UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 0-21105
FIREBRAND FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3414302
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One State Street Plaza, New York, NY 10004
(Address of principal executive offices) (Zip Code)
(212) 208-6500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 15, 2000
----- --------------------------------
Common Stock, $.0001 par value 8,992,487 shares
<PAGE>
FIREBRAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
Index
Part I - Financial Information Page
----
Item 1. Financial Statements
Consolidated Statement of Financial Condition as of
October 31, 2000 (Unaudited) and January 31, 2000 3
Consolidated Statement of Operations for the three and nine
months ended October 31, 2000 and 1999 (Unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity for
the year ended January 31, 2000 and the nine months
ended October 31, 2000 (Unaudited) 5
Consolidated Statement of Cash Flows for the nine months
ended October 31, 2000 and 1999 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 16
Part II - Other Information
Item 2. Sales of Unregistered Securities during the nine months
ended October 31, 2000 18
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIREBRAND FINANCIAL GROUP INC, AND SUBSIDIARIES
Consolidated Statements of Financial Condition
Assets October 31, January 31,
2000 2000
-------------- ------------
(Unaudited)
Cash and cash equivalents $ 7,623,000 $ 4,715,000
Receivable from broker dealers 1,497,000 407,000
Securities owned at market value 3,817,000 635,000
Securities owned, not readily
marketable, at fair value 1,543,000 1,543,000
Investment in affiliates 11,594,000 5,248,000
Investment in discontinued operations 7,628,000 11,552,000
Investment fees receivable 300,000 3,253,000
Loans receivable 388,000 987,000
Office furniture, equipment and leasehold
improvements, net 1,987,000 1,346,000
Goodwill, net 1,508,000 1,592,000
Income taxes receivable 135,000 223,000
Other assets 1,744,000 1,117,000
------------ ------------
Total Assets $ 39,764,000 $ 32,618,000
============ ============
Liabilities and Stockholders' Equity
Securities sold, not yet purchased, at
market value $ 12,000 $ 40,000
Commissions payable 193,000 240,000
Deferred tax liability 2,088,000 3,145,000
Income taxes payable 595,000 1,028,000
Payable to related parties 2,000,000 --
Accrued expenses and other liabilities 513,000 900,000
------------ ------------
5,401,000 5,353,000
Minority interests in net assets of
subsidiaries 8,689,000 --
Liabilities subordinated to the claims of
general creditors 314,000 314,000
------------ ------------
Total Liabilities 14,404,000 5,667,000
------------ ------------
Common stock ($.0001 par value;
35,000,000 shares authorized;
9,209,875 shares issued;
9,019,387 and 8,629,213 shares
outstanding, respectively) 2,000 1,000
Additional paid-in capital 26,960,000 20,342,000
Retained earnings (510,000) 9,206,000
Accumulated other comprehensive income (loss) 16,000 (51,000)
------------ ------------
26,468,000 29,498,000
Less treasury stock, at cost: 190,488 and
580,662 shares respectively (1,108,000) (2,547,000)
------------ ------------
Total Stockholders' Equity 25,360,000 26,951,000
------------ ------------
Total Liabilities and Stockholders'
Equity $ 39,764,000 $ 32,618,000
============ ============
See accompanying notes to consolidated financial statements.
3
<PAGE>
FIREBRAND FINANCIAL GROUP, INC AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months Nine months
Ended October 31, Ended October 31,
------------------------------ --------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 1,097,000 $ 1,515,000 $ 4,943,000 $6,017,000
Investment banking 281,000 136,000 1,738,000 52,600
Principal transactions (723,000) (308,000) 24,000 (214,000)
Equity in earnings of
unconsolidated (1,025,000) - 875,000 630,000
Asset management fees (282,000) 14,000 575,000 38,668
Interest 536,000 255,000 1,105,000 716,000
Other revenue 835,000 44,000 893,000 (70,904)
------------ ------------ ----------- -----------
Total revenues $ 719,000 $ 1,656,000 $ 10,153,000 $7,169,364
------------ ------------ ----------- -----------
Expenses:
Compensation and benefits $ 3,599,000 $ 1,050,000 $ 7,801,000 $3,493,000
Occupancy and equipment 1,149,000 305,000 1,754,000 833,000
Communications 214,000 152,000 744,000 532,000
Brokerage, clearing and
exchange fees 297,000 259,000 911,000 928,000
Professional fees 143,000 199,000 894,000 314,000
Business development 283,000 48,000 2,909,000 168,000
Other expenses 271,000 316,000 1,019,000 676,400
------------ ------------ ----------- -----------
Total Operating Expenses 5,956,000 2,329,000 16,032,000 6,944,400
------------ ------------ ----------- -----------
Income (Loss) from continuing
operation (5,237,000) (673,000) (5,879,000) 224,964
Minority interest in operations
of subs (1,094,000) - (2,030,000) -
------------ ------------ ----------- -----------
Income (Loss) before taxes (4,143,000) (673,000) (3,849,000) 224,964
Income tax (benefit) provision - 142,000 (1,057,000) 177,000
------------ ------------ ----------- -----------
Income (Loss) from continuing
operation (4,143,000) (815,000) (2,792,000) 47,964
------------ ------------ ----------- -----------
Discontinued operations:
Loss from operations of the
discontinued GKN
Securities segment net
of income tax benefit of $0 (1,819,000) (2,831,000) (6,924,000) (3,237,000)
Loss from operations of the
discontinued Institutional
and Research segment, net of
income tax benefit of $0 and
$223,000, and $0 and $213,000,
respectively - - - (322,000)
Loss from disposal of the
Institutional and Research segment - - - (750,000)
Loss from operation of the discontinued
On-site Day Trading segment, net of
income tax benefit of $0 and $37,000
and $0 and $81,000, respectively - - - (465,000)
------------ ------------ ----------- -----------
(1,819,000) (2,831,000) (6,924,000) (4,774,000)
------------ ------------ ----------- -----------
Net Income (Loss) $(5,962,000) $ (3,646,000) $(9,716,000) $ (4,726,036)
============ ============ =========== ===========
Weighted average common shares
outstanding - basic and diluted 9,019,387 8,623,180 8,895,603 8,565,581
============ ============ =========== ===========
Basic and diluted EPS from:
Loss from continuing operations $ (0.46) $ (0.09) $ (0.31) $ 0.01
Loss from discontinued operations (0.20) (0.33) (0.78) (0.56)
------------ ------------ ----------- -----------
Net loss $ (0.66) $ (0.42) $ (1.09) $ (0.55)
============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FIREBRAND FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended January 31, 2000 and the Nine Months Ended October 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------- ----------------- Paid-in
Shares Amt. Shares Amt. Capital
--------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1999 1,140,000 $ 114,000 9,209,875 $ 1,000 $ 21,022,00
Net income - - - - -
Starting bonuses awarded - - - - (147,000)
Stock options exercised - - - - (109,000)
Forfeiture of stock issued -
compensation plan - - - - 112,000
Stock issued - deferred
compensation plan - - - - (93,000)
Stock issued - 401(k) plan - - - - (131,000)
Preferred stock conversion (100,800) (10,000) - - (61,000)
Cancellation of preferred stock (1,039,200) (104,000) - - (894,000)
Note receivable paid - - - - 121,000
Amortization of unearned
compensation - - - - 522,000
Translation adjustment - - - - -
----------- --------- -------- ------- ------------
Balance at January 31, 2000 - $ - 9,209,875 $ 1,000 $20,342,000
=========== ========= ========= ======== ===========
Net income - - - - -
Net proceeds of stock sale
by EarlyBirdCapital.com - - - - 9,978,000
Minority Interest - EarlyBirdCapital.com (6,234,000)
Net proceeds of stock sale
By Shochet Holdings - - - - 7,926,000
Minority Interest - Shochet Holdings - - - - (4,485,000)
Stock options exercised - - - - (22,000)
Forfeiture of stock issued -
compensation plan - - - - 17,000
Stock issued - deferred
compensation plan - - - - (120,000)
Stock issued - 401(k) plan - - - - (81,000)
Stock issued as employment bonus - - - - (132,000)
Repurchase of stock for treasury - - - - -
Stock issued - compensation plan - - - - (1,635,000)
Amortization of unearned
compensation - - - - 277,000
Investment in Angeltips - - - 1,000 1,129,000
Translation adjustment - - - - -
------------ ---------- --------- -------- -----------
Balance at October 31, 2000 - $ - 9,209,875 $ 2,000 $26,960,000
============ ========== ========= ======== ===========
See accompanying notes to consolidated financial statements.
(continued next page)
</TABLE>
5
<PAGE>
FIREBRAND FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended January 31, 2000 and the Nine Months Ended October 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
(Accumulated Accumulated
Deficit) Other Treasury Stock
Retained Comprehensive --------------------
Earnings (Loss) Income Shares Amt. Total
---------- -------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1999 $ 4,351,000 $ (18,000) (798,976) $(3,516,000) $ 21,954,000
Net income 4,855,000 - - - 4,855,000
Starting bonuses awarded - - 79,746 351,000 204,000
Stock options exercised - - 66,631 294,000 185,000
Forfeiture of stock issued -
compensation plan - - (27,046) (112,000) -
Stock issued - deferred
compensation plan - - 34,676 153,000 60,000
Stock issued - 401(k) plan - - 48,179 212,000 81,000
Preferred stock conversion - - 16,128 71,000 -
Cancellation of preferred stock - - - - (998,000)
Note receivable paid - - - - 121,000
Amortization of unearned - - - - -
compensation - - - - 522,000
Translation adjustment - (33,000) - - (33,000)
----------- ----------- -------- ---------- -----------
Balance at January 31, 2000 $ 9,206,000 $ (51,000) (580,662) $(2,547,000) $26,951,000
========== ======== ========= =========== =============
Net income (9,716,000) - - - (9,716,000)
Net proceeds of stock sale
by EarlyBirdCapital.com - - - - 9,978,000
Minority Interest - EarlyBirdCapital.com (6,234,000)
Net proceeds of stock sale
By Shochet Holdings - - - - 7,926,000
Minority Interest - Shochet Holdings - - - - (4,485,000)
Stock options exercised - - 27,053 120,000 98,000
Forfeiture of stock issued -
compensation plan - - (3,916) (17,000) -
Stock issued - deferred
compensation plan - - 47,951 210,000 90,000
Stock issued - 401(k) plan - - 25,351 111,000 30,000
Stock issued as employment bonus - - 30,000 131,000 (1,000)
Repurchase of stock for treasury - - (109,168) (751,000) (751,000)
Stock issued - compensation plan - - 372,903 1,635,000 -
Amortization of unearned
compensation - - - - 277,000
Investment in Angeltips - - - - 1,130,000
Translation adjustment - 67,000 - - 67,000
---------- -------- --------- ----------- -------------
Balance at October 31, 2000 $ (510,000) $ 16,000 (190,488)$ (1,108,00) $ 25,360,000
========== ======== ========= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FIREBRAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Operating activities:
Net loss $ (9,716,000) $ (4,726,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 860,000 523,000
Equity in earnings of unconsolidated
affiliate (875,000) -
Minority interests in operations of
subsidiari (2,030,000) -
Loss on disposal of segment - 750,000
Translation adjustment 67,000 (6,000)
Other (219,000) 388,000
---------------- ---------------
(11,913,000) (3,071,000)
(Increase) decrease in operating assets:
Receivable from brokers and dealers (1,090,000) 659,000
Securities owned, at market value (3,182,000) (72,000)
Securities owned, not readily marketable - (190,000)
Investment in affiliates - -
Investment fees receivable 2,953,000 -
Income taxes receivable 88,000 1,569,000
Loans receivable 599,000 336,000
Investment in discontinued operations 3,000,000 -
Other assets (627,000) (574,000)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (28,000) (391,000)
Commissions payable (47,000) (1,264,000)
Income taxes payable (433,000) -
Payable to related parties 2,000,000 -
Deferred tax liability (1,057,000) -
Accrued expenses and other liabilities (387,000) 267,000
---------------- ---------------
Net cash used in operating activities (13,124,000) (2,731,000)
---------------- ---------------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (1,021,000) (280,000)
Liquidation of investment in limited partnerships - (192,000)
Investment in discontinued operations (3,000,000) -
Investment in new venture -
Cash from disposal of segment - 875,000
---------------- ---------------
Net cash (used in) provided by investing activities (1,121,000) 403,000
---------------- ---------------
Financing activities:
Proceeds from issuance of EarlyBirdCapital.com stock 9,978,000 -
Proceeds from issuance of Shochet Holdings stock 7,926,000 -
(Purchase) sale of treasury stock (751,000) 140,000
Payment of subscription receivable - 121,000
Repayment of subordinate debt - (93,000)
---------------- ---------------
Net cash provided by financing activities 17,153,000 168,000
---------------- ---------------
Net change in cash and cash equivalents 2,908,000 (2,160,000)
Cash and cash equivalents at beginning of year 4,715,000 10,553,000
---------------- ---------------
Cash and cash equivalents at end of period $ 7,623,000 $ 8,393,000
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FIREBRAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include the activities of Firebrand
Financial Group, Inc. and its subsidiaries (the "Company"). The Company is
primarily engaged in the following segments: full service and discounted retail
brokerage, online investment banking, and asset management. These segments
provide securities brokerage, investment banking, online investing, merchant
banking and asset management and trading services for individuals and
corporations through the Company's subsidiaries.
The company's main operating subsidiaries are EarlyBirdCapital, Inc.
("EarlyBird"), Shochet Securities, Inc. ("Shochet Securities") and Dalewood
Associates, Inc.
Until recently the Company was also involved in full service retail brokerage
through its subsidiary GKN Securities Corp. GKN has been classified as a
discontinued operation as of the third quarter of fisal 2001. See Note 8 below
for a discussion of a subsequent event involving GKN Securities Corp.
All significant intercompany accounts and transactions are eliminated in
consolidation. In the opinion of management, the consolidated financial
statements reflect all adjustments, which are all of a normal recurring nature,
necessary for a fair statement of the Company's financial position and results
of operations for the interim periods presented. These consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended January 31, 2000, in
its annual report on Form 10-K. Certain reclassifications have been made to the
prior period amounts to conform to the current presentation.
The financial statements conform with generally accepted accounting principles
("GAAP"). The preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures 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 vary from these estimates.
The Company's principal business activities are affected by many factors,
including general economic and market conditions, which can result in
substantial fluctuations in the Company's revenues and net income. Therefore,
the results of operations for the nine months ended October 31, 2000, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. Segment and Geographic Area Data
The Company currently operates in three principal segments: Full Service and
Discounted Retail Brokerage, Online Investment Banking, and Asset Management.
Each segment is managed separately based on types of products and services
offered and the related client bases. The Company evaluates the performance of
its segments based primarily on income before income taxes.
8
<PAGE>
o Full Service and Discounted Retail Brokerage - provides full service
discount brokerage services, through Shochet Securities to a clientele
consisting primarily of retired individuals who invest in exchange-listed
equity securities, fixed income securities and mutual funds.
o Online investment banking - through EarlyBirdCapital Inc., which provides
an online community for the financing and development of early stage
companies. This Internet-based investment bank provides client companies
with advisory services and access to capital, and qualified investors with
readily accessible investment opportunities.
o Asset Management - provides asset management services to investors through
Dalewood Associates, Inc., the general partner of Dalewood Associates, L.P.
Dalewood Associates, L.P. is a private partnership which invests primarily
in venture stage, pre-IPO companies. The Company also owns limited
partnership interests in Dalewood Associates, Inc.
The Company allocates to segments certain overhead expenses based upon specified
agreed-upon amounts. Certain of the segments incur interest expense on
subordinated debt payable to the Company at contract rates. All such amounts are
eliminated in consolidation. The amounts below are in thousands.
<TABLE>
<CAPTION>
Full
Service
& Online Eliminations
Discounted Investment Asset and
Retail Bank Management All other Total
------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Income Statement
Three months ended:
October 31, 2000:
------------------------------
Revenues from external sources $ 1,803 $ 14 $ (1,307) 209 $ 719
Intersegment revenues - - - - -
(Loss) income before income taxes (730) (2,124) (1,384) 95 (4,143)
October 31, 1999:
------------------
Revenue from external sources $ 1,672 $(203) $ 14 173 $ 1,656
Intersegment revenues - - - - -
(Loss) income before income tax (324) (241) 14 (122) (673)
Nine months ended:
October 31, 2000:
-----------------
Revenues from external sources $ 6,399 $ 2,338 $ 1,450 (34) $ 10,153
Intersegment revenues - - - - -
(Loss) income before income taxes (1,747) (3,430) 1,370 (42) (3,849)
October 31, 1999:
---------------------
Revenue from external sources $ 6,002 $4,147 $ 669 (3,649) $ 7,169
Intersegment revenues - - - - -
(Loss) income before income tax (644) (1,369) 668 225
1,570
Balance Sheet data:
--------------------
October 31, 2000:
--------------------
Segment assets $ 9,651 $ 8,758 $ 9,200 12,155 $ 39,764
January 31, 2000:
Segment assets $ 3,902 $523 $ 8,123 $20,070 $ 32,618
</TABLE>
9
<PAGE>
The Company's principal operations are located in the United States. The Company
maintains an office in Europe. Gross revenues from operations in Europe
represent less than 1% of the Company's overall revenues.
3. Net Capital Requirements
EarlyBirdCapital and Shochet Securities are registered broker-dealers with the
Securities and Exchange Commission ("SEC") and member firms of the National
Association of Securities Dealers, Inc. ("NASD"). As such, EarlyBirdCapital and
Shochet Securities are subject to the SEC's net capital rule, which requires the
maintenance of minimum net capital.
EarlyBirdCapital has elected to compute net capital under the standard aggregate
indebtedness method permitted by the net capital rule, which requires that the
ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1. At October 31, 2000, EarlyBirdCapital had net capital of
$1,655,141 and a net capital requirement of $100,000.
Shochet Securities has also elected to compute net capital under the standard
aggregate indebtedness method permitted by the net capital rule. At October 31,
2000, Shochet Securities had net capital of $1,399,000 and a net capital
requirement of $100,000.
4. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted EPS:
(Loss) income from continuing operations $ (4,143,000) $ (815,000) $(2,792,000)$ 48,000
Loss from discontinued operations (1,819,000) (2,831,000) (6,924,000) (4,774,000)
----------- ------------- ------------------------
Net loss $ (5,962,000) $ (3,646,000) $ (9,716,000) $ (4,726,000)
============= ============= ============= ==============
Denominator for basic EPS 9,019,387 8,623,180 8,895,603 8,565,581
============= ============= ============= ==============
Denominator for diluted EPS 9,019,387 8,623,180 8,895,603 8,565,581
============= ============= ============= ==============
Basic and diluted EPS from:
(Loss) income from continuing operations $ (0.46) $ (0.09) $ (0.31) $ 0.01
Loss from discontinued operations (0.20) (0.33) (0.78) (0.56)
-------------- ------------ -------------- -------------
Net loss $ (0.66) $ (0.42) $ (1.09) $ (0.55)
============= ============ ============= ==============
</TABLE>
10
<PAGE>
5. Supplemental Cash Flow Information
Nine months ended
October 31,
2000 1999
------------- -------------
Cash paid for:
Income taxes $ 371,000 $ 187,000
Non-cash financing transactions:
Treasury stock issued
- for compensation plan $ 138,000 $ 204,000
- to 401(k) plan $ 30,000 $ 81,000
- to deferred compensation plan $ 90,000 $ 60,000
6. Commitments and Contingencies
The Company's broker-dealer subsidiaries are involved in various legal
proceedings arising from its securities activities. Management believes that
resolution of these proceedings will have no material adverse effect on the
Company's consolidated financial position or results of operations.
7. Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of comprehensive income and
its components. Total comprehensive income measures all changes in stockholders'
equity resulting from transactions of the period, other than transactions with
stockholders.
The components of comprehensive loss for the three and nine months ended October
31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net loss $ (5,962,000) $ (3,646,000) $ (9,716,000) $ (4,726,000)
Other comprehensive loss:
Foreign currency translation
adjustments 3,000 13,000 (67,000) (6,000)
-------------- --------------- --------------- ---------------
Total comprehensive loss $ (5,959,000) $ (3,633,000) $ (9,783,000) $ (4,732,000)
============== =============== ============== ===============
</TABLE>
8. Subsequent events
On November 28, 2000, the Company and its wholly owned subsidiary, GKN
Securities Corp. ("GKN"), and Investec Ernst & Company ("Investec"), entered
into an agreement ("Agreement"), under which certain brokers employed by GKN
will be terminated by GKN on or about December 18, 2000 ("Transfer Date"). In
turn, on the Transfer Date, these brokers will be offered employment by Investec
and GKN shall effect an electronic transfer of these brokers' client accounts to
Investec. The transfer is part of the Company's strategy to focus its business
on investment banking services.
Under the Agreement, GKN will receive certain percentages of the gross
commissions generated by these brokers at Investec during the three year period
beginning on the Transfer Date ("Override Fees"). These percentages are 6% in
the first year and 8% in each of the second and third years. Investec has
guaranteed that the Override Fees to be received by GKN shall be at least equal
to $500,000 in the first year, $400,000 in the second year and $300,000 in the
third year.
As a result of the transaction described above, GKN Securities Corp. has been
accounted for on a discontinued basis.
Certain other assets will be liquidated in an orderly fashion; management does
not expect a material loss as a result of this transaction.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the consolidated results of operations and financial
condition of Firebrand Financial Group, Inc. and Subsidiaries should be read in
conjunction with the Consolidated Financial Statements included in Item 1 of
this document and with the Management's Discussion and Analysis of the Financial
Condition and Results of Operations included in the Company's Fiscal 2000 Annual
Report on Form 10-K.
Business Environment
Our primary business activities include investment banking, online investing,
merchant banking and asset management, securities brokerage and securities
trading, with an emphasis on early stage growth companies. These activities are
subject to general economic and market conditions and the volatility of trading
markets. We witnessed an extension of the favorable market conditions, which had
existed throughout much of fiscal year 2000, for the initial stages of fiscal
2001. However, during the last two quarters volume retreated significantly from
the record levels. This volatility also characterizes our asset management
activities, both through performance fees and the company's investment in
Dalewood LP.
The Company owns a majority interest in both EarlyBirdCapital.com and Shochet
Holding Corp. EarlyBirdCapital.com is the parent of EarlyBirdCapital, Inc
(online investment banking) and Dalewood Associates Inc. (asset management).
Shochet Holding Corp. is the parent of Shochet Securities (a discount
broker/dealer).
During the first half of fiscal 2001, the Company's strategic plans for
EarlyBirdCapital.com and Shochet Holding reached key milestones as both entities
raised capital. EarlyBirdCapital.com raised $11 million of gross proceeds
through a private placement; the Company retains a 64.5% equity interest in
EarlyBirdCapital. Shochet Holding raised $9,405,000 of gross proceeds; the
Company retains a 53.5% equity interest in Shochet Holding.
In November 2000, an agreement was entered into to dispose of certain assets of
GKN Securities Corp. See Note 8 to the financial statements for a discussion of
this transaction.
The results of operations for the nine months ended October 31, 2000 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
Results of Operations
Three Months Ended October 31, 2000 vs. Three Months Ended October 31, 1999
Net loss for the three months ended October 31, 2000 was $5,962,000, as compared
with a net loss of $3,646,000 for the three months ended October 31, 1999. Net
loss from continuing operations for the three months ended October 31, 2000 was
$4,143,000; for the three months ended October 31, 1999, net loss from
continuing operations was $815,000. Basic and diluted loss per share of common
stock was $0.66 for the third quarter of fiscal 2001 as compared to a loss of
$0.42 for the third quarter of fiscal 2000. Basic and diluted loss from
continuing operations per share of common stock was $0.46 for the third quarter
of fiscal 2001, and was $0.09 for the third quarter of fiscal 2000.
Revenues
Total revenues decreased by 57% to $719,000 for the third quarter of fiscal
2001, versus the third quarter of fiscal 2000, mainly as a result of declines in
commission revenues, principal transactions, and equity in earnings of
unconsolidated affiliates.
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Commission revenues decreased 28% to $1,097,000 in the third quarter of fiscal
2001, versus the third quarter of fiscal 2000. The drop was primarily due to a
decrease in trading volume, which reflected the challenging environment in the
trading markets.
Investment banking revenues were $281,000, versus $136,000 in the third quarter
of fiscal 2000. The increase is the result of higher deal management fees
generated at EarlyBirdCapital.
The loss from principal transactions was $723,000. The loss was $308,000 in the
year-earlier period.
Asset management activities generated a loss of $1,307,000, versus a gain of
$14,000 in the year-earlier period. The loss reflects an investment loss of
$1,025,000, representing a decrease in the value of assets managed by Dalewood
Associates LP, a private investment fund. Such value and accordingly the amount
of revenues generated may vary significantly from period to period depending
upon the market value of the underlying securities being managed, which is
dependent upon economic and market conditions. The loss also reflects asset
management fees of $(282,000), which consists of the following: management fee
revenue was $118,000, and the general partner's performance bonus accrual was
$(400,000) as a result of the investment loss for the quarter.
Interest income increased 110% to $536,000 in the third fiscal quarter as a
result of interest earned on funds from newly raised capital at
EarlybirdCapital.com and Shochet Holding.
Other revenues were $835,000 in the third fiscal quarter, versus $44,000 in the
prior fiscal year third quarter.
Expenses
Total expenses for the third quarter of fiscal 2001 were $5,956,000, as compared
to $2,329,000 for the third quarter of fiscal 2000. The increase is primarily
attributable to an increase in compensation and benefits expense, and occupancy
and equipment expense.
Compensation and benefits expense increased to $3,599,000 from $1,050,000 in the
prior year third quarter. The increase is primarily attributable to additional
staffing at EarlyBirdCapital, Shochet, and the Parent, offset somewhat by
declines in broker commission payouts.
Occupancy and equipment expense in the fiscal 2001 quarter increased to
$1,149,000, from $305,000 in the third quarter of fiscal 2000. The increase
reflected an increase in equipment costs.
Brokerage, clearing and exchange fees increased to $297,000 in the third quarter
of fiscal 2001, from $259,000 in the third quarter of fiscal 2000.
Communications expense was $214,000 in the third quarter, versus $152,000 in the
year-earlier period. The increase is primarily attributable to an increase in
market data expenses.
Professional fees decreased to $143,000 in the fiscal third quarter, from
$199,000 in the prior year third fiscal quarter. The decrease is due to lower
consulting and legal fees.
Business development expenses were $283,000 in the fiscal 2001 third quarter,
versus $48,000 in the year-earlier period. The increase reflected increased
expenditures by Shochet and EarlyBirdCapital in establishing their online
presences and broadening their brand name recognition.
Other expenses decreased to $271,000 in the third fiscal quarter, from $316,000
in the year-earlier period.
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Minority Interest
The sale of 46.5% of Shochet Holdings and 35.5% of Earlybirdcapital.com in the
first quarter of fiscal 2001 created minority interest accounts; for the third
quarter, the minority interests absorbed part of the operating losses of those
two entities, providing a $1,094,000 benefit to the company.
Discontinued Operations
During the third quarter of fiscal 2001, the Company announced its intention to
discontinue GKN Securities Corp., its Full Service Retail segment. As a result,
that subsidiary's loss of $1,819,000 has been reported as a discontinued
operation in the third fiscal quarter. In the year-earlier third quarter, GKN
had a net loss of $2,831,000.
Nine Months Ended October 31, 2000 vs. Nine Months Ended October 31, 1999
Net loss for the nine months ended October 31, 2000 was $9,716,000, as compared
with a net loss of $4,726,000 for the nine months ended October 31, 1999. Net
loss from continuing operations for the nine months ended October 31, 2000 was
$2,792,000, as compared to net income of $48,000 for the year-earlier third
period. Basic and diluted loss per share of common stock was $1.09 for the nine
months ended October 31, 2000, as compared to a loss of $0.55 for the fiscal
2000 third quarter. Basic and diluted loss from continuing operations per share
of common stock was $0.31 for the first 9 months of fiscal 2000, versus earnings
per share of $0.01 in the year-earlier period.
Revenues
Total revenues increased to $10,153,000 for the first nine months of fiscal
2001, versus $7,169,000 in the year-earlier third quarter, primarily as a result
of higher investment banking fees.
Commission revenues decreased to $4,943,000 in the first nine months of fiscal
2001, versus $6,017,000 in the first nine months of fiscal 2000. The decrease is
primarily attributable to reduced commissions in the second and third quarters
in concert with declining equity markets.
Investment banking revenues increased to $1,738,000, versus $53,000 in the
fiscal 2000 period. The increase is primarily the result of deal management fees
generated by EarlyBirdCapital.
The gain from principal transactions was $24,000, versus a loss of 214,000 in
the first nine months of fiscal 2000.
Asset management activities generated revenues of $1,450,000, up from $669,000
in the year-earlier period. Revenues benefited from the increased value of
assets under management and the corresponding fee for managing those assets.
Such value and accordingly the amount of revenues generated may vary
significantly from period to period depending upon the market value of the
underlying securities being managed, which is dependent upon economic and market
conditions. Equity in earnings of unconsolidated affiliates was $875,000 in the
first nine months of fiscal 2001, versus $630,000 in the year-earlier period,
reflecting better results at Dalewood Associates LP, a private investment fund.
Asset management fees rose to $575,000, versus $39,000 in the fiscal 2000 nine
month period.
Interest income increased to $1,105,000 in the first nine months of fiscal 2001,
versus $716,000 in the first nine months of fiscal 2000, as a result of interest
earned on funds from newly raised capital at EarlyBirdCapital.com and Shochet
Holdings.
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Other revenues were $893,000 for the first nine months of fiscal 2001, versus
$(71,000) for the first nine months of fiscal 2000. The increase is primarily
attributable to a recovery on an arbitration matter.
Expenses
Total expenses for the first nine months of fiscal 2001 were $16,032,000, as
compared to $6,944,000 in the same period in fiscal 2000. The increase is
primarily attributable to increases in compensation, occupancy and equipment,
professional fees, and business development. Part of the increase represented
planned marketing and promotion initiatives at EarlyBirdCapital and Shochet
Securities, as those entities seek to expand their brand name recognition.
Compensation and benefits expense rose to $7,801,000, from $3,493,000 in the
corresponding prior year period. Higher commission expenses, as well as
additional staffing at EarlyBirdCapital, Shochet, and the Parent, were primarily
responsible.
Occupancy and equipment expense in the fiscal 2001 period increased to
$1,754,000, versus $833,000 in the first nine months of fiscal 2000, reflecting
an increase in equipment costs.
Brokerage, clearing and exchange fees decreased to $911,000 for the first nine
months of fiscal 2001, from $928,000 for the first nine months of fiscal 2000.
Communications expense increased to $744,000 for the first nine months of fiscal
2001, from $532,000, reflecting increased market data expenses.
Professional fees increased to $894,000 for the first nine months of fiscal
2001, from $314,000 in the first nine months of fiscal 2000, primarily as a
result of increased consulting and legal fees.
Business development expenses were $2,909,000 in the first nine months of fiscal
2001, versus $168,000 in the year-earlier period. The increase reflected
increased expenditures by Shochet and EarlyBirdCapital in establishing their
online presences and broadening their brand name recognition.
Other expenses increased to $1,019,000 from $676,000.
Minority Interest
The sale of 46.5% of Shochet Holdings and 35.5% of EarlyBirdCapital.com in the
first quarter of fiscal 2001 created minority interest accounts; for the first
nine months of fiscal 2001, the minority interests absorbed part of the
operating losses of those two entities, providing a $2,030,000 benefit to the
company.
Income taxes
For the nine months ended October 31, 2000, the Company booked an income tax
benefit of $1,057,000 against its consolidated pretax loss.
Discontinued Operations
During the third quarter of fiscal 2001, the Company announced its intention to
discontinue GKN Securities Corp., its Full Service Retail segment. As a result,
that subsidiary's loss of $6,924,000 for the first nine months of fiscal 2001
has been reported as a discontinued operation in the third fiscal quarter.
During fiscal 2000, management discontinued the operations of the On-site Day
Trading, and Institutional and Research segments of our business. After-tax
losses for the nine months ended October 31, 1999 from these discontinued
operations and from GKN Securities were $4,774,000.
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Weighted average common shares outstanding
The weighted average number of common shares outstanding used in the computation
of basic and diluted loss per common share was 8,895,603 for the first nine
months of fiscal 2001, compared with 8,565,581 in the prior year's period. The
weighted average number of common shares outstanding used in the computation of
basic and diluted loss per common share was 9,019,387 for the third quarter of
fiscal 2001, compared with 8,623,180 in the prior year's period.
Liquidity and Capital Resources
Approximately 33% of our company's assets at October 31, 2000 are highly liquid,
consisting primarily of cash and cash equivalents, securities inventory and
receivables from other broker-dealers, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from our clearing broker, turn over rapidly.
As a securities dealer, we may carry significant levels of securities inventory
to meet customer needs. Our inventory of market-making securities is readily
marketable; however, holding large blocks of the same security may limit
liquidity and prevent realization of full market value for the securities.
Securities owned, but not readily marketable, represent underwriter warrants and
the securities underlying such warrants. The liquidity of these securities is
limited. A relatively small percentage of our total assets are fixed. The total
assets or the individual components of total assets may vary significantly from
period to period because of changes relating to customer demand, economic and
market conditions, and proprietary trading strategies.
Our domestic operating brokerage subsidiaries, Shochet Securities and
EarlyBirdCapital are subject to the net capital rules of the NASD and the SEC.
They and our company, therefore, are subject to certain restrictions on the use
of capital and its related liquidity. Shochet Securities' and EarlyBirdCapital's
respective net capital positions as of October 31, 2000 were $1,399,000 and
$1,655,141, which were $1,299,000 and $1,555,141, respectively, in excess of
their respective net capital requirements.
During the nine months ended October 31, 2000, the Company's cash position
increased approximately $2.9 million. During the period, two subsidiaries,
EarlyBirdCapital.com and Shochet Holding, sold stock with net proceeds of $9.9
million and $7.9 million, respectively. Operating losses reduced the increase.
In conjunction with our corporate headquarters relocation in New York we have
significantly upgraded our technological infrastructure. The combined costs of
the move and the technological investment were financed through a series of
operating leases. These leases total $4.8 million. As security for these leases,
we arranged for a standby letter of credit. As collateral for the standby letter
of credit, we have placed $2.5 million in a restricted cash escrow account with
the provider. With the discontinuance of GKN Securities Corp., the space
required by corporate headquarters will be approximately half of that required
previously.
Our overall capital and funding needs are continually reviewed to ensure that
our capital base can support the estimated needs of its business units. These
reviews take into account business needs as well as regulatory capital
requirements of the subsidiaries. Based upon these reviews, management believes
that our capital structure is adequate for current operations and reasonably
foreseeable future needs.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Our market making, investing and underwriting activities often involve the
purchase, sale or short sale of securities as principal. Such activities subject
our capital to significant risks from markets that may be characterized by
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relative illiquidity or may be particularly susceptible to rapid fluctuations in
liquidity. Such market conditions could limit our ability to resell securities
purchased or to purchase securities sold short. These activities subject our
capital to significant risks, including market, credit counterparty and
liquidity risks. Market risk relates to the risk of fluctuating values based on
market prices without action on our part. Our primary credit risk is settlement
or counterparty risk, which relates to whether a counterparty will fulfill its
contractual obligations, such as delivery of securities or payment of funds.
Liquidity risk relates to our inability to liquidate assets or redirect the
deployment of assets contained in illiquid investments. In addition, our market
and liquidity risks associated with asset revaluation are increased because
these risks associated with asset revaluation are increases because these risks
for us are concentrated and thus subject us to increased risks if market
conditions deteriorate.
Other Matters
Safe Harbor Cautionary Statement
We occasionally make forward-looking statements such as forecasts and
projections of expected future performance or statements of our plans and
objectives. When used in this quarterly report and in future filings with the
SEC, in our press releases and in oral statements made with the approval an
authorized executive officer, the words or phrases "will likely result," "the
Company expects," "we intend or expect," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions, including
confirmations by one of our authorized executive officers of any such
expressions made by a third party regarding us with respect to the company are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. We want to caution you not to
place undue reliance on these forward-looking statements, each of which speaks
only as of the date made. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors that
could affect our results of operations and cause its results to differ from
these statements include:
o industry factors beyond our control could adversely affect us
o if there is a market downturn, our revenues are likely to decline and, if
unable to reduce expenses at the same pace, our results of operations would
deteriorate
o our business involves small- and mid-capitalization companies which are
subject to higher degree of risk and therefore could adversely affect our
business
o our business is subject to risks of losses from underwriting activities
o the value of our investment account fluctuates due to factors beyond our
control and may adversely affect our business
o our merchant banking and proprietary trading investments may cause our
operating results to fluctuate widely regardless of whether we have
liquidated our investments and actually realized gain or loss
o performance is not predictable regarding our asset management business;
unsuccessful investments will result in diminished returns on our
investments and lower performance fees
o we operate in a very competitive industry
o our expansion may not be successful
For a more complete discussion of these and other factors, see Exhibit 99 to our
Annual Report on Form 10-K for the fiscal year ended January 31, 2000. We have
no obligation to publicly release the result of any revisions that may be made
to any forward-looking statements to reflect anticipated or unanticipated events
or circumstances occurring after the date of these statements.
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Part II - OTHER INFORMATION
ITEM 2 SALES OF UNREGISTERED SECURITIES
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule BD (10/31/00)
(b) Reports on Form 8-K:
None
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIREBRAND FINANCIAL GROUP, INC.
Date: December 15, 2000 /s/ John P. Margaritis
---------------------------
John P. Margaritis
Chief Executive Officer
/s/ Robert M. Rosenberg
---------------------------
Robert M. Rosenberg
Chief Financial Officer
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FIREBRAND FINANCIAL GROUP, INC. AND SUBSIDIARIES
Exhibit Index
Number Description
--------- -------------
27 Financial Data Schedule BD (10/31/00)
20
