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, 1999
OR
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to ___________________
Commission File number 0-22265
GBI CAPITAL MANAGEMENT CORP.
(Exact Name of Registrant as Specified in its Charter)
Florida 65-0701248
- ------------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1055 Stewart Avenue, Bethpage, New York 11714
- ------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (516) 470-1000
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO______
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: At February 9,
2000, Issuer had outstanding 18,806,612 shares of Common Stock, par value $.0001
per share.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GBI CAPITAL MANAGEMENT CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
December 31, August 24,
1999 1999
------------- ------------------
(Unaudited)
<S> <C> <C>
Assets
Cash $ 228,878 $ 502,437
Receivable from brokers and dealerws 20,314,466 8,576,148
Securities owned, at market value 13,148,681 3,390,606
Furniture, fixtures and leasehold improvements,
at cost net of accumulated depreciation and
amoritization of$2,251,101 and $2,051,418 for December 31,
1999 and August 24, 1999 respectively 2,607,064 2,468,361
Deferred tax asset 1,019,206 834,000
Other assets 1,420,332 1,361,393
------------- ---------------
Total assets $ 38,738,627 $ 17,132,945
============= ===============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 12,023,506 $ 3,918,091
Note payable - 243,667
Income taxes payable 964,007 84,600
Accrued expenses and other liabilities 11,093,983 4,820,811
------------- ---------------
Total liabilities 24,081,496 9,067,169
------------- ---------------
Stockholders' equity:
Common stock - $.0001 par value;
Authotized 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 3,112,021
Retained earnings 7,123,487 4,952,156
------------- ---------------
Total stockholders' equity 14,657,131 8,065,776
------------- ---------------
Total liabilitiees and stockholders' equity $ 38,738,627 $ 17,132,945
============= ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GBI CAPITAL MANAGEMENT CORP. AND SUBSIDIARIES
Cconsolidated Statements of Operations
<TABLE>
For the Three Months Ended
December 31, December 31,
1999 1998
---------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Commissions and trading income $ 23,643,961 $ 15,874,460
Interest and dividends, net 368,025 172,657
Underwriting fees 343,127 (91,801)
Other 43,092 16,667
------------- ----------------
Total revenues 24,398,205 15,971,983
------------- ----------------
Expenses:
Compensation and benefits 16,261,551 11,935,449
Brokerage, clearance and exchange fees 1,635,225 1,131,809
Communications 702,473 485,576
Occupancy and equipment 1,339,360 1,009,067
Professional fees 323,444 181,527
Business development 389,362 374,533
Other 1,250,879 1,231,819
------------- ----------------
Total expenses 21,902,294 16,349,780
------------- ----------------
Income (loss) before provisions for income taxes 2,495,911 (377,797)
Income tax provision (benefit) 1,009,292 (40,700)
------------- -----------------
Net income (loss) $ 1,486,619 $ (337,097)
============= =================
Basic earnings (loss) per common share $ .08 $ (.02)
============= =================
Diluted earnings (loss) per common share $ .08 $ (.02)
============= =================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
GBI CAPITAL MANAGEMENT CORP. AND SUBSIDIARIES
Consolidated Statements Changes in Stockholders' Equity
<TABLE>
For the Three Months Ended December 31, 1999
---------------------------------------------
Common Stock Additional
------------------- Paid-in Retained
Shares Par Value Capital Earnings Total
--------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1999 18,806,612 1,881 7,536,801 5,636,867 13,175,549
Syndication costs - - (5,038) (5,038)
Net income - - - 1,486,619 1,486,619
--------- ----------- ----------- ---------- ------------
Balance at December 31, 1999 18,806,612 $ 1,881 $ 7,531,763 $ 7,123,486 $ 14,657,130
========== =========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
GBI CAPITAL MANAGEMENT CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
Three Months Ended December 31,
--------------------------------------
1999 1998
-------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 1,486,619 $(337,097)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 151,408 133,500
Deferred taxes (167,206) (5,200)
Decrease (increase) in operating assets:
Receivable from brokers and dealers (6,201,384) 137,560
Securities owned, at market value (4,054,863) (1,161,105)
Other assets (312,611) (2,961,096)
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased 4,769,698 2,037,815
Income taxes payable 463,165 (2,377,032)
Accrued expenses and other liabilitiees 3,881,769 1,955,587
-------------- ------------
Net cash provided by (used in) operating activities 16,595 (2,577,068)
-------------- ------------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (268,049) (122,602)
Syndication costs (5,038) (115,035)
--------------- --------------
Net cash used in investing activities (273,087) (237,637)
--------------- --------------
Financing activities:
Subscriptions received - 3,070,267
-------------- -------------
Net cash provided by financing activities - 3,070,267
-------------- -------------
Net (decrease) increase in cash (256,492) 255,562
Cash at beginning of period 485,370 501,912
-------------- --------------
Cash at end of period $ 228,878 $ 757,474
============== ===============
Supplemental disclosure or cash flow information
Cash paid during the year for:
Interest $ 874,429 $ 639,414
Income Taxes $ 709,435 $ -
</TABLE>
See accompanying notes to financial statements.
4
<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 Gaines, Berland Inc.
("Gaines Berland"), GBI Trading Corp. (a development stage company) and GBI
Fund Management Corp. (the general partner of the GBI 1500 Focus Fund L.P.,
a private investment partnership formed in August 1999), (collectively the
"Company"). GBI Trading Corp. 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
Gaines Berland. For accounting purposes, the acquisition has been treated
as a recapitalization of Gaines Berland with Gaines Berland as the acquirer
(reverse acquisition). The historical financial statements prior to August
24, 1999 are those of Gaines Berland.
Gaines, Berland Inc. is a broker-dealer registered with the Securities and
Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. Gaines Berland acts as an introducing broker,
market maker, underwriter and trader for its own account.
Gaines Berland does not carry accounts for customers or perform custodial
functions related to customers' securities. Gaines Berland introduces all
of its customer transactions, which are not reflected in these financial
statements, to its clearing broker, which maintains the customers' accounts
and clears such transactions. Additionally, this clearing broker provides
the clearing and depository operations for Gaines Berland's proprietary
securities transactions. These activities may expose the company to
off-balance-sheet risk in the event that customers do not fulfill their
obligations with the clearing broker, as Gaines Berland has agreed to
indemnify the clearing broker for any resulting losses.
At December 31, 1999, all of the securities owned and securities sold, not
yet purchased, and the amount receivable from clearing broker reflected on
the consolidated statement of financial condition are security positions
with and amounts due from this clearing broker.
The Company maintains cash in bank deposit accounts, which at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit
risk on cash.
Securities transactions, commission revenue and commission expenses are
recorded on a trade-date basis. Unrealized gains and losses on securities
transactions are included in commissions and trading income in the
consolidated statement of operations.
The financial statements have been prepared in conformity with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q. Accordingly they do not include all of the
information and footnotes as required by generally accepted accounting
principles for annual financial statements. These consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended August 24, 1999,
contained in its Annual Report on Form 10-K. Certain reclassifications have
been made to the prior year amounts to conform to the current presentation.
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, 1999 are not necessarily indicative of the results that may be
expected for the full year ending September 30, 2000.
Furniture and fixtures are depreciated on a straight-line basis over the
economic useful lives of the assets, not exceeding seven years. Leasehold
improvements are amortized over the lesser of their economic useful lives
or the expected term of the related lease.
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.
5
<PAGE>
2. INCOME TAXES
The Company files consolidated federal income tax returns, but each
constituent entity files separate state income tax returns. The provision
for income taxes differs from the amount of income taxes determined by
applying the federal statutory rates principally because of the effect of
state taxes and permanent differences.
3. NET CAPITAL REQUIREMENT
As a registered broker-dealer, Gaines Berland is subject to the SEC's
Uniform Net Capital Rule 15c3-1 ("Net Capital Rule"), which requires the
maintenance of minimum net capital. Gaines Berland computes its net capital
under the aggregate indebtedness method permitted by rule 15c3-1, which
requires that Gaines Berland maintain minimum net capital, as defined, of
the greater of 6-2/3% of aggregate indebtedness, as defined, or $100,000,
or an amount determined based on the market price and number of securities
in which Gaines Berland is a market-maker, not to exceed $1,000,000.
At December 31, 1999, Gaines Berland had net capital, as defined, of
$3,297,221, which exceeded minimum net capital requirements of $803,532 by
$2,493,689.
4. COMMITMENTS AND CONTINGENCIES
Gaines Berland has been named as defendant in certain legal actions in the
ordinary course of business. At December 31, 1999 and December 31, 1998,
Gaines Berland had accrued $2,463,100 and $1,392,000, respectively, for
settlement of all such legal proceedings.
5. EARNINGS PER SHARE
Net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. The
following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
Three months ended December 31, 1999:
Basic and dilutive:
Income available to common stockholders (numerator) $ 1,486,619
Weighted-average shares (denominator) 18,806,612
Per-Share amount $ .08
Three months ended December 31, 1998:
Basic and dilutive:
Loss available to common stockholders (numerator) $ (337,097)
Weighted-average shares (denominator) 17,046,850
Per-Share amount $ (.02)
6. ACCRUED EXPENSES
At December 31, 1999 Gaines Berland had accrued expenses of $11,093,983, of
which $6,603,000 was for commissions payable, $825,000 was for bonus
accrual, $2,463,100 was for settlements and $759,794 was for deferred rent
payable.
6
<PAGE>
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
Commissions and trading income for the three months ended December 31, 1999
increased 48.9% to $23,643,961 from the three months ended December 31, 1998.
This increase is a result of the addition of registered representatives and an
active market in equity securities.
Interest and dividend income, net for the three months ended December 31,
1999 increased 113.1%, to $368,025 from the comparable period in 1998. The
increase is primarily due to higher average cash balances with our clearing
broker, rising interest rates and the elimination of interest expense on a
subordinated loan that was satisfied in July of 1999.
Underwriting fees for the three months ended December 31, 1999 increased by
473.8%, to $343,127, from the comparable period in 1998. The increase is the
result of our participation in three underwritten public offerings as a
co-manager, during the 1999 period, as opposed to not participating in any
public offerings for the comparable period in 1998.
Other revenues for the three months ended December 31, 1999 increased
158.6%, to $43,092 from the three months ended December 31, 1998. This increase
is due to an insurance claim for a faulty telephone switch that was settled in
December 1999.
Employee compensation and benefits for the three months ended December 31,
1999 increased 36.3%, to $16,261,551 from the comparable period in 1998. The
increase is primarily attributable to the increase in our revenues since
employee compensation to the Company's traders and registered representatives is
directly related to certain components of revenue. Employee compensation and
benefits as a percentage of commission and trading revenue actually decreased
6.8% in 1999.
Brokerage, clearance and exchange fees for the three months ended December
31, 1999 increased 44.5%, to $1,635,225, from the comparable period in 1998 as a
result of higher ticket volume.
Communications expense for the three months ended December 31, 1999
increased 44.7%, to $702,473, from the comparable period in 1998. This increase
is a result of the establishment and operations of an additional branch office
in Florida and the expansion of the New York City office.
Occupancy and equipment costs for the three months ended December 31, 1999
increased 32.7%, to $1,339,360, from the comparable period in 1998. This
increase is a result of the establishment of an additional branch office in
Florida and the relocation to a larger facility in New York City.
Professional fees for the three months ended December 31, 1999 increased
78.2%, to $323,444, from the comparable period in 1998. This increase is
primarily a result of our decision to use outside counsel for customer
arbitrations in 1999.
7
<PAGE>
Business development costs for the three months ended December 31, 1999
increased 4%, to $389,362, from the comparable period in 1998. This increase is
primarily the result of additional registered representatives and broker
trainees, and the purchase of additional prospective customer lists used to
generate new business.
Other expenses for the three months ended December 31, 1999 were generally
comparable to the corresponding period in 1998.
Income tax provision for the three months ended December 31, 1999 was
$1,009,292 as compared to the income tax benefit of $40,700 for the three months
ended December 31, 1998, which was consistent with the increase in income before
this income tax provision.
Net income of $1,486,619 for the three months ended December 31, 1999,
compares to net loss of $337,097 for the three months ended December 31, 1998.
This resulted primarily from the increase in revenues offset by increases in
expenses as discussed above.
Liquidity and Capital Resources
Approximately 87% of the Company's assets at December 31, 1999 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, Gaines, Berland 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. Gaines Berland's
net capital position as of December 31, 1999, was $3,297,221, which was
$2,493,689, in excess of its' net capital requirement.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business
units. These reviews take into account business needs as well as regulatory
capital requirements of the subsidiary. Based upon these reviews, management
believes that the Company's capital structure is adequate for current operations
and reasonably foreseeable future needs.
The Company's brokerage subsidiary, as guarantor of its customer accounts
to its clearing broker, is exposed to off-balance-sheet risks in the event that
its customers do not fulfill their obligations with the clearing broker. In
addition, to the extent the Company maintains a short position in certain
securities, it is exposed to a further off-balance-sheet market risk, since the
Company's ultimate obligation may exceed the amount recognized in the financial
statements.
Other Matters
Year 2000 computer issue
We initiated a firm-wide program to address the Year 2000 computer issue in
order to prepare our computer systems and applications for properly processing
dates after December 31, 1999. This program consisted of a series of steps to
identify all critical and non-critical systems, determine Year 2000 compliance
through inquiries and testing and change non-compliant systems. Our program was
substantially in place before yearend 1999, and, to our knowledge, has prevented
any problems associated with the Year 2000 computer issue. Our entire program
cost less than $200,000. We do not foresee the occurrence of any Year 2000
problems in the future.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, Gaines Berland was named as a defendant in a class action
lawsuit commenced in the United States District Court for the Southern District
of Texas relating to a secondary public offering of Mitcham Industries, Inc. for
which it served as an underwriter with Jefferies & Company, Inc. and Rauscher
Pierce Refsnes, Inc. (the "Moskowitz Class Action"). That offering involved the
sale of approximately $35,000,000 in securities, although the amount of damages
claimed is undeterminable at this time. Gaines Berland, along with the other
underwriters, is entitled to be indemnified by Mitcham pursuant to the
underwriting agreement executed in connection with that offering, subject to
certain qualifications, reservations and limitations as provided in that
underwriting agreement. On September 28, 1999, the underwriter defendants'
(including Gaines Berland) motion to dismiss this lawsuit against them was
granted by the Court. On or about December 8, 1999, plaintiffs filed an amended
complaint. On January 18, 2000, the underwriter defendants filed a motion to
dismiss the amended complaint. The motion to dismiss is currently pending.
In addition to the foregoing, Gaines Berland has been, and continues to be
the subject of numerous civil actions and arbitrations arising out of customer
complaints relating to its activities as a broker-dealer in securities, as an
employer and as a result of other business activities. In general, the cases
involve various allegations that employees of Gaines Berland had mishandled
customer accounts. At December 31, 1999, we estimate that the total amount
sought from Gaines Berland in pending and threatened claims is approximately
$12,020,000. 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 2. SALES OF UNREGISTERED SECURITIES
<TABLE>
Consideration Received
and Description of If Option, Warrant
Underwriting or Other or Convertible
Discounts to Market Security, Terms of
Title of Price Afforded To Exemption from Exercise or
Date of Sale Security Number Sold Purchasers Registration Claimed Conversions
- ------------ -------- ----------- ---------- -------------------- -----------
<C> <C> <C> <C> <C> <C>
12/13/99 Options to 1,115,624 Options granted under 4(2) 1/3 exercisable
purchase Common 1999 Performance Equity 12/13/00, 12/13/01,
Stock Plan; no cash 12/13/02 at an
consideration received exercise price of
by Company until $3.00 per share and
exercise which all expire
12/12/09
12/13/99 Options to 40,000 Options granted under 100% exercisable
purchase 1999 Performance immediately at an
Common Stock Equity Plan; no cash exercise price of
consideration received $3.00 per share and
by Company until which all expire
exercise 4(2) 12/12/00
</TABLE>
9
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule (12/31/99)
(b) Reports on Form 8-K
None.
10
<PAGE>
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 10, 2000 By: /s/ Joseph Berland
----------------------
Joseph Berland
Chairman of the Board and
Chief Executive Officer
By: /s/ Diane Chillemi
------------------------
Diane Chillemi
Chief Financial Officer
11
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- -------- ------------------
27 Financial Data Schedule (9/30/99)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC -31-1999
<CASH> 228,878
<SECURITIES> 13,148,681
<RECEIVABLES> 20,314,466
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,692,025
<PP&E> 2,607,064
<DEPRECIATION> (2,251,101)
<TOTAL-ASSETS> 38,738,627
<CURRENT-LIABILITIES> 24,081,496
<BONDS> 0
<COMMON> 1,881
0
0
<OTHER-SE> 14,655,250
<TOTAL-LIABILITY-AND-EQUITY> 38,738,627
<SALES> 24,398,205
<TOTAL-REVENUES> 24,398,205
<CGS> 18,286,138
<TOTAL-COSTS> 18,286,138
<OTHER-EXPENSES> 3,616,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,495,911
<INCOME-TAX> 1,009,292
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,486,619
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
