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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 24, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number 0-22265
GBI CAPITAL MANAGEMENT CORP.
---------------------------------------------------
(Name of Exact Registrant as Specified in Its Charter)
Florida 65-0701248
- ------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1055 Stewart Avenue, Bethpage, New York 11714
- ---------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 470-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share
Indicated by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicated by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 16, 1999, the aggregate market value of the Registrant's
Common Stock (based on the reported last sale price on the NASD OTC Bulletin
Board) held by non-affiliates of the registrant was $19,470,627.75.
As of November 16, 1999, 18,806,612 shares of issuer's Common Stock
were outstanding.
The information required in Part III by Items 10, 11, 12 and 13 is
incorporated by reference to Registrant's proxy statement in connection with its
next Annual Meeting of Stockholders, which will be filed by the Registrant
within 120 days after the close of its fiscal year.
GBI CAPITAL MANAGEMENT CORP.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
SECTION PAGE NO.
PART I
Item 1. Business
Item 2. Properties
Item 3 Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
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PART I
ITEM 1. BUSINESS.
General
We are a holding company engaged in the retail and institutional
securities brokerage business and provide investment banking and research
services through Gaines, Berland Inc., our primary operating subsidiary. Gaines
Berland is registered as a broker-dealer with the Securities and Exchange
Commission and is a member firm of the National Association of Securities
Dealers, Inc. and the Securities Investor Protection Corporation. Gaines
Berland's business activities consist primarily of retail sales and trading of
exchange listed and over-the- counter equity securities, options and mutual
funds, as well as investment banking and research services. At September 30,
1999, the Company had approximately 296 registered representatives and
maintained approximately 41,000 retail and institutional accounts. Gaines
Berland is currently licensed to conduct activities as a broker-dealer in all 50
states, the District of Columbia and the Commonwealth of Puerto Rico, and
operates primarily from its headquarters in Bethpage, New York. Gaines Berland
also maintains branch offices in California, New York City and Florida.
We were incorporated under the laws of the State of Florida on February
5, 1996. Gaines Berland was incorporated under the laws of the State of New York
in August 1983. Gaines Berland became our wholly-owned subsidiary on August 24,
1999 pursuant to a merger with FHGB Acquisition Corporation, our wholly-owned
subsidiary, with Gaines Berland surviving the merger. All references to the
Company, unless the context requires otherwise, refer to the Company and Gaines
Berland.
Sources of Revenue
The following table indicates the dollar amount and the percentage of
total revenues we derived from our sources of revenues for the last three fiscal
years (the fiscal years ended August 24, 1999, August 31, 1998 and August 31,
1997). Revenues from agency transactions in securities for customers are shown
as commissions. Principal transactions include profits from market making and
other trading activities, as well as revenues from transactions in securities
for customers where we acted in a principal capacity. Investment banking
revenues consist of commissions, selling commissions, consulting fees and
income from underwriting participation activities and placement agent fees.
"Other Income" consists primarily of rental income and dividends.
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
Commissions and
trading income $54,625,000 95.9% $ 52,025,000 89.8% $58,072,000 93.1%
Underwriting fees and
investment banking $ 1,387,000 2.4% $ 4,795,000 8.3% $ 3,281,000 5.3%
Interest and dividends
and other income $ 971,000 1.7% $ 1,074,000 1.9% $ 1,002,000 1.6%
------------- ---- ------------ ---- ------------ ----
Total Revenues $56,983,000 100% $ 57,894,000 100% $62,355,000 100%
Retail Business
Most of our revenues in the last several years are generated from our
retail business. We charge commissions to our individual and institutional
clients for executing buy and sell orders of securities on national and regional
exchanges and in the over-the-counter market. When we receive a buy or sell
order for a security in which we make a market, we may act as a principal and
purchase from, or sell to, our customers the security on a disclosed basis at a
price set in accordance with applicable securities regulations.
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We act as both principal and agent in the execution of our customers'
orders in the over-the-counter market. We buy, sell and maintain an inventory of
various securities in order to "make a market" in those securities. In executing
customer orders for over-the-counter securities in which we do not make a
market, we charge a commission and act as agent between our customers and an
unaffiliated market-maker. However, when the buy or sell order is in a security
in which we make a market, we may act as principal and purchase securities from
or sell securities to our customers, which includes the permissible mark-up or
mark-down from the current market price, in accordance with applicable
securities regulations.
Trading profits or losses depend upon the skills of the employees
engaged in market making activities, the capital allocated to positions in
securities and the general trends of prices in the securities markets. Trading
as principal requires the commitment of capital and creates an opportunity for
profits and risk of loss due to market fluctuations. We may take both long
(ownership) and short (borrowing shares to effect sales of such shares)
positions in those securities in which we make a market. As of September 30,
1999, we made markets in approximately 230 securities.
Investment Banking Activities
Our investment banking revenues are principally derived from managing
or co-managing public offerings of equity securities and from fees for providing
investment banking and corporate finance consulting services. In the corporate
finance area, we have been active as an underwriter or selling group member in
over 150 public equity transactions since 1994. Participation as a managing
underwriter or in an underwriting syndicate involves both economic and
regulatory risks. An underwriter may incur losses if it is unable to resell the
securities it is committed to purchase. In addition, under the federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to such offerings. Acting as a managing underwriter increases these
risks. Underwriting commitments constitute a charge against net capital and our
ability to make underwriting commitments may be limited by the requirement that
we must at all times be in compliance with regulations regarding our net
capital.
Investment Activities
We also seek to realize investment gains by purchasing, selling and
holding securities for our own account on a daily basis. We trade as principal
in domestic equity and equity-related securities both on exchanges and in the
over-the-counter market. We also engage for our own account in the arbitrage of
securities. Our arbitrage activities involve purchasing securities at discounts
from the value that we believe will be realized upon a later sale of those
securities. We are required to commit the capital necessary for use in these
investment activities. The amount of capital committed at any particular time
will vary according to market, economic and financial factors, including the
other aspects of our business. Additionally, in connection with our investment
banking activities, we also receive warrants that entitle us to purchase
securities of the corporate issuers for which we raise capital or provide
advisory services.
Research Services
Our research activities, which historically were focused primarily on
the energy industry, now also include the review and analysis of general market
conditions and other industry groups; the issuance of in-depth written reports
of companies, with recommendations on specific actions to buy, sell or hold; the
furnishing of information to retail and institutional customers; and responses
to inquiries from customers and account executives. Gaines Berland also utilizes
the services of Bear Stearns to provide research and analysts' reports.
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Wholesale Trading Activities
We have obtained regulatory approval to launch our proposed wholesale
trading operations. We intend to hire traders who will make markets
in a number of securities and who will also execute trades for
institutional and high net worth investors. These trading operations will be
based in our Ft. Lauderdale, Florida office.
Money Management Strategy
We recently expanded our operations to include money management
services by establishing a private investment fund, GBI 1500 Focus Fund, L.P.
Our wholly-owned subsidiary, GBI Fund Management Corp., is the general partner
of this fund.
Internet Strategy
We are currently exploring expanding our operations through the use of
the Internet, including offering to customers online brokerage services and
research as well as conducting public offerings of securities over the Internet.
Administration, Operations, Securities Transactions Processing and Customer
Accounts
We do not hold any funds or securities for our customers. Instead, we
use the services of Bear Stearns Securities Corp. as our clearing agent on a
fully disclosed basis. Bear Stearns processes all securities transactions and
maintains customer accounts on a fee basis. Customer accounts are protected
through the SIPC for up to $500,000, of which coverage for cash balances is
limited to $100,000. In addition, all customer accounts are fully protected by
an Excess Securities Bond issued by the Travelers Casualty & Surety Company
providing protection for the account's entire net equity (both cash and
securities). The services of Bear Stearns include billing, credit control, and
receipt, custody and delivery of securities. Bear Stearns provides operational
support necessary to process, record, and maintain securities transactions for
our brokerage activities. Bear Stearns provides these services to our customers
at a total cost which is less than it would cost us to process such transactions
on our own. Bear Stearns also lends funds to our customers through the use of
margin credit. These loans are made to our customers on a secured basis, with
Bear Stearns maintaining collateral in the form of saleable securities, cash or
cash equivalents. Under the terms of the clearing agreement, we indemnify Bear
Stearns for any loss on these credit arrangements.
Competition
We encounter intense competition in all aspects of our business and
compete directly with many other securities firms for clients, as well as
registered representatives. A significant number of our competitors offer their
customers a broader range of financial services and have substantially greater
resources than Gaines Berland. National retail firms such as Merrill Lynch
Pierce Fenner & Smith Incorporated, Salomon Smith Barney, Inc. and Morgan
Stanley/Dean Witter dominate the industry. We also compete with numerous
regional and local firms. In addition, a number of firms offer discount
brokerage services to retail customers and generally effect transactions at
substantially lower commission rates on an "execution only" basis, without
offering other services such as investment recommendations and research.
Moreover, there is substantial commission discounting by full-service
broker-dealers competing for institutional and retail brokerage business. The
recent emergence of online trading has further intensified the competition for
brokerage customers. We currently do not offer any online trading services to
our customers. The continued expansion of discount brokerage firms and online
trading could adversely effect our retail business. Other financial
institutions, notably commercial banks and savings and loan associations, offer
customers some of the same services and products presently provided by
securities firms. While it is not possible to predict the type and extent of
5
competing services which banks and other institutions ultimately may offer to
customers, we may be adversely affected to the extent those services are offered
on a large scale basis. We try to compete through our advertising and recruiting
programs for registered representatives interested in joining us.
Government Regulation
The securities industry is subject to extensive and constantly evolving
federal and state regulations promulgated by the SEC and various state agencies,
as well as self-regulatory organizations such as NASD Regulation, Inc., the
regulatory arm of the NASD. The principal purpose of such regulations is the
protection of customers and the securities markets. The SEC is the federal
agency charged with the administration of the federal securities laws. Much of
the regulation of broker-dealers, however, has been delegated to self-regulatory
organizations, principally the NASD Regulation and the national securities
exchanges. These self-regulatory organizations adopt rules (subject to approval
by the SEC) which govern the industry and conduct periodic examinations of
member broker-dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. Gaines
Berland is registered with, and subject to the state securities commissions in
50 states, the District of Columbia and the Commonwealth of Puerto Rico.
The regulations to which broker-dealers are subject cover all aspects
of the securities industry, including sales methods, trading practices among
broker-dealers, capital structure of securities firms, record keeping and the
conduct of directors, officers, employees and registered representatives.
Additional legislation, changes in rules promulgated by the SEC and by
self-regulatory bodies or changes in the interpretation or enforcement of
existing laws and rules often directly affect the method of operation and
profitability of broker-dealers. The SEC and the self-regulatory bodies may
conduct administrative proceedings which can result in censure, fine, suspension
or expulsion of a broker-dealer, its officers, employees or registered
representatives.
Net Capital Requirements
As a registered broker-dealer and member of the NASD, Gaines Berland is
subject to the SEC's net capital rule, which is designed to measure the general
financial integrity and liquidity of a broker-dealer. Net capital is defined as
the net worth of a broker-dealer subject to certain adjustments. In computing
net capital, various adjustments to net worth are made with a view to excluding
assets which are not readily convertible into cash and making a conservative
valuation of other assets, such as firm's position in securities. Gaines Berland
computes its minimum net capital requirement based on the "aggregate
indebtedness method," which stipulates minimum net capital to be the greater of
$100,000 or 6-2/3% of aggregate indebtedness or an amount determined based upon
the market price and number of securities in which Gaines Berland is a market-
maker, not to exceed $1,000,000. Aggregate indebtedness is the total of certain
liabilities of a broker-dealer arising from or in connection with any
transaction whatsoever, and includes, among other things, money borrowed, money
payable against securities loaned and securities "failed to receive," the market
value of securities borrowed to the extent to which no equivalent value is paid
or credited. For broker-dealers using this method, the net capital rule requires
that the ratio of aggregate indebtedness to net capital not exceed 15 to 1, and
imposes restrictions on operations as described below. Compliance with the net
capital rule limits those operations of securities firms which require the
intensive use of their capital, such as underwriting commitments and principal
trading activities, and limits the ability of securities firms to pay dividends
or make payments on certain indebtedness, including subordinated debt, as it
matures.
In addition to the above requirements, funds invested as equity capital
may not be withdrawn, nor may any unsecured advances or loans be made to any
stockholder of a registered broker-dealer, if, after giving effect to such
withdrawal, advance or loan and to any other such withdrawal, advance or loan as
well as to any scheduled payments of subordinated debt which are scheduled to
occur within six months, the net capital of the broker-dealer would fall below
120% of the minimum dollar amount of net capital required or the ratio of
aggregate indebtedness to net capital would exceed 10 to 1. Further, any funds
invested in the form of subordinated debt generally must be invested for a
minimum term of one year and repayment of such debt may be suspended if the
broker-dealer fails to maintain certain minimum net capital levels. For example,
scheduled payments of subordinated debt are suspended in the event that
6
the ratio of aggregate indebtedness to net capital of the broker-dealer would
exceed 12 to 1 or its net capital would be less than 120% of the minimum dollar
amount of net capital required.
At August 24, 1999, Gaines Berland had net capital of $2,773,730 which
exceeded its minimum net capital requirements of $562,500 by $2,211,230, and its
ratio of aggregate indebtedness to net capital was 1.86 to 1. Failure to
maintain the required net capital may subject a firm to suspension or expulsion
by the NASD, the SEC and other regulatory bodies and ultimately may require its
liquidation. The net capital rule also prohibits payments of dividends,
redemption of stock and the prepayment, or payment in respect of principal or
subordinated indebtedness if net capital, after giving effect to the payment,
redemption or repayment, would be less than the specified percent (120%) of the
minimum net capital requirement. Compliance with the net capital rule could
limit those operations of Gaines Berland that require the intensive use of
capital, such as underwriting and trading activities, and also could restrict
our ability to withdraw capital from our operating subsidiaries, which in turn
could limit our ability to pay dividends, repay debt and redeem or purchase
shares of its outstanding capital stock.
Personnel
As of September 30, 1999, we employed approximately 500 full-time
employees, including 296 registered representatives. None of our personnel is
covered by a collective bargaining agreement. We consider our relationship with
our employees to be good.
ITEM 2. PROPERTIES.
The principal executive offices of the Company and Gaines Berland are
located at 1055 Stewart Avenue, Bethpage, New York, 11714, where the Company
leases approximately 92,400 square feet of office space at a base rent of
$1,706,232 per year with certain annual escalation clauses. The initial term of
the lease expires in May 2007. The Company also operates the following branch
offices:
Approximate
Approximate Annual
Office Location Square Footage Lease Rental Expiration
- --------------- -------------- ------------ ----------
22 Cortlandt Street 27,000 $627,450 March 31, 2010
New York, New York
2149 East Commercial Blvd. 2,470 $43,200 May 31, 2001
Ft. Lauderdale, Florida
2449 Chestnut Street 250 $12,000 month-to-month
San Francisco, California
ITEM 3. LEGAL PROCEEDINGS.
In January 1999, Gaines Berland was named as a defendant in a class
action lawsuit commenced in the United States District Court for the Southern
District of Texas relating to a secondary public offering of Mitcham Industries,
Inc. for which it served as an underwriter with Jefferies & Company, Inc. and
Rauscher Pierce Refsnes, Inc. (the "Moskowitz Class Action"). That offering
involved the sale of approximately $35,000,000 in securities, although the
amount of damages claimed is undeterminable at this time. Gaines Berland, along
with the other underwriters, is entitled to be indemnified by Mitcham pursuant
to the underwriting agreement executed in connection with that offering, subject
to certain qualifications, reservations and limitations as provided in that
underwriting agreement. On September 28, 1999, the underwriter defendants'
(including Gaines Berland) motion to dismiss this lawsuit against them was
granted by the Court.
7
In April, 1999, Alan Gaines, a former officer and principal shareholder
of Gaines Berland, filed an arbitration claim with the NASD against Gaines
Berland and several of its former principal shareholders arising from the
termination of the business relationship between Mr. Gaines and Gaines Berland.
Mr. Gaines sought in excess of $2.5 million in damages. On October 20, 1999,
this matter was settled and Gaines Berland agreed to pay Mr. Gaines $433,017
(including $243,017 which was not in dispute).
In addition to the foregoing, Gaines Berland has been, and continues to
be the subject of numerous civil actions and arbitrations arising out of
customer complaints relating to its activities as a broker-dealer in
securities, as an employer and as a result of other business activities. In
general, the cases involve various allegations that employees of Gaines Berland
had mishandled customer accounts. At October 31, 1999, we estimate that the
total amount sought from Gaines Berland in pending and threatened claims is
approximately $11,200,000. It is our opinion, based upon our historical
experience and the reserves established by us, that the resolution of all claims
presently pending will not have a material adverse effect on the consolidated
financial condition of our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 23, 1999, we held a special meeting of stockholders to
consider the proposed merger among the Company (f/k/a Frost Hanna Capital Group,
Inc.), FHGB Acquisition Corporation, a wholly-owned subsidiary of the Company,
and Gaines Berland, pursuant to which FHGB would merge into Gaines Berland with
Gaines Berland surviving the merger and becoming a wholly-owned subsidiary of
the Company. In consideration of the merger, Gaines Berland's shares of common
stock would be canceled and extinguished and automatically converted into the
right to receive 21,917 shares of the Company's common stock. The shareholders
voted to approve the merger, with 1,752,081 shares voting for the merger and
15,000 shares voting against the merger.
We also proposed to change our name to GBI Capital Management Corp. The
stockholders voted to change our name, with 1,752,081 shares voting for the name
change, 15,000 shares voting against the name change, and 200 shares abstaining
from the vote.
We also proposed to amend our Articles of Incorporation to provide
authorization for 2,000,000 shares of an authorized class of preferred stock
which would vest the Board of Directors with the authority to determine the
designations, preferences and limitations of the preferred stock. The
stockholders voted to approve the amendment with 1,694,681 shares voting for,
72,200 shares voting against, and 400 shares abstaining from the vote.
In connection with the merger, a new slate of directors was proposed
for election. The following people were elected to the Board of Directors:
Name Shares Voted For Shares Withheld
- ---- ---------------- ---------------
Joseph Berland 1,753,561 5,400
Richard J. Rosenstock 1,753,561 5,400
Mark Zeitchick 1,753,561 5,400
Vincent Mangone 1,753,561 5,400
Steven A. Rosen 1,753,561 5,400
Benjamin D. Pelton 1,753,561 5,400
We also proposed the approval of the 1999 Performance Equity Plan. The
stockholders voted to approve this plan with 1,681,181 shares voting for, 62,200
shares voting against, and 12,900 shares abstaining from the vote.
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We also proposed the approval of the Annual Incentive Bonus Plan. The
stockholders voted to approve this plan with 1,681,181 shares voting for, 62,600
shares voting against, and 12,500 shares abstaining from the vote.
We also proposed the approval of the Special Performance Incentive
Plan. The stockholders voted to approve this plan with 1,680,181 shares voting
for, 62,600 shares voting against, and 13,500 shares abstaining from the vote.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to the completion of our initial public offering on October 16,
1997, there was no established public trading market for the Company's Common
Stock. The Company's Common Stock became eligible for quotation on the NASD OTC
Bulletin Board in the final week of October 1997 under the symbol FHAN. On
August 24, 1999, we changed our name to GBI Capital Management Corp. and on
August 25, the Common Stock began quotation under the symbol GBIC. The following
table sets forth the high and low bid prices for the Common Stock as reported by
the NASD for the periods indicated. The prices represent inter-dealer
quotations, which do not include retail markups, markdowns or commissions and
may not necessarily represent actual transactions.
Period High($) Low($)
Fiscal 1999
Fourth Quarter 5.0 3.25
(6/99-8/99)
Third Quarter 5.25 2.375
(3/99-5/99)
Second Quarter 3.0 2.125
(12/98-2/99)
First Quarter 3.125 1.125
(9/98-11/98)
Fiscal 1998
Fourth Quarter 4.5 1.25
(6/98-8/98)
Third Quarter 5.5 4.5
(3/98-5/98)
Second Quarter 5.625 5.125
(12/97-2/98)
First Quarter [No quotes available]
(9/97-11/97)
Holders
On November 15, 1999, there were 78 holders of record of our common
stock. We believe there are over 500 beneficial owners of our common stock.
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Dividends
To date, we have not paid or declared any dividends on our common
stock. The payment of future dividends, if any, will be at the discretion of the
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current anticipated cash needs
as well as any other factors that the Board of Directors may deem relevant. Our
ability to pay dividends in the future also may be restricted by Gaines
Berland's obligations to comply with the net capital requirements imposed on
broker-dealers by the SEC and the NASD. We do not intend to declare any
dividends in the foreseeable future, but instead intend on retaining all
earnings for use in our business.
Recent Sales of Unregistered Securities
Consideration
Received and
Description of
Underwriting or
Other Discounts Exemption If Option, Warrant or
to Market Price from Convertible Security
Date of Title of Afforded to Registration Terms of Exercise or
Sale Security Number Sold Purchasers Claimed Conversion
-------- ------------ ----------- --------------- ------------- ----------------------
8/24/99 Common Stock 15,999,410 In consideration of 4(2) N/A
the merger
8/24/99 Common Stock 150,000 Consulting 4(2) N/A
services provided
in connection with
the merger
8/24/99 Options to 300,000 Options granted 4(2) Exercisable after vesting
Purchase under for ten years from date of
Common Stock Employment grant at an exercise price
Agreements; no of $4.0625 per share,
cash vesting in five annual
consideration installments commencing
received by on date of grant.
Company until
exercise
8/24/99 Options to 200,000 Options granted 4(2) Exercisable after vesting
Purchase under for five years from date of
Common Stock Employment grant at an exercise price
Agreements; no of $4.46875 per share,
cash vesting in five annual
consideration installments commencing
received by on date of grant.
Company until
exercise
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from the
Company's audited financial statements. This selected financial data should be
read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K:
Fiscal Period
Ended August 24 Fiscal Year Ended August 31
--------------- ---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands except share,
per share and Other Data)
Income Statement Data:
Total revenues $ 56,983 $ 57,895 $ 62,355 $ 39,944 $ 22,921
Total expenses 57,420 57,108 54,879 38,896 22,684
Pre-tax (loss) income (437) 787 7,476 1,048 227
Net (loss) income (324) 352 4,178 448 13
Basic and diluted earnings
per common share (.02) .03 .38 .05 .00
Weighted average shares
outstanding - basic and diluted 16,473,748 11,421,819 10,870,832 9,950,308 9,336,642
Balance Sheet Data:
Total assets $ 17,133 $ 16,645 $ 20,700 $ 6,276 $ 5,550
Total liabilities (excluding
subordinated debt) 9,067 10,266 13,986 4,051 3,788
Subordinated debt -- 1,000 1,000 1,000 1,000
Stockholders' equity 8,066 5,379 5,714 1,225 762
Other Data:
Ratio of assets to
stockholders equity 2.12 3.09 3.62 5.12 7.28
Return on average equity (4.8%) 6.4% 120.4% 45.1% 17.1%
Pre-tax return on average equity
(6.5%) 14.2% 215.5% 105.5 29.8%
Book value per share $ .50 $ .31 $ .49 $ .12 $ .08
Registered representatives 296 233 270 114
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with the
Commission, the words or phrases "will likely result," "management expects" or
"the Company expects," "will continue," "is anticipated," "estimated" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. These risks and uncertainties include those set forth in the
Company's definitive Proxy Statement relating to a special meeting of
stockholders held on August 23, 1999. The Company has no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
Overview
The following discussion and analysis should be read in conjunction with
the our consolidated financial statements. The discussion of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
We are engaged in the securities brokerage and trading business and provide
investment banking and research services. Primarily revenues are generated by
retail sales and trading of listed and OTC equity securities, options and mutual
funds, investment banking and research services. We earn commissions from the
buying and selling of equity securities on an agency basis. As a principal, we
buy and sell securities, both for proprietary trading and to facilitate sales to
our retail customers and other dealers. These securities are purchased in
secondary markets or from the underwriters of new issues. Principal transactions
with customers are effected at a net price equal to the current inter-dealer
price plus or minus a mark-up or mark-down within the guidelines of applicable
securities regulations. The revenues derived from our transactions as principal
reflect realized and unrealized gains and losses on such transactions.
Results of Operations
For the Period September 1, 1998 to August 24, 1999 vs. Year Ended August 31,
1998
Commissions and trading income for the period from September 1, 1998 to
August 24, 1999 increased 5% to $54,625,262, from the year ended August 31,
1998.
This increase is a result of the addition of registered representatives and an
active market in equity securities.
Interest and dividend income, net for the period from September 1, 1998 to
August 24, 1999 decreased slightly, .5%, to $922,376 from the year ended August
31, 1998.
Underwriting fees and investment banking for the period from September 1,
1998 to August 24, 1999 decreased by 71.1%, to $1,386,588, from the year ended
August 31, 1998. The decrease is the result of our not participating in any
underwritten public offerings where we acted as a manager or co-manager during
the 1999 period, while we participated in four public offerings for our
investment banking clients, raising approximately $141 million, in fiscal 1998.
Other revenues for the period from September 1, 1998 to August 24, 1999
decreased by 66.7%, to $49,007, from the year ended August 31, 1998. The
decrease is the result of the decrease in consulting activities from which we
derive fees.
Employee compensation and benefits for the period from September 1, 1998 to
August 24, 1999 decreased 3.8%, to $39,018,835, from the year ended August 31,
1998. The decrease is due primarily to the elimination of investment banking
personnel and the reduction in bonuses due to our decreased profitability.
12
Brokerage, clearance and exchange fees for the period from September 1,
1998 to August 24, 1999 increased 13.8%, to $2,678,741, from the year ended
August 31, 1998 as a result of higher ticket volume.
Communications expense for the period from September 1, 1998 to August 24,
1999 increased 1.1%, to $2,534,013, from the year ended August 31, 1998. This
increase is a result of the establishment and operations of an additional branch
office.
Occupancy and equipment costs for the period from September 1, 1998 to
August 24, 1999 increased 6.2%, to $5,113,830, from the year ended August 31,
1998. This increase is a result of the establishment of an additional branch
office in Florida and the relocation to a larger facility in New York City.
Professional fees for the period from September 1, 1998 to August 24, 1999
increased 157.2%, to $2,119,803, from the year ended August 31, 1998. This
increase is primarily a result of costs associated with expanding our business,
complying with regulatory requirements and litigation expenses.
Business development costs for the period from September 1, 1998 to August
24, 1999 decreased 17.7%, to $1,534,638, from the year ended August 31, 1998.
This decrease is primarily the result of decreased promotional expenses.
Other expenses for the period from September 1, 1998 to August 24, 1999
increased 5.7%, to $4,420,419, from the year ended August 31, 1998. This
increase is the result of an increase in reserve for potential litigation.
Income tax benefit for the period from September 1, 1998 to August 24, 1999
was $112,470 as compared to the income tax provision of $435,177 for the year
ended August 31, 1998, which was consistent with the decrease in income before
this income tax provision.
Net loss of $324,576 for the period from September 1, 1998 to August 24,
1999 compares to net income of $352,270 for the year ended August 31, 1998. This
resulted primarily from the decrease in revenues and the increases in expenses
as discussed above.
Year Ended August 31, 1998 vs. Year Ended August 31, 1997
Commissions and trading income for the year ended August 31, 1998 decreased
10.4% to $52,025,409 from the year ended August 31, 1997. The decrease is
primarily attributable to an appreciation of $4,800,000 in underwriters'
purchase options in fiscal 1997, which did not exist in 1998, and the decrease
in registered representatives employed by us in fiscal 1998 as compared to
fiscal 1997.
Interest and dividend income, net for the year ended August 31, 1998
increased 19%, to $927,356 from the year ended August 31, 1997. The increase is
primarily attributable to our maintaining higher cash balances with their
clearing broker in 1998.
Underwriting fees and investment banking for the year ended August 31, 1998
increased by 46%, to $4,795,185, from the year ended August 31, 1997. The
increase is the result of our participating in four public offerings where we
acted as a manager or co-manager, raising approximately $141,000,000 for our
13
investment banking clients during the 1998 period. In 1997 we participated in
three public offerings, and raised approximately $36,000,000, for our investment
banking clients.
Other revenues for the year ended August 31, 1998 decreased by 34.1%, to
$147,010, from the year ended August 31, 1997. The decrease is the result of the
decrease in consulting activities from which we derive fees.
Employee compensation and benefits for the year ended August 31, 1998
decreased .5%, to $40,561,426 from the year ended August 31, 1997. Since
employee compensation to our traders and registered representatives is directly
related to revenue, a portion of employee compensation follows the change in our
revenues. The decrease in employee compensation is not directly proportionate
with the decrease in revenues because a portion of the revenue decrease is
related to a reduction in value of our investment account, which has no
relationship to employee compensation.
Brokerage, clearance and exchange fees for the year ended August 31, 1998
increased 3%, to $2,354,440, from the year ended August 31, 1997 as a result of
higher ticket volume.
Communications expense for the year ended August 31, 1998 increased 9.1%,
to $2,505,735, from the year ended August 31, 1997. This increase is a result of
additional personnel in the institutional trading, investment banking and
research departments.
Occupancy and equipment costs for the year ended August 31, 1998 increased
21.4%, to $4,814,782, from the year ended August 31, 1997. This increase is a
result of the relocation to a larger facility in April 1997.
Professional fees for the year ended August 31, 1998 decreased 30.5%, to
$824,101, from the year ended August 31, 1997. This decrease was a result of the
employment of in-house counsel, which reduced the need for outside legal
services.
Business development costs for the year ended August 31, 1998 decreased
15.9%, to $1,864,315, from the year ended August 31, 1997. This decrease is
primarily the result of decreased promotional expenses.
Other expenses for the year ended August 31, 1998 increased 94.8%, to
$4,182,714, from the year ended August 31, 1997. This increase is the result of
an increase in reserve for potential litigation.
Income tax provision for the year ended August 31, 1998 was $435,177 as
compared to the income tax provision of $3,298,256 for the year ended August 31,
1997, which was consistent with the decrease in income before this income tax
provision.
Net income of $352,270 for the year ended August 31, 1998 compares to net
income of $4,177,944 for the year ended August 31, 1997. This resulted primarily
from the decrease in revenues and increases in expenses as discussed above.
Liquidity and Capital Resources
Approximately 73% of our assets at August 24, 1999 were highly liquid,
consisting primarily of cash and cash equivalents, securities inventories, and
receivables from other broker-dealers, all of which fluctuate, depending upon
the levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from our clearing broker, turn over rapidly.
As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. Our inventory of market-making securities is
readily marketable; however, holding large blocks of the same security may limit
liquidity and prevent realization of full market value for the securities. A
14
relatively small percentage of our total assets are fixed. The total assets or
the individual components of total assets may vary significantly from period to
period because of changes relating to customer demand, economic and market
conditions, and proprietary trading strategies.
The Company's brokerage subsidiary, Gaines Berland, is subject to net
capital rules of the NASD and the SEC. Therefore, it is subject to certain
restrictions on the use of capital and its related liquidity. Gaines Berland's
net capital position as of August 31,1999 and August 24, 1998 was, $2,773,730,
and $1,807,781 respectively, which was $2,211,230 and $1,315,778 respectively,
in excess of its net capital requirements.
Our overall capital and funding needs are continually reviewed to ensure
that its capital base can support the estimated needs of its business units.
These reviews take into account business needs as well as regulatory capital
requirements of the subsidiary. Based upon these reviews, management believes
that our capital structure is adequate for current operations and reasonably
foreseeable future needs.
As guarantor of our customer accounts to our clearing broker, we are
exposed to off-balance-sheet risks in the event that its customers do not
fulfill their obligations with the clearing broker. In addition, to the extent
we maintain a short position in certain securities, it is exposed to a further
off-balance-sheet market risk, since our ultimate obligation may exceed the
amount recognized in the financial statements.
Year 2000
We have instituted a firm wide program to address the year 2000 issue in
order to prepare our computer systems and applications for properly processing
dates after December 31, 1999.
Third party vendors and service providers provide all of our computer
programs. Most of the programs were purchased after the Year 2000 issue became
widely recognized. We have sought and received confirmation from our third-party
program and service providers that the Year 2000 issue has been appropriately
managed. Bear Stearns, Gaines Berland's clearing firm, is our largest and most
important computer service related vendor. Bear Stearns has installed a new
system to appropriately manage the Year 2000 issue for Gaines Berland. In
addition, Bear Stearns has provided confirmation to Gaines Berland of its
compliance with the Year 2000 issue and we have performed point to point testing
with Bear Stearns to get further comfort of their compliance with the year 2000
issue.
We have also assessed our state of readiness regarding non-information
technology systems for compliance with the Year 2000 issue. None of such systems
are critical to the operation of the Company's business. Two such systems have
been identified which require remediation, which has been completed. Based on
information currently available, we do not expect our Year 2000 expenditures for
computer systems and non-information technology systems, in the aggregate, for
fiscal 2000 to exceed $50,000. The expected costs of the Year 2000 program are
based on management's current estimates, however, actual results could differ
materially from those plans.
The Year 2000 issue creates risk for us from unforeseen problems in our own
computer systems, third party vendors, and service provides, and from third
parties with whom we deal. We are continuing to communicate with our vendors and
service providers to determine the likely extent to which they may be affected
by third parties' Year 2000 plans and target dates. In this regard, while we do
not now expect material financial exposure as a result of the year 2000 problem,
there can be no assurance that the systems of other entities on which we rely
will be remedied on a timely basis, or that a failure to remedy by another
party, would not have a material adverse effect on us. Such failures could have
a material impact on our ability to conduct business. In particular, we do not
have a contingency plan in place in the event Bear Stearns is unable to provide
15
clearing services or if general utility or telecommunications services fail as a
result of the Year 2000 issue. In either of such events, we would be unable to
conduct our business until the problem was remedied. Any such suspension of our
business, if for more than a very brief period of time, would materially
adversely affect us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market making, investing and underwriting activities often involve
the purchase, sale or short sale of securities as principal. Such activities
subject our capital to significant risks from markets that may be characterized
by relative illiquidity or may be particularly susceptible to rapid fluctuation
in liquidity. Such market conditions could limit our ability to resell
securities purchased or to purchase securities sold short. These activities
subject our capital to significant risks, including market, credit counterparty
and liquidity risks. Market risk relates to the risk of fluctuating values based
on market prices without action on our part. Our primary credit risk is
settlement or counterparty risk, which relates to whether a counterparty will
fulfill its contractual obligations, such as delivery of securities or payment
of funds. Liquidity risk relates to our inability to liquidate assets or
redirect the deployment of assets contained in illiquid investments. In
addition, our market and liquidity risks and risks associated with asset
revaluation are increased because these risks for us are concentrated.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Report of Goldstein Golub Kessler LLP on the Consolidated
Financial Statements as of August 24, 1999 and
August 31, 1998 and for the period September 1, 1998 to
August 24, 1999 and for the year ended August 31, 1998............ 18
Report of Lerner & Sipkin, CPAs, LLP on the Consolidated
Financial Statements as of August 31, 1997 and for the
year then ended................................................... 19
Consolidated Statements of Financial Condition as of
August 24, 1999 and August 31, 1998............................... 20
Consolidated Statements of Operations for the period from
September 1, 1998 to August 24,1999 and the years ended
August 31, 1998 and 1997.......................................... 21
Consolidated Statements of Changes in Stockholders' Equity for
the period from September 1, 1998 to August 24, 1999 and the
years ended August 31, 1998 and 1997.............................. 22
Consolidated Statements of Cash Flows for the period from
September 1, 1998 to August 24, 1999 and the years
August 31, 1998 and 1997.......................................... 23
Notes to the Consolidated Financial Statements..................... 24-29
17
GOLDSTEIN GOLUB KESSLER LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
GBI Capital Management Corp.
We have audited the accompanying consolidated statements of financial condition
of GBI Capital Management Corp. and Subsidiary as of August 24, 1999 and August
31, 1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the period from September 1, 1998 to
August 24, 1999 and for the year ended August 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GBI Capital
Management Corp. and Subsidiary as of August 24, 1999 and August 31, 1998, and
the results of their operations and their cash flows for the period from
September 1, 1998 to August 24, 1999 and for the year ended August 31, 1998, in
conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 12, 1999
1185 Avenue of the Americas Suite 500 New York, NY 10036-2602
TEL 212 372 1800 FAX 212 372 1801 www.ggk.com
18
Lerner & Sipkin, CPAs, LLP
Certified Public Accountants
132 Nassau Street, Suite 1023
New York, NY 10038
Telephone (212) 571-0064 Facsimile (212) 571-0074
INDEPENDENT AUDITORS' REPORT
To the Officers and Directors of
GBI Capital Management Corp.
1055 Stewart Avenue
Bethpage, NY 11714
Gentlemen:
We have audited the accompanying statement of financial condition of GBI Capital
Management Corp. as of August 31, 1997, and the related statements of income,
changes in stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GBI Capital Management Corp. as
of August 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The information contained in the accompanying
schedules is presented for purposes of additional analysis and is not a required
part of the basic financial statements, but is supplementary information
required by Rule 17a-5 of the Securities and Exchange Commission. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, the information is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Lerner & Sipkin, CPAs, LLP
-------------------------------------
Lerner & Sipkin, CPAs, LLP
New York, NY
October 28, 1997
19
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARY
Consolidated Statements of Financial Condition
August 24, August 31,
1999 1998
------------ -----------
ASSETS:
Cash $502,437 $513,131
Receivable from clearing broker 8,576,148 9,433,488
Securities owned, at market value 3,390,606 2,536,588
Furniture, fixtures and Leasehold Improvements, at cost, net of
accumulated depreciation and amortization of $2,051,418 and $1,341,342 at
August 24, 1999 and August 31, 1998, respectively. 2,468,361 3,038,536
Deferred tax benefit 834,000 549,900
Other Assets 1,361,393 573,720
------------ ------------
Total assets $17,132,945 $16,645,363
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $3,918,091 $2,886,495
Note payable 243,667 833,333
Income taxes payable 84,600 2,333,722
Accrued expenses and other liabilities 4,820,811 4,212,629
------------ -----------
Total liabilities 9,067,169 10,266,179
------------ -----------
Commitments and Contingencies
Subordinated Borrowing - 1,000,000
------------ -----------
Stockholders' Equity:
Common stock - $.0001 par value
authorized 100,000,000
issued and outstanding 15,999,410 and 17,139,094 shares, respectively 1,600 1,714
Additional paid-in capital 3,112,020 3,508,405
Retained earnings 4,952,156 5,276,732
Less stock subscriptions receivable - (3,407,667)
------------ -----------
Total stockholders' equity 8,065,776 5,379,184
------------ -----------
Total liabilities and stockholders' equity $17,132,945 $16,645,363
============ ============
See Notes to Consolidated Financial Statements
20
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARY
Consolidated Statements of Operations
For the period from
September 1, 1998 For the Year Ended August 31,
to August 24, -----------------------------------
1999 1998 1997
------------------- ----------------- --------------
Revenues:
Commissions and trading income $ 54,625,262 $ 52,025,409 $ 58,072,198
Interest and dividends, net 922,376 927,356 779,427
Underwriting fees and Investment Banking 1,386,588 4,795,185 3,280,592
Other 49,007 147,010 223,092
------------------- ----------------- --------------
56,983,233 57,894,960 $ 62,355,309
------------------- ----------------- --------------
Expenses:
Compensation and benefits 39,018,835 40,561,426 40,781,280
Brokerage, clearance and exchange fees 2,678,741 2,354,440 2,285,464
Communications 2,534,013 2,505,735 2,295,148
Occupancy and equipment 5,113,830 4,814,782 3,967,576
Professional fees 2,119,803 824,101 1,185,333
Business development 1,534,638 1,864,315 2,217,573
Other 4,420,419 4,182,714 2,146,735
------------------- ----------------- --------------
57,420,279 57,107,513 54,879,109
------------------- ----------------- --------------
(Loss) income before provision for income taxes (437,046) 787,447 $ 7,476,200
Income tax benefit/(provision) 112,470 (435,177) (3,298,256)
------------------- ----------------- --------------
Net (loss)/income $ (324,576) $ 352,270 $ 4,177,944
================== ================= ==============
Basic (loss)/earnings per common share $ (0.02) $ 0.03 $ 0.38
================== ================= ==============
Diluted (loss)/earnings per comon share $ (0.02) $ 0.03 $ 0.38
================== ================= ==============
See Notes to Consolidated Financial Statements
21
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the period from September 1, 1996 to August 24, 1999
Common Additional Stock
Stock Paid-in Retained Treasury Subscription
Shares Par Value Capital Earnings Stock Receivable Total
---------- --------- ---------- --------- -------- ------------- -------
Stockholders' equity,
September 1, 1996 12,799,528 1,280 $ 689,809 $ 746,518 $ (212,500) $ - $ 1,225,107
Purchase and retirement of
common stock (219,170) (22) (36,978) - - - (37,000)
Sale of common stock 1,972,530 197 347,603 - - - 347,800
Net income - - - 4,177,944 - - 4,177,944
---------- --------- ---------- --------- -------- -------- ---------
Stockholders' equity,
August 31, 1997 14,552,888 1,455 1,000,434 4,924,462 (212,500) - 5,713,851
Purchase of treasury stock - - - - (1,234,270) - (1,234,270)
Sale of stock 2,586,206 259 2,507,971 - 1,446,770 (3,407,667) 547,333
Net income - - - 352,270 - - 352,270
---------- --------- ---------- --------- -------- -------- ---------
Stockholders' equity at
August 31, 1998 17,139,094 1,714 3,508,405 5,276,732 - (3,407,667) 5,379,184
Cancellation of stock subscription (416,423) (42) (214,658) - - 214,700 -
Cash receipt for stock subscription - - - - - 3,192,967 3,192,967
Purchase and retirement of stock (832,846) (83) (238,216) - - - (238,299)
Issuance of stock 109,585 11 56,489 - - - 56,500
Net Income - - - (324,576) - - (324,576)
---------- --------- ---------- --------- -------- -------- ---------
Stockholders' equity,
August 24, 1999 15,999,410 $ 1,600 $ 3,112,020 $4,952,156 $ - $ - $8,065,776
========== ========= =========== ========== ======== ======== ==========
See Notes to Consolidated Financial Statements
22
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARY
Consolidated Statement of Cash Flows
For the period For the For the
September 1, 1998 Year Ended Year Ended
to August 24, August 31, August 31,
1999 1998 1997
-------------- ------------ ------------
Cash flows from operating activities:
Net (loss)income $ (324,576) $ 352,270 $4,177,944
Adjustments to reconcile net income(loss) to net cash
provided by/(used in)operating activities:
Depreciation and amortization 710,076 553,094 587,780
Deferred income taxes (284,100) (2,511,900) -
Decrease(increase) in operating assets:
Receivable from clearing broker dealer 857,340 146,809 (5,054,775)
Securities owned , at market value (854,018) 4,768,726 (6,752,606)
Other assets (787,673) 23,908 (286,691)
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased, at market value 1,031,596 (3,311,056) 6,022,446
Income taxes payable (2,249,122) 1,571,141 2,395,805
Accrued expenses and other liabilities 608,182 (850,988) 1,516,737
-------------- ------------ ------------
Net cash (used in)/provided by operating activities (1,292,295) 742,004 2,606,640
-------------- ------------ ------------
Cash flows from investing activity - Purchase of fixed assets (139,901) (602,089) (2,814,299)
-------------- ------------ ------------
Cash flows from financing activities:
Collection of stock subscriptions receivable 3,192,967 - -
Sale of common stock 56,500 547,333 347,800
Purchase and retirement of common stock (238,299) - (37,000)
Purchase of common stock into treasury - (400,937) -
Repayment of subordinated borrowing (1,000,000) - 1,000,000
Payment of note payable (666,667) - (1,000,000)
Proceeds from note payable 77,001 - -
-
-------------- ------------ ------------
Net cash provided by financing activities 1,421,502 146,396 310,800
-------------- ------------ ------------
Net (decrease) increase in cash (10,694) 286,311 103,141
Cash at beginning of period 513,131 226,820 123,679
-------------- ------------ ------------
Cash at end of period $ 502,437 $ 513,131 $ 226,820
============== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period from September 1, 1998 to August 24, 1999,
and the years ending August 31, 1998 and 1997:
Interest $ 2,744,398 $ 1,706,236 $ 150,333
============== ============ ============
Income taxes $ 2,606,431 $ 1,366,448 $ 906,752
============== ============ ============
See Notes to Consolidated Financial Statements
23
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Gaines, Berland Inc. is a broker-dealer registered with the Securities and
Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. Gaines Berland acts as an introducing broker,
market maker, underwriter and trader for its own account.
The consolidated financial statements include the accounts of Gaines
Berland and its wholly owned subsidiary, GBI Trading Corp. (a development
stage company) (collectively the "Company"). GBI Trading was incorporated
in February 1999. On August 24, 1999, Gaines Berland consummated a merger.
See Note 11.
Gaines Berland does not carry accounts for customers or perform custodial
functions related to customers' securities. Gaines Berland introduces all
of its customer transactions, which are not reflected in these financial
statements, to its clearing broker, which maintains the customers' accounts
and clears such transactions. Additionally, this clearing broker provides
the clearing and depository operations for Gaines Berland's proprietary
securities transactions. These activities may expose the company to
off-balance-sheet risk in the event that customers do not fulfill their
obligations with the clearing broker, as Gaines Berland has agreed to
indemnify the clearing broker for any resulting losses.
At August 24, 1999, all of the securities owned and securities sold, not
yet purchased, and the amount receivable from clearing broker reflected on
the consolidated statement of financial condition are security positions
with and amounts due from this clearing broker.
The Company maintains cash in bank deposit accounts, which at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit
risk on cash.
Securities transactions, commission revenue and commission expenses are
recorded on a trade-date basis. Unrealized gains and losses on securities
transactions are included in principal transactions in the consolidated
statement of operations.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require the use of estimates by
management.
Furniture and fixtures are depreciated on a straight-line basis over the
economic useful lives of the assets, not exceeding seven years. Leasehold
improvements are amortized over the lesser of their economic useful lives
or the expected term of the related lease.
Management does not believe that any recently issued, but not yet
effective, accounting standards, if currently adopted, would have a
material effect on the accompanying consolidated financial statements.
24
2. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED:
Securities owned and securities sold, not yet purchased consists of:
August 24, August 31,
August 24, 1999 August 31, 1998
1999 Securities 1998 Securities
Securities Sold Not Yet Securities Sold Not Yet
Owned Purchased Owned Purchased
------------ ---------- ---------- ------------
Equities $ 710,253 $3,886,145 $ 684,436 $2,852,138
Warrants 2,679,103 31,946 1,852,152 34,357
Options 1,250
------------- ---------- ---------- -----------
$ 3,390,606 $3,918,091 $2,536,588 $2,886,495
============= ========== ========== ===========
Securities owned, traded on a national exchange are valued at the bid
price. Securities sold, not yet purchased, traded on a national exchange
are valued at the ask price. The resulting unrealized gains and losses are
reflected in revenue.
Securities sold, not yet purchased, represent obligations of Gaines Berland
to deliver specified securities by purchasing the securities in the market
at prevailing market prices. Accordingly, these transactions result in
off-balance-sheet market risk as Gaines Berland's ultimate obligation may
exceed the amount recognized in the financial statements.
At August 31, 1998 stock warrants may not have been readily marketable and
have been valued at fair value as determined by management. The warrants
are valued based on a percentage of the market value of the underlying
securities. The resulting unrealized gains and losses are reflected in
principle transactions.
3. NOTE PAYABLE:
As a part of a buy-out agreement dated May 31, 1998 with one of Gaines
Berland's stockholders, Gaines Berland signed a promissory note in the
amount of $1,000,000 maturing June 30, 1999. The promissory note was to be
paid in 12 monthly installments bearing no interest. In April 1999, This
stockholder commenced arbitration before the NASD in connection with the
buyout agreement (see Note 8). In October 1999 the arbitration was settled
for $443,017, which included the remaining balance on the note payable.
Because of its short-term nature, the fair value of the note payable
approximates its carrying amount.
4. INCOME TAXES:
Deferred income tax benefits result from the net effect of unrealized
appreciation on securities positions and the accrual of settlements.
25
The Provision (benefit) for income taxes consists of:
Period from
September 1, Year ended
1998 to ----------------------------
August 24, August 31, August 31
1999 1998 1997
--------------------------------------------
Current:
Federal $ 79,678 $ 2,194,596 $ 969,241
State and local 91,952 752,481 367,015
---------- ----------- ----------
Total Current 171,630 2,947,077 1,336,256
---------- ----------- ----------
Deferred:
Federal (209,000) (1,804,000) 1,400,000
State and Local (75,100) (707,900) 562,000
---------- ----------- ----------
Total deferred (284,100) (2,511,900) 1,962,000
---------- ----------- ----------
Provision (benefit) $ (112,470) $ 435,177 $3,298,256
========== =========== ==========
The provision (benefit) for income taxes for the years ended August 24,
1999 and August 31, 1998 and 1997 differs from the amount computed using
the federal statutory rate of 34% as a result of the following:
August 24, August 31, August 31,
1999 1998 1997
---------------------------
Tax (benefit) at federal statutory rate (34%) 34% 34%
State income taxes 8% 9% 9%
Other - 12% 1%
---------------------------
(26%) 55% 44%
===========================
The deferred tax asset (liability) results from the following:
August 24, August 31, August 31,
1999 1998 1997
----------------------------------
Unrealized gains on securities $ 0 $ (30,000) $(1,962,000)
Other temporary differences 834,000 580,000 -
----------------------------------
Total deferred tax (liability) asset $834,000 $ 550,000 $(1,962,000)
==================================
5. NET CAPITAL REQUIREMENT
As a registered broker-dealer, Gaines Berland is subject to the SEC's
Uniform Net Capital Rule 15c3-1 ("Net Capital Rule"), which requires the
maintenance of minimum net capital. Gaines Berland computes its net capital
under the aggregate indebtedness method permitted by rule 15c3-1, which
requires that Gaines Berland maintain minimum net capital, as defined, of
the greater of 6-2/3% of aggregate indebtedness, as defined, or $100,000,
or an amount determined based on the market price and number of securities
in which Gaines Berland is a market-maker, not to exceed $1,000,000.
At August 24, 1999 and August 31, 1998 and 1997, Gaines Berland had net
capital, as defined, of $2,773,730, $1,807,781 and $3,739,225, which
exceeded minimum net capital requirements of $562,500, $492,003 and
$388,607 by $2,211,230, $1,315,778 and $3,350,618, respectively.
26
6. PROFIT-SHARING PLAN
Gaines Berland is a sponsor of a defined contribution profit-sharing plan
for its eligible employees. Contributions to the plan, if any, are
determined by the employer and come out of its current accumulated profits
not to exceed the amount permitted under the Internal Revenue Code as a
deductible expense. Gaines Berland made no contribution to the plan for the
period from September 1, 1998 to August 24, 1999 and the years ended August
31, 1998 and 1997.
7. SUBORDINATED BORROWING
Gaines Berland repaid a subordinated loan on July 22, 1999. The
subordinated borrowing had been approved by the NASD for inclusion in
computing Gaines Berland's net capital pursuant to the Net Capital Rule.
The loan had been established with a stockholder of Gaines Berland and was
interest bearing at a rate of 7-7/8% per annum, resulting in interest
expense of approximately $71,000 for the period from September1, 1998 to
August 24, 1999 and approximately $80,000 for each of the years ended
August 31, 1998, 1997. Because of its short-term nature, the fair value
of the subordinated loan approximates its carrying amount.
8. COMMITMENTS AND CONTINGENCIES
Gaines Berland leases office space at several locations including Bethpage,
NY, New York City, NY and Fort Lauderdale, FL. These leases expire May 30,
2007, March 31, 2010 and May 13, 2001, respectively. Gaines Berland also
occupies additional space for its branch in California and Florida under
month-to-month leases. The minimum annual rental payments for these leases
are as follows:
Year ending August 31,
2000 $ 1,569,937
2001 1,947,936
2002 1,949,889
2003 1,983,255
2004 1,997,714
Thereafter 9,441,222
-----------
$18,816,153
===========
The leases contain provisions for escalations based on increases in certain
costs incurred by the lessor. Gaines Berland has the option to renew one of
these leases for an additional three-year period. Rent expense was
$1,618,970 for the period ended August 24, 1999 and $1,997,871 and
$1,444,000 for the years ended August 31, 1998 and 1997, respectively.
Gaines Berland has been named as defendant in certain legal actions in the
ordinary course of business. Additionally, in April 1999 a former
stockholder of Gaines Berland commenced an arbitration before the NASD
asserting, among other things, fraud and breach of contract relating to an
agreement dated May 31, 1998. The arbitration was settled in October 1999
for $443,017, which included the remaining balance on the note payable (see
Note 3). At August 24, 1999 and August 31, 1998 and 1997, Gaines Berland
had accrued
27
$2,004,000 and $1,400,000 and $650,000, respectively, for settlement of all
such legal proceedings.
9. FINANCIAL INSTRUMENTS
Gaines Berland's activities include the purchase and sale of warrants.
Warrants give the buyer the right to purchase securities at a specific
price until a specified expiration date. These financial instruments are
used to conduct trading activities and manage market risk.
Gaines Berland may receive warrants as apart of its underwriting activities
for initial public offerings.
Such transactions may result in credit exposure in the event the
counterparty to the transaction is unable to fulfill its contractual
obligations. Substantially all of the warrants are traded on national
exchanges, which can be subject to market risk in the form or price
fluctuations.
10. EARNINGS PER SHARE
Net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. The
following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
Period September 1, 1998 to August 24, 1999:
Basic and diluted:
Loss available to common stockholders (numerator) $ (324,576)
Weighted-average shares (denominator) 16,473,748
Per-Share amount $ (.02)
Year ended August 31, 1998:
Basic and diluted:
Income available to common stockholders (numerator) $ 352,270
Weighted-average shares (denominator) 11,421,819
Per-Share amount $ .03
Year ended August 31, 1997:
Basic and diluted:
Income available to common stockholders (numerator) $ 4,177,944
Weighted-average shares (denominator) 10,870,832
Per-Share amount $ .38
11. SUBSEQUENT EVENTS
On August 24, 1999, Gaines Berland consummated a merger with FHGB
Acquisition Corporation, a wholly owned subsidiary of Frost Hanna Capital
Group, Inc. ("Frost Hanna"). Frost Hanna is a publicly owned company which
trades on the NASD OTC Bulletin Board.
The merger agreement provided that the Company survived the merger and
became a wholly owned subsidiary of Frost Hanna, and that each share of
28
common stock of the Company was exchanged for 21,917 shares of Frost Hanna
common stock. Simultaneously, Frost Hanna changed its name to GBI Capital
Management Corp. For accounting purposes, the acquisition has been treated
as a recapitalization of Gaines Berland with Gaines Berland as the acquirer
(reverse acquisition). The historical financial statements prior to August
24, 1999 are those of Gaines Berland. This recapitalization has been
reflected in these financial statements.
The Company's fiscal year-end has been changed to September 30.
12. INTEREST EXPENSE
During the period September 1, 1998 to August 24, 1999 and for the years
ended August 31, 1998 and 1997, the Company incurred interest expense of
$2,815,422 and $1,706,236 and $154,298, respectively.
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As reported in our Current Report on Form 8-K, dated May 27, 1999,
we dismissed Arthur Andersen LLP and subsequently engaged Goldstein Golub
Kessler LLP as our new independent accountants for the fiscal year ending August
24, 1999. The report of Arthur Andersen LLP on our financial statements for each
of the past two years did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. The decision to dismiss Arthur Andersen LLP and engage
Goldstein Golub Kessler LLP was made by our board of directors. During the two
most recent fiscal years and through the date of termination (September 3,
1999), there were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See Item 13.
ITEM 11. EXECUTIVE COMPENSATION.
See Item 13.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 10, 11, 12 and 13 is incorporated
by reference to the information included in our definitive proxy statement in
connection with the next Annual Meeting of Stockholders, which will be filed by
the Registrant within 120 days after the close of its fiscal year.
30
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Report of Goldstein Golub Kessler LLP on the Consolidated
Financial Statements as of August 24, 1999 and August 31, 1998
and for the period September 1, 1998 to August 24, 1999 and for
the year ended August 31, 1998.
Report of Lerner & Sipkin, CPAs, LLP on the Consolidated
Financial Statements as of August 31, 1997 and for the
year then ended.
Consolidated Statements of Financial Condition as of
August 24, 1999 and August 31, 1998.
Consolidated Statements of Operations for the period from
September 1, 1998 to August 24,1999 and the years ended
August 31, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity
for the period from September 1, 1998 to August 24, 1999
and the years ended August 31, 1998 and 1997.
Consolidated Statements of Cash Flows for the period
from September 1, 1998 to August 24, 1999 and the years
August 31, 1998 and 1997.
Notes to the Consolidated Financial Statements.
(a)(3) Exhibits
See Exhibit Index appearing later in this Report.
(b) Reports on Form 8-K
Current Report on Form 8-K, dated May 27, 1999, and filed with
the SEC on June 23, 1999, reporting under Item 5 the execution of the Merger
Agreement relating to the merger between the Registrant and Gaines, Berland.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GBI CAPITAL MANAGEMENT CORP.
(Registrant)
Dated: November 22, 1999 /s/
By:_______________________
Name: Joseph Berland
Title: Chairman of the Board
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signatures Title Date
- ----------- ----- --------
/s/ Chairman of the Board and Chief November 22, 1999
- ----------------------------------- Executive Officer
Joseph Berland
/s/ Chief Financial Officer (and November 22, 1999
- ----------------------------------- Principal Accounting Officer)
Diane Chillemi
/s/
- ----------------------------------- Director November 22, 1999
Vincent Mangone
/s/
- ----------------------------------- Director November 22, 1999
Benjamin Pelton
/s/
- ----------------------------------- Director November 22, 1999
Steven A. Rosen
/s/
- ----------------------------------- Director November 22, 1999
Richard J. Rosenstock
/s/
- ----------------------------------- Director November 22, 1999
Mark Zeitchick
32
EXHIBIT INDEX [To be Confirmed]
Incorporated
Exhibit By Reference No. in
Number Description from Document Document Page
- ------ ----------- ------------- -------- ----
2.1 Agreement and Plan of Merger, dated May A 2.1
27, 1999
3.1 Articles of Incorporation B 3.1
3.2 Articles of Amendment to the Articles of -- -- Filed
Incorporation, dated August 24, 1999 Herewith
3.3 By-Laws B 3.2
4.1 Form of Common Stock Certificate B 4.1
4.2 Form of Warrant Agreement between the B 4.2
Registrant and Cardinal Capital
Management, Inc. (including the form of
Warrant Certificate).
10.1 Agreement of Lease, dated December 20, - -- Filed
1996, between the Registrant and Briarcliffe Herewith
College, Inc.
10.2 Standard Form of Office Lease, dated - - Filed
August 3, 1999, between the Registrant and Herewith
Mayore Estates LLC and 80 Lafayette LLC, together,
with Amendment dated August 19, 1999.
10.3 Agreement for Securities Clearance -- -- Filed
Services, dated April 30, 1985, between Herewith
Gaines Berland and Bear Stearns.
10.4 1999 Performance Equity Plan C Exhibit "C"
10.5 Annual Incentive Bonus Plan* C Exhibit "D"
10.6 Special Performance Incentive Plan* C Exhibit "E"
10.7 Form of Employment Agreement, dated C Exhibit "F"
August 24, 1999, between the Registrant
and certain employees*
10.7.1 Schedule of Employment Agreement in the -- -- Filed
form of Exhibit 10.7, including material detail Herewith
in which such document differs from Exhibit
10.7
21 List of Subsidiaries -- -- Filed
Herewith
27.1 Financial Data Schedule -- -- Filed
Herewith
33
- ---------------------
A. Registrant's Form 10-QSB filed on August 16, 1999.
B. Registrant's Registration Statement on Form SB-2 (File No. 333-31001).
C. Registrant's Definitive Proxy Statement relating to a Special Meeting of
Stockholders held on August 23, 1999.
* Management Compensation Contract
34