Wit Capital Europe, the
Company acquired 189,748 shares of enba plc, the Company's joint venture
partner, in exchange for 1,878,596 shares of the Company's common stock. In
addition, the Company holds investments in publicly traded and privately held
companies, venture capital and hedge funds and in limited liability companies.
The Company's investments are primarily accounted for at fair value.
7. CONTINGENCIES
The Company is currently subject to claims and legal proceedings arising in
the normal course of its business. In the opinion of management, the resolution
of such legal proceedings should not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
A person formerly associated with the Company has asserted a right to
purchase 560,000 shares of common stock at $1.43 per share. In the opinion of
management, such assertion is without merit, and the Company intends to contest
any lawsuit filed against it. These 560,000 shares of common stock have been
reported as forfeited stock options in 1998.
8
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WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes," which requires the recognition of deferred tax
assets and liabilities attributable to differences in the accounting basis and
tax basis of assets and liabilities at tax rates expected to be in effect when
these balances reverse. Future tax benefits attributable to temporary
differences are recognized to the extent that realization of such benefits is
more likely than not. The Company files consolidated Federal and combined state
and local income tax returns with its wholly-owned subsidiaries.
The components of the Company's income tax expense for the periods ended
March 31, 2000 and March 31, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Current:
Federal.................................. $ -- $ --
State and local.......................... 1,186,679 --
----------- -----------
1,186,679 --
----------- -----------
Deferred:
Federal.................................. 7,424,231 --
State and local.......................... 1,997,256 --
----------- -----------
9,421,487 --
----------- -----------
$10,608,166 $ --
=========== ===========
</TABLE>
The Company's effective tax rate differs from the Federal statutory rate due
to the recording of a valuation allowance on the Company's current period losses
incurred prior to the acquisition of SoundView, nondeductible goodwill related
to the acquisition and state and local income taxes.
The Company has released its valuation allowance of $16,800,000 recorded
through the date of the SoundView merger as part of purchase accounting for the
merger transaction. The Company has recorded deferred tax assets of $23,000,000
primarily related to net operating loss carryforwards and deferred compensation
offset by deferred tax liabilities resulting from unrealized appreciation on
investments. The Company has also recorded deferred tax liabilities of
$32,000,000 as a result of the difference between the accounting and tax basis
of intangible assets other than goodwill acquired in the merger with SoundView.
9. NET CAPITAL REQUIREMENTS
WSV and WCC are subject to the SEC's Uniform Net Capital Rule 15c3-1. WSV's
net capital, as defined, is required to be the greater of $250,000 or an amount
determinable based on the market prices and number of securities in which WSV
acts as a market maker. As of March 31, 2000 WSV's net capital was $15,198,124,
which was $14,695,624 in excess of the minimum net capital requirement. WCC's
net capital, as defined, is required to be the greater of $100,000 or the
minimum net capital required based on aggregate indebtedness. As of March 31,
2000 and December 31, 1999, WCC's ratio of aggregate indebtedness to net capital
was .53 to 1 and .51 to 1 and its net capital was $14,944,191 and $23,914,930,
which was $14,413,008 and $23,095,740 in excess of the minimum net capital
requirements, respectively.
9
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ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Wit Capital Group, Inc. ("WCG" or the "Company") was incorporated on
March 27, 1996 and commenced operations in September 1997. The accompanying
unaudited consolidated financial statements include the accounts of WCG and its
wholly owned subsidiaries, Wit SoundView Corporation ("WSV", formerly SoundView
Technology Group, Inc.), Wit Capital Corporation ("WCC"), SoundView Asset
Management, Inc., SoundView Capital Management, Inc., BidPlus Corporation
("BidPlus") and Wit VC LLC. Through our broker-dealer subsidiaries, we are the
largest online investment banking group focused exclusively on the Internet and
technology sectors. We offer a strong complement of investment banking services,
from Internet-strategic advisory, venture capital and private equity placements,
to public offerings and M&A advisory. With one of the largest research teams in
the sector, we produce comprehensive sell-side research on over 285 Internet and
technology companies, developed for our online and institutional audiences.
We are also recognized as the first firm to bring online individual
investors directly into the capital formation process in a meaningful way and
continue to leverage the Internet to revolutionize the way in which issuers and
investors communicate.
The results presented below for the three month period ended March 31, 2000
reflect the results of the combined company after completion of our merger with
SoundView Technology Group, Inc. ("SoundView") on January 31, 2000. In
March 2000, SoundView changed its name to Wit SoundView Corporation.
The results presented in the discussion of the three months ended March 31,
1999 reflect the results of Wit Capital Group, Inc. and its broker-dealer
subsidiary, Wit Capital Corporation. During the first three months of 1999, Wit
Capital Corporation was in an early stage of its operations and generated only
minimal revenues from its investment banking and brokerage activities.
Accordingly, the Company does not believe that the period to period comparisons
of its operating results below are necessarily meaningful and should not be
relied upon as indicators of future performance.
MERGER
On January 31, 2000, the Company completed its merger with SoundView
Technology Group, Inc., a Connecticut-based private broker-dealer and investment
banking firm focused exclusively on technology. The total consideration was
$320 million consisting of Wit Capital Group, Inc. common stock and cash. The
merger was accounted for using the purchase method of accounting. The excess of
the purchase price over the estimated fair value of the net assets acquired was
allocated to certain identifiable intangible assets and goodwill, a total of
$275.9 million which will be amortized on a straight line basis over periods
between 3 and 20 years.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1999.
REVENUES
The Company's revenues for the three months ended March 31, 2000, which
include revenues of SoundView after January 31, 2000, were $106.6 million
compared to $3.9 million for the three months ended March 31, 1999.
Investment banking revenue for the three months ended March 31, 2000
increased to $60.3 million from $3.1 million for the three months ended
March 31, 1999. Investment banking revenue is primarily derived from the public
offering of equity securities, and also from Internet-strategic advisory,
venture capital and private equity placements, and M&A advisory services. The
growth in investment banking revenue is attributable to favorable issuing
conditions for technology and Internet companies as well as a
10
<PAGE>
larger number of professionals dedicated to our investment banking activities.
During the first quarter of 2000, we participated in a total of 61 public equity
offerings, 31 as co-manager and 30 as syndicate member compared to the three
months ended March 31, 1999 during which we participated in 19 offerings, 8 as
co-manager and 11 as syndicate member. During the first quarter of 2000, we
retained 2.7 million shares for distribution to our online customers, compared
to 1.5 million shares in the first quarter of 1999. In addition to revenue
generated from public equity transactions, revenue related to Internet-strategic
advisory has also increased as a result of an increase number of strategic
advisory relationships and frequency of transactions.
Brokerage revenue for the three months ended March 31, 2000 increased to
$36.5 million from $434,000 for the three months ended March 31, 1999. Revenues
derived from our brokerage operations are related to our institutional equity
and our online, or individual trading, operations. For the three months ended
March 31, 2000, our institutional and online operations contributed
$32.5 million and $4.0 million, respectively, to our total brokerage revenue.
With the completion of our merger with SoundView, our brokerage services were
expanded to include institutional sales and trading, and accordingly our results
for the three month period ended March 31, 2000 reflect the initial contribution
of that business to our brokerage revenue. For the quarter ended March 31, 2000,
average daily institutional trading commissions rose 31% compared to average
daily commissions recognized by SoundView in the fourth quarter of 1999, prior
to the merger. This revenue has increased as a result of increased trading
volumes, an increase in the number of companies under research coverage and an
increase in the number of stocks for which we make a market. The number of
stocks we make markets in increased to 219 as of March 31, 2000 compared to 181
stocks which SoundView made markets in as of December 31, 1999, prior to the
merger. The increase in revenue derived from our online, or individual trading
business resulted primarily from an increase in the number of active customer
accounts and an increase in the number of trades executed for our online
customers. Wit Capital Corporation charges its online customers a brokerage
commission of $14.95 for market orders and $19.95 for limit orders. The average
daily number of online trades executed for the three month period ended
March 31, 2000 was 3,000, compared to 405 for the three month period ended
March 31, 1999. As of March 31, 2000, total active online accounts numbered
83,100 compared to 2,900 active online accounts as of March 31, 1999.
Asset management fees for the three months ended March 31, 2000 increased to
$7.8 million from $0 for the three months ended March 31, 1999. This revenue is
derived from management and syndication fees received from our series of
Dawntreader II venture capital funds which closed during the quarter and from
incentive royalties from hedge funds that were formerly managed by SoundView.
During the three months ended March 31, 1999, we had not yet commenced our
venture capital fund operations, and accordingly, derived no revenue from this
business.
Interest income for the three months ended March 31, 2000 increased to
$1.8 million from $192,000 for the three months ended March 31, 1999. The
Company earns interest income from the investment of cash balances raised
through financing activities until the funds are used in its business. During
the first three months of 2000, the Company's average monthly cash balance was
$136.6 million as compared to a monthly average of $23.8 million for the first
three months of 1999.
Unrealized gains on investments for the three months ended March 31, 2000
decreased to $62,000 from $155,000 for the three months ended March 31, 1999.
Unrealized gains on investments primarily consist of gains on the mark to market
and sale of equity securities that the Company receives as consideration for
financial advisory services and from increased investment returns from the
Company's investments in investment partnerships focused on the technology
sector.
EXPENSES
Compensation and benefits expense for the three months ended March 31, 2000
increased to $64.9 million from $6.6 million for the three months ended
March 31, 1999. Compensation and benefits
11
<PAGE>
expense consists of salaries, bonuses and other benefits paid or provided to our
employees. The increase in compensation expense primarily relates to higher
incentive compensation accrued on higher revenues and an increase in the number
of employees from 111 as of March 31, 1999 to 439 as of March 31, 2000.
Compensation and benefits expense as a percentage of total revenues was 61% for
the three months ended March 31, 2000 which represents an improvement from 168%
for the three months ended March 31, 1999. For the three months ended March 31,
1999, compensation expense included $2.6 million related to those portions of
contractual upfront payments to several professionals for which no future
service by the employees was required. As we continue to hire more investment
banking and research professionals and participate in more transactions, we
expect compensation expense to grow.
Professional services expense for the three months ended March 31, 2000
increased to $2.3 million from $682,000 for the three months ended March 31,
1999. Professional services expense includes legal, consulting, accounting, and
recruiting fees which have increased as we continue to make strategic
investments, expand our business internationally, make improvements to our
customer service and infrastructure, hire additional personnel, and increase our
brokerage and investment banking operations.
Brokerage and clearance expense for the three months ended March 31, 2000
increased to $6.2 million from $261,000 for the three months ended March 31,
1999. This expense primarily consists of fees paid to independent floor brokers
on the New York Stock Exchange for the execution of institutional customer
agency business as well as amounts paid to our clearing brokers for processing
and clearing customers' trades. The increase in brokerage and clearance expense
reflects the increased transactional volume and growth of our brokerage
operations.
Data processing and communications expense for the three months ended
March 31, 2000 increased to $1.8 million from $300,000 for the three months
ended March 31, 1999. Data processing and communications expense includes costs
related to market data services, transaction processing and telephone and other
communication charges. These expenses have increased as a result of an increased
number of active customer accounts and an increased volume of transactions
processed. We expect these costs will continue to grow as transaction volume
increases.
For the three months ended March 31, 2000, we wrote-off approximately
$1.3 million in computer software and hardware originally developed or purchased
to operate an after-hours trading system. In light of information that became
available to us during the quarter regarding redeployment of those assets, we
wrote-off approximately $1.3 million of previously capitalized costs
representing management's estimate of the impairment in the value of the assets.
Technology development expense for the three months ended March 31, 2000
increased to $1 million from $336,000 for the three months ended March 31, 1999.
This increase resulted from continued enhancements to our technology
infrastructure, primarily related to our online brokerage operations. We expect
technology development expense to increase as operations continue to grow and as
we continue to invest in our infrastructure and new business initiatives.
Depreciation and amortization for the three months ended March 31, 2000
increased to $1.3 million from $220,000 for the three months ended March 31,
1999. Depreciation and amortization consists primarily of depreciation and
amortization of property, equipment and leasehold improvements and amortization
of computer software. The increases in depreciation and amortization reflect the
increased investments the Company has made in its technology, equipment and
facilities. The Company expects these expenses to continue to grow as it
continues to invest in technology and infrastructure.
Occupancy expense for the three months ended March 31, 2000 increased to
$792,000 from $90,000 for the three months ended March 31, 1999. As of
March 31, 1999, we leased one floor in our New York location. As a result of the
growth of our business and our merger with SoundView, we now lease several
floors in our New York location and we operate an office in Stamford,
Connecticut and an additional,
12
<PAGE>
larger office in San Francisco. As we continue to grow and expand our business,
we expect occupancy expense to increase.
Marketing and business development expense for the three months ended
March 31, 2000 increased to $3 million from $212,000 for the three months ended
March 31, 1999. Marketing and business development expense consists primarily of
travel, entertainment, advertising and costs associated with our conferences.
Marketing expense in 1999 primarily consists of travel, entertainment and other
costs associated with developing our investment banking business. We expect
these expenses to continue to increase as we continue to expand our investment
banking business and as we anticipate spending increased amounts on focused
marketing directed at issuers during the coming fiscal year.
Other expenses for the three months ended March 31, 2000 increased to
$1.3 million from $145,000 for the three months ended March 31, 1999. Other
expenses include office supplies, registrations and other administrative
expenses which have all increased as we continue to expand our business and
operations.
Equity in net loss of affiliates for the three months ended March 31, 2000
increased to $1.7 million from $0 for the three months ended March 31, 1999.
Equity in net loss of affiliates represents our proportional share of the losses
incurred by Wit Capital Japan and Wit Capital Europe based on our ownership
interest in each joint venture. We expect these losses to increase as Wit
Capital Japan and Wit Capital Europe prepare to commence operations in mid to
late 2000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Wit Capital has satisfied its cash requirements primarily
through private placements of common stock and convertible preferred stock.
During June 1999, Wit Capital Group, Inc. completed an initial public offering
in which it issued 8,740,000 shares of its common stock at $9.00 per share. The
Company received approximately $72.8 million in cash proceeds, net of
underwriting discounts and offering costs. The Company believes that its
existing cash balances will be sufficient to meet anticipated cash requirements
for at least the next twelve months. We may, nonetheless, seek additional
financing to support our activities during the next twelve months or thereafter.
There can be no assurance, however, that additional capital will be available on
reasonable terms, if at all, when needed or desired.
Net cash used in operating activities was $12.5 million for the three months
ended March 31, 2000, compared to $8.1 million during the same period in the
preceding year. Cash used in operating activities for the three months ended
March 31, 2000 was primarily from net income of $7.5 million, an increase in net
operating assets of $76.9 million offset by a net increase in operating
liabilities of $39.2 million. Cash used in operating activities for the three
months ended March 31, 1999 was primarily from a net loss of $4.9 million, a net
increase in operating assets of $4.5 million, and an increase in operating
liabilities of $1.1 million.
Cash provided by investing activities was $54.1 million for the three months
ended March 31, 2000, compared to cash used of $543,000 for the three months
ended March 31, 1999. Cash provided by investing activities for the three months
ended March 31, 2000 was primarily for net purchases and sales of short-term
investments of $62.7 million, the acquisition of SoundView for $22.5 million
($6.8 million, net of cash received of $15.7 million), fixed asset purchases of
$1.1 million and purchases of computer software of $704,000. Cash used in
investing activities for the three months ended March 31, 1999 resulted from
purchases of fixed assets of $535,000 and from purchases of computer software of
$8,000.
Cash provided by financing activities was $8.9 million for the three months
ended March 31, 2000, compared to $31.8 million for the three months ended
March 31, 1999. Cash provided by financing activities for the three months ended
March 31, 2000 resulted primarily from $8.9 million in proceeds received from
the issuance of common stock for exercise of options and warrants. Cash provided
by financing activities for the three months ending March 31, 1999 resulted
primarily from $31.6 million
13
<PAGE>
received from issuances of the Company's Series D Preferred Stock, now common
stock, to accredited investors.
The Company continues to use the net proceeds from its IPO for working
capital purposes. In January 2000, Wit Capital paid approximately $22.5 million
to shareholders of SoundView in connection with its merger with SoundView and in
March 2000, the Company invested $10 million in Internet HealthCare Group, a
business-to-business e-commerce company focused on e-healthcare and e-insurance.
The Company expects to continue to use the proceeds for working capital purposes
and for strategic acquisitions or investments.
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change from the Item 305 information included in
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1999.
PART II
ITEM 1--LEGAL PROCEEDINGS
Certain claims and legal proceedings are described in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999.
We are currently subject to other claims and legal proceedings arising in
the normal course of our business. We do not believe that the resolution of such
claims and legal proceedings should have a material adverse effect on us.
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company continues to use the net proceeds from its IPO for working
capital purposes. In March 2000, the Company invested $10 million in Internet
HealthCare Group, a business-to-business e-commerce company focused on
e-healthcare and e-insurance. The Company expects to continue to use the
proceeds for working capital purposes and for strategic acquisitions or
investments.
On January 31, 2000, the Company acquired by merger SoundView Technology
Group, Inc. for approximately 11.4 million shares and $22.5 million in cash.
Shares issued to nine of the shareholders were offered and sold in a private
placement, exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended and the remaining shares were registered under such Act.
On March 30, 2000, the Company issued 1,878,596 shares of common stock to
enba plc in exchange for 189,748 shares of enba plc. The transaction was a
private placement and exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
During the quarter, the Company issued 363,300 shares of common stock to 2
investors for exercise of their warrants at an exercise price of $1.43 per
share. The transactions were private placements and exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
During the quarter, the Company extended interest bearing loans to one of
its executive officers and one of its managing directors totaling $7,979,688
with which they purchased a total of 475,000 shares of common stock. The shares
were registered under the Company's Stock Incentive Plan, as amended.
ITEM 3--DEFAULT UPON SENIOR SECURITIES
None
14
<PAGE>
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on January 27, 2000.
Following are descriptions of the matters voted on and the results of such
meeting:
1. To consider and vote on a proposal to approve the Agreement and Plan of
Merger, dated as of October 31, 1999, by and among Wit Capital
Group, Inc., W/S Merger Corp. and SoundView Technology Group, Inc.
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
---------- --------- -----------
<S> <C> <C> <C>
Votes...................................... 42,397,714 65,146 103,417
</TABLE>
2. To consider and vote on a proposal to approve an amendment to the 1999
Stock Incentive Plan to increase the number of shares reserved for
issuance under the Stock Incentive Plan to 27,350,000 shares.
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
---------- --------- -----------
<S> <C> <C> <C>
Votes...................................... 41,419,475 1,097,118 49,684
</TABLE>
3. To consider and vote on a proposal to approve an amendment to the 1999
Stock Incentive Plan to limit the maximum number of options and other
awards which may be granted to an employee in any fiscal year to ensure
compliance with Section 162(m) under the Internal Revenue Code.
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
---------- --------- -----------
<S> <C> <C> <C>
Votes...................................... 48,784,972 92,140 44,473
</TABLE>
ITEM 5--OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
The Company has included in this Form 10-Q filing, and from time to time its
management may make, statements which may constitute forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are not
historical facts but instead represent only the Company's beliefs regarding
future events, many of which, by their nature, are inherently uncertain and
outside of the Company's or its management's control. It is possible that its
actual results may differ, possibly materially, from the anticipated results
indicated in these forward-looking statements. Important factors that could
cause actual results to differ from those in the Company's specific
forward-looking statements include:
- a decline in general economic conditions or the United States securities
markets;
- the inability to secure share allotments in underwritten offerings in
which the Company participates sufficient to satisfy its customers' demand
and generate revenue;
- the inability to ensure sufficient revenue to cover its costs and create
profits;
- increasing competitive pressures; and
Additional information regarding these and other important factors that
could cause actual results to differ from those in the Company's forward-looking
statements is contained under the section entitled "Risk Factors" in the
Company's Registration Statement on Form S-1 (File No. 333-74619), as filed with
the SEC in connection with the Company's initial public offering of common stock
and in the Company's Registration Statement on Form S-4 (No. 333-92887) as filed
with the SEC in connection with the company's merger with SoundView Technology
Group, Inc. The Company hereby incorporates by reference those risk factors
(other than those contained under the headings "Our common stock has never been
15
<PAGE>
publicly traded so we cannot predict the extent to which a market will develop
for our common stock or how volatile that market will be" and "This offering
will cause immediate dilution") into this Form 10-Q.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1--Financial Data Schedule
(b) Reports on Form 8-K:
On February 1, 2000, the Company filed a current report on Form 8-K
regarding the completion of the acquisition of SoundView Technology Group, Inc.
("SoundView") on January 31, 2000 pursuant to the terms of an Agreement and Plan
of Merger, dated as of October 31, 1999, by and among Wit Capital Group, Inc.,
SoundView and W/S Merger Corp., a wholly owned subsidiary of Wit Capital
Group, Inc.
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.
<TABLE>
<S> <C> <C>
Dated: May 15, 2000 Wit Capital Group, Inc.
By: /s/ RONALD READMOND
-----------------------------------------
Ronald Readmond
VICE CHAIRMAN, PRESIDENT AND
CO-CHIEF EXECUTIVE OFFICER
By: /s/ CURTIS L. SNYDER
-----------------------------------------
Curtis L. Snyder
CHIEF FINANCIAL OFFICER
</TABLE>
16
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<PERIOD-START> JAN-01-2000
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