U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities and
- ----- Exchange Act of 1934
For the quarterly period ended June 30, 2000
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the transition period from ___________________ to _____________________
Commission File number 1-15799
GBI CAPITAL MANAGEMENT CORP.
----------------------------
(Exact Name of 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) 470-1000
------------------
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No _____.
Indicate the number of shares outstanding of each of the Issuer's
classes of common equity, as of the latest practicable date: At August 8, 2000,
Issuer had outstanding 18,806,612 shares of Common Stock, par value $.0001 per
share.
PART I . FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, August 24,
2000 1999
--------------- ----------------
(Unaudited)
Assets
Cash and cash equivalents $ 5,109,694 $ 502,437
Receivable from brokers and dealers 21,709,059 8,576,148
Securities owned, at market value 5,533,882 3,390,606
Furniture, fixtures and leasehold improvements, at cost
net of accumulated depreciation and amortization of
$2,554,855 and $2,051,418 for June 30, 2000 and
August 24, 1999 respectively 4,163,825 2,468,361
Deferred tax asset 1,100,000 834,000
Other assets 2,114,411 1,361,393
------------- ---------------
Total assets $ 39,730,871 $ 17,132,945
============= ===============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 2,179,300 $ 3,918,091
Note payable - 243,667
Income taxes payable 2,621,407 84,600
Accrued expenses and other liabilities 14,441,489 4,820,811
------------- ---------------
Total liabilities 19,242,196 9,067,169
------------- ---------------
Stockholders' equity:
Common stock - $.0001 par value;
authorized 100,000,000, shares issued and outstanding
18,806,612 and 15,999,410 shares, respectively. 1,881 1,600
Additional paid-in capital 7,531,763 3,112,020
Retained earnings 12,955,031 4,952,156
------------- ---------------
Total stockholders' equity 20,488,675 8,065,776
------------- ---------------
Total liabilities and stockholders' equity $ 39,730,871 $ 17,132,945
============= ===============
See accompanying notes to financial statements.
2
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended For the Nine months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Commissions and trading income $ 16,182,040 $ 14,121,588 $ 89,603,912 $ 46,934,320
Interest and dividends, net 956,458 292,133 1,883,400 671,250
Underwriting fees 2,090,086 273,576 4,599,438 184,925
Other 21,066 18,145 95,140 36,661
---------------- ------------ -------------- -------------
Total Revenues 19,249,650 14,705,442 96,181,890 47,827,156
---------------- ------------ -------------- -------------
Expenses:
Compensation and benefits 10,787,909 8,989,486 61,891,268 32,000,229
Brokerage, clearance and exchange fees 1,818,161 1,250,701 5,822,945 3,699,691
Communications 815,663 607,362 2,512,546 1,859,147
Occupancy and equipment 1,567,532 1,271,444 4,594,022 3,357,238
Professional fees 458,330 775,010 1,628,308 1,609,941
Business development 388,768 389,027 1,355,573 1,210,127
Other 1,156,201 748,816 5,842,450 3,587,761
---------------- ------------ -------------- -------------
Total Expenses 16,992,564 14,031,846 83,647,112 47,324,134
---------------- ------------ -------------- -------------
Income before provision (benefit)
for income taxes 2,257,086 673,596 12,534,778 503,022
Income tax provision(benefit) 974,755 (258,504) 5,216,614 (194,904)
---------------- ------------ -------------- -------------
Net Income $ 1,282,331 $ 932,100 $ 7,318,164 $ 697,926
=================== ============== ============= =============
Basic earnings per common share $ 0.07 $ 0.06 $ 0.39 $ .04
=================== ============== ============= =============
Diluted earnings per common share $ 0.07 $ 0.06 $ 0.39 $ .04
=================== ============== ============= =============
See accompanying notes to financial statements.
3
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements Changes in Stockholders' Equity
For the Nine months ended June 30, 2000
------------------------------------------
Common Stock Additional
------------------- Paid-in Retained
Shares Par Value Capital Earnings Total
--------- --------- --------- ---------- ---------
Balance at September 30, 1999 18,806,612 1,881 7,536,801 5,636,867 13,175,549
Syndication costs - - (5,038) - (5,038)
Net income - - - 7,318,164 7,318,164
--------- --------- --------- ---------- ----------
Balance at June 30, 2000 18,806,612 $ 1,881 $ 7,531,763 $ 12,955,031 $ 20,488,675
========== ========== ============ ============ ============
See accompanying notes to financial statements.
4
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statement of Cash Flows
Nine months ended June 30,
--------------------------
2000 1999
-------------- -------------
(Unaudited) (Unaudited)
Operating activities:
Net income $ 7,318,164 $697,926
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 455,162 452,725
Deferred taxes (248,000) (741,100)
Loss on sale of artwork - 256,967
Decrease (increase) in operating assets:
Receivable from brokers and dealers (7,595,977) (1,749,858)
Securities owned, at market value 3,559,936 (1,706,070)
Other assets (1,006,690) 66,969
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased (5,074,508) 1,185,241
Income taxes payable 2,120,565 (1,894,844)
Accrued expenses and other liabilities 7,229,274 516,934
-------------- -------------
Net cash provided by (used in) operating activities 6,757,926 (2,915,110)
-------------- -------------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (2,128,564) (284,898)
Proceeds from sale of art work - 6,850
Syndication costs (5,038) -
--------------- -------------
Net cash used in investing activities (2,133,602) (278,048)
--------------- --------------
Financing activities:
Subscriptions received - 2,933,367
--------------- -------------
Net cash provided by financing activities - 2,933,367
--------------- -------------
Net increase (decrease) in cash 4,624,324 (259,791)
Cash and cash equivalents at beginning of period 485,370 501,912
--------------- --------------
Cash and cash equivalents at end of period $ 5,109,694 $ 242,121
============== ===============
Supplemental disclosure or cash flow information
Cash paid during the period for:
Interest $ 3,308,680 $ 2,010,884
Income Taxes $ 3,342,689 $ 660,585
See accompanying notes to financial statements.
5
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements include the accounts of GBI
Capital Management Corp, and its wholly owned subsidiaries, GBI
Capital Partners Inc., formerly Gaines, Berland Inc.("GBI Capital")
and GBI Fund Management Corp. (the general partner of the GBI 1500
Focus Fund L.P., a private investment partnership formed in August
1999), and GBI Capital's wholly owned subsidiary, GBI Trading
Corp.("GBI Trading") (a development stage company), (collectively the
"Company"). GBI Trading was incorporated in February 1999 and GBI Fund
Management Corp. was incorporated in August 1999.
On August 24, 1999 GBI Capital Management Corp., formerly known as
Frost Hanna Capital Group, Inc., acquired all of the outstanding
common stock of GBI Capital. For accounting purposes, the acquisition
has been treated as a recapitalization of GBI Capital with GBI Capital
as the acquirer (reverse acquisition). The historical financial
statements prior to August 24, 1999 are those of GBI Capital. The
Company has changed its fiscal year end to September 30th. The
Company's Statement of Operations, Statements of Changes in
Stockholders Equity, and Statement of Cash Flows are for the period
October 1, 1999 to June 30, 2000.
GBI Capital is a broker-dealer registered with the Securities and
Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. GBI Capital acts as an introducing broker,
market maker, underwriter and trader for its own account.
GBI Capital does not carry accounts for customers or perform custodial
functions related to customers' securities. GBI Capital 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
GBI Capital'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 GBI Capital has agreed to indemnify the clearing broker for any
resulting losses.
At June 30, 2000, 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 for interim financial
information and with the instructions to Form 10-Q. Accordingly they
do not include all of the information and footnotes as required by
generally accepted accounting principles for annual financial
statements. These consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
notes thereto for the year ended August 24, 1999, contained in its
Annual Report on Form 10-K. In the opinion of management of the
Company, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been
included. The operations for the nine months ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the
full year ending September 30, 2000.
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.
6
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.
2. INCOME TAXES:
The Company files consolidated federal income tax returns, but each
constituent entity files separate state income tax returns. The
provision for income taxes differs from the amount of income taxes
determined by applying the federal statutory rates principally because
of the effect of state taxes and permanent differences.
3. NET CAPITAL REQUIREMENT
As a registered broker-dealer, GBI Capital is subject to the SEC's
Uniform Net Capital Rule 15c3-1 ("Net Capital Rule"), which requires
the maintenance of minimum net capital. GBI Capital computes its net
capital under the aggregate indebtedness method permitted by rule
15c3-1, which requires that GBI Capital 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 GBI Capital is a market-maker,
not to exceed $1,000,000.
At June 30, 2000, GBI Capital had net capital, as defined, of
$9,903,309, which exceeded minimum net capital requirements of
$1,137,526 by $8,765,783.
4. COMMITMENTS AND CONTINGENCIES
GBI Capital has been named as defendant in certain legal actions in
the ordinary course of business. At June 30, 2000 and June 30, 1999,
GBI Capital had accrued $3,418,250 and $1,745,000, respectively, for
settlement of all such legal proceedings.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share ("EPS"):
Three months ended Nine months ended
June 30, June 30,
------------------------------------------------------------------------------------------
2000 1999 2000 1999
Numerator for basic and diluted EPS:
Net income (loss) $ 1,282,331 $ 932,100 $ 7,318,164 $ 697,926
============ =========== ============ ===========
Denominator for basic EPS 18,806,612 16,006,635 18,806,612 16,496,195
Denominator for diluted EPS 18,809,846 16,006,635 18,824,810 16,496,195
============ =========== ============ ===========
Basic EPS 0.07 0.06 0.39 .04
============ =========== ============ ===========
Diluted EPS 0.07 0.06 0.39 .04
============ =========== ============ ===========
6. ACCRUED EXPENSES
At June 30, 2000 GBI Capital had accrued expenses of $14,441,489, of which
$4,501,720 was for commissions and salaries payable, $4,819,800 was for bonus
accrual, $3,418,250 was for settlements and $942,832 was for deferred rent
payable.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
When used in this form 10-Q and in future filings by the Company with the
Securities and Exchange 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.
Results of Operations
Three Months Ended June 30, 2000 vs. Three Months Ended June 30, 1999
Revenues
Commissions and trading income for the three months ended June 30, 2000
increased 14.6% to $16,182,040 from the three months ended June 30, 1999. 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 three months ended June 30, 2000
increased 227.4%, to $956,458 from the comparable period in 1999. The increase
is primarily due to higher average cash balances with our clearing broker and
rising interest rates.
Underwriting fees for the three months ended June 30, 2000 increased to
$2,090,086 from $273,576 during the comparable period in 1999. The increase is
the result of our participation in one underwritten public offering as a
co-manager , during the 2000 period, as opposed to not participating as a
co-manager in any public offerings for the comparable period in 1999.
Expenses
Employee compensation and benefits for the three months ended June 30, 2000
increased 20%, to $10,787,909 from the comparable period in 1999. The increase
is primarily attributable to the increase in revenues since employee
compensation to the Company's traders and registered representatives is directly
related to certain components of revenue.
Brokerage, clearance and exchange fees for the three months ended June 30,
2000 increased 45.4%, to $1,818,161, from the comparable period in 1999 as a
result of higher ticket volume.
Communications expense for the three months ended June 30, 2000 increased
34.3%, to $815,663, from the comparable period in 1999. This increase is a
result of the increase in registered representatives in Bethpage, the
establishment and operations of an additional branch office in Florida and the
expansion of the New York City office.
8
Occupancy and equipment costs for the three months ended June 30, 2000
increased 23.3%, to $1,567,532, from the comparable period in 1999. 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 three months ended June 30, 2000 decreased 40.9%,
to $458,330, from the comparable period in 1999. This decrease is primarily a
result of additional expense in 1999 attributed to merger activities and the
start up of GBI Trading Corp.
Business development costs for the three months ended June 30, 2000 were
comparable to expenses in 1999.
Other expenses for the three months ended June 30, 2000 increased 54.4% to
$1,156,201, from the corresponding period in 1999. This increase is primarily a
result of an increase in underwriting activities and the expenses related to
them, and an increase in the number of customer arbitrations.
Income tax provision for the three months ended June 30, 2000 was $974,755
as compared to the income tax benefit of $258,504 for the three months ended
June 30, 1999, which was consistent with the increase in income before this
income tax provision.
Net income of $1,282,331 for the three months ended June 30, 2000, compares
to net income of $932,100 for the three months ended June 30, 1999. This
resulted primarily from the increase in revenues offset by increases in expenses
as discussed above.
Nine months ended June 30, 2000 vs. Nine months ended June 30, 1999
Revenues
Commissions and trading income for the nine months ended June 30, 2000
increased 90.9% to $86,903,912 from the nine months ended June 30, 1999. 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 nine months ended June 30, 2000
increased 180.6%, to $1,883,400 from the comparable period in 1999. The increase
is primarily due to higher average cash balances with our clearing broker and
rising interest rates.
Underwriting fees for the nine months ended June 30, 2000 increased to
$4,599,438 from $184,925 during the comparable period in 1999. The increase is
the result of our participation in five underwritten public offerings as a
co-manager, during the 2000 period, as opposed to not participating as a
co-manager in any public offerings for the comparable period in 1999.
Other revenues for the nine months ended June 30, 2000 increased 159.6%, to
$95,140 from the comparable period in 1999. This increase is primarily due to an
insurance claim for a faulty telephone switch that was partially settled in
December 1999 and management fees derived from the GBI 1500 Focus Fund.
Expenses
Employee compensation and benefits for the nine months ended June 30, 2000
increased 93.4%, to $61,891,268 from the comparable period in 1999. The increase
is primarily attributable to the increase in revenues since employee
compensation to the Company's traders and registered representatives is directly
related to certain components of revenue.
Brokerage, clearance and exchange fees for the nine months ended June 30,
2000 increased 57.4%, to $5,822,945, from the comparable period in 1999 as a
result of higher ticket volume.
Communications expense for the nine months ended June 30, 2000 increased
35.2%, to $2,512,546, from the comparable period in 1999. This increase is a
result of the establishment and operations of an additional branch office in
Florida and the expansion of the New York City office.
Occupancy and equipment costs for the nine months ended June 30, 2000
increased 36.8%, to $4,594,022, from the comparable period in 1999. 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 nine months ended June 30, 2000 were comparable
to expenses in 1999.
9
Business development costs for the nine months ended June 30, 2000
increased 12% to $1,355,573 from the comparable period in 1999. This increase is
primarily the result of additional registered representatives and broker
trainees, and the purchase of additional prospective customer lists used to
generate new business.
Other expenses for the nine months ended June 30, 2000 increased 62.8% to
$5,842,450, from the corresponding period in 1999. This increase is primarily a
result of an increase in underwriting activities and the expenses related to
them and an increase in the number of customer arbitrations.
Income tax provision for the nine months ended June 30, 2000 was $5,216,614
as compared to the income tax benefit of $194,904 for the nine months ended June
30, 1999, which was consistent with the increase in income before this income
tax provision.
Net income of $7,318,164 for the nine months ended June 30, 2000, compares
to net income of $697,296 for the nine months ended June 30, 1999. This resulted
primarily from the increase in revenues offset by increases in expenses as
discussed above.
Liquidity and Capital Resources
Approximately 81% of the Company's assets at June 30, 2000 are 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 the Company's 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 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, GBI Capital Partners Inc., 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. GBI
Capital's net capital position as of June 30, 2000, was $9,903,309, which was
$8,785,783, in excess of its net capital requirement.
The Company's 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 the Company's capital structure is adequate for current operations
and reasonably foreseeable future needs.
The Company's brokerage subsidiary, as guarantor of its customer accounts
to its clearing broker, is 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 the Company maintains a short position in certain
securities, it is exposed to a further off-balance-sheet market risk, since the
Company's ultimate obligation may exceed the amount recognized in the financial
statements.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, GBI Capital 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. GBI Capital, 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 GBI Capital) motion to dismiss this lawsuit against them was granted
by the Court. On or about December 8, 1999, plaintiffs filed an amended
complaint. On January 18, 2000, the underwriter defendants filed a motion to
dismiss the amended complaint. The motion to dismiss is currently pending.
In addition to the foregoing, GBI Capital 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 GBI Capital had mishandled
customer accounts. At June 30, 2000, we estimate that the total amount sought
from GBI Capital in pending and threatened claims is approximately $14,114,761.
It is our opinion, based upon our historical experience and the reserves already
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.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule (6/30/00)
(b) Reports on Form 8-K
None.
12
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.
GBI Capital Management Corp.
----------------------------
(Registrant)
Dated: August 9, 2000 By: /s/ Joseph Berland
-------------------------------
Joseph Berland
Chairman of the Board and
Chief Executive Officer
By: /s/ Diane Chillemi
-------------------------------
Diane Chillemi
Chief Financial Officer
13
EXHIBIT INDEX
Exhibit
Number Description
- ------- --------------
27 Financial Data Schedule (6/30/00)
14