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 December 31, 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.
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(Exact Name of Registrant as Specified in its Charter)
Florida 65-0701248
- --------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1055 Stewart Avenue, Bethpage, New York 11714
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(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 February 8,
2001, 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
December 31, September 30,
2000 2000
------------- ---------------
(Unaudited)
Assets
Cash and cash equivalents $ 5,193,168 $ 5,255,669
Receivable from brokers and dealers 8,579,276 21,507,788
Securities owned, at market value 2,381,971 3,513,865
Furniture, fixtures and leasehold improvements,
at cost net of accumulated depreciation and
amortization of $3,093,018 and $2,831,499
for December 31, 2000 andSeptember 30, 2000
respectively. 4,113,284 4,166,744
Deferred tax asset 1,326,000 1,156,000
Investment in and receivable from affiliates 1,493,667 1,489,134
Other assets 3,772,805 2,330,803
------------- ---------------
Total assets $ 26,860,171 $ 39,420,003
============= ===============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 1,019,800 $ 2,203,708
Income taxes payable - 182,788
Accrued expenses and other liabilities 6,084,836 15,770,427
------------- ---------------
Total liabilities 7,104,636 18,156,923
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Stockholders' equity:
Common stock - $.0001 par value;
Authorized 100,000,000 shares, issued and outstanding
18,806,612 shares. 1,881 1,881
Additional paid-in capital 7,531,763 7,531,763
Retained earnings 12,221,891 13,729,436
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Total stockholders' equity 19,755,535 21,263,080
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Total liabilities and stockholders' equity $ 26,860,171 $ 39,420,003
============= ===============
See accompanying notes to financial statements.
2
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended
December 31, December 31,
2000 1999
--------- ---------
(Unaudited) (Unaudited)
Revenues:
Commissions and trading income $ 9,942,162 $ 23,643,961
Interest and dividends, net 669,866 368,025
Underwriting fees 11,996 343,127
Other 111,159 43,092
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Total Revenues 10,735,183 24,398,205
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Expenses:
Compensation and benefits 6,764,823 16,261,551
Brokerage, clearance and exchange fees 1,270,906 1,540,143
Communications 1,054,037 702,473
Occupancy and equipment 1,528,216 1,339,360
Professional fees 661,274 323,444
Business development 686,795 484,444
Other 1,385,562 1,250,879
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Total Expenses 13,351,613 21,902,294
------------ ------------
Income (loss) before provision (benefit)
for income taxes (2,616,430) 2,495,911
Income tax provision (benefit) (1,108,885) 1,009,292
------------ ------------
Net Income (Loss) $ (1,507,545) $ 1,486,619
============ ============
Basic earnings per common share $ (0.08) $ 0.08
============ ============
Diluted earnings per common share $ (0.08) $ 0.08
============ ============
See accompanying notes to financial statements.
3
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Three months ended December 31, 2000
Additional
Common Stock Paid-in Retained
Shares Par Value Capital Earnings Total
--------- ---------- ------------ ------------ ----------
Balance at September 30, 2000 18,806,612 $ 1,881 $ 7,531,763 $ 13,729,436 $ 21,263,080
Net loss -- -- -- (1,507,545) (1,507,545)
---------- --------- ------------ ------------ ------------
Balance at December 31, 2000 18,806,612 $ 1,881 $ 7,531,763 $ 12,221,891 $ 19,755,535
========== ========= ============ ============ ============
See accompanying notes to financial statements.
4
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statement of Cash Flows
Three months ended December 31,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
Operating activities:
Net (loss)/income $ (1,507,545) $ 1,486,619
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 261,519 151,408
Deferred taxes (170,000) (167,206)
Decrease (increase) in operating assets:
Receivable from brokers and dealers 12,928,512 (6,201,384)
Securities owned, at market value 1,131,894 (4,054,863)
Other assets (1,442,003) (312,611)
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased (1,183,908) 4,769,698
Income taxes payable (182,788) 463,165
Accrued expenses and other liabilities (9,685,590) 3,881,769
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Net cash provided by operating activities 150,091 16,595
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Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (208,059) (268,049)
Investment in affiliate (4,533) --
Syndication costs -- 5,038
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Net cash used in investing activities (212,592) (273,087)
--------------- --------------
Net decrease in cash (62,501) (256,492)
Cash and cash equivalents at beginning of period 5,255,669 485,370
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Cash and cash equivalents at end of period $ 5,193,168 $ 228,878
============== ===================
Supplemental disclosure or cash flow information
Cash paid during the period for:
Interest $ 1,048,450 $ 874,429
Income Taxes $ 578,031 $ 709,435
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, 2000 to December
31, 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 December 31, 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 with respect to these cash balances.
Securities transactions, commission revenue and commission expenses are
recorded on a trade-date basis. Unrealized gains and losses on
securities transactions are included in trading income in the
consolidated statement of operations.
The financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of
America 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 September 30, 2000,
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 three months ended December
31, 2000 are not necessarily indicative of the results that may be
expected for the full year ending September 30, 2001.
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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.
2. INCOME TAXES:
The Company files consolidated federal income tax returns, but each
constituent entity files separate state income tax returns. The
provision (benefit) 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 December 31, 2000, GBI Capital had net capital, as defined, of
$3,413,577, which exceeded minimum net capital requirements of
$1,000,000 by $2,413,577.
4. COMMITMENTS AND CONTINGENCIES
GBI Capital has been named as defendant in certain legal actions in the
ordinary course of business. At December 31, 2000 and September 30,
2000, GBI Capital had accrued $2,206,100 and $2,348,000, 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 December 31,
-------------------------------
2000 1999
Numerator for basic and diluted EPS:
Net income (loss) $ (1,507,545) $ 1,486,619
============= ===========
Denominator for basic EPS 18,806,612 18,806,612
Denominator for diluted EPS 18,806,612 18,806,612
============= ===========
Basic EPS (0.08) 0.08
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Diluted EPS (0.08) 0.08
============= ===========
6. ACCRUED EXPENSES
At December 31, 2000 GBI Capital had accrued expenses of $6,084,836, of
which $1,450,891 was for commissions and salaries payable, $2,206,100
was for settlements and $1,004,930 was for deferred rent payable.
7. SUBSEQUENT EVENTS
On February 8, 2001, the Company entered into a Stock Purchase Agreement
with New Valley Corporation ("New Valley"), Ladenburg Thalmann Group Inc.
("LTGI"), a wholly-owned subsidiary of New Valley, Berliner
Effektengesellshaft AG ("Berliner") and Ladenburg Thalmann & Co. Inc.
("Ladenburg"), a registered broker-dealer whose common stock is owned by
New Valley and Berliner. Pursuant to the Stock Purchase Agreement, the
Company will purchase all of the outstanding stock of Ladenburg from New
Valley and Berliner in exchange for (i) 18,181,819 shares of the
Company's newly-issued Common Stock, (ii) $10,000,000 principal amount of
the Company's convertible promissory notes and (iii) $10,000,000 in cash.
In connection with this transaction, certain of the Company's current
principal stockholders also will sell a portion of the Company's common
stock owned by them to LTGI for cash. As a result of these transactions,
Ladenburg will become a wholly-owned subsidiary of the Company and New
Valley will acquire beneficial ownership of approximately 50.1% of the
Company's outstanding common stock. The transactions are subject to
certain closing conditions, including approval of the transaction by the
Company's stockholders. The transactions will be more fully described in
a Current Report on Form 8-K to be filed by the Company shortly. The
convertible promissory notes to be issued by the Company to the sellers
mature on December 31, 2005. The Company will finance the cash portion of
the purchase price by issuing $10,000,000 principal amount of similar,
but not identical, convertible promissory notes to a third party.
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 December 31, 2000 vs. Three Months Ended December 31, 1999
Revenues
Commissions and trading income for the three months ended December 31,
2000 decreased 58% to $9,942,162 from the three months ended December 31, 1999.
This decrease is primarily due to a decrease in trading volume, which reflected
deteriorating market conditions.
Interest and dividend income, net for the three months ended December
31, 2000 increased 82%, to $669,866 from the comparable period in 1999. The
increase is primarily due to rising interest rates and an increase in the
percentage of margin interest our clearing broker shares with us.
Underwriting fees for the three months ended December 31, 2000
decreased 97% to $11,996 from $343,127 during the comparable period in 1999. The
decrease is the result of our not participating in any underwritten public
offering as a co-manager during the 2000 period, as opposed to our
participation as a co-manager in three public offerings for the comparable
period in 1999.
Other revenues for the three months ended December 31, 2000 increased
158% to $111,159 from the three months ended December 31, 1999. This increase is
primarily due to an insurance claim for business interruption, which was settled
in November 2000 and management fees from the 1500 Focus Fund.
Expenses
Employee compensation and benefits for the three months ended December
31, 2000 decreased 58%, to $6,764,823 from the comparable period in 1999. The
decrease is primarily attributable to the decrease in revenues since employee
compensation to the Company's traders and registered representatives is directly
related to certain components of revenue. The three months ended December 31,
2000 had no bonus accruals as compared to $825,000 accrued and $490,000 paid for
the comparable period in 1999.
Brokerage, clearance and exchange fees for the three months ended
December 31, 2000 decreased 17.5%, to $1,270,906, from the comparable period in
1999 as a result of lower ticket volume and reduced ticket charges.
Communications expense for the three months ended December 31, 2000
increased 50%, to $1,054,037, from the comparable period in 1999. This increase
is a result of the increase in registered representatives in Bethpage and the
New York City office and the rollout of computers to every registered
representative, resulting in a 79% increase in news services.
8
Occupancy and equipment costs for the three months ended December 31,
2000 increased 14.1%, to $1,528,216, from the comparable period in 1999. This
increase is primarily a result of an increase in depreciation expense attributed
to the purchase of additional computer equipment.
Professional fees for the three months ended December 31, 2000
increased 104.5%, to $661,274, from the comparable period in 1999. This increase
is due to higher legal and consulting fees.
Business development costs for the three months ended December 31, 2000
increased 41.8% to $686,795, from the comparable period in 1999. This increase
is due to an increase in recruiting expenses.
Other expenses for the three months ended December 31, 2000 increased
10.8% to $1,385,562, from the corresponding period in 1999. This increase is
primarily a result of an increase in bad debt expense.
Income tax benefit for the three months ended December 31, 2000 was
$1,108,885 as compared to the income tax provision of $1,009,292 for the three
months ended December 31, 1999, which was consistent with the decrease in income
before this income tax benefit.
Net loss of $1,507,545 for the three months ended December 31, 2000,
compares to net income of $1,486,619 for the three months ended December 31,
1999. This resulted primarily from the decrease in revenues offset by decreases
in expenses as discussed above.
Liquidity and Capital Resources
Approximately 60.1% of the Company's assets at December 31, 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 December 31, 2000, was $3,413,577, which
was $2,413,577, 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.
On February 8, 2001, the Company entered into a Stock Purchase
Agreement with New Valley Corporation ("New Valley"), Ladenburg Thalmann Group
Inc. ("LTGI"), a wholly-owned subsidiary of New Valley, Berliner
Effektengesellshaft AG ("Berliner") and Ladenburg Thalmann & Co. Inc.
("Ladenburg"), a registered broker-dealer whose common stock is owned by New
Valley and Berliner. Pursuant to the Stock Purchase Agreement, the Company will
purchase all of the outstanding stock of Ladenburg from New Valley and Berliner
in exchange for (i) 18,181,819 shares of the Company's newly-issued Common
Stock, (ii) $10,000,000 principal amount of the Company's convertible
promissory notes and (iii) $10,000,000 in cash. In connection with this
transaction, certain of the Company's current principal stockholders also will
sell a portion of the Company's common stock owned by them to LTGI for cash. As
a result of these transactions, Ladenburg will become a wholly-owned subsidiary
of the Company and New Valley will acquire beneficial ownership of approximately
50.1% of the Company's outstanding common stock. The transactions are subject to
certain closing conditions, including approval of the transaction by the
Company's stockholders. The transactions will be more fully described in a
Current Report on Form 8-K to be filed by the Company shortly. The convertible
promissory notes to be issued by the Company to the sellers mature on December
31, 2005. The Company will finance the cash portion of the purchase price by
issuing $10,000,000 principal amount of similar, but not identical, convertible
promissory notes to a third party.
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.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 December 31,
2000, we estimate that the total amount sought from GBI Capital in pending and
threatened claims is approximately $9,301,000. 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.
ITEM 2. SALES OF UNREGISTERED SECURITIES
Consideration
Received and
Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Security, Terms of
Price Afforded to Exemption from Exercise or
Date of Sale Title of Security Number Sold Purchasers Registration Claimed Conversions
- ------------ ----------------- ----------- ---------- -------------------- -----------
12/20/00 Options to 60,000 Options granted under 4(2) 100% exercisable
purchase Common 1999 Performance immediately at an
Stock Equity Plan; no cash exercise price of
consideration $2.125 per share
received by Company and which all
until exercise expire 12/19/10
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
11
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: February 14, 2001 By: /s/ Joseph Berland
----------------------------------
Joseph Berland
Chairman of the Board and
Chief Executive Officer
By: /s/ Diane Chillemi
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Diane Chillemi
Chief Financial Officer
12