UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A-5
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of The Securities Exchange Act of 1934
SUMMIT BROKERAGE SERVICES, INC.
(Name of Small Business Issuer in its charter)
Florida 59-3041826
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
25 Fifth Avenue, Indialantic, Florida 32903
(Address of principal executive offices) (zip code)
Issuer's telephone number: (321) 724-2303
Securities to be registered under Section 12(g) of the Act:
Title of each class Name of each exchange on which each class
is to be registered
---------------------- -----------------------------------------
Common OTC Bulletin Board
Securities to be registered pursuant to Section 12(g) of the Act.
Common Stock, $.0001 par value
<PAGE>
INTRODUCTORY STATEMENT
Summit Brokerage Services, Inc. (the "Company" or "Summit") has elected to
file this Form 10-SB registration statement on a voluntary basis in order to
become a reporting company under the Securities Act of 1934. The primary purpose
for this is that the Company intends to be listed for trading on the OTC
Electronic Bulletin Board. Under the current NASD rules, in order to become
listed on the OTC Electronic Bulletin Board, a company now must be a reporting
company under the Securities Act of 1934.
This registration statement, including the information that may be
incorporated herein by reference, contains forward-looking statements including
statements regarding, among other items, the Company's business and growth
strategies, and anticipated trends in the Company's business and demographics.
These forward-looking statements are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control. Actual results
could differ materially from these forward-looking statements as a result of
factors described in Item 2, Section E, Page 12 "Risk Factors," including among
others, regulatory or economic influences.
ITEM 1. DESCRIPTION OF BUSINESS
A. General Overview and History
Summit Brokerage Services, Inc. is an independent broker dealer offering
financial services to clients across the country and is a National Association
of Securities Dealers (NASD) member firm.
The Company currently has 39 branch offices nationwide and seven new branch
offices pending licensing as of this writing. The anticipated time frame for
completion of the licensing process for these pending offices is March 31, 2000.
The Company provides the following financial services through its Planners
to their clients:
1. Both full service and discount stock and bond brokerage services
2. Load and no-load mutual fund executions
3. Asset allocation services for mutual funds, stocks and bonds
4. Mortgage origination
5. Life, health and disability insurance coverage
6. Money market funds
7. Clearing services for its branch offices
8. Registered Investment Advisor services
9. Financial Planning Services
The founder of the Company is Mr. Richard Parker, the Chairman of the
Board, Chief Executive Officer, and majority shareholder. Mr. Parker started
the company in 1994 as a one-man firm, and was its sole source of revenue as
well as management. By the end of 1997, the company had grown to 11 offices.
<PAGE>
2
By the end of 1998, the company had grown to 24 offices. By the end of 1999,
the company had grown to 39 offices. The offices are located in Florida,
Georgia, South Carolina, North Carolina, Maryland, Pennsylvania, New Jersey,
Tennessee, California, and Washington. The majority of the offices are located
in Florida. The majority of the firm's customers are retail with a small amount
of corporate and institutional clients. The firm is essentially a "financial
planning" firm, whereby a Registered Representative (Planner) discusses clients'
financial needs and objectives in detail, develops a plan (at no cost), and
implements the plan with the clients' approval.
The Company has a history of significant operating losses, as outlined in
Item 2, Management's Discussion and Analysis of Financial Condition and Plan of
Operation. While the Company believes that its operations and current capital
resources will be sufficient to fund the Company's working capital needs through
fiscal year 2000, no assurances can be given that the Company will be able to
limit its future negative cash flow or that it will be able to obtain any
outside financing that it may require in the future. Additionally, unless the
Company is able to continue increasing its revenues, adding new branch offices
and registered representatives, and/or significantly reduce its operating costs,
the Company may need to fund any future negative cash flows from additional debt
or equity financing. The failure of the Company to obtain the amount of any
financing that it may need in the future could have a material adverse effect on
the Company's operations, as well as its ability to continue as a going concern.
B. Organization
Summit was incorporated under the laws of the state of Florida in September
1993. Additionally there are three wholly owned subsidiary corporations:
- Summit Holding Group, Inc. B a holding company
- Summit Financial Group, Inc. B a registered investment advisor
- Summit Insurance Agency Corporation B an insurance business
Unless otherwise specified or indicated by the context, all references in
this Form 10-SB to the company are to Summit Brokerage Services, Inc. and all of
its subsidiaries.
The Company's common stock is quoted on the OTC Bulletin Board under the
symbol SUBO and began trading in June 1998.
The Company is located in the Summit Building located at 25 Fifth Ave.,
Indialantic, Florida, 32903; telephone: 321-724-2303; web site:
www.summitbrokerage.com.
- ------------------------
<PAGE>
3
C. Industry Background
The financial services industry has been in existence for over 100 years.
Traditionally, the industry came from three separate areas: the banking
industry, the brokerage industry and the insurance industry. Over the last 25
years, the three industries have slowly merged together to form an industry now
commonly referred to as financial services. The industry offers financial
planning services to a wide array of individuals and companies. With the
introduction of the Internet, a host of industry publications, and several
financial television networks, the general public has become increasingly versed
with the financial instruments available and much more savvy about investments
in general.
Over the last two decades, 401K plans have become the investment of choice
for many investors. Companies desiring to limit their ongoing liability have
moved away from defined benefit and profit sharing plans electing the 401K to
invest retirement funds for their employees. Many investors begin working with
the financial services industry through participation in their company's 401(k)
plan.
D. Products
Summit offers a broad range of products to the investing public through its
registered reps and branch offices. These products include mutual funds,
variable annuities, individual stocks, bonds, and insurance products and managed
money accounts.
The Company earns income (recorded as "commission revenue") as products are
sold by its registered representatives. The Company receives commission revenue
from its product suppliers, (i.e., mutual fund companies or insurance companies)
and pays out a percentage of this amount, (recorded as "commission expense") to
the representative who sold the product, in accordance with the contract
agreement between the Company and the representative. A specimen Registered
Representative Agreement and is attached as an exhibit.
The Company's registered reps offer package products to the investing
public. Package products include mutual funds, variable annuities, and unit
investment trusts. This term is descriptive of a package of securities,
usually common stocks, which are managed by an investment company. While many
are licensed to sell individual stocks and bonds, it is a relatively small
percentage of Summit's business B less than 12% of revenue. Using a package
product mix produces:
1. More suitable products to the general public
2. More efficient management of the funds
3. A reduction of risks from buying individual securities
4. An easier process of supervision by the Summit compliance team.
The managed accounts are charged a fee which provides a steady base of
revenue for Summit in both good and bad markets. This gives a more predictable
stream of income. While investors are sometimes reluctant to buy individual
securities and to pay what they may consider as high commission fees, they have
<PAGE>
4
invested heavily in recent years into mutual funds and variable annuities.
These products are usually part of a group of mutual funds sometimes referred to
as a "family." It is possible for the investor, through management of these
accounts, to move from fund to fund within the family, to take advantage of
sectors of the economy which are experiencing growth which may be greater than
that of other sectors. For example, an investor may be in a growth and income
fund and move to a technology fund based upon the advice of an investment
adviser. By managing the investor's portfolio within the mutual fund family and
advising as to when the move should be made, the adviser continues to earn the
fee from the amount of money under management rather than a one time commission,
which may or may not materialize, based upon whether or not the stock markets
move up or down.
For example, if an investor has $200,000 under management, Summit will
realize a management fee of 1.75 percent, or $3,500, on an annual basis. Even
if the value of portfolio decreases to $150,000, Summit continues to realize
income from the management fee in the amount of $2,625, which is less than in
the previous year. On the positive side, if the portfolio grew to $250,000,
Summit will realize an annual fee $4,375.
Currently, Summit has over $27 million under management and is adding money
on a monthly basis. By offering the product mix that Summit offers, it believes
that its reps will be viewed more as advisers than traditional stock brokers.
This helps by creating personal relationships with the clients that provide a
long and mutually beneficial working relationship.
Revenues by product for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C> <C>
Mutual funds $2,318,800 49% $ 797,400 30%
Variable annuities $1,526,100 32% $ 937,000 35%
Equities $ 522,000 11% $ 118,500 4%
Ria. $ 153,900 3% $ 330,000 12%
Insurance $ 145,300 3% $ 435,300 16%
Misc $ 90,500 1% $ 276,100 10%
Grand Total $4,756,600 100% $2,894,300 100%
</TABLE>
E. Business Strategy
Summit has since 1995 implemented a strategy of affiliating independent
financial planning offices across the country with the firm. These independent
offices bear the full expense of the day-by-day operations of their
independently owned branch office. Summit receives on average 10% to 20%
over-ride of the gross revenue provided by these branch offices. In addition,
there are several other forms of income Summit derives from its branches.
One additional source of revenue is Registered Investment Advisory (RIA)
fees. Summit derives revenue in the form of fee based management of individual
stocks and/or bond accounts and mutual fund accounts offered by its registered
reps. Much of the management of these funds are out-sourced to outside managers
for the day-by-day management.
<PAGE>
5
Another source of revenue comes from the wide array of insurance products
offered by Summit, including life insurance, fixed annuities, long-term care,
and disability insurance.
Revenues are also derived from our Master Marketing Area business model. In
order to build a more rapid method of distribution, Summit contracts with
experienced and well-capitalized industry producers for a geographical location
in the country, usually 3 to 5 counties. These producers receive the right to
add offices and registered reps in that area, in return for the contractual
obligation to build out that territory within a specific period of time, usually
three years.
F. Market Segments
One of the positive aspects of the financial services industry is virtually
any person or company is a potential client. In the early years of life, young
families invest for college funding and begin to prepare for their retirement.
Middle age families focus more on retirement planning and capital
accumulation to achieve other financial goals.
The seniors market focuses on preservation of capital and providing income
through the retirement years.
With a growing population, there is no sign that these trends will
diminish. Based on interaction with our clients, it is the company's belief
that most people feel that the days of relying on government to provide for
their retirement via Social Security are all but gone. To maintain sufficient
income during retirement requires investing on an ongoing basis through their
lifetime. This only serves to help the financial services industry continue the
same growth it has seen for the last 12 years. It is our belief, based upon
current economic conditions (i.e., interest rates) that in order for
individuals' investments to appreciate, they must find alternative products
other than savings accounts, CDS, etc. in which to invest their money.
Securities investments, while representing an inherent risk to principal, also
provide a means for appreciation. While future performance of the securities
markets cannot be predicted from past performance, we believe as long as
individuals seek these alternative means for capital appreciation, securities
markets have the potential to continue at substantial growth rates. We believe
this is supported by the growth in the securities markets from 1987 through
1999.
G. Seasonality and Cyclical Factors
The Company's revenues are affected only slightly by the traditional US
vacation seasons, such as July, August, and December. Company revenues may be
more adversely affected by cyclical factors, such as financial market downturns,
problems or recessions in the US or global economies, etc. Such conditions would
present risk in the need for additional capital to be raised by the Company, to
offset related significant reductions in revenues.
<PAGE>
6
H. Employees
The Company currently employs 15 full time corporate office staff,
including officers and management, as well as 64 licensed representatives
(Financial Planners or Planners.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION
The following discussion and analysis of the Company's consolidated
financial condition and results of operation for the fiscal years ended December
31, 1999, 1998 and 1997, and for the fiscal quarters ended December 31, 1999,
1998 and 1997, should be read in conjunction with the Company's consolidated
financial statements included elsewhere herein.
When used in conjunction in the following discussions, the words
"believes," "anticipates," "intends," "expects," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, which could cause results to differ materially
from those projected, including, but not limited to, those set forth in Item 2,
Section E, Page 12, "Risk Factors."
A. General Discussion of the Company
The Company is a National Association of Securities Dealers (NASD) member
firm. The Company is an independent broker-dealer offering financial services to
clients across the country. The firm provides financial services through its
Planners to their clients.
In 1997, the company began an aggressive expansion of new branch offices.
In order to accomplish this, it was necessary to build up its infrastructure,
including additional management and staff personnel, computer systems, offices,
etc. These increased expenditures resulted in lower earnings for the company,
as well as the need for additional capital infusions. Therefore, from 1997
through 1999, the company's financial statements reflect significant losses
during this period of building current and future revenues, while it was raising
the necessary capital through two private placements offerings (see Item 4, page
25, Recent Sales of Securities.)
For more information about the company's ability to continue as a going
concern, please refer to Note 18 in the attached Notes to Consolidated Financial
Statements.
<PAGE>
7
B. Results of Operations
RESULTS OF OPERATIONS FOR:
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues increased in fiscal 1999 by $1,862,340 (65%) to $4,756,619 from
$2,894,279 in fiscal 1998. The increase was due to several factors: 1) the
large increase in the number of branch offices from 1998 to 1999 (from 24 to
39); 2) the increased revenues from existing offices (those added prior to
1999); and 3) an increase in new offices with higher producing registered
representatives.
Expenses increased in fiscal 1999 by $2,086,678 (61%) to $5,490,629 from
$3,403,951 in fiscal 1998. The higher expenses were also attributable to the
related cost of the increased revenue - commissions expense (the payments to the
registered representatives for their portion of the revenue).
For 1999, the Company incurred higher non-cash expenses as follows:
reserve for deferred tax asset $139,000 (a)
amortization of unearned stock compensation 214,504 (b)
reserve for uncollectible receivable 31,040 (c)
capitalized marketing expenses written off 8,828 (d)
--------
Total 1999 Non-Cash Expenses $393,372
========
(a) deferred taxes are explained further in Note 11 of the Notes to
Consolidated Financial Statements.
(b) amortization of unearned stock compensation is explained further in Note
7 of the Notes to Consolidated Financial Statements.
(c) Uncollectible receivable is explained further in Note 4 of the Notes to
Consolidated Financial Statements.
(d) Capitalized marketing costs are explained further in Note 6 of the Notes
to Consolidated Financial Statements.
All of the above items are also explained in Note 16 of the Notes to
Consolidated Financial Statements.
Due to the increased revenues and related commission costs, the Company
ended the year with a high Accrued Commission Payable balance, which was more
than offset by the combination of the company's available cash and accounts
receivable balances (see Financial Statements section, Consolidated Statements
of Financial Condition.)
<PAGE>
8
The Company believes that its registered investment advisory services and
investment income will continue to represent a larger portion of the Company's
overall revenues in the future.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues increased in fiscal 1998 by $1,266,120 (78%) to $2,894,279 from
$1,628,159 in fiscal 1997. This increase was largely due to the addition of 13
new branch offices during 1998.
Expenses increased in fiscal 1998 by $1,550,281 (84%) to $3,403,951 from
$1,853,670 in fiscal 1997. This increase was largely due to the growth in
revenues during 1998, which resulted in higher commission expense as well as
higher general operating expenses.
FISCAL QUARTER ENDED DECEMBER 31, 1999 COMPARED TO QUARTER ENDED DECEMBER 31,
1998
Sales increased in fiscal quarter ended December 31, 1999 by $951,267
(145%) to $1,610,261 from $658,994 in fiscal quarter ended December 31, 1998. As
discussed in the fiscal year comparison above, this increase was largely due to
the addition of new branch offices in 1999, as well as higher production from
existing locations.
Expenses also increased in the recent period by $1,020,601 (137%) to
$1,768,721 from $748,120 in the previous period. This increase was largely
attributable to the growth in revenues during 1999, which resulted in higher
commission expense and higher general operating expenses, as well as the
non-cash items mentioned in the fiscal year comparison above.
FISCAL QUARTER ENDED DECEMBER 31, 1998 COMPARED TO QUARTER ENDED DECEMBER 31,
1997:
Sales increased in the fiscal quarter ended December 31, 1998 by $172,922
(36%) to $658,994 from $486,072 in the fiscal quarter ended December 31, 1997
Expenses also increased in the recent period by $189,568 (34%) to $748,210
from $558,642 in the previous period.
C. Liquidity and Capital Resources
Historically the company's cash flows from operations have been negative,
and funded by stock issuance (see Item 2, Section B, Results of Operations.) As
described above in Results from Operations, by the fourth quarter of 1999, the
company had succeeded in building its revenue base to a level at which it should
provide sufficient cash flow to meet existing operating costs. If these
revenues continue, the company presently sees no immediate need for additional
outside capital in order to meet operating costs in the near term.
<PAGE>
9
However, the possibility exists that additional capital may be required for
future acquisition purposes, in order to achieve more rapid additional revenue
growth. As a result, the company's business plan calls for a registered
offering either in fiscal 2000 or 2001.
Additional liquidity, if necessary, is available to the Company through a
commitment from its majority shareholder, Richard Parker, to enter into a
subordinated debt agreement of at least $100,000. For purposes of compliance
with NASD Net Capital Rules, a subordinated loan of $40,000 from this commitment
was funded on February 24, 2000, and approved by the NASD on March 14, 2000.
The Company's net cash from operations was $(200,591) at December 31, 1999
and $(518,265) at December 31, 1998. The $317,674 reduction in cash flows from
operations is mainly the result of timing, as the Company received commissions
at year-end, but the related commission liability was not paid until January
2000.
Cash flows from financing activities were $533,422 in fiscal year 1999 and
$428,679 in fiscal year 1998. As previously mentioned, these cash inflows
resulted from the Company's two private placements.
D. Significant Business Relationships
On January 26, 1994 the Company entered into a clearing agreement with
First Clearing Corporation, a subsidiary of First Union Bank (formerly Wheat
First Securities, Inc.) to execute securities orders and maintain accounts for
clients on behalf of the Company.
On December 17, 1993, the Company entered into a Broker-Dealer Management
Agreement with Summit Group of Companies, Inc., ( "management company") to
provide management services for the broker-dealer. The agreement is attached as
an exhibit. These services include administrative, clerical, accounting
functions, as well as other services necessary to conduct the broker-dealer's
business. As disclosed in the enclosed December 31, 1999 audited financial
statements, under the section Notes to the Consolidated Financial Statements,
Note 13 Related Party Transactions, the management company is wholly owned by
the Chairman and majority shareholder of Summit Brokerage Services, Inc.,
Richard Parker.
However, the company is not dependent upon the services of the management
company, and the relationship no longer exists as of January 1st, 2000.
<PAGE>
10
E. Risk Factors
Capitalization and Financial History:
There are, of course, many factors that may affect the financial well being
of the company. The markets in general will have a direct impact on the
investing public and their willingness to invest in financial vehicles. While
over a long period of time markets have consistently gone up, the markets have
become more and more volatile over the years, therefore, causing concern with
the investing public. If a down turn in the market occurs for a substantial
period of time, it could affect negatively the Company's growth and even its
ability to maintain its current revenue stream.
There is always the possibility that inadequate capitalization could
curtail the growth and even affect the day-by-day operations of the firm. If
the current revenue sources or the current growth model was hampered in any way,
it could result in lack of capitalization to not only grow the company, but to
run its day-by-day operation. See Item 2, Section C, "Liquidity and Capital
Resources."
During the past two years, the Company has incurred net losses of
($734,010) and $(509,672) respectively. Based on its own internal projections,
the Company believes that its operations and current capital resources will be
sufficient to fund the Company's working capital needs through the 2000 fiscal
year, provided that there are no significant increases in operating expenses.
While it is endeavoring to keep costs contained as much as possible, the failure
of the Company to prevent such increases in the immediate future would have a
material adverse effect on the Company's operations and on its ability to
operate in the manner its business is currently being conducted. In addition,
there can be no assurances that the increased revenues necessary to provide a
profit will continue.
Ability to attract reps and branch offices:
While Summit has shown strong growth for its first three years in
attracting branch offices and registered representatives, this is due primarily
to training provided in the industry by the Company's CEO and founder, Richard
Parker. If Mr. Parker was not physically able to continue this training, it
would have a negative effect on the recruiting aspect of the firm.
The biggest risk the company currently faces is the continued recruitment
of successful registered representatives. The company's future ability to
continue as an ongoing concern greatly depends upon the success of these efforts
at present. In addition, registered representatives who are successful in their
present practices are increasingly reluctant to change their broker-dealer
relationship. This fact increases the risk for the company to continue its
recruiting efforts.
<PAGE>
11
Regulators:
While Summit maintains a high standard of compliance and regulatory
adherence at all times, there is at least 102 regulatory bodies that Summit must
answer to with 50 state securities divisions, 50 state insurance divisions, the
NASD and the SEC. Many of the rules and regulations are extremely complex and,
even if a financial services firm desires and strives to adhere to all
regulations, there is always the potential of infraction of rules that could
result in regulatory action either monetarily or against the firm in general.
Financial liability from errors and omissions:
Whenever a company handles funds for another person, the potential of
litigation is always present. Summit strives through its supervisors,
compliance officers, and managers to maintain a high degree of compliance and
supervision in these areas. However, mistakes can occur. To assure that the
financial liability is manageable, Summit maintains errors and omissions
insurance. There are, of course, exceptions to all E&O policies and there is
always the potential that one or more events may not be covered through E&O
insurance and therefore become a liability to the company.
Competition:
There is strong competition in the financial services industry. Many of
Summit's competitors are extremely well capitalized and have decades of
experience in the business. This obviously presents business risks to the
company.
This competition includes such financial giants as Merrill Lynch, Morgan
Stanley Dean Witter, Citicorp, and Charles Schwab. In an economic condition
where investors may withdraw substantial portions of their investment funds, the
above competitors have the capital and experience to weather such a downturn in
the markets (i.e., a substantial decrease in the Dow Jones or NASDAQ indexes.)
Limited depth of management:
The Company has a quality management team. However, that team is limited
in number. If one or more of the immediate management team was incapacitated,
this could have a negative effect on the company.
Outside managers:
Summit subcontracts much of its management managers in mutual funds,
variable annuities and managed accounts. Therefore, the investors judge their
financial results based on the performance of these managers. If Summit should
hire managers that do not perform adequately, it could lose the assets under
management and therefore have a negative effect on the company.
<PAGE>
12
F. Employees
As of the current date, the Company has 15 full time employees. As the
Company increases its operations, additional employees will be required. The
Company's future success depends on its ability to attract and retain other
qualified personnel, for which competition is intense. The loss of Mr. Richard
Parker or the Company's inability to attract and retain other qualified
employees could have a material adverse affect on the Company.
G. Risks Associated with Year 2000
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
H. Additional Information
The Company intends to provide an annual report to its security holders,
and to make quarterly reports available for inspection by its security holders.
The annual report will include audited financial statements.
The Company will, as a result of this filing, become subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Act")
and, in accordance with the Commission, such reports, proxy statements and other
information may be inspected at public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549; Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; 7 World
Trade Center, New York, New York, 10048; and 5670 Wilshire Boulevard, Los
Angeles, California 90036. Copies of such material can be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street
N.W., Washington, D.C. 20549, at prescribed rates. For further information, the
SEC maintains a website that contains reports, proxy and information statements,
and other information regarding reporting companies at http://www.sec.gov or
call (800) SEC-0330.
ITEM 3. DESCRIPTION OF PROPERTY
The Company maintains its principal business operations at 25 Fifth Avenue,
Indialantic, Florida 32903. The Company's telephone number is (321) 724-2303 and
the web site address is www.summitbrokerage.com.
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13
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1999,
with respect to the beneficial ownership of common stock by (i) each person who,
to the knowledge of the Company, beneficially owned or had the right to acquire
more than 5% of the outstanding common stock, (ii) each Director of the Company,
and (iii) all executive Officers and Directors of the Company as a group:
<TABLE>
<CAPTION>
Name of Beneficial Owner(1) Number of Shares Percentage(2)
- ---------------------------------------- ---------------------- --------------
<S> <C> <C>
Richard Parker (3) (4) 3,327,595 73.3%
Brian Best (5) 14,250 .3%
Harry Green (6) 44,250 1.0%
D. Mark Olson (5) 6,250 .1%
Jack Root (6) 14,250 .3%
William R. Turner (7) 108,850 2.4%
Mark F. Caulfield (8) 67,500 1.5%
_________________
<FN>
(1) Unless otherwise indicated, the address of each person is c/o Summit
Brokerage Services, Inc., 25 Fifth Ave., Indialantic, FL 32903
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options, warrants or convertible securities that are currently
exercisable, or exercisable within 60 days of December 31, 1999, are deemed
outstanding for computing the percentage of the person holding such
options, warrants or convertible securities but are not deemed outstanding
for computing the percentage of any other person. Except as indicated by
footnote and subject to community property laws where applicable, the
persons named in the table have sole Voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(3) Includes 640,175 shares owned by Richard & Joan Parker, JT TEN.
(4) Includes 95,000 shares issuable pursuant to a stock purchase option
currently exercisable.
(5) Includes 6,250 shares issuable pursuant to a stock purchase option
currently exercisable.
(6) Includes 11,250 shares issuable pursuant to a stock purchase option
currently exercisable.
(7) Includes 100,000 shares issuable pursuant to a stock purchase option
currently exercisable.
(8) Includes 47,500 shares issuable pursuant to a stock purchase option
currently exercisable.
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following table sets forth the names and positions with the Company and
ages of the executive officers and directors of the Company. Directors will be
elected at the Company's annual meeting of shareholders and serve for one year
or until their successors are elected and qualify. Officers are elected by the
Board and their terms of office are at the discretion of the Board, except to
the extent governed by employment contract.
Name Age Title
---- --- -----
Richard Parker 48 Chairman & CEO
William R. Turner 56 President & COO
Mark F. Caulfield 41 CFO & Secretary/Treasurer
Brian Best 30 Director
Harry Green 58 Director
Mark Olson 51 Director
Jack Root 66 Director
<PAGE>
14
All key employees are employed full-time by Summit. All Directors are not
employed full-time by Summit. There are no material consequences of this
situation to Summit.
Duties, Responsibilities and Experience
Richard Parker, Chairman of the Board and Chief Executive Officer
Mr. Parker, the founder of the Company, began his career in the financial
services industry in 1974 as a licensed Realtor. A year later, he became the
youngest licensed broker in the history of the Lakeland Board of Real Estate
when he and his mother, Doris Parker, opened R/D Parker Realty, a franchise of
Century 21, the nation's largest real estate sales organization. For the next
decade, Mr. Parker sold, developed, built and managed real estate projects
primarily throughout Polk County. During that time, he was recognized as a
national sales leader for Century 21. In 1986, Mr. Parker became fully licensed
to sell securities and insurance with Dean Witter. Following his tenure with
Dean Witter, he became the branch manager of Anchor National Financial, a
SunAmerica company. With Anchor National, Mr. Parker was the second highest
producer nationally among the company's several hundred licensed
representatives. During this time, Mr. Parker incorporated and began doing
business as The Summit Financial Group, Inc. and the Summit Group of Companies.
The Summit Brokerage Service Inc., a NASD licensed broker/dealer, was added to
the Summit Group of Companies. Mr. Parker holds series 7, 63, 65 and 24
licenses, as well as life insurance and real estate licenses. Mr. Parker is
employed full-time at Summit.
William R. Turner, President and Chief Operations Officer
William R. Turner, in addition to his duties with the Company, has a
consulting practice available to the securities and insurance industries.
Although this remains a viable consulting practice, for the term of Mr. Turner's
contract with Summit Brokerage Services Inc., he is committed full-time to his
duties as President and Chief Operating Officer of Summit. He is a former Senior
Vice President and Secretary of INVEST Financial Holding Co., Inc., as well as
Senior Vice President and Director of Compliance for INVEST Financial
Corporation. Mr. Turner was with INVEST for over 11 years and helped create the
standards used by regulators on the sale of investment products within banks and
other non-traditional securities areas. INVEST's regulatory record was flawless
during Mr. Turner's tenure. Prior to INVEST, Mr. Turner was a corporate officer
and registered representative with Paine Webber, Jackson and Curtis and a
registered representative with Merrill Lynch. He has been on numerous industry
panels. He was also a regulator with the National Association of Securities
Dealers, Inc., as an examiner and the Assistant Director of NASDAQ, the NASD's
automated quotation system. He has been in the securities/insurance industry
for over 30 years. Mr. Turner is employed full-time at Summit.
<PAGE>
15
Mark Caulfield, Chief Financial Officer and Secretary/Treasurer
Mark Caulfield is a Certified Public Accountant with over 20 years in
financial management, serving in such key roles as Vice President of Finance and
Administration, as well as Controller. He has been involved with a number of
similar rapidly growing companies, including such industries as hospitality
management, travel and tourism, restaurant, and nuclear power service
contracting. He has served on numerous business, charitable, and community
boards and committees. He and his family currently devote a great deal of time
to church and Rotary involvement. He is also a member of several professional
associations, including the American Institute of Certified Public Accountants.
Mr. Caulfield is employed full-time at Summit.
Brian R. Best, Director
Since 1998, Mr. Best has been a medical center representative for COR
Therapeutics, a bio-pharmaceutical company with a breakthrough product in
cardiac care. He is responsible for managing 12 coastal hospitals and over 100
physicians. Mr. Best was employed to create a new standard of care for cardiac
patients in the Emergency Room and in percutaneous coronary interventions with
the use of Integrilin. He is assisting in the development of research
facilities for NDA studies and international company representatives. From 1992
to 1998, he was employed by Abbot Laboratories. As a Neurological Sales
Specialist, he marketed anti-convulsants and anti-psychotics to neurologists and
psychiatrists. As PPR/SWAT, he fulfilled a variety of assignments during this
time, including three relocations to rebuild vacant territories. He received a
Bachelor of Science degree from Wake Forest University in 1992. Mr. Best is not
employed full-time at Summit.
Harry S. Green, Director
From 1966 until he retired in 1994, Mr. Green worked for Wal-Mart. After
graduation from University of Arkansas in 1970, he started on their management
program and was promoted to District Manager in 1977. In 1984 he was promoted
to Regional Vice President and in 1988 he was Regional Vice President of Sam's.
From 1990 to 1994, he worked with SuperCenters and was Operations Director for
Bud's. Mr. Green is not employed full-time at Summit.
<PAGE>
16
D. Mark Olson, Director
Mr. Olson began his securities industry career in 1978 as a registered
representative with Shearson. In 1983, as Divisional Director of Sales, he
directed the sales efforts of 600 registered reps located in 39 branches in 10
states. In 1987, Mr. Olson joined Kemper Financial Services as National Director
of Sales, where he directed the sale of Kemper mutual funds, annuities, and
unit investment trusts through banks, brokerage firms, financial planners, and
insurance agents. He put many of the country's leading banks in the securities
business, such as Chemical Bank, California Federal Savings Bank, Dime Savings
Bank of New York, Banco De Poplar, Hinsdale Federal Savings Bank, and Trans
Financial National Bank. This development lead to his position as Executive
Vice President at Kemper. He later became President, CEO, and Chairman of the
Board of Invest Financial Corporation Holding Company, and all subsidiaries.
Under his guidance, Invest increased sales from under one billion dollars to
over four billion dollars annually, and became profitable after seven previous
years of net losses. In 1994, Mr. Olson became a management consultant to the
securities, banking, and insurance industries. His clients have been US banks,
insurance companies, mutual fund companies, money managers, and NYSE member
broker/dealers. He has also served numerous clients in Canada. He created a
financial services company for a leading Midwestern bank holding company,
created many of the innovative sales and marketing strategies used in the
securities industry today. He has trained thousands of registered
representatives how to improve their business. He served as President and CEO
and helped turn around a troubled third party workers' compensation
administrator and a property and casualty insurance company. He also served as
President and CEO of a large managing general insurance agency and risk manager.
Mr. Olson is an accomplished public speaker and frequently provides keynote
addresses for national sales events of companies in the securities industry.
Mr. Olson is not employed full-time at Summit.
Jack B. Root, Director
Mr. Root is a 40 year veteran of the financial service industry. He began
his career as a financial advisor and has worked his way up through the ranks of
the industry. Mr. Root developed the Successful Money Management Seminar and
has since helped develop similar courses for Canada and New Zealand. He has
presented over 3,500 hours of seminar instruction and has prepared financial
plans for hundreds of individuals and families. He retired from Successful
Money Management Seminars, Inc., in 1998. Mr. Root is not employed full-time at
Summit.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for its
fiscal years ended December 31, 1999, December 31, 1998, and December 31, 1997
to its Chief Executive Officer and all other executive officers (collectively,
the "Named Executive Officers") whose total salary and bonus from the Company
exceeded $100,000 in the fiscal year ended December 31, 1999
<PAGE>
17
Name and Fiscal Year Ended
Principal Position December 31 Salary
- ---------------------- -------------------- -------
Richard Parker, CEO 1999 $188,471
1998 $147,200
1997 $149,400
Employment Agreements
The Company entered into a two-year employment agreement with William R.
Turner (the "Turner Employment Agreement"), the Company's Chief Operating
Officer and President, in September 1999. The term of the Turner Employment
Agreement commenced on September 22, 1999 and will expire on September 22, 2001.
The Turner Employment Agreement provides that in consideration for Mr. Turner 's
services, he is to be paid a salary of $100,000 during the first year of the
agreement, 15,000 shares of the Company's common stock, and options to purchase
50,000 shares of the Company's common stock at an option price of $2.50 per
share. During the second year of the agreement Mr. Turner will receive a 5%
increase in salary and 15,000 shares of the Company's common stock, and options
to purchase 50,000 shares of the Company's common stock at an option price of
$2.50 per share. The contract is renewable upon agreement by both parties.
The Company does not currently have an Executive Compensation Committee.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain family members of Richard Parker, the Company's Chairman and CEO,
and William Turner, the Company's President and COO, own shares of the Company's
common stock as set forth below:
<TABLE>
<CAPTION>
# of Date
Name Shares Relationship Acquired
- -------------------------------- -------- --------------- -----------
<S> <C> <C> <C>
Cole, Anthony Shane C/F Brittney 500 Granddaughter 12/19/97
Shane Cole UTMA/FL 5,000 9/2/99
Cole, Anthony Shane C/F Joshua
Brice Cole UTMA/FL 500 Grandson 12/19/97
Cole, Dabney Wayne C/F McKenna 500 Grandson 12/19/97
Cole UTMA/FL 5,000 10/4/99
Cole, Dabney & Melissa Cole, 2,000 Stepson 12/19/97
JTTEN 5,000 10/22/99
</TABLE>
<PAGE>
18
<TABLE>
<CAPTION>
# of Date
Name Shares Relationship Acquired
- --------------------------- -------- --------------- -----------
<S> <C> <C> <C>
Cole, Dabney Wayne 5,720 Stepson 11/9/98 thru
10/4/99
Cole, Anthony & Gale, JTTEN 7,000 Son & 10/22/99
Daughter-in-law
Cole, Gale 5,000 Daughter-in-law 9/2/99
Parker, Aaron 1,040 Nephew 7/23/98
Parker, Roger 1,000 Brother 7/23/98
Parker, Joan 7,000 Wife 10/13/97
7,500 11/9/98
12,500 1999
Parker, Richard & Joan, JTTEN 640,175 Self & Wife 1999
Parker, Doris 5,000 Mother 9/2/99
Parker, Richard Sr. 5,000 Father 9/2/99
Parker, Richard Sr. & Doris, JTTEN 2,000 Mother & Father 7/23/98
Turner, Darrell & Jennifer, JTTEN 400 Son & 12/14/99
Daughter-in-law
Turner, Stephen R. 200 Son & 12/14/99
Daughter-in-law
</TABLE>
ITEM 8. DESCRIPTION OF SECURITIES
The Company's Articles of Incorporation authorizes the issuance of
10,000,000 shares of common stock, $.0001 par value per share, of which
4,553,757 shares are outstanding, held of record by approximately 140
stockholders as of the date of this filing. The Company is not authorized to
issue shares of preferred stock. The holders of common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Subject to preferences applicable to the currently outstanding
shares, holders of common stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and liquidation preference of any then
outstanding preferred stock. All outstanding shares of common stock are fully
paid and nonassessable.
<PAGE>
19
The transfer agent for the common stock is Florida Atlantic Stock Transfer,
Inc., 7130 Nob Hill Road, Tamarac, Florida 33321.
<PAGE>
20
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
The common stock is currently quoted on the OTC Bulletin Board operated by
The NASDAQ Stock Market, Inc. (the "OTC Bulletin Board") under the symbol
"SUBO." The following table sets forth the high and low last sale prices for the
common stock for each fiscal quarter, or interim period, in which the common
stock has been publicly traded, as reported by the OTC Bulletin Board. These
prices do not reflect retail mark-ups, markdowns or commissions and may not
represent actual transactions.
Quarter Ended Low High
-------------- ------- -------
June 30, 1998 (1) $ 2.50 $3.38
September 30, 1998 $ 3.00 $3.57
December 31, 1998 $ 3.32 $3.94
March 31, 1999 $ 1.50 $4.00
June 30, 1999 $ 3.50 $4.00
September 30, 1999 $ 2.25 $6.13
December 31, 1999 $ 4.13 $6.25
_______________
(1) Trading on the OTC-BB exchange began on June 24, 1998.
The closing sales price on January 12, 1999 reported on the OTC Bulletin
Board was $5.13 per share of common stock.
To date, the Company has not paid any cash dividends on its common stock.
However, pursuant to the terms of the Company's Rule 504 D Private Placement
offering in 1997, shareholders who held their stock for two years were entitled
to and issued stock dividends.
The Company issued 5,400 shares of Summit common stock as part of the
original Unit issuance of its 1997 limited offering on December 17, 1999
pursuant to the terms of their initial subscription in the Company; the fair
market value on this date was 4 5/8. These shares were issued, in light of
negative retained earnings, to meet the Company's obligation to those
shareholders who met the requirements of the original share subscription as set
forth in the Limited Offering Memorandum.
ITEM 2. LEGAL PROCEEDINGS
The Company is not presently a party to any litigation nor to the knowledge
of management is any litigation threatened against the Company which would
materially affect the Company.
<PAGE>
21
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On January 13, 2000, the client-auditor relationship between Summit
Brokerage Services, Inc. and Flavin, Jackson, Zirilli & Bouvier, the independent
accountants who were previously engaged as the principal accountants to audit
the Company's financial statements, was terminated by the Company. The
termination of the client-auditor relationship was a result of the desire of the
Company to engage a firm that was registered with the SEC Practice Section of
the AICPA, in anticipation of filing a registration statement with the SEC. The
Company has engaged Hoyman, Dobson & Company, P.A., effective January 13, 2000,
to serve as independent accountants.
Previous independent accountants:
- -----------------------------------
1. Flavin, Jackson, Zirilli & Bouvier was dismissed on January 13 2000;
2. The report of Flavin, Jackson, Zirilli & Bouvier on the financial
statements of the Company for the past two years contained no adverse opinion,
disclaimer of opinion, nor was qualified or modified as to uncertainty, audit
scope, or accounting principles;
3. The decision to change accountants was approved by the Company Board
of Directors;
4. During the two most recent fiscal years, and through the date of
their letter, there were no disagreements nor differences of opinion with
Flavin, Jackson, Zirilli & Bouvier on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope of procedure, which
disagreements, if not resolved to the satisfaction of Flavin, Jackson, Zirilli &
Bouvier, would cause it to make reference to the subject matter of the
disagreements in connection with its report.
5. During the two most recent fiscal years and through the date of
their letter, there were no events as listed in Regulation S-K, Item 304, (a)
(1) (v) paragraphs (A) through (D), which led to any disagreements or
differences of opinion with Flavin, Jackson, Zirilli & Bouvier.
6. The Company has furnished Flavin, Jackson, Zirilli & Bouvier with a
copy of the Company's above statements, which are made in response to Item 304
(a) of the Securities and Exchange Commission Regulation S-K ( a ) and has
requested that Flavin, Jackson, Zirilli & Bouvier furnish the Company with a
letter addressed to the Commission, stating whether or not Flavin, Jackson,
Zirilli & Bouvier agrees with such statements. A copy of Flavin, Jackson,
Zirilli & Bouvier's letter, dated January 21, 2000 is attached hereto.
New independent accountants:
- ------------------------------
On January 13, 2000, Hoyman, Dobson & Company, P.A., was engaged as
independent accountants for the Company. During the two most recent fiscal
years and through the date of their letter, there have been no reportable events
as defined in regulation S-K Item 304(a)-(1) (v). A copy of Hoyman, Dobson &
Company, P.A.,'s letter, dated January 21, 2000 is attached hereto.
<PAGE>
22
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Private Placements
The Company has capitalized its operations from two separate limited
offerings pursuant to Rule 504 of Regulation D. The Rule 504 exemption as
utilized in both offerings was available to the Company based upon the following
facts and circumstances:
- The Company was not a blank check company and was not a reporting
company.
- The Company raised less than $1 million during each of the offering
periods.
- The Company offered its securities to both accredited and
non-accredited investors only in states where respective blue sky
exemptions were complied with.
Between July 1997 and May 1998, the Company issued 322,800 shares of its
common stock for a total aggregate amount of $807,000. The 322,800 shares were
sold to approximately 48 investors in a transaction exempt from registration
pursuant to Rule 504 of Regulation D promulgated under the 1933 Act. No
underwriters were used in connection with this transaction.
Between September 1998 and January 2000, the Company issued 400,267 shares
of its common stock for a total aggregate amount of $864,000. The 400,267 shares
were sold to approximately 49 investors in a transaction exempt from
registration pursuant to Rule 504 of Regulation D promulgated under the 1933
Act. No underwriters were used in connection with this transaction
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Chapter 607 of the Florida Statutes provides for the indemnification of
officers and directors under certain circumstances against expenses incurred in
successfully defending against a claim and authorizes Florida corporations to
indemnify their officers and directors under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their being or having been an officer or director.
Section 607.0850 of the Florida Statutes permits a corporation, by so
providing in its certificate of incorporation, to eliminate or to limit a
director's liability to the corporation and its stockholders for monetary
damages arising out of certain alleged breaches of their fiduciary duty. Section
607.0850 provides that no such limitation of liability may affect a director's
liability with respect to any of the following: (i) breaches of the director's
duty of loyalty to the corporation or its stockholders; (ii) acts or omissions
not made in good faith or which involve intentional misconduct of knowing
violations of law; (iii) liability for dividends paid or stock repurchased or
<PAGE>
23
redeemed in violation of the Florida General Corporation Law; or (iv) any
transaction from which the director derived an improper personal benefit.
Section 607 does not authorize any limitation on the ability of the corporation
or its stockholders to obtain injunctive relief, specific performance or other
equitable relief against directors.
Article VIII of the Company's By-laws provide each director or officer of
the corporation shall be indemnified as of right to the fullest extent permitted
by current or future legislation or by current or future judicial or
administrative decisions against any fine, liability, cost, or expense,
including attorneys' fees, asserted against or incurred by the director or
officer. The corporation can agree to grant the same right of indemnification
to other agents or employees of the corporation and to persons serving at the
request of the corporation as its representative in the position of a director,
officer, agent, or employee of another enterprise. The right of indemnification
shall extend to the heirs, personal representatives, and estate of each person
granted the right pursuant to the preceding sentences. The right of
indemnification shall not be exclusive of other rights to which those seeking an
indemnification may be entitled. The corporation may maintain insurance at its
expense to protect itself and any such person against any fine, liability, cost,
or expense, whether or not the corporation would have the legal power to
directly indemnify the person against that liability.
The foregoing right of indemnification is not deemed to be exclusive of any
other rights to which those seeking indemnification may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors, or
otherwise.
<PAGE>
24
PART F/S
FINANCIAL STATEMENTS
The audited financial statements of the Company, audited by Hoyman, Dobson
& Company, PA, Certified Public Accountants, 215 Baytree Drive, Suite 1,
Melbourne, Florida 32940, required by Regulation S-X commence on page F/S 1
hereof in response to this Item of this Registration Statement on Form 10-SB and
are incorporated herein by this reference.
<PAGE>
25
PART III
ITEM 1. INDEX TO EXHIBITS
2 Reorganization Agreement (not applicable)
3 (i) Articles of Incorporation and Amendments **
3 (ii) By-Laws **
4 Instruments defining the rights of holders (refer to exhibit 3)
9 Voting Trust agreement (not applicable)
10 Material contracts (not applicable)
11 Statement re: Computation of per share earnings (not applicable)
16 Letter of change in certifying accountant **
21 Subsidiaries of the Registrant **
24 Power of Attorney (not applicable)
27 Financial Data Schedule
99 Additional Exhibits
Registered Representative Agreement **
Broker-Dealer Management Agreement with Summit Group of
Companies, Inc.**
* To be filed by amendment
** Previously filed
<PAGE>
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-SB/A-5 to be
signed on its behalf by the undersigned, thereunto duly authorized.
Summit Brokerage Services, Inc.
April 27, 2000 /s/ Richard Parker
---------------------------------
Richard Parker
Chairman of the Board and
Chief Executive Officer
27
<PAGE>
Board of Directors and Shareholders
Summit Brokerage Services, Inc. and Subsidiaries
Indialantic, Florida
We have audited the accompanying consolidated statement of financial condition
of Summit Brokerage Services, Inc. (a Florida Corporation) and Subsidiaries as
of December 31, 1999, and the related consolidated statement of income (loss),
changes in stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements of Summit
Brokerage Services, Inc. and Subsidiaries as of December 31, 1998 were audited
by other auditors whose report dated February 17, 1999, expressed an unqualified
opinion on those statements. As discussed in Note 16, the Company has restated
its year ended December 31, 1998 financial statements to properly reflect the
amortization of unearned stock compensation, in conformity with generally
accepted accounting principles. The other auditors reported on the 1998
financial statements before the restatement.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Summit Brokerage
Services, Inc. and Subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 16 to the financial statements, the previously reported
commission revenues and commissions receivable as of December 31, 1999, were
discovered by management after January 28, 2000, the date of the auditor's
report, to be understated. In addition, management fully reserved against the
December 31, 1999 deferred tax asset and other receivables and wrote off other
assets. Accordingly, an adjustment has been made to retained earnings as of
December 31, 1999 to correct these errors.
1
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Summit Brokerage Services, Inc. and Subsidiaries
Page Two
We also audited the adjustment described in Note 16 that were applied to restate
the 1998 financial statements. In our opinion, such adjustments are appropriate
and have been properly applied.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 18 to the
financial statements, the Company has suffered recurring losses from operations
at December 31, 1999 which raises substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 18. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Hoyman, Dobson & Company, P.A.
Melbourne, FL
January 28, 2000, except to Note 16
as to which the date is April 20, 2000
2
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Summit Brokerage Services, Inc.
Indialantic, Florida
We have audited the statement of financial condition of Summit Brokerage
Services, Inc. as of December 31, 1998, and the related statement of income,
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Summit Brokerage Services, Inc.
as of December 31, 1998 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedule I
is presented for the purpose of additional analysis and is not a required part
of the basic financial statements, but is supplementary information required by
rule 17a-5 of the Securities and Exchange Act of 1934. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
As described in Note 16 to the financial statements, the Company had a prior
period adjustment to properly reflect a valuation allowance against the deferred
tax asset.
FLAVIN, JACKSON, ZIRILLI & BOUVIER
February 17, 1999, except to Note 15
as to which the date is April 20, 2000
Melbourne, Florida
3
- --------------------------------------------------------------------------------
"RESTATED"
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Cash $ 408,957 $ 106,804
Cash with clearing broker 25,132 25,377
Commissions receivable 463,356 79,410
Prepaid expenses 27,132 61,900
Other receivables, net of $31,040 and $0 allowance for
doubtful accounts at December 31, 1999 and 1998 - 9,850
Due from related party 102,704 91,089
Subscription receivable 48,000 --
Property and equipment at cost, less accumulated
depreciation of $70,970 and $33,442 at
December 31, 1999 and 1998, respectively 79,267 85,873
Deferred tax asset, net of valuation allowance of
$283,860 and $144,860 at December 31, 1999 and 1998 -- --
Other assets -- 9,537
------------- -------------
Total assets $1,154,548 $ 469,840
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 63,896 $ 20,949
Accrued commission expense 645,925 84,986
Deferred income 24,667 --
------------- -------------
Total liabilities 734,488 105,935
------------- -------------
Stockholders' equity
Common stock, par value $.0001 per share. Authorized
10,000,000 shares, 4,541,751 shares issued and 4,538,132
shares outstanding at December 31, 1999, 3,905,571 issued
and outstanding at December 31, 1998 454 391
Additional paid-in capital 2,559,389 1,293,106
Unearned stock compensation (517,223) (178,620)
Treasury stock, at cost (18,578) --
Subscriptions receivable (94,000) --
Accumulated deficit (1,509,982) (750,972)
------------- -------------
Total stockholders' equity 420,060 363,905
------------- -------------
Total liabilities and stockholders' equity $1,154,548 $ 469,840
============= =============
</TABLE>
The accompanying notes are an integral part of this statement. 4
- --------------------------------------------------------------------------------
"RESTATED"
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
For the years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Revenues
Commissions $ 4,712,651 $2,801,431
Interest and dividends 27,565 41,367
Other 16,403 51,481
------------- --------------
4,756,619 2,894,279
------------- --------------
Expenses
Commissions 3,596,311 2,091,083
Occupancy 116,752 111,622
Amortization of unearned stock compensation/
consultant expenses 214,504 32,287
Management fees 1,156,235 885,482
Bad debt expense 31,040 -
Other operating expenses 375,787 283,477
------------- --------------
5,490,629 3,403,951
------------- --------------
Net loss before income taxes (734,010) (509,672)
Provision for income taxes - -
------------- --------------
Net loss $ (734,010) $(509,672)
============= ==============
Weighted Average Common Shares and
Common Share Equivalents Outstanding 4,180,322 3,789,849
============= ==============
Earnings per share $ (0.1756) $ (0.1345)
============= ==============
</TABLE>
The accompanying notes are an integral part of this statement. 5
- --------------------------------------------------------------------------------
"RESTATED"
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------------------- Unearned
Number of Additional Stock
Shares Paid-In Compen- Treasury
Outstanding Par Value Capital sation Stock
----------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997,
as previously reported 3,725,020 $ 373 $ 653,537 $ -- $ --
Adjustments for correction of
Error for deferred tax asset
Valuation allowance -- -- -- -- --
--------- --------- ---------- -------- --------
Balances, December 31, 1997,
as restated 3,725,020 $ 373 $ 653,537 $ -- $ --
Issuance of common stock for cash 112,700 11 428,669 -- --
Issuance of common stock for
unearned compensation 67,851 7 210,900 (210,907) --
Amortization of unearned stock compensation -- -- -- 32,287 --
Net loss -- -- -- -- --
--------- --------- ---------- -------- --------
Balances, December 31, 1998 3,905,571 391 1,293,106 (178,620) --
Issuance of common stock for cash 324,333 33 551,967 -- --
Issuance of common stock for
subscription receivable 94,667 9 141,991 -- --
Issuance of common stock for
unearned compensation/
consultant expenses 110,011 10 525,952 (525,962) --
Issuance of common stock for legal services 15,000 1 54,449 (54,450) --
Issuance of common stock for
future private placement services 100,000 10 -- (10) --
Total
Stock-
Subscription Accumulated holder's
Receivable Deficit Equity
------------ ----------- -----------
<S> <C> <C> <C>
Balances, December 31, 1997,
as previously reported $ -- $ (195,070) $ 458,840
Adjustments for correction of
Error for deferred tax asset
Valuation allowance -- (46,230) (46,230)
----------- ----------- -----------
Balances, December 31, 1997,
as restated $ -- $ (241,300) $ 412,610
Issuance of common stock for cash -- -- 428,680
Issuance of common stock for
unearned compensation -- -- --
Amortization of unearned stock compensation -- -- 32,287
Net loss -- (509,672) (509,672)
Balances, December 31, 1998 -- (750,972) 363,905
Issuance of common stock for cash -- -- 552,000
Issuance of common stock for
subscription receivable (94,000) -- 48,000
Issuance of common stock for
unearned compensation/
consultant expenses -- -- --
Issuance of common stock for legal services -- -- --
Issuance of common stock for
future private placement services -- -- --
</TABLE>
The accompanying notes are an integral part of this statement. 6
- --------------------------------------------------------------------------------
"RESTATED"
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (continued)
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------------------- Unearned
Number of Additional Stock
Shares Paid-In Compen- Treasury
Outstanding Par Value Capital sation Stock
----------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Amortization of unearned stock
compensation/consultant
expenses -- -- -- 214,504 --
Stock dividends issued 5,400 1 24,999 -- --
Retirement of common stock (13,225) (1) (33,075) 27,315 --
Purchase of treasury stock (3,625) -- -- -- (18,578)
Net loss -- -- -- -- --
--------- --------- ---------- -------- --------
Balances, December 31, 1999 4,538,132 $ 454 $ 2,559,389 $(517,223) $(18,578)
========= ========= =========== ========= ========
Amortization of unearned stock
compensation/consultant
expenses -- -- 214,504
Stock dividends issued -- (25,000) --
Retirement of common stock -- -- (5,761)
Purchase of treasury stock -- -- (18,578)
Net loss -- (734,010) (734,010)
----------- ----------- -----------
Balances, December 31, 1999 $ (94,000) $(1,509,982) $ 420,060
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement. 7
- --------------------------------------------------------------------------------
"RESTATED"
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
Cash flows from operating activities
Cash received from customers $ 4,348,585 $ 2,779,601
Cash paid to suppliers and employees (4,559,387) (3,339,233)
Interest received 10,211 41,367
----------- -----------
Net cash used in operating activities (200,591) (518,265)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (30,923) (65,822)
----------- -----------
Net cash used in investing activities (30,923) (65,822)
----------- -----------
Cash flows from financing activities
Purchase of treasury stock (18,578) --
Issuance of common stock 552,000 428,679
----------- -----------
Net cash provided by financing activities 533,422 428,679
----------- -----------
Net increase (decrease) in cash and
cash equivalents 301,908 (155,408)
Cash and cash equivalents at beginning of year 132,181 287,589
----------- -----------
Cash and cash equivalents at end of year $ 434,089 $ 132,181
=========== ===========
The accompanying notes are an integral part of this statement. 8
- --------------------------------------------------------------------------------
"RESTATED"
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Continued
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
--------- ---------
RECONCILIATION OF NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES
Net loss $(734,010) $(509,672)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 37,529 29,932
Amortization -- 819
Amortization of unearned stock
compensation/consultant expenses 214,504 32,287
Retirement of common stock (5,761) --
Increase in commissions receivable (383,946) (73,311)
Decrease in other receivables 9,850 --
Decrease (increase) in prepaid expenses 34,768 (47,272)
Increase in due from related party (11,615) (1,809)
Decrease in other assets 9,537 1,343
Increase (decrease) in accounts payable 42,947 (20,589)
Increase in accrued commission expense 560,939 70,007
Increase in deferred income 24,667 --
--------- ---------
Net cash used in operating activities $(200,591) $(518,265)
========= =========
Cash and cash equivalents for the purpose of this
statement consisted of the following at December 31:
Cash $ 408,957 $ 106,804
Cash with clearing broker 25,132 25,377
--------- ---------
$ 434,089 $ 132,181
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal year 1999, the Company issued 5,400 shares of common stock dividends
totaling $25,000.
In fiscal year 1999, the Company issued a $142,000 stock subscription receivable
for 94,667 shares of common stock.
The accompanying notes are an integral part of this statement. 9
- --------------------------------------------------------------------------------
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Summit Brokerage Services Inc. (the "Company") is a National
Association of Securities Dealers (NASD) member firm. The Company is an
independent broker dealer offering financial services to clients across the
country through its 39 branch offices.
On December 31, 1999 the Company acquired 100% of Summit Holding Group, Inc.
through the purchase of stock for $1. Summit Holding Group, Inc. had $200 of
assets at the time of the purchase and no liabilities. Summit Holding Group,
Inc. (a holding company) owns 100% of Summit Financial Group, Inc. (a registered
investment advisor) and Summit Insurance Agency Corporation (an insurance
business). There was no activity in these three entities during fiscal year 1999
and 1998.
CONSOLIDATION POLICY - The accompanying consolidated financial statements
include the accounts of the Corporation and its subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
MUTUAL FUNDS - RESERVED - The Corporation has an interest bearing reserve
deposit with a clearing firm. The clearing firm requires this deposit of all
introducing firms for whom it transacts business.
COMMISSION RECEIVABLE - The Company considers commissions receivable fully
collectible; accordingly, no allowance is required.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation,
for financial reporting and tax purposes, is based on the straight-line and
double declining balance methods over the estimated useful lives of the related
assets, generally 3 to 7 years.
MARKETING COSTS - Marketing costs, except for costs associated with
direct-response marketing, are charged to operations when incurred. The costs of
direct-response marketing costs are capitalized and amortized over the period
during which future benefits are expected to be received.
DEFERRED INCOME - Deferred income represents advances received from the clearing
company for unearned commissions.
TREASURY STOCK - Treasury stock is shown at cost.
10
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMMISSIONS REVENUE AND EXPENSES - Commissions revenue is recorded on a
trade-date basis as transactions occur. The Company receives commissions on
products sold by their branch offices. The Company receives all commissions from
the transactions, takes their commission based on the terms agreed to in the
registered representative agreements and remits all remaining commissions to the
branch offices.
INCOME TAXES - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related to operating losses. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax also is recognized for operating losses and
tax credits that are available to offset future taxable income.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share for the years ended
December 31, 1999 and 1998 have been computed by dividing net income (loss) by
the weighted average number of shares outstanding. Diluted earnings (loss) per
share for the years ended December 31, 1999 and 1998 did not differ from amounts
computed under the basic computation.
ESTIMATES - The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2 - DUE FROM RELATED PARTY
At December 31, 1999 and 1998, the Company has a receivable of $14,220 and
$19,959, respectively, from a company, 100% owned by a shareholder who is also
the Company's majority stockholder for expenses paid by Summit Brokerage
Services, Inc. on the related company's behalf. This company conducts
educational and training seminars and generates income from fees paid by the
participants. The receivable is unwritten and is intended to be paid back in
fiscal year 2000.
The Company at December 31, 1999 and 1998 has advances of $88,484 and $71,130,
respectively, to an entity 100% owned by a shareholder who is also the Company's
majority shareholder for expenses paid by Summit Brokerage Services, Inc. on the
related company's behalf. This related company owns an office building that the
Company leases. Interest of $17,354 was accrued on the advance during fiscal
year 1999 at 8% per annum and is included in due from related party. The entire
balance outstanding including accrued interest is intended to be repaid to the
Company.
11
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - SUBSCRIPTION RECEIVABLE
At December 31, 1999 the Company has a subscription receivable of $142,000.
$48,000 of this subscription receivable is included as an asset at December 31,
1999 since it was collected before the financial statements were issued. The
remaining uncollected $94,000 is shown as a reduction of stockholders' equity.
NOTE 4 - OTHER RECEIVABLE
At December 31, 1999 the Company has a receivable from a former sales
representative in the amount of $31,040, due to be repaid by January 4, 1999,
which represents advances paid to the sales representative. The receivable is
currently in litigation and has been fully reserved for.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1999 and 1998:
1999 1998
--------- ---------
Computer systems and software $ 76,345 $ 50,948
Equipment 15,655 10,130
Leasehold improvements 58,237 58,237
--------- ---------
Total 150,237 119,315
Less: accumulated depreciation (70,970) (33,442)
--------- ---------
$ 79,267 $ 85,873
========= =========
Depreciation expense charged to operations was $37,529 for the year ended
December 31, 1999 and $29,932 for the year ended December 31, 1998.
NOTE 6 - OTHER ASSETS
Other assets at December 31, 1998 consisted of capitalized marketing costs of
$9,537. These costs were being amortized straight-line over 15 years.
Amortization expense for the year ended December 31, 1998 was $819. These costs
were written off during fiscal year 1999.
12
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 7 - COMMON STOCK
On July 16th, 1997, the Company established a restricted stock bonus plan as an
encouragement for employees and certain consultants to remain in the employment
or service of the Company. The shares granted under the plan were in the form of
restricted stock vesting over a two-year period beginning after the date of
grant of the award. Since the stock issued is subject to forfeiture until
two-years of continuous employment or service from the date of the grant award,
unearned compensation is recorded at the fair market value at the date awarded
as a reduction of stockholder's equity. Compensation and consultant expense is
recognized pro rata over the period during which the shares are earned in
accordance with FASB 123. Compensation and consultant expenses recognized for
the year ended December 31, 1999 was $185,313 and $1,966, respectively.
Compensation expense for 1998 was $32,287. There was no stock issued in fiscal
year 1998 to consultants. In fiscal year 1999, 13,225 shares of stock issued for
compensation originally recorded at $33,075 was forfeited and retired. The total
amount of compensation expense amortized in 1998 which was added back to
compensation expense in 1999 was $5,761. There was no stock forfeited in fiscal
year 1998.
On January 13, 1999, the Company granted 15,000 shares of restricted stock to an
attorney to pay for services rendered through the end of 2000. When the shares
were issued, unearned compensation for consulting services of $54,450 was
recorded at the fair market value of the stock on the date of issue as a
reduction of stockholder's equity. Consultant expense is recognized pro rata
over the period during which the services are being performed. Consultant
expenses recognized for the year ended December 31, 1999 are $27,225. Unearned
consultant expenses at December 31, 1999 are $27,225.
On July 29, 1999, the Company placed into escrow 100,000 shares of restricted
stock in the name of a placement agent for services to be performed during 2000
and into 2001. The stock issued is being held in escrow as of December 31, 1999
pending performance of these services. The stock issued has been recorded at $10
(100,000 shares at par value of $.0001) at December 31, 1999. The fair value of
these shares will be determined and additional costs recorded when the services
begin.
NOTE 8 - TREASURY STOCK
Treasury stock is shown at cost, and in 1999 consists of 3,625 shares of common
stock.
NOTE 9 - STOCK OPTIONS
On December 31, 1999, the Company granted stock options to key personnel to
purchase 155,000 shares of the Company's common stock at an exercise price of
$2.50 per share. The terms of the options provide that the options will expire
five years after the grant date and will vest one year from the grant date. At
December 31, 1999 no shares have been exercised.
13
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its option plans and,
accordingly, no compensation cost has been recognized in the financial
statements for stock options granted. The shares were granted on December 31,
1999, therefore there is also no compensation cost to be recognized and
disclosed under the provisions of SFAS 123 since the options were only
outstanding for one day. These options vest over a one-year period from the
grant date.
There were no stock options outstanding during fiscal year 1998. Stock option
activity during fiscal year 1999 is as follows:
Weighted -
average
Number of exercise
Shares price
--------- --------
Outstanding at December 31, 1998 -- $ --
Granted on December 31, 1999 155,000 2.50
Exercised -- --
Forfeited -- --
------- -------
Outstanding at December 31, 1999 155,000 $ 2.50
======= =======
Using the Black Scholes option-pricing model, the per share weighted average
fair value of stock options granted on December 31, 1999 where market price is
greater than the exercise price on the grant date is $4.00.
The following weighted average assumptions were used:
Expected risk-free interest rate 7%
Expected life 5 years
Expected volatility 50%
Expected dividend yield 0.00%
At December 31, 1999, the exercise price and weighted-average remaining
contractual lives of outstanding options was $2.50 and five years for all
shares.
At December 31, 1999, the number of options exercisable was 155,000 and the
weighted-average exercise price of those options was $2.50.
14
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and
1998
- --------------------------------------------------------------------------------
NOTE 10 - OPERATING LEASE
The Company leases office space under a non-cancelable operating lease with an
entity whose major shareholder is also the Company's major shareholder. Under
the terms of the lease, the Company leases office space for its headquarters.
The lease expires in 2007. Minimum future rental payments for each of the next
five years and in the aggregate are as follows:
2000 $ 109,200
2001 109,200
2002 109,200
2003 109,200
2003 109,200
Subsequent 309,400
------------
Total $ 855,400
============
Total rent expense, including month-to-month leases, for the years ending
December 31, 1999 and 1998 was $116,752 and $111,622 respectively.
NOTE 11 - INCOME TAXES
A summary of the provision for income taxes at December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax benefit due to temporary differences:
Federal $ 104,000 $ 72,168
State 35,000 26,462
Change in valuation allowance (139,000) (98,630)
--------- ----------
Total income tax benefit (expense) $ -- $ --
========= ==========
</TABLE>
The deferred tax asset at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax asset - NOL carryforwards $ 283,860 $ 144,860
Valuation allowance (283,860) 144,860
--------- ---------
Net deferred tax asset $ -- $ 144,860
========= =========
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of all of the deferred tax assets will be realized. The Company has
established a valuation allowance for the entire deferred tax asset which
consists of net operating loss carryforwards.
15
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (CONTINUED)
The company has net operating loss carryforwards of approximately $1,415,000 for
federal and state income tax purposes, which are available to offset future
taxable income. These loss carryforwards expire in various years from 2012 to
2019.
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rates of 34% for both 1999 and 1998 to income (loss) before
income taxes due to the effects of net operating loss carryforwards and the
valuation allowance.
NOTE 12 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of temporary cash investments. The Company places
its temporary cash investments with financial institutions. The amount of credit
exposure in excess of federally-insured limits at December 31, 1999 and 1998 was
$317,647 and $0, respectively.
All financial instruments are carried at amounts that approximate fair value
because of the short maturity of these instruments.
NOTE 13 - RELATED PARTY TRANACTIONS
The Company has entered into a written agreement
whereby it pays a management fee to cover overhead expenses which include
administrative services, clerical and accounting to an entity which is a
wholly owned company of the majority shareholder of the Company. Under this
agreement, the management fee is equal to 95% of the Company's prior month net
income. Net income is defined as gross income of the Company from whatever
source, less commissions paid to representatives and commissions re-allowed to
other broker-dealer firms and other expenses, excluding the monthly management
fee and income taxes incurred by the Company. The management fees may be
reduced or waived for any month where necessary to insure that the net capital
of the Company does not fall below $100,000 and/or the ratio of the Company's
aggregate indebtedness to net capital does not exceed 1,000%, as such terms are
defined by the National Association of Securities Dealers. The term of the
agreement is one year and can be extended for additional consecutive one-year
terms unless either party notifies the other at least one month prior to the
completion of any one-year term of its desire to terminate the agreement.
The management agreement was terminated effective January 1, 2000. In order to
reflect the true costs of the support services, the Company has, instead of
following the management agreement, reflected all support services costs paid by
the management company on their behalf in the financial statements at December
31, 1999 and 1998. The total fees paid to the related party were $1,156,235
and $885,482 for 1999 and 1998. The total fees paid to the related party were
$1,156,235 and $885,482 for 1999 and 1998, respectively.
16
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANACTIONS (CONTINUED)
The Company received $29,015 in fiscal year 1999 of commissions from a related
company owned by the majority stockholder for referrals to the seminars
conducted by the related company. No fees were received in 1998. (See Note 2)
The Company paid rent of $109,200 and $97,874 for fiscal year 1999 and 1998 to a
related company owned by the majority shareholder. The related company owns the
building the Company is leasing (See Note 10).
NOTE 14 - NET CAPITAL REQUIREMENT
The company is a "Fully Disclosed Broker Dealer." The Company does not carry
customer accounts and does not accept customer funds or securities. Instead, it
has entered into a "clearing agreement" with a clearing firm and has fully
disclosed all of its customer accounts to this firm.
The Company is subject to the Securities and Exchange Commission Uniform Net
Capital Ruse (SEC Rule 15C 3-1), which requires the maintenance of minimum net
capital.
The fully phased-in net capital requirement for "fully disclosed" firms that
receive, but do not hold, customer or other securities, is $50,000. The rule
also requires that the ratio of aggregate indebtedness to net capital shall not
exceed 15 to 1.
At December 31, 1999 and 1998, the Company had net capital after the
restatements in Note 16 of $64,863 and $103,607, respectively, which was in
excess of its required net capital of $50,000. The Company's aggregate
indebtedness to net capital ratio after the restatements in Note 16 was 11 to 1
and 1 to 1 at December 31, 1999 and 1998, respectively. The net capital at
December 31, 1999, before the restatements, was $8,459 and the net capital ratio
was 84 to 1. There was no effect on these ratios at December 31, 1998 as a
result of the fiscal year 1998 restatements.
NOTE 15 - RECLASSIFICATION
Certain reclassifications have been made to the December 31, 1998 financial
statements to conform with the December 31, 1999 financial statement
presentation. Such reclassifications have had no effect on net income as
previously reported.
17
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 16 - RESTATEMENT
December 31, 1999 restatement
- -----------------------------
On February 7, 2000, management determined, based on actual collections, that
commissions revenue and receivables at December 31, 1999 had been understated by
$68,520. Commission expense and accrued commission expense related to the same
transactions were understated by $23,229 at December 31, 1999. The net of these
amounts, $45,291, reduced the net loss and increased the accumulated deficit at
December 31, 1999. The net capital requirement in Note 14 was revised
accordingly. The statement of cash flow was also revised for the effects of
these changes.
On March 29, 2000, management determined that as of December 31, 1999, marketing
costs of $8,828 should have been written off, a $31,040 receivable from an
employee should have been fully reserved for and the deferred tax asset of
$139,000 generated in fiscal year 1999 should have been offset by a valuation
allowance. These adjustments were made to correct errors made in the Company's
previous December 31, 1999 financial statements. The result of these
restatements was to reduce total assets and increase the accumulated deficit at
December 31, 1999 by $178,868. The net loss at December 31, 1999 was also
increased by $178,868. The statement of cash flows was revised for these
changes. There was no effect on the net capital requirement disclosed in Note
14 as a result of these adjustments.
As a result of the restatements, earnings per share increased from $(0.1328) to
$(0.1756).
December 31, 1998 restatement
- --------------------------------
The accompanying financial statements for December 31, 1998 have been restated
to properly reflect the amortization of unearned compensation expense in the
amount of $32,287 and to show a valuation allowance against the deferred tax
asset of $98,630. As a result of the correction of these errors, net loss for
the year ended December 31, 1998 was increased by $130,917.
The accumulated deficit as of December 31, 1997 was restated to properly reflect
the cumulative effect of the correction of the error in recording the valuation
allowance for the deferred tax asset. As a result, the accumulated deficit at
December 31, 1997 was increased by $46,230.
As a result of the restatements, earnings per share decreased from $(0.1085) to
$(0.1345).
18
- --------------------------------------------------------------------------------
<PAGE>
SUMMIT BROKERAGE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENCY
The Company entered into a two-year employment agreement with William R. Turner
(the "Turner Employment Agreement"), the Company's Chief Operating Officer and
President, in September, 1999. The term of the Turner Employment Agreement
commenced on September 22, 1999 and will expire on September 22, 2001. The
Turner Employment Agreement provides that in consideration for Mr. Turner's
services, he is to be paid a salary of $100,000 during the first year of the
agreement, 15,000 shares of the Company's common stock, and options to purchase
50,000 shares of the Company's common stock at an option price of $2.50 per
share. The stock compensation and options for the first year have been included
in Note 7 and 9. During the second year of the agreement, Mr. Turner will
receive a 5% increase in salary and 15,000 shares of the Company's common stock
and options to purchase 50,000 shares of the Company's common stock at an option
price of $2.50 per share. The shares and options for the second year have not
been earned or received as of December 31, 1999 by Mr. Turner, therefore no
compensation has been recorded for these shares and options. The contract is
renewable upon agreement by both parties.
NOTE 18 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has had recurring net losses.
These matters raise substantial doubt about the entity's ability to continue as
a going concern. Management plans to do a public offering in the future, is
continuing to open new branch offices and currently has commitments for several
new branch offices. In addition, the Company has a commitment from one of its
major shareholders to enter into a subordinated debt agreement of at least
$100,000 which will qualify as net capital. However, the Company's ability to
continue as a going concern is contingent on the success of future operations,
the formalization of existing commitments for new branch offices and the
subordinated debt agreement. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 19 - OFF BALANCE SHEET RISK
Included in the Company's clearing agreement with its clearing broker-dealer, is
an indemnification clause. This clause relates to instances where the Company's
customers fail to settle security transactions. In the event this occurs, the
Company has indemnified the clearing broker-dealer to the extent of the net loss
on the unsettled trade. At December 31, 1999, management of the Company had not
been notified by the clearing broker-dealer, nor were they otherwise aware, of
any potential losses relating to this indemnification.
19
- --------------------------------------------------------------------------------
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Consolidated
Financial Statements of Summit Brokerage Services, Inc. and Subsidiaries for the
Year Ended December 31, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 434089
<SECURITIES> 0
<RECEIVABLES> 614060
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1075281
<PP&E> 150237
<DEPRECIATION> 70970
<TOTAL-ASSETS> 1154548
<CURRENT-LIABILITIES> 734488
<BONDS> 0
0
0
<COMMON> 454
<OTHER-SE> 419606
<TOTAL-LIABILITY-AND-EQUITY> 1154548
<SALES> 4712651
<TOTAL-REVENUES> 4756619
<CGS> 0
<TOTAL-COSTS> 5490629
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (734010)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (734010)
<EPS-BASIC> (.176)
<EPS-DILUTED> (.176)
</TABLE>
