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 September 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.
(Name of Exact Registrant as Specified in Its Charter)
Florida 65-0701248
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of 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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.0001 per share
Securities registered pursuant to Section 12(g) of the Act: None
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 December 12, 2000, the aggregate market value of the Registrant's
Common Stock (based on the closing price on the American Stock Exchange on that
date) held by non-affiliates of the registrant was $16,709,786.63.
As of December 15, 2000, 18,806,612 shares of the Registrant'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.
<PAGE>
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 GBI Capital Partners, Inc. (formerly Gaines, Berland Inc.), our
primary operating subsidiary. GBI Capital Partners 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. GBI Capital Partner'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, 2000, the Company had
approximately 407 registered representatives and maintained approximately 55,000
retail and institutional accounts. GBI Capital Partners 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. GBI Capital Partners 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. GBI Capital Partners was incorporated under the laws of the State of
New York in August 1983. GBI Capital Partners became our wholly-owned subsidiary
on August 24, 1999 pursuant to a merger with FHGB Acquisition Corporation, our
wholly-owned subsidiary, with GBI Capital Partners surviving the merger. All
references to the Company, unless the context requires otherwise, refers to the
Company and GBI Capital Partners.
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" (although we refer to them as fiscal years, we are actually referring to
the fiscal period from August 25, 1999 to September 30, 2000, the fiscal period
from September 1, 1998 to August 24, 1999 and the fiscal year ended August 31,
1998). 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 consists 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
2000 1999 1998
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Commissions and Trading
Income $ 118,160,646 94% $ 54,625,000 95.9% $ 52,025,000 89.8%
Underwriting Fees and
Investment Banking $ 4,762,978 3.8% $ 1,387,000 2.4% $ 4,795,000 8.3%
Interest and Dividends and
Other Income $ 2,777,897 2.2% $ 971,000 1.7% $ 1,074,000 1.9%
--------------- ---- ------------ ---- ------------- ----
Total Revenues $ 125,701,521 100% $ 56,983,000 100.0% $ 57,894,000 100%
</TABLE>
2
<PAGE>
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.
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 its 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,
2000, we made markets in approximately 1,000 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
187 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. 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.
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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 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. GBI Capital Partners also
utilizes the services of Bear Stearns to provide research and analysts' reports.
Wholesale Trading Activities
We have instituted wholesale trading operations in our Ft. Lauderdale,
Florida office. We currently employ eleven traders and traders assistants who at
September 30, 2000, made markets in approximately 1,000 securities and who also
execute trades for institutional and high net worth investors.
Money Management Strategy
We expanded our operations in November 1999 to include money management
services by establishing a private investment fund, GBI 1500 Focus Fund, L.P.,
which invests its capital in publicly traded equity securities. At September 30,
2000, net partners' capital in this fund amounted to approximately $10,400,000.
Our wholly-owned subsidiary, GBI Fund Management Corp., is the general partner
of this fund for which it receives an annual management fee based on the net
assets of the fund and an incentive fee based on the performance of the fund
each year.
Internet Strategy
We have established a new website, www.gbicapital.com, which provides
general information about the Company and provides our clients with continuous
access to accounts, statements, market updates, charts, quotes, stock alerts and
numerous other features.
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 we believe 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 GBI Capital Partners. 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.
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<PAGE>
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
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 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. GBI Capital Partners 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, GBI Capital
Partners 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.
GBI Capital Partners 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 GBI Capital
Partners 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
5
<PAGE>
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 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 September 30, 2000, GBI Capital Partners had net capital of
$11,033,845 which exceeded its minimum net capital requirements of $1,063,548 by
$9,970,297, and its ratio of aggregate indebtedness to net capital was 1.45 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 GBI Capital Partners 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, 2000, we employed approximately 700 full-time
employees, including 407 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 GBI Capital Partners
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 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
New York, New York 27,000 $627,000 March 31, 2010
2149 East Commercial Blvd.
Ft. Lauderdale, Florida 3,750 $78,000 May 31, 2001
2449 Chestnut Street
San Francisco, California 250 $12,000 month-to-month
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
In January 1999, GBI Capital Partners 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 was undeterminable at the time. GBI Capital
Partners, along with the other underwriters, is entitled to be indemnified by
Mitcham Industries, Inc. 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 Partners) 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. On
October 2, 2000, the underwriter defendants' motion to dismiss the amended
complaint was granted by the Court.
GBI Capital Partners has been, and continues to be the subject of
numerous civil actions and arbitrations arising out of customers 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 Partners had mishandled customer
accounts. At September 30, 2000, we estimate that the total amount sought from
GBI Capital Partners in pending and threatened claims is approximately
$11,600,000.
It is our opinion, based upon our historical experience and the
reserves established by us, that the resolution of all claims presently pending
will not have a material adverse effect on the consolidated financial condition
of our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock became eligible for quotation on the NASD
OTC Bulletin Board in October 1997 under the symbol FHAN. On August 24, 1999, we
changed our name to GBI Capital Management Corp. and on August 25, 1999, the
common stock began quotation on the NASD OTC Bulletin Board under the symbol
GBIC. On April 14, 2000, our common stock began trading on the American Stock
Exchange under the symbol GBC. The following table sets forth the high and low
closing prices (for the Amex) and last sale prices (for the OTC Bulletin Board)
for the common stock as reported by Bloomberg for the periods specified.
Period High($) Low($)
------ ------- ------
Fiscal 2000
Fourth Quarter 3.00 2.5625
(7/00-9/00)
Third Quarter 3.50 2.50
(4/00-6/00)
Second Quarter 3.375 2.625
(1/00-3/00)
First Quarter 3.75 2.50
(10/99-12/99)
Fiscal 1999
Fourth Quarter 4.875 2.875
(7/99-9/99)
Third Quarter 5.125 2.75
(4/99-6/99)
Second Quarter 3.00 2.375
(1/98-3/99)
First Quarter 4.25 2.00
(10/98-12/98)
Holders
On December 15, 2000, there were 69 holders of record of our common
stock. Based upon our last mailing to stockholders we believe there are over 500
beneficial owners of our common stock.
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 GBI Capital
Partner'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
None.
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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:
<TABLE>
<CAPTION>
<S> <C> C> <C> <C> <C>
Fiscal Period Fiscal Period
Ended Ended
September 30, August 24, Fiscal Year Ended August 31,
2000(*) 1999 (**) 1998 1997 1996
------------- ------------- ---- ---- ----
(in thousands except share, per
share and Other Data)
Income Statement Data:
----------------------
Total revenues $125,702 $56,983 $57,895 $62,355 $39,944
Total expenses 110,459 57,420 57,108 54,879 38,896
Pre-tax (loss) income 15,242 (437) 787 7,476 1,048
Net (loss) income 8,777 (324) 352 4,178 448
Basic and diluted earnings
per common share 0.47 (.02) .03 .38 .05
Weighted average shares
outstanding - Basic and
Diluted 18,806,612 16,473,748 11,421,819 10,870,832 9,950,308
Balance Sheet Data:
------------------
Total assets 39,420 $ 17,133 $16,645 $20,700 $ 6,276
Total liabilities (excluding
subordinated debt) 18,157 9,067 10,266 13,986 4,051
Subordinated debt -- -- 1,000 1,000 1,000
Stockholders' equity 21,263 8,066 5,379 5,714 1,225
Other Data:
-----------
Ratio of assets to
stockholders equity 1.85 2.12 3.09 3.62 5.12
Return on average equity 59.8% (4.8%) 6.4% 120.4% 45.1%
Pre-tax return on average equity 104% (6.5%) 14.2% 215.5% 105.5%
Book value per share 1.13 .50 .31 .49 12
Registered representatives 407 296 233 270 114
----------------------------------------------------
* Period from August 25, 1999 to September 30, 2000.
** Period from September 1, 1998 to August 24, 1999.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Foreword-Looking Statements
When used in this Form 10-K and in future filings by the Company with
the SEC, 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 Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any 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 Item 1 of Part I hereof
(entitled "Business"), in Item 7 of Part II hereof (entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"), in
Exhibit 99 hereof and elsewhere in this Report. 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 statement.
Overview
The following discussion and analysis should be read in conjunction
with 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 From August 25, 1999 to September 30, 2000 ("fiscal 2000") vs.
the Period From September 1, 1998 to August 24, 1999 ("fiscal 1999")
Revenue
Commissions and trading income for fiscal 2000 increased 116.3%, to
$118,160,646 from fiscal 1999. The increase is a result of the addition of
registered representatives and an active market in equity securities.
Interest and dividend income, net for fiscal 2000 increased 193.6%, to
$2,707,738 from fiscal 1999. The increase is primarily due to higher average
cash balances with the Company's clearing broker.
Underwriting fees and investment banking for fiscal 2000 increased
343.5%, to $4,762,978 from fiscal 1999. The increase is primarily a result of
our participation in one underwritten public offering where we acted as a
co-manager during fiscal 2000 as opposed to not participating as a co-manager in
any public offerings for the comparable period in fiscal 1999.
Other revenues for fiscal 2000 increased by 43.2%, to $70,159 from
fiscal 1999. The increase is the result of the settlement of an insurance claim
for a faulty telephone switch.
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Expenses
Employee compensation and benefits for fiscal 2000 increased 105.9%, to
$80,334,416 from fiscal 1999. The increase is primarily attributable to the
increase in revenue (and is roughly comparable) since employee compensation to
the Company's registered representatives and traders is directly related to
certain components of revenue.
Brokerage, clearance and exchange fees for fiscal 2000 increased
170.7%, to $7,249,951 from fiscal 1999 as a result of higher ticket volume.
Communications expense for fiscal 2000 increased 51.3%, to $3,833,744
from fiscal 1999. The 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.
Occupancy and equipment costs for fiscal 2000 increased 33.9%, to
$6,849,701 from fiscal 1999. The 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 fiscal 2000 increased 19.1%, to
$2,524,596 from fiscal 1999. The increase is primarily a result of costs
associated with expanding our business, complying with regulatory requirements
and litigation expenses.
Business development costs for fiscal 2000 increased 58.3%, to
$2,429,977 from fiscal 1999. The increase is the result of increased promotional
and recruiting expenses, and an increase in registered representatives and
broker trainees, and the purchase of additional prospective customer lists used
to generate new business.
Other expenses for fiscal 2000 increased 63.7%, to $7,236,972 from
fiscal 1999. The increase is the result of an increase in reserves for potential
litigation and an increase in underwriting activities and the expenses related
to them.
Income tax provision for fiscal 2000 was $6,464,884 as compared to the
income tax benefit of $112,470 for fiscal 1999, which is consistent with the
increase in income before this income tax provision.
Net income of $8,777,659 for fiscal 2000 compares to net loss of
$324,576 for fiscal 1999. This resulted primarily from the increase in revenues
offset by increases in expenses as discussed above.
For the Period From September 1, 1998 to August 24, 1999 ("fiscal 1999") vs.
Year Ended August 31, 1998 ("fiscal 1998")
Revenue
Commissions and trading income for fiscal 1999 increased 5.0%, to
$54,625,262 from fiscal 1998. The increase is a result of the addition of
registered representatives and an active market in equity securities.
Interest and dividend income, net for fiscal 1999 was comparable to
fiscal 1998.
Underwriting fees and investment banking for fiscal 1999 decreased by
71%, to $1,386,588 from fiscal 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 fiscal 1999, while we participated in four public offerings
for our investment banking clients, raising approximately $141 million, in
fiscal 1998.
Other revenues for fiscal 1999 decreased by 66.7%, to $49,007 from
fiscal 1998. The decrease is the result of the decrease in consulting activities
from which we derive fees.
11
<PAGE>
Expenses
Employee compensation and benefits for fiscal 1999 decreased 3.8%, to
$39,018,835 from fiscal 1998. The decrease is due primarily to the elimination
of investment banking personnel and the reduction in bonuses due to our
decreased profitability.
Brokerage, clearance and exchange fees for fiscal 1999 increased 13.8%,
to $2,678,741 from fiscal 1998 as a result of higher ticket volume.
Communications expense for fiscal 1999 increased 1.1%, to $2,534,013
from fiscal 1998. The increase is a result of the establishment and operations
of an additional branch office.
Occupancy and equipment costs for fiscal 1999 increased 6.2%, to
$5,113,830 from fiscal 1998. The 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 fiscal 1999 increased 157.2%, to $2,119,803 from
fiscal 1998. The increase is primarily a result of costs associated with
expanding our business, complying with regulatory requirements and litigation
expenses.
Business development costs for fiscal 1999 decreased 17.7%, to
$1,534,638 from fiscal 1998. The decrease is primarily the result of decreased
promotional expenses.
Other expenses for fiscal 1999 increased 5.7%, to $4,420,419 from
fiscal 1998. The increase is the result of an increase in reserve for potential
litigation.
Income tax benefit for fiscal 1999 was $112,470 as compared to the
income tax provision of $435,177 for fiscal 1998, which was consistent with the
decrease in income before this income tax benefit.
Net loss of $324,576 for fiscal 1999 compares to net income of $352,270
for fiscal 1998. This resulted primarily from the decrease in revenues and
increases in expenses as discussed above.
Liquidity and Capital Resources
Approximately 77% of our assets at September 30, 2000, 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
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, 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 it's related liquidity. GBI Capital
Partners' net capital position as of September 30, 2000, and August 24, 1999,
was $ 11,033,845, and $2,773,730, respectively, which was $9,970,297 and
$2,211,230, respectively, in excess of its net capital requirements.
Our overall capital and funding needs are continually reviewed to
ensure that our capital base can support the estimated needs of our 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. From
time to time we consider certain expansion opportunities, including possible
acquisitions of other companies. In connection with pursuing such opportunities
we may need to seek external financing.
12
<PAGE>
As guarantor of our customer accounts to our clearing broker, we are
exposed to off-balance-sheet risks in the event that our customers do not
fulfill their obligations with the clearing broker. In addition, to the extent
we maintain a short position in certain securities, we are exposed to a further
off-balance-sheet market risk, since our ultimate obligation may exceed the
amount recognized in the financial statements.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Report of Goldstein Golub Kessler LLP F - 1
Consolidated Statements of Financial Condition
as of September 30, 2000 and August 24, 1999 F - 2
Consolidated Statements of Operations for the periods
from August 25, 1999 to September 30, 2000, and
September 1, 1998 to August 24, 1999, and for the
year ended August 31, 1998 F - 3
Consolidated Statements of Changes in Stockholders' Equity
for the periods from August 25, 1999 to September 30,
2000, and September 1, 1998 to August 24, 1999, and
for the year ended August 31, 1998 F - 4
Consolidated Statements of Cash Flows for the periods from
August 25, 1999 to September 30, 2000, and September 1,
1998 to August 24, 1999, and for the year ended
August 31, 1998 F - 5
Notes to Consolidated Financial Statements F - 6
13
<PAGE>
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 Subsidiaries as of September 30, 2000 and
August 24, 1999, and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for the periods from August 25, 1999 to
September 30, 2000 and 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 Subsidiaries as of September 30, 2000 and August 24, 1999,
and the results of their operations and their cash flows for the periods from
August 25, 1999 to September 30, 2000 and September 1, 1998 to August 24, 1999
and for the year ended August 31, 1998, in conformity with generally accepted
accounting principles.
/S/ GOLDSTEIN GOLUB KESSLER LLP
GOLDSTEIN GOLUB KESSLER LLP
November 11, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Financial Condition
<S> <C> <C>
September 30, August 24,
2000 1999
------------ ----------
ASSETS:
Cash and cash equivalents $ 5,255,669 $ 502,437
Receivable from broker 21,507,788 8,576,148
Securities owned, at market value 3,513,865 3,390,606
Furniture, fixtures and Leasehold Improvements, at cost, net of
accumulated depreciation and amortization of $2,831,499 and $2,051,418 at
September 30, 2000 and August 24, 1999, respectively. 4,166,744 2,468,361
Deferred tax asset 1,156,000 834,000
Investment in and receivable from affiliates 1,489,134 -
Other Assets 2,330,803 1,361,393
----------- ----------
Total assets $39,420,003 $17,132,945
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, not yet purchased, at market value $ 2,203,708 $ 3,918,091
Note payable - 243,667
Income taxes payable 182,788 84,600
Accrued expenses and other liabilities 15,770,427 4,820,811
----------- ----------
Total liabilities 18,156,923 9,067,169
----------- ----------
Commitments and Contingencies - -
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 13,729,436 4,952,156
----------- ----------
Total stockholders' equity 21,263,080 8,065,776
----------- ----------
Total liabilities and stockholders' equity $39,420,003 $17,132,945
================= ================
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the period For the period
August 25,1999 September 1, 1998 For the Year Ended
to September 30, to August 24, August 31,
2000 1999 1998
<S> <C> <C> <C>
---------------- ------------- -------------------
Revenues:
Commissions and trading income $ 118,160,646 $ 54,625,262 $ 52,025,409
Interest and dividends, net 2,707,738 922,376 927,356
Underwriting fees 4,762,978 1,386,588 4,795,185
Other 70,159 49,007 147,010
---------------- ------------- -------------------
125,701,521 56,983,233 57,894,960
---------------- ------------- -------------------
Expenses:
Compensation and benefits 80,334,416 39,018,835 40,561,426
Brokerage, clearance and exchange fees 7,249,951 2,678,741 2,354,440
Communications 3,833,744 2,534,013 2,505,735
Occupancy and equipment 6,849,701 5,113,830 4,814,782
Professional fees 2,524,596 2,119,803 824,101
Business development 2,429,977 1,534,638 1,864,315
Other 7,236,972 4,420,419 4,182,714
---------------- ------------- -------------------
110,459,357 57,420,279 57,107,513
---------------- ------------- -------------------
Income (loss) before provision
for income taxes 15,242,164 (437,046) 787,447
Income tax (provision) benefit (6,464,884) 112,470 (435,177)
---------------- ------------- -------------------
Net income (loss) $ 8,777,280 $ (324,576) $ 352,270
================ ============= ===================
Basic (loss) earnings per common share $ 0.47 $ (.02) $ 0.03
================ ============= ===================
Diluted (loss) earnings per comMon share $ 0.47 $ (.02) $ 0.03
================ ============= ===================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the period from September 1, 1997 to September 30, 2000
<TABLE>
<CAPTION>
Common
Stock Additional Stock
------------------------ Paid-in Retained Treasury Subscription
Shares Par Value Capital Earnings Stock Receivable Total
---------- ------------ ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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,
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 loss -- -- -- (324,576) -- -- (324,576)
---------- ------------ ----------- ----------- ------------ ---------- ----------
Stockholders' equity,
August 24, 1999 15,999,410 1,600 3,112,020 4,952,156 -- -- 8,065,776
Net Income -- -- -- 684,711 -- -- 684,711
Stock Issued in connection with
reverse merger 2,807,202 281 4,424,781 -- -- -- 4,425,062
Stockholders' equity,
September 30, 1999 18,806,612 1,881 7,536,801 5,636,867 -- -- 13,175,549
Net Income -- -- -- 8,092,569 -- -- 8,092,569
Syndication Costs -- -- (5,038) -- -- -- (5,038)
---------- ----------- ----------- ----------- ------------ ---------- ----------
Stockholders' equity,
September 30, 2000 18,806,612 $ 1,881 $ 7,531,763 $ 13,729,436 $ -- $ -- $21,263,080
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
GBI CAPITAL MANAGEMENT CORP. and SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the period For the period
August 25,1999 September 1, 1998 For the Year Ended
to September 30, to August 24, August 31,
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,777,280 $ (324,576) $ 352,270
Adjustments to reconcile net income (loss) to net cash
provided by (used in)operating activities:
Depreciation and amortization 780,080 710,076 553,094
Deferred income taxes (322,000) (284,100) (2,511,900)
Unrealized loss on investment in affiliate 90,027 -- --
Decrease (increase) in operating assets:
Receivable from clearing broker dealer (12,931,640) 857,340 146,809
Securities owned, at market value (123,259) (854,018) 4,768,726
Other assets (969,410) (787,673) 23,908
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased, at market value (1,714,383) 1,031,596 (3,311,056)
Income taxes payable 98,188 (2,249,122) 1,571,141
Accrued expenses and other liabilities 10,949,616 608,182 (850,988)
----------- ----------- -----------
Net cash (used in) provided by operating activities 4,634,499 (1,292,295) 742,004
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (2,478,463) (139,901) (602,089)
Investment in affiliate (1,579,161) -- --
----------- ----------- -----------
Net cash (used in) investing activities (4,057,624) (139,901) (602,089)
----------- ----------- -----------
Cash flows from financing activities:
Collection of stock subscriptions receivable -- 3,192,967 --
Sale of common stock 4,425,062 56,500 547,333
Syndication costs (5,038) -- --
Purchase and retirement of common stock -- (238,299) --
Purchase of common stock into treasury -- -- (400,937)
Repayment of subordinated borrowing -- (1,000,000) --
Payment of note payable (243,667) (666,667) --
Proceeds from note payable -- 77,001 --
----------- ----------- -----------
Net cash provided by financing activities 4,176,357 1,421,502 146,396
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 4,753,232 (10,694) 286,311
Cash and cash equivalents at beginning of period 502,437 513,131 226,820
----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,255,669 $ 502,437 $ 513,131
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,033,646 $ 2,744,398 $ 1,706,236
============ =========== ==========
Income taxes $ 6,551,654 $ 2,606,431 $ 1,366,448
============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
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 30. The Company's
Statement of Operations, Statements of Changes in Stockholders Equity,
and Statement of Cash Flows for 1999 and 2000 are for the period
September 1, 1998 to August 24, 1999 and August 25, 1999 to September
30, 2000, respectively.
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 September 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 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.
The investment in affiliates consists of a limited partnership
investment in the GBI 1500 Focus Fund L.P. accounted for by the equity
method.
F-6
<PAGE>
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. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED:
<TABLE>
<CAPTION>
Securities owned and securities sold, not yet purchased consists of:
<S> <C> <C> <C> <C> <C>
2000 2000 1999 1999
Securities Securities Sold Securities Securities Sold
Owned Not Yet Purchased Owned Not Yet Purchased
------------------- ----------------------- ----------------- ------------------------
Equities $ 1,423,861 $ 2,131,341 $ 710,253 $ 3,886,145
Warrants 2,090,004 72,367 2,679,103 31,946
Options 1,250
------------------- ----------------------- ----------------- ------------------------
$ 3,513,865 $ 2,203,708 $ 3,390,606 $ 3,918,091
=================== ======================= ================= ========================
</TABLE>
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 GBI
Capital 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 GBI Capital's ultimate
obligation may exceed the amount recognized in the financial
statements.
Stock warrants may not be 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 trading income.
3. INCOME TAXES:
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Period from Period from
<S> <C> <C> <C> <C>
August 25, 1999 September 1, 1998 Year Ended
to September 30, to August 24, August 31,
2000 1999 1998
--------------------------- ---------------------- -----------------------
Current:
Federal $ 4,935,111 $ 79,678 $ 2,194,596
State and local 1,851,773 91,952 752,481
------------------- ---------------- ------------------
Total Current 6,786,884 171,630 2,947,077
------------------- ---------------- ------------------
Deferred:
Federal (242,000) (209,000) (1,804,000)
State and Local (80,000) (75,100) (707,900)
------------------- ---------------- ------------------
Total deferred (322,000) (284,100) (2,511,900)
------------------- ---------------- ------------------
Provision (benefit) $ 6,464,884 $ (112,470) $ 435,177
=================== ================ ==================
</TABLE>
The provision (benefit) for income taxes for the periods ended
September 30, 2000, August 24, 1999 and August 31, 1998, differs from
the amount computed using the federal statutory rate of 34% as a result
of the following:
F-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2000 1999 1998
------------- -------------- -------------
Tax (benefit) at federal statutory rate 34% (34%) 34%
State income taxes 9% 8% 9%
Other - - 12%
------------- -------------- -------------
43% (26%) 55%
============= ============== =============
</TABLE>
The deferred tax asset results from the following:
2000 1999
---------------- ----------------
Deferred rent $ 179,000 $ 0
Acrued settlements 977,000 834,000
---------------- ----------------
Total deferred tax asset $ 1,156,000 $ 834,000
---------------------------
The Company files consolidated federal income tax returns, but each
constituent entity files separate state income tax returns.
4. 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 September 30, 2000, August 24, 1999, and August 31, 1998, GBI
Capital had net capital, as defined, of $11,033,845, $2,773,730, and
$1,807,781, respectively, which exceeded minimum net capital
requirements of $1,063,548, $562,500 and $492,003 by $9,970,297,
$2,211,230 and $1,315,778, respectively.
5. PROFIT-SHARING PLAN
GBI Capital 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. GBI Capital made no contribution to the
plan for the period from August 25, 1999 to September 30, 2000, the
period from September 1, 1998 to August 24, 1999 and the year ended
August 31, 1998.
6. SUBORDINATED BORROWING
GBI Capital repaid a subordinated loan on July 22, 1999. The
subordinated borrowing had been approved by the NASD for inclusion in
computing GBI Capital's net capital pursuant to the Net Capital Rule.
The loan had been established with a stockholder of GBI Capital 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 September 1, 1998
to August 24, 1999, and approximately $80,000 for the year ended August
31, 1998.
F-8
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
GBI Capital 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 31, 2001, respectively. GBI
Capital also occupies additional space for its branch in California
under month-to-month leases. The minimum annual rental payments for
these leases are as follows:
Year ending September 30,
2000 $ 1,920,032
2001 1,952,652
2002 1,986,088
2003 2,027,688
2004 2,143,380
Thereafter 5,339,622
----------------
$15,369,462
================
The leases contain provisions for escalations based on increases in
certain costs incurred by the lessor. GBI Capital has the option to
renew one of these leases for an additional three-year period. Rent
expense was $2,758,075 for the period ended September 30, 2000,
$1,618,970 for the period ended August 24, 1999, and $1,997,871 for the
year ended August 31, 1998.
The leases provide for rent abatements and scheduled increases in base
rent. Rent expense is charged to operations ratably over the term of
the leases which results in deferred rent payable which represents
cumulative rent expense charged to operations from inception of these
leases in excess of required lease payments.
As of September 30, 2000, the Company has employment agreements with
five key executives through August 2004. The agreements provide for
annual base salaries of $600,000 for the next five years. In addition,
the agreement provides for additional compensation based upon a
percentage of income as defined in the agreements.
GBI Capital has been named as defendant in certain legal actions in the
ordinary course of business. At September 30, 2000, August 24, 1999,
and August 31, 1998, GBI Capital had accrued $ 2,348,000, $2,004,000
and $1,400,000, respectively, for settlement of all such legal
proceedings.
8. FINANCIAL INSTRUMENTS
GBI Capital'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.
GBI Capital may receive warrants as a part of its underwriting
activities for initial public offerings.
Such transactions may result in credit exposure in the event the
counter party 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 of price
fluctuations.
F-9
<PAGE>
9. EARNINGS PER SHARE
Net income (loss) per common share is calculated by dividing net income
by weighted average number of common shares outstanding. Stock options
outstanding have not been included in the computation of diluted EPS,
as the effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted
earnings per share ("EPS"):
<TABLE>
<CAPTION>
August 25, 1999 September 1, 1998 Year Ended
to September 30, to August 24, August 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Numerator for basic and diluted EPS:
Net income (loss) $ 8,777,280 $ (324,576) $ 352,270
=================== ======================= ===============
Denominator for basic and
dilutive EPS 18,806,612 16,473,748 11,421,819
=================== ======================= ===============
</TABLE>
10. ACCRUED EXPENSES
At September 30, 2000, GBI Capital had accrued expenses of $15,770,427,
of which $4,500,178 was for commissions and salaries payable,
$5,750,375 was for bonus accrual, $2,348,000 was for settlements,
$998,198 was for deferred rent payable, and $2,173,376 was for other
accruals (none more than 5% of accrued expenses). At August 24, 1999,
GBI Capital had accrued expenses of $4,820,811, of which $1,400,000
was for commissions and salaries payable, $200,000 was for bonuses,
$2,022,561 was for settlements, $533,656 was for deferred rent, and
$664,594 was for other accruals (none more than 5% of accrued
expenses).
11. INTEREST EXPENSE
During the periods August 25, 1999 to September 30, 2000, and September
1, 1998 to August 24, 1999, and for the year ended August 31, 1998, the
Company incurred interest expense of $5,039,359, $2,815,422 and
$1,706,236, respectively.
F-10
<PAGE>
12. STOCK OPTION PLAN
In 1999, the Company adopted the 1999 Performance Equity Plan (the "Plan")
which provides for the grant of stock options and stock purchase rights to
certain designated employees, officers and directors and certain other
persons performing services for the Company, as designated by the board of
directors. Pursuant to the Plan, an aggregate of 3,000,000 shares of common
stock have been reserved for issuance.
A summary of the status of the Plan at September 30, 2000, and changes
during the period ended September 30, 2000, is presented below:
Weighted Avg.
Shares Exercise Price
----------------------------------------------------------------------------
Granted 1,691,988 $ 3.36
Forfeited 27,875 3.00
----------------------------------------------------------------------------
Outstanding at end of period 1,664,113 3.36
----------------------------------------------------------------------------
Options exercisable at year-end 277,198 4.03
----------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices September 30, 2000 Life (Years) Price September 30, 2000 Price
--------------- ---------------------- ------------------ ----------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
4.47 200,000 3.92 4.47 89,508 4.47
4.06 300,000 8.92 4.06 147,690 4.06
3.00 1,127,749 9.21 3.00 40,000 3.00
2.75 36,364 9.25 2.75 - 2.75
--------------- ---------------------- ------------------ ----------------- ---------------------- --------------
1,664,113 8.52 3.36 277,198 4.03
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compenstion cost has been
recognized for the stock option plans. Had compensation cost been
determined based on the fair value at the grant dates for those awards
consistent with the method of FASB Statement No. 123, the Company's net
income and net income per share for the year ended September 30, 2000,
would have been increased to the pro forma amounts indicated below:
-------------------------------------------------------------------------------
Net income:
As reported $8,777,280
--------------------------------------------------------------------------------
Pro forma 7,270,529
--------------------------------------------------------------------------------
Earnings per share:
As reported - Basic and diluted $ .47
--------------------------------------------------------------------------------
Pro forma - Basic and diluted $ .39
-------------------------------------------------------------------------------
The estimated grant date present value reflected in the above table is
determined using the Black-Scholes model. The material factors incorporated
in the Black-Scholes model in estimating the value of the options reflected
in the above table include the following: (i) the fair market value of the
underlying stock on the dates of grant, (ii) an option term ranging from 5
to 10 years, (iii) a risk-free rate range of 5.81% to 6.41% that represents
the interest rate on a U.S. Treasury security with a maturity date
corresponding to that of the option term, (iv) volatility of 97.73% and (v)
no annualized dividends paid with respect to a share of common stock at the
date of grant. The ultimate values of the options will depend on the future
price of the Company's common stock, which cannot be forecast with
reasonable accuracy.
F-11
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As reported in our Current Report on Form 8-K, dated August 24, 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 the
year ended August 31, 1998 did not contain an adverse option or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. (See second paragraph of Note 1 of Notes to Consolidated
Financial Statements.) The decision to dismiss Arthur Andersen LLP and engage
Goldstein Golub Kessler LLP was made by our board of directors. During the
fiscal year ended August 31, 1998, 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 to be included in our definitive proxy statement in
connection with the next Annual Meeting of Stockholders, which we intend to file
within 120 days after the close of our fiscal year. If our definitive proxy is
not filed by that time, we will file an amendment to this Form 10-K which
discloses the information required by Items 10, 11, 12 and 13.
24
<PAGE>
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: December 27, 2000
By: /s/ Joseph Berland
----------------------------
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/ Joseph Berland
--------------------------------
Joseph Berland Chairman of the Board and December 27, 2000
Chief Executive Officer
/s/ Diane Chillemi
--------------------------------
Diane Chillemi Chief Financial Officer December 27, 2000
(and Principal Accounting
Officer)
/s/ Vincent Mangone
-------------------------------
Vincent Mangone Director December 27, 2000
/s/ Benjamin Pelton
-------------------------------
Benjamin Pelton Director December 27, 2000
/s/ Steven A. Rosen
-------------------------------
Steven A. Rosen Director December 27, 2000
/s/ Richard J. Rosenstock
-------------------------------
Richard J. Rosenstock Director December 27, 2000
/s/ Mark Zeitchick
-------------------------------
Mark Zeitchick Director December 27, 2000
/s/ Kenneth Sperber
-------------------------------
Kenneth Sperber Director December 27, 2000
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C> <C> <C>
Incorporated
Exhibit By Reference from
Number Description Document No. in Document Page
------ ----------- -------- --------------- ----
2.1 Agreement and Plan of Merger, dated May 27, 1999 A 2.1
3.1 Articles of Incorporation B 3.1
3.2 Articles of Amendment to the Articles of D 3.2
Incorporation, dated August 24, 1999
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 Registrant B 4.2
and Cardinal Capital Management, Inc. (including
the form of Warrant Certificate).
10.1 Agreement of Lease, dated December 20, 1996, D 10.1
between the Registrant and Briarcliffe College,
Inc.
10.2 Standard Form of Office Lease, dated August 3, D 10.2
1999, between the Registrant and Mayore Estates
LLC and 80 Lafayette LLC, together with
Amendment, dated August 19, 1999.
10.3 Agreement for Securities Clearance Services, D 10.3
dated April 30, 1985, between 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 August 24, C Exhibit "F"
1999, between the Registrant and certain
employees*
10.7.1 Schedule of Employment Agreements in the form of D 10.7.1
Exhibit 10.7, including material detail in which
such documents differ from Exhibit 10.7*
10.8 Form of Stock Option Agreement, dated August 24,
1999, between the Registrant and certain -- -- Filed
employees* Herewith
10.8.1 Schedule of Stock Option Agreements in the form
of Exhibit 10.8, including material detail in -- -- Filed
which such documents differ from Exhibit 10.8* Herewith
26
<PAGE>
10.9 Form of Stock Option Agreement, dated December
13, 1999, between the Registrant and certain -- -- Filed
directors* Herewith
10.9.1 Schedule of Stock Option Agreements in the form
of Exhibit 10.9, including material detail in Filed
which such documents differ from Exhibit 10.9* -- -- Herewith
10.10 Form of Stock Option Agreement, dated December
13, 1999, between the Registrant and Diane -- -- Filed
Chillemi* Herewith
21 List of Subsidiaries -- -- Filed
Herewith
23.1 Accountant's Consent -- -- Filed
Herewith
27 Financial Data Schedule -- -- Filed
Herewith
99 Risk Factors -- -- Filed
Herewith
---------------------
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.
D. Registrant's Annual Report on Form 10-K for the year ended August 24, 1999.
* Management Compensation Contract
</TABLE>
27
