Form 10QSB for Global Capital Partners Inc
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-26202
GLOBAL CAPITAL PARTNERS INC.
(Exact Name Of Small Business Issuer As Specified In Its Charter)
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Delaware 52-1807562
(State Or Other Jurisdiction Of (I.R.S. Employer Identification No.)
Incorporation Or Organization)
6000 Fairview Road, Suite 1410, Charlotte, North Carolina 28210
(Address Of Principal Executive Offices)
(704) 643-8220
(Issuer's Telephone Number, Including Area Code)
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Check whether the issuer: (1) 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 |_|
Transitional Small Business Disclosure Format: Yes |_| No |X|
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on November 12, 2000, was 3,639,423.
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GLOBAL CAPITAL PARTNERS, INC.
Index to Form 10-QSB
Page
Part I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Historical Financial Statements
Consolidated Statement of Financial Condition
as of September 30, 2001.................................. 2
Consolidated Statements of Operations
Quarterly and Six Month Periods Ended
September 30, 2001 and 2000............................... 3
Consolidated Statements of Cash Flows
Six Month Periods Ended September 30, 2001 and 2000....... 4
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation... 14
Part II-- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signature .......................................................... 23
Part I - FINANCIAL INFORMATION
Financial Statements
GLOBAL CAPITAL PARTNERS INC.
(A Delaware Corporation)
Consolidated Statement of Financial Condition
(In thousands, except share amounts)
September 30,
2001
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ASSETS
Cash and cash equivalents $ 477
Receivables
Broker dealers 1,955
Other 219
Securities owned, at value 1,473
Notes receivable 1,600
Furniture and equipment,
at cost (net of accumulated
depreciation and amortization
of $969) 737
Deferred income taxes 4,287
Goodwill, net 654
Net assets available for sale
Other assets and deferred amounts 592
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Total Assets $ 11,994
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LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 1,925
Convertible debenture 3,050
Compensation, benefits, and
related taxes 345
Securities sold not yet purchased,
at value 9
Deferred gain on sale of subsidiary 848
Accounts payable and accrued expenses 1,142
Other liabilities and deferred amounts 917
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8,236
Long-term borrowings 4,685
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Total liabilities 12,921
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Commitments and contingencies
Shareholders' equity
Preferred stock; $.01 par value;
2,500,000 shares authorized; no
shares issued and outstanding at
September 30, 2001 -
Common stock; $.05 par value;
15,000,000 shares authorized;
3,639,423 shares issued and
outstanding at September 30, 2001 720
Paid-in capital 51,627
Accumulated deficit (52,632)
Notes & stock subscription
receivables - common stock and
warrants (642)
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Total shareholders' equity (927)
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Total Liabilities and
Shareholders' Equity $ 11,994
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See notes to consolidated financial statements.
- 2 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware Corporation)
Consolidated Statements of Operations
(In thousands, except per share amounts)
For the Quarter For the Six Months
Ended September 30, Ended September 30,
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2001 2000 2001 2000
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(As Restated) (As Restated)
Revenues
Commissions $ 2,618 $ 6,492 $ 8,848 $ 12,198
Investment banking 297 2,187 343 2,821
Interest and dividends 70 265 222 408
Principal transactions, net
Trading 1 (567) 637 479
Investment (53) (20) (12) 874
Other 572 305 1,040 872
------------ ------------ ------------ ------------
Total revenues 3,505 8,662 11,078 17,652
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Costs and expenses
Compensation and benefits 2,861 6,048 8,239 11,420
Brokerage, clearing, exchange fees
and other 405 1,569 1,124 2,922
General and administrative 686 761 1,242 1,263
Occupancy 340 542 691 957
Communications 211 299 475 645
Office supplies and expense 338 459 744 728
Consulting fees 252 303 509 584
Interest 160 76 387 155
Depreciation and amortization 76 125 173 250
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Total costs and expenses 5,329 10,182 13,584 18,924
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Loss before benefit for income taxes and
minority interest in earnings of
subsidiaries (1,824) (1,520) (2,506) (1,272)
Benefit for income taxes - - 290
Minority interest in earnings
of subsidiaries 28 74
------------ ------------ ------------ ------------
Loss from continuing operations (1,824) (1,492) (2,506) (908)
------------ ------------ ------------ ------------
Discontinued operations
Income (loss) from discontinued
operations (66) - (266) (189)
Gain on sale of discontinued operations 106 - 106 1,958
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Income (loss) from discontinued
operations 40 - (160) 1,769
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Income (loss) before extraordinary item (1,784) (1,492) (2,666) 861
Extraordinary gain on debt forgiveness
in conjunction with clearing
arrangement - - 417 -
------------ ------------ ------------ ------------
Net income (loss) $ (1,784) $ (1,492) $ (2,249) $ 861
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding
Basic 3,639,423 2,615,210 3,639,423 2,610,197
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Diluted 3,639,423 2,958,015 3,639,423 2,953,003
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Loss from continuing operations per share
Basic $ (0.50) $ (0.57) $ (0.69) $ (0.35)
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Diluted $ (0.50) $ (0.50) $ (0.69) $ (0.31)
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Income (loss) from discontinued
operations per share
Basic $ 0.01 $ - $ (0.04) $ 0.68
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Diluted $ 0.01 $ - $ (0.04) $ 0.60
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Income from extraordinary item per share
Basic $ - $ - $ 0.11 $ -
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Diluted $ - $ - $ 0.11 $ -
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Net (income) loss per common share
Basic $ (0.49) $ (0.57) $ (0.62) $ 0.33
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Diluted $ (0.49) $ (0.50) $ (0.62) $ 0.29
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See notes to consolidated financial statements.
- 3 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware Corporation)
Consolidated Statements of Cash Flows
(In thousands)
For the Six Months
Ended September 30,
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2001 2000
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(As Restated)
Cash flows from operating activities
Net loss from continuing operations $ (2,506) $ (908)
Adjustments to reconcile net loss to
net cash (used in) operating
activities from continuing operations:
Depreciation and amortization 173 250
Minority interest in earnings
of subsidiaries - (74)
Deferred taxes - (290)
Extraordinary item 417 -
Other (55) (94)
Changes in operating assets and
liabilities
Receivables (448) 3,389
Securities owned, at value 997 (2,209)
Other assets (280) (393)
Employee compensation and
related taxes (948) (3,161)
Securties sold, not yet purchased (173) 12
Accounts payable and accrued expenses 110 2,904
Other liabilities (100) 354
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Net cash provided by (used in)
continuing operations (2,813) (220)
Net cash (used in) discontinued operations (325) (1,319)
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Net cash (used in) operating activities (3,138) (1,539)
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Cash flows from investing activities
Net proceeds from (payments for)
Sale of majority interest
in subsidiary 200 -
Capital expenditures (164) (846)
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Net cash provided by (used in)
investing activities 36 (846)
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Cash flows from financing activities
Net proceeds from (payments for)
Issuance of common stock 1,832 1,079
Proceeds from borrowings 987 -
Repayments of borrowings (525) (380)
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Net cash provided by financing activities 2,294 699
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Decrease in cash and cash equivalents (808) (1,686)
Cash and cash equivalents, beginning of year 1,285 2,284
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Cash and cash equivalents, end of year $ 477 $ 598
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Supplemental disclosure of cash flow
information
Cash paid for income taxes $ - $ -
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Cash paid for interest $ 211 $ 155
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See notes to consolidated financial statements.
- 4 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware Corporation)
Consolidated Statements of Cash Flows (continued)
(In thousands)
For the Six Months
Ended September 30,
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2001 2000
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Supplemental disclosure of cash flow
information
Non-cash transactions
Issuance of common stock for interest $ 44 $ -
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In August 2001, the Company sold the
majority of Sutton Online, Inc.,
its subsidiary, in exchange for $200
in cash and notes receivable
totalling $1,600. The total sales
price was $1,800.
Cash received $ 200 $ -
Notes receivable 1,600 -
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Total consideration received in
sale of European operations $ 1,800 $ -
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In June 2000, the Company sold its
European operations in exchange
for $2,000 in equity securities and
notes receivable totalling $25,500.
Total sales price was $27,500.
Equity securities received at
market value $ - $ 2,000
Notes receivable - 25,500
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Total consideration received in
sale of European operations $ - $ 27,500
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See notes to consolidated financial statements.
- 5 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements
For the Quarterly Period Ended September 30, 2001
(Unaudited)
1. Interim Reporting
The financial statements of Global Capital Partners Inc., its U.S.
subsidiaries and European subsidiaries through the date of disposition
(collectively, "Global Capital Partners" or the "Company") for the
quarterly period ended September 30, 2001 have been prepared by the
Company, are unaudited, and are subject to year-end adjustments. These
unaudited financial statements reflect all known adjustments (which
included only normal, recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented in
accordance with generally accepted accounting principles. The results
presented herein for the interim periods are not necessarily indicative of
the actual results to be expected for the fiscal year.
The notes accompanying the consolidated financial statements in the
Company's Annual Report on Form 10-KSB as amended for the year ended March
31, 2001 include accounting policies and additional information pertinent
to an understanding of these interim financial statements.
2. Summary of Significant Accounting Policies
Organization and Basis of Presentation
The consolidated financial statements include Global Capital Partners Inc.,
its U.S. subsidiaries, and European subsidiaries through the date of
disposition. Investments in business entities in which the Company does not
have control, but has the ability to exercise significant influence over
the operating and financial policies, are accounted for under the equity
method.
These consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position and the results of the operations of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Management believes that the estimates
utilized in the preparation of the consolidated financial statements are
prudent and reasonable. Actual results could differ from these estimates.
The Company, through its subsidiaries, provides a wide range of financial
services primarily in the United States. Its businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring,
and other corporate finance advisory activities; asset management; merchant
banking and other principal investment activities; brokerage and research
services; and securities clearance services. These services are provided to
a diversified group of clients and customers, including corporations,
governments, financial institutions, and individuals.
Financial Instruments
Substantially all of the Company's financial assets and liabilities and the
Company's trading positions are carried at market or fair values or are
carried at amounts which approximate fair value because of their short-term
nature. Estimates of fair value are made at a specific point in time, based
on relevant market information and information about the financial
instrument, specifically, the value of the underlying financial instrument.
These estimates do not reflect any premium or discount that could result if
the Company's entire holdings of a particular financial instrument were
offered for sale at one time. The Company has no investments in
derivatives.
- 6 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Quarterly Period Ended September 30, 2000
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Financial Instruments (continued)
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried at their original
costs. The carrying value of such equity securities is adjusted when
changes in the underlying fair values are readily ascertainable, generally
as evidenced by listed market prices or transactions which directly affect
the value of such equity securities. Downward adjustments relating to such
equity securities are made in the event that the Company determines that
the eventual realizable value is less than the carrying value.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses on these securities are
determined on a specific identification basis and are included in earnings.
Collateralized Securities Transactions
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities purchased under agreements to resell are treated as financing
arrangements and are carried at contract amounts reflecting the amounts at
which the securities will be subsequently resold as specified in the
respective agreements. The Company takes possession of the underlying
securities purchased under agreements to resell and obtains additional
collateral when the market value falls below the contract value. The
maximum term of these agreements is generally less than ninety-one days.
Other Receivables
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities. These
receivables are due on demand.
Underwritings
Underwritings include gains, losses, and fees, net of syndicate expenses
arising from securities offerings in which the Company acts as an
underwriter or agent. Underwriting fees are recorded at the time the
underwriting is completed and the income is reasonably determinable. The
Company reflects this income in its investment banking revenue.
Fees
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered
into by the Company. The Company reflects this income in its investment
banking revenue.
Securities Transactions
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
Commissions
Commissions and related clearing expenses are recorded on a trade date
basis as securities transactions occur.
- 7 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Quarterly Period Ended September 30, 2000
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Translation of Foreign Currencies
Assets and liabilities of operations in foreign currencies are translated
at period end rates of exchange and the income statements are translated at
weighted average rates of exchange for the period. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," gains or losses resulting from translating foreign
currency financial statements, net of hedge gains or losses and their
related tax effects, are reflected in cumulative translation adjustments, a
separate component of stockholders' equity. Gains or losses resulting from
foreign currency transactions are included in net income.
Furniture, and Equipment
Furniture and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets
ranging from three to ten years.
Common Stock Data
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. The outstanding warrants and stock
options are currently excluded from the earnings per share calculation as
their effect would be antidilutive.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 encourages, but does not require, companies to record compensation
expense for stock-based employee compensation plans at fair value. The
Company has elected to account for its stock-based compensation plans using
the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Under the provisions of APB No. 25, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
common stock at the date of grant over the amount an employee must pay to
acquire the stock.
Deferred Income Taxes
Deferred income taxes in the accompanying financial statements reflect
temporary differences in reporting results of operations for income tax and
financial accounting purposes. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers all demand deposits held in banks and certain highly liquid
investments with maturities of 90 days or less other than those held for
sale in the ordinary course of business to be cash equivalents.
Goodwill
Goodwill is amortized on a straight-line basis over 25 years and is
periodically evaluated for impairment that is other than temporary on an
undiscounted cash flow basis. The carrying value is reviewed to evaluate if
the facts and circumstances support the valuation for recoverability. If a
review of the facts and circumstances, such as significant declines in
sales, earnings or cash flows or material adverse changes in the business
climate beyond normal, cyclical variations, suggest that it may be impaired
and not recoverable, as
- 8 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Quarterly Period Ended September 30, 2000
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Goodwill (continued)
determined based on the operating performance and the estimated future
undiscounted cash flows of the entity acquired, impairment is measured by
comparing the carrying value of goodwill to estimated fair value. Estimated
fair value is determined based on the viability of the underlying entity
acquired on a stand-alone basis, discounted cash flows, or appraisals.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
4. Short-Term Borrowings
The Company meets its short-term financing needs through unsecured
short-term notes payable, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
Advances from Affiliated Companies
Periodically, the Company's subsidiaries and affiliates will provide
operating advances to other members in the affiliated group. These advances
are generally due on demand and are not subject to interest charges.
5. Convertible debentures
As additional collateral to certain convertible debentures issued by
MoneyZone.com, the Company provided to the holder a right to exchange those
debentures for its own convertible debentures and warrants. The holder
notified the companies of its intent to exchange, and on January 24, 2001,
the Company issued a 5% Convertible Debenture in the amount of $3,050,000
and warrants in exchange for certain convertible debentures of
MoneyZone.com. The debentures have a due date of January 24, 2006 but may
be converted by the holder at any time. The conversion price shall be the
lesser of (1) $1.24 or (2) 85 percent of the average of the lowest three
per share market values during the eighteen trading days immediately
preceding the applicable conversion date (beneficial conversion feature).
These convertible debentures are subject to significant covenants which
include an adjustment to the conversion price in the event of a stock
dividend, subdivision, combination or reclassification of the Company's
common stock; the issuance of rights, options or warrants to all holders of
the Company's common stock; or any issuance of securities at a per share
selling price less than the conversion price, as adjusted (with certain
exceptions). The convertible debentures further describe potential events
of default which include, among other things, failure to pay interest and
principal within the prescribed periods; failure to perform any covenant
contained in, or a material breach of, any of the documents relating to the
sale of the debenture; bankruptcy or insolvency; default under certain
other indebtedness; delisting of the Company's common stock from the Nasdaq
SmallCap Market, or a change of control of the Company. In the event of a
default, the holder of these convertible debentures may consider them
immediately due and payable and enforce all available rights and remedies.
Pursuant to a registration rights agreement related to these convertible
debentures, the Company has agreed to exercise its best efforts to prepare,
file, and to have a registration statement declared effective as soon as
reasonably possible in order to register the resales of the shares of the
Company's common stock issuable upon conversion of these convertible
debentures and the exercise of the related warrants.
- 9 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Quarterly Period Ended September 30, 2000
(Unaudited)
4. Convertible debentures (continued)
At the issue date, the intrinsic value of the beneficial conversion feature
was calculated assuming that the conversion date was the same as the issue
date. In accordance with the terms of the convertible debenture, the
conversion price was determined to be 85 percent of the average of the
lowest three per share market values during the eighteen trading days
immediately preceding the issue date. Since the amount of the intrinsic
value of the beneficial conversion feature exceeded the principal amount of
the debt, it was limited to the principal amount of the debt, or
$3,050,000. Accordingly, this beneficial conversion feature has been
reflected in the financial statements as paid-in capital and interest
expense. The warrants allow the holder to purchase 50,000 shares of the
Company's common stock at $5.50 per share.
Pursuant to the terms of a registration rights agreement issued to the
holder of the convertible debentures of the Company, a Registration
Statement under the Securities Act of 1933 on Form S-3 relating to the
registration of an aggregate of 2,092,063 shares of the Company's common
stock, par value of $.05 per share, was filed on February 2, 2001. As of
the filing date of this Quarterly Report on Form 10-QSB, this registration
statement has not yet been declared effective.
5. Discontinued Operations
Eastbrokers Beteiligungs AG
The Company decided to sell its interest in Eastbrokers Beteiligungs AG and
on June 14, 2000 entered into agreements with certain non-related entities
to sell such subsidiaries for $27,500,000 consisting of equity securities
valued at $2,000,000 and notes of $25,500,000. As of the date of sale, the
foreign subsidiaries' net assets and costs of disposal were approximately
$25,000,000.
The disposal of Eastbrokers Beteiligungs AG has been accounted for as
discontinued operations. Accordingly, its operating results are segregated
and reported as discontinued operations in the accompanying consolidated
statements of operations and cash flows. The fiscal year end of the former
European subsidiaries is December 31. Their financial information is
included on the basis of a closing date that precedes the Company's closing
date by three months.
In May 2001, we hired a Swiss merchant bank to evaluate the potential value
of the underlying assets to determine the appropriate carrying value of our
notes receivable and to prepare for asset recovery in the event of a
default by the purchasers. In June 2001, the purchasers defaulted on the
notes receivable. The Swiss merchant bank is currently acting on our behalf
to assume control of the underlying assets in an attempt to maximize the
net realizable value on liquidation. At the March 31, 2001 balance sheet
date, based on information received to date and due to the uncertainty
surrounding the recoverable value of these notes receivable and the
underlying assets, the Company recorded a pre-tax, non-cash charge of $25.5
million to reflect what we believe is a significant impairment of the notes
receivable and the underlying assets.
Sutton Online, Inc.
In June 2001, the Company announced that it and the other stockholder of
Sutton Online, Inc. entered into an exchange agreement with Ikon Ventures,
Inc., a publicly traded corporation with no current business operations,
pursuant to which the stockholders of Sutton Online, Inc. will exchange all
of the outstanding shares of Sutton Online, Inc.for shares of Ikon
Ventures, Inc. As a result of this transaction, the stockholders of Sutton
Online, Inc. will own approximately 78 percent of Ikon Ventures, Inc. Among
other things, the closing of this transaction is conditioned upon the
Company's sale of approximately 46 percent of Sutton Online to third
parties prior to the share exchange. Our ownership percentage of Sutton
Online was approximately 55 percent immediately prior to this sale. Upon
completion of these transactions, the company now owns approximately 5
percent of Ikon Ventures, Inc.
- 10 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Quarterly Period Ended September 30, 2000
(Unaudited)
5. Discontinued Operations (continued)
Sutton Online, Inc. (continued)
The disposal of a majority interest in of Sutton Online, Inc. has been
accounted for as a discontinued operation and its operating results are
segregated and reported as discontinued operations in the accompanying
consolidated statements of operations and cash flows.
On August 8, 2001, the Company announced that it closed the sale of a
controlling interest in Sutton Online, Inc. for $1,800,000, of which
$200,000 was received in cash and $1,600,000 was received in the form of
notes receivable collateralized by 5,964,444 shares of IKON Ventures,
Inc.'s common stock. The notes receivable carry an interest rate of 6
percent per annum, payable annually, with the principal due August 1, 2003.
In connection with this sale, the stockholders of Sutton Online, Inc.
completed a share exchange with Ikon Ventures, Inc. pursuant to which
Sutton Online, Inc. became a wholly owned subsidiary of Ikon Ventures, Inc.
Since the Company did not sell its entire ownership interest in Sutton
Online, Inc., the Company now owns approximately 5 percent of Ikon
Ventures, Inc. as a result of this share exchange and the dilution
resulting from the share exchange and the issuance of additional shares by
IKON Ventures, Inc.
As of the date of disposition, the Company's basis and costs related to the
disposition were approximately $846,000 resulting in a gain on disposition
of $954,000. Because a majority of the Company's ownership interest was
sold to the management of Sutton Online, Inc., this transaction has been
accounted for as an installment sale. The net gain currently recognized in
conjunction with this transaction is $106,000. The remainder of the net
gain has been deferred pending receipt of the payments due under the terms
of the notes receivable.
6. Commitments and contingencies
Leases and Related Commitments
The Company occupies office space under leases which expire at various
dates through 2003. These leases contain provisions for periodic
escalations to the extent of increases in certain operating and other
costs. The Company's subsidiaries occupy office space under various
operating leases which generally contain cancellation clauses whereby the
Company may cancel the lease with thirty to ninety days written notice.
Legal
We and our subsidiaries are subject to several legal proceedings in various
jurisdictions throughout the United States.
Global Capital Securities Corporation also is involved in an arbitration
proceeding related to the National Family Care Life Insurance Company
litigation entitled National Family Care Life Insurance Co. v. Pauli
Company, Inc., et al., NASDR Case No. 96-02673 (the "Arbitration"). The
Arbitration panel entered an award against Global Capital Securities
Corporation in July 1998 in favor of third-party plaintiff Pauli & Company,
Inc. of approximately $370,000, which was significantly below the initial
award sought by Pauli & Company, Inc. of approximately $1,100,000. Global
Capital Securities Corporation has filed a motion in the National Family
Care Life Insurance Company litigation to vacate this award and plans to
vigorously contest this award on appeal. The award against Global Capital
Securities Corporation is a contributory award. Global Capital Securities
Corporation is only responsible to Pauli & Company, Inc. to the extent that
they remit their settlement or a portion thereof to National Family Care
Life Insurance Co. In the event that Pauli & Company, Inc. does not remit
the full amount of their settlement to National Family Care Life Insurance
Co., Global Capital Securities Corporation is only responsible for a
proportionate share of the total awarded to Pauli & Company, Inc. As of the
date of this filing, Pauli & Company, Inc. was in bankruptcy. Legal
(continued)Counsel has advised the Company that its exposure to Pauli &
Company, Inc. is minimal due to their involvement in bankruptcy proceedings
and their expected liquidation.
- 11 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Quarterly Period Ended September 30, 2000
(Unaudited)
6. Commitments and contingencies (continued)
Legal (continued)
Lee Schlessman et al v. Global Capital Partners, Inc. and EBI Securities
Corporation, Denver County District Court, Colorado, Case No. 00 CV 1795.
The plaintiffs commenced this action in April 2000, alleging that we
unlawfully prepaid $1,350,000 of convertible secured promissory notes
without affording the plaintiffs the right to convert the notes into common
stock. The notes were issued in March 1999, and entitled the holders to
convert at a price of $5.75. We filed a registration statement covering the
conversion, which was declared effective in August 1999. In February 2000,
we inquired as to whether the noteholders intended to convert. When it was
learned that they were not intending to convert, we prepaid the notes
pursuant to their terms, thereby extinguishing the conversion privilege.
The noteholders sued both GCAP and Global Capital Securities, claiming that
they have suffered damages as a result of not being entitled to convert and
sell the common stock issued upon conversion. This litigation has been
settled for approximately $1.2 million through the carrier of the Company's
liability insurance policy.
We are involved in a number of judicial, regulatory and arbitration
proceedings (including those described above and actions that have been
separately described in previous filings) concerning matters arising in
connection with the conduct of our businesses. Some of the actions have
been brought on behalf of various classes of claimants and seek damages of
material and indeterminate amounts. We believe, based on currently
available information and advice of counsel, that the results of such
proceedings, in the aggregate, will not have a material adverse effect on
our financial condition but might be material to operating results for any
particular period, depending, in part, upon the operating results for such
period.
As of September 30, 2001, the Company has accrued $634,000 against its
outstanding settlements and other ongoing litigation.
6. Common Stock
Reverse Stock Split
On July 2, 2001, the Company announced a 1 for 4 reverse stock split
whereby each 4 shares of the Company's outstanding common stock will be
exchanged for one newly issued share. The split will be effective as of
July 3, 2001. Unless otherwise noted, all references to shares and share
prices, including retroactive treatment, reflect the reverse split on the
basis of the effective ratio.
8. Going Concern and Other Important Factors
The financial services industry has been severely affected by the
prevailing adverse market conditions, and these adverse conditions were
magnified by the events of September 11, 2001. As a result, we have
suffered significant losses which have had a significant negative effect on
our liquidity since September 11, 2001. We expect the current weakness in
the financial markets will continue through the end of our fiscal year,
March 2002. In October 2001, we reached an agreement in principal with a
group of accredited investors for them to purchase between $3.5 million and
$10.0 million of our 8% Series A Preferred Stock and common stock warrants.
We are in the process of scheduling a special meeting of stockholders in
order to approve this proposed transaction. The Company will require this
financing by January 15, 2002 to continue operations. If the financing is
insufficient or unavailable, or, if the Company experiences unexpected
shortfalls in its anticipated revenues or increases in its anticipated
expenses, the Company would be required to further reduce headcount, defer
vendor payments, sell operating assets and/or seek protection under the
bankruptcy code.
- 12 -
GLOBAL CAPITAL PARTNERS INC.
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Quarterly Period Ended September 30, 2000
(Unaudited)
8. Going Concern and Other Important Factors (continued)
We believe that we will withstand the current adverse conditions in the
financial markets if we raise at least $3.5 million in our proposed private
placement and we successfully complete the implementation of the proposed
changes in our operations such as combining the operations of our Syosset
and Melville, New York branch offices into a single location to realize
greater economies of scale and to eliminate costs associated with redundant
job functions, reorganizing the other corporate offices to reduce costs
associated with redundant job functions and the conversion of nearly all of
the corporate personnel and managers' compensations schedules to an
incentive based compensation model. We also expect that if we raise the
full amount we are seeking in our private placement, we will then be
positioned to pursue opportunities for future growth. We believe that the
weakness in the financial markets provides opportunities for us to increase
ourproduction levels at a reasonable cost with acceptable risk tolerances,
both from growth by acquisition and as a result of decreased competition.
We are actively seeking additional franchise operations to further enhance
our current production levels.
Also, in October 2001, we received a notice of delisting from the Nasdaq
Stock Market. In this notice, we were informed that we no longer satisfied
the requirements for continued listing due to insufficient net tangible
assets and for public interest concerns. A hearing is scheduled for
November 15, 2001 before the Nasdaq Listing Qualifications Panel for us to
directly address these issues and to request continued listing. We believe
that we have meritorious responses to the public interest concerns
expressed by the Nasdaq Stock Market and that the reduction of our debt
upon conversion of our convertible debentures into the common stock covered
by this prospectus, coupled with the proceeds of our proposed private
placement, will provide us with sufficient net tangible assets and
stockholders' equity.
If the Company is unable to generate additional equity and adequate cash or
if it is unable to prevent delisting by Nasdaq, there will be a material
and adverse effect on the business operations, financial condition and
results of operations of the Company, to the extent that a sale,
liquidation, or restructuring of the Company will be necessary, in whole,
or in part.
The above factors raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements have
been prepared on the basis that the Company will continue as a going
concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
- 13 -
Part I-- FINANCIAL INFORMATION (continued)
Item 2. Management's Discussion and Analysis or Plan of Operation
Certain information set forth in this report includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
These forward-looking statements may relate to such matters as anticipated
financial performance, future revenues or earnings, business prospects,
projected ventures, new products, anticipated market performance and similar
matters. The words "budgeted", "anticipate", "project", "estimate", "expect",
"may", "believe", "potential" and other similar statements are intended to be
among the statements that are considered "forward-looking" statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which are made as of the date hereof. A variety of factors could cause our
actual results to differ materially from the anticipated results or other
expectations expressed in or implied by our forward-looking statements. These
risks and uncertainties, many of which are beyond our control, include, but are
not limited to: (i) transaction volume in the securities markets, (ii) the
volatility of the securities markets, (iii) fluctuations in interest rates, (iv)
changes in regulatory requirements which could affect the cost of doing
business, (v) fluctuations in currency rates, (vi) general economic conditions,
(vii) changes in the rate of inflation and related impact on securities markets,
(viii) competition from existing financial institutions and other new
participants in the securities markets, (ix) legal developments affecting the
litigation experience of the securities industry, (x) changes in federal and
state tax laws which could affect the popularity of products sold by us, and
(xi) the risks and uncertainties set forth under the caption "Risk Factors"
which appears in Item 1 of our Annual Report on Form 10-KSB as amended for the
fiscal year ended March 31, 2001 (the "Fiscal 2001 Form 10-KSB"). We undertake
no obligation to release publicly any revisions to the forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect unanticipated events or developments, except as required by law.
This Form 10-QSB for the quarterly period ended September 30, 2001, makes
reference to our Fiscal 2001 Form 10-KSB. The Fiscal 2001 Form 10-KSB includes
information necessary or useful to an understanding of our businesses and
financial statement presentations. We will furnish a copy of our Fiscal 2001
Form 10-KSB upon request made directly to our headquarters at 6000 Fairview
Road, Suite 1410, Charlotte, North Carolina 28210, telephone number (704)
643-8220 and facsimile number (704) 643-8097.
We use the following terms of identification to simplify the presentation
of information in this report. "GCAP and subsidiaries" refers to Global Capital
Partners, Inc. and its subsidiaries. Global Capital Partners, Inc. is the issuer
of the publicly traded common stock covered hereby. "We," "us," or "our" refer
collectively to GCAP and its subsidiaries. The term SEC is sometimes used to
simplify references to the U.S. Securities and Exchange Commission.
Overview
We commenced operations in 1993 with the goal of acquiring businesses in
the Czech Republic in order to take advantage of the rapid growth in business
opportunities arising from the privatization of the newly-democratized Czech
Republic. From 1993 through 1996, we owned interests in a Czech hotel and a
Czech department store chain.
In 1996, we re-evaluated our business strategy and, after considering a
variety of investment opportunities, acquired Eastbrokers Beteiligungs AG.
Eastbrokers Beteiligungs AG is an Austrian brokerage company with offices
throughout Central and Eastern Europe. During 1998 and 1999, we modified our
business strategy for Europe in response to an overall economic downturn that
impacted much of Central and Eastern Europe. As a result, we reduced, closed or
sold operations in various parts of Central and Eastern Europe. In June 2000,
due to recurring net operating losses and persistent net cash flow deficits, we
disposed of this business.
In 1997, we expanded our brokerage operations into the United States
through the acquisition of an existing New York-based broker dealer. In May
1998, we acquired a Denver, Colorado based investment banking and brokerage firm
which we subsequently renamed Global Capital Securities Corporation. In November
1999, we acquired a New York based investment banking and brokerage firm which
we subsequently renamed Global Capital Markets, LLC. During fiscal 2001, we
combined the operations of Global Capital
- 14 -
Securities and Global Capital Markets to form a single entity operating under
the Global Capital Securities' banner.
In July 1999, we completed the merger of our majority owned subsidiary,
EBonlineinc.com, Inc. with and into CERX Venture Corporation. The name of the
surviving corporation was later changed to MoneyZone.com. As a result of this
transaction, we owned approximately 48 percent of MoneyZone.com. MoneyZone.com
was a start-up capital formation internet portal that matched investors with
entrepreneurs. During the 2000 fiscal year, we sold 19 percent of our interest
and realized a profit of $3,350,000. In December 2000, MoneyZone.com
discontinued its operations and abandoned its business plan. In January 2001, we
acquired a convertible debenture and warrants of MoneyZone.com from a third
party in exchange for the Company's convertible debenture and warrants (see Note
7 to the consolidated financial statements below). In March 2001, we entered
into an agreement with MoneyZone.com pursuant to which the Company agreed to
convert the debenture into a reduced number of shares of MoneyZone.com common
stock and to receive all of the assets of MoneyZone.com in consideration for the
remainder of the shares of common stock issuable upon full conversion of the
debenture. In April 2001, the March 2001 agreement was amended and superseded in
its entirety rendering it null and void. Under the terms of the April 2001
agreement, we received 100,000 shares of MoneyZone.com's Series A Preferred
Stock and 8,448,990 shares of MoneyZone.com's common stock. As a result of the
conversion of this debenture pursuant to the April 2001 agreement, we own
approximately 70 percent of MoneyZone.com. We are currently exploring strategic
alternatives including a sale or merger for this entity which has discontinued
its operations and abandoned its business plan.
In November 1999, we acquired 55% of Sutton Online, an online trading firm.
In June 2001, we and the other stockholders of Sutton Online entered into an
exchange agreement with Ikon Ventures, Inc., a publicly traded corporation which
had no current business operations, pursuant to which the stockholders of Sutton
Online would exchange all of the outstanding shares of Sutton Online for shares
of Ikon Ventures, Inc. Among other things, the closing of this transaction was
conditioned upon our sale of approximately 46% of Sutton Online to third parties
prior to the share exchange. On August 8, 2001, we disposed of approximately 46%
of our interest in Sutton Online to third parties for $1,800,000 in cash and
notes. As a result of this transaction and pursuant to the exchange agreement,
the stockholders of Sutton Online own approximately 78% of Ikon Ventures and we
own approximately 5% of Ikon Ventures.
In April 2000, the world financial markets began an unexpected and
precipitous decline. When we realized that this decline was not merely
temporary, we responded by analyzing the effectiveness of each of our operating
units. On the basis of cash flows and future earnings potential, we identified
our European operations as the weakest of our operating units due to their
recurring operating losses, persistent net cash flow deficits, and the estimated
time anticipated to return to profitability. In order to concentrate on the
operating units that we believed present the greatest future potential to us and
to our stockholders, we sold our European operations in June 2001 for $27.5
million, the consideration received consisted of $2.0 million in equity
securities and $25.5 million in notes receivable.
In May 2001, we hired a Swiss merchant bank to evaluate the potential value
of the underlying assets to determine the appropriate carrying value of our
notes receivable and to prepare for asset recovery in the event of a default by
the purchasers. In June 2001, the purchasers defaulted on the notes receivable.
The Swiss merchant bank is currently acting on our behalf to assume control of
the underlying assets in an attempt to maximize the net realizable value on
liquidation. Based on information received to date and due to the uncertainty
surrounding the recoverable value of these notes receivable and the underlying
assets, we have recorded a pre-tax, non-cash charge of $25.5 million to reflect
what we believe is a significant impairment of the notes receivable and the
underlying assets.
In April 2001, we converted our investment in MoneyZone.com and increased
our ownership position from 30% to 78%. Due to projected future cash flow
deficits, we ceased the operations of this business and we are in the process of
exploring strategic alternatives for this business unit, including a sale or
merger.
In completing the analysis of our two brokerage operations, we became aware
of several duplicate functions that could be eliminated and other functions that
could be streamlined through the combination of the two operations. In September
2000, we began the process to combine these operations. By the end of December
2000, the combination process was substantially complete. Effective January 1,
2001, the combined company
- 15 -
operates under the banner of Global Capital Securities. We have also brought in
new management personnel to complete a "top to bottom" review of the operations
and make suggestions to further improve the operation and efficiency of our
brokerage operations.
Based on recommendations by the new management personnel, we are adopting a
focused risk management approach to running our core brokerage business. Among
the changes recommended are the following: reduction in the amount of capital
subject to risk in proprietary trading, development of a plan to convert our
corporate branches to franchise branches, renegotiating compensation structures
throughout the company to an incentive based model, closing unprofitable
offices, and renegotiating key vendor contracts. We are currently in the process
of implementing these recommendations. Once these changes have been completed
and the effects begin to filter to the bottom line, it is anticipated that we
may be able to save approximately $3,000,000 annually.
The financial services industry has been severely affected by the
prevailing adverse market conditions, and these adverse conditions were
magnified by the events of September 11, 2001. As a result, we have suffered
significant losses which have had a significant negative effect on our liquidity
since September 11, 2001. We expect the current weakness in the financial
markets will continue through the end of our fiscal year, March 2002. We believe
that we will withstand the current adverse conditions in the financial markets
if we raise at least $3.5 million in our proposed private placement and we
successfully implement the proposed changes in our operations described above.
We also expect that if we raise the full amount we are seeking in our private
placement, we will then be positioned to pursue opportunities for future growth.
We believe that the weakness in the financial markets provides opportunities for
us to increase our production levels at a reasonable cost with acceptable risk
tolerances, both from growth by acquisition and as a result of decreased
competition. We are actively seeking additional franchise operations to further
enhance our current production levels.
Global Capital Securities Corporation
Global Capital Securities operates 13 financial services offices in 13
cities across the United States. We own and operate 3 of these offices and the
other 10 offices are franchise operations. We employ over 200 people of which
approximately 160 are registered representatives. Global Capital Securities is a
registered broker-dealer with the SEC and is licensed in all 50 states and the
District of Columbia. It is also a member of the NASD and the SIPC. Customer
accounts are insured to $100 million under the SIPC excess insurance program.
Global Capital Securities operates pursuant to the exemptive provisions of SEC
Rule 15c3-3(k)(2)(ii) and clears all transactions with and for customers on a
fully disclosed basis. Historically, an important part of Global Capital
Securities' business has been acting as an underwriter in public offerings of
securities. Although it has not participated in an underwriting since June 2000,
Global Capital Securities has participated in the underwriting and/or
co-underwriting of over $500 million in initial and secondary equity and debt
offerings for over 50 U.S. public companies. Global Capital Securities retained
and sold approximately $125 million of these underwritings and/or
co-underwritings.
In our franchise branches, there is generally an agreement with the branch
manager(s) for a special allocation of the net profit (loss) of the office they
are supervising. Global Capital Securities typically retains between 15 and 20
percent of the gross commissions earned by these branches. Personnel in these
branches are employees registered with Global Capital Securities and Global
Capital Securities assumes the same compliance and regulatory obligations as in
the corporate branches.
As a securities broker, Global Capital Securities acts as an agent for its
customers in the purchase and sale of common and preferred stocks, options and
debt securities traded on securities exchanges or in the over-the-counter
market. A major portion of its revenues is derived from commissions from
customers on these transactions. Our customer transactions in securities are
effected either on a cash or margin basis.
Global Capital Securities maintains its clearing arrangement with Fiserv
Correspondent Services, Inc., a subsidiary of Fiserv, Inc. Fiserv Correspondent
Services provides Global Capital Securities with back office support,
transaction processing services on all the principal national securities
exchanges and access to many other financial services and products. This
arrangement enables Global Capital Securities to offer its clients a
- 16 -
broad range of products and services that is typically only offered by firms
that are larger and/or have a larger capital base.
Global Capital Securities operates primarily as a full-service retail
brokerage firm focusing on individual investors. It also maintains and conducts
corporate finance, proprietary research and trading activities. Global Capital
Securities provides its brokerage clients with a broad range of traditional
investment products and services. Global Capital Securities also strives to
distinguish itself with investors and corporate finance clients through its
commitment to professional but personalized service. Its investment banking
department's mission is to enhance and develop the capital structures of small
to middle-market emerging growth companies through private placements, bridge
financing and public offerings in order to enable the firm's corporate finance
clients to capitalize on promising business opportunities, favorable market
conditions, and/or late stage product development. Global Capital Securities
also participates in the public finance area with offerings of public and
private debt securities. This activity is complemented by a bond trading
department that focuses on government, municipal and corporation obligations.
Global Capital Securities is continually seeking new opportunities to
create additional revenue sources and cost savings. The potential result is
increased internal growth, which complements external growth through
acquisitions. Several initiatives that Global Capital Securities has undertaken
in this regard follow:
1. Fixed Income. In December 1998, Global Capital Securities added a
fixed income department. This group is responsible for the underwriting,
trading, retail distribution and research of government, municipal and corporate
bonds. This group adds an additional profit center to the retail, corporate
finance and equity trading divisions and also has created synergies with the
other departments. As Global Capital Securities works to broaden the product
base of its financial consultants and their customers, the fixed income
department creates or locates new product through underwritings or independent
research ideas. Additionally, the fixed income department allows Global Capital
Securities' corporate finance to capture business that would not have been
previously available.
2. Asset Allocation. GlobalCapital Securities has developed an
in-house asset allocation program to augment the efforts of our financial
consultants. This in-house system was developed utilizing industry software
which, along with additional marketing materials, is customized for its use.
This approach represents an investment strategy which is based on a Nobel Prize
winning study called "Modem Portfolio Theory," the basis of which is that people
can create "optimal" risk-vs.-return portfolios by mixing varying amounts of
different asset classes according to their correlation to one another. Many
market studies suggest that asset allocation, rather than individual investment
selection, accounts for over 90 percent of a typical portfolio's returns. Global
Capital Securities concurs with this notion, and as a result, are educating its
financial consultants to utilize the program. The results have been very
favorable and Global Capital Securities has found this approach to be an
effective tool for gathering more assets. Global Capital Securities believes
that the new communication systems that are being implemented and which will be
available at the desk top level will enhance its financial consultants' ability
to utilize the asset allocation model.
3. Managed Money. In keeping with the changes in the securities
industry, Global Capital Securities is actively entering the field of
managed-money and wrap-fee compensation arrangements in place of the more
traditional fee-per-transaction approaches. In short, the managed money approach
charges the client a flat annual percentage of the money managed rather than a
fee for each transaction. Many people believe that this approach better aligns
the investment advisor's goals with that of the client. This approach requires
some additional accounting and registration procedures, both of which have been
implemented by Global Capital Securities and its applicable business partners.
Global Capital Securities intends to hire additional financial consultants with
managed money experience in addition to actively re-educating its existing
financial consultants.
4. Retail Expansion. Currently, Global Capital Securities is focusing
on filling its existing offices in order to improve efficiencies. Due to recent
severe correction in the over-the-counter U.S. equity markets, several
competitors of Global Capital Securities have ceased business. As a result,
numerous opportunities have arisen that may result in the expansion into several
additional markets. Global Capital Securities is actively pursuing these
opportunities to continue the expansion of its operations on a franchise basis.
- 17 -
Sutton Online Inc
Sutton Online is an online trading firm that offers trade executions, level
II software and data, Internet service and training for online investors to
individual investors, money managers and hedge funds. Sutton Online also
provides brokerage firms the necessary tools to offer financial products via the
Internet.
On August 8, 2001, we announced we closed the sale of a controlling
interest in Sutton Online, Inc. for $1,800,000 in cash and notes receivable. In
connection with this sale, the stockholders of Sutton Online, Inc. completed a
share exchange with Ikon Ventures, Inc. pursuant to which Sutton Online, Inc.
became a wholly owned subsidiary of Ikon Ventures, Inc. As a result of these
transactions, we currently own approximately 5% of Ikon Ventures, Inc.
MoneyZone.com
MoneyZone.com previously operated a website which provided five primary
services to its customers: the ability to apply for a commercial loan from a
network of more than 100 lenders; the ability to list a business for sale; the
ability to post an equity funding request; search capabilities for professional
service providers; and a business toolkit with resources for business owners. In
December 2000, MoneyZone.com announced that it terminated its operations and is
currently exploring strategic alternatives for its business, including the
possibility of a sale or merger.
Results of Operations
See Note 1 of the Notes to Consolidated Financial Statements for the
Quarterly Period Ended September 30, 2001, for an explanation of the basis of
presentation of the financial statements.
Revenues. For the quarterly period ended September 30, 2001, our revenues
decreased to $3,505,000 from $8,662,000 for the quarterly period ended September
30, 2000 representing a 60 percent decline. Revenues for the quarterly period
ended September 30, 2000 included the one time gain from the sale of a portion
of our interest in MoneyZone.com of $925,000. This profit is reflected in the
consolidated statements of operations under the caption of "Principal
transactions, net" - Investments. After adjusting for the effects of these one
time gains, our revenues were $7,737,000 for the quarterly period ended
September 30, 2000. Market conditions declined precipitously following the
events of September 11, 2001 which led to a corresponding reduction in the
overall volume of transactions. Further, as security prices continued to
decline, so did our average revenue per transaction from the commissions. It is
anticipated that there may be some continued weakness in the financial markets
for the next few months which may continue to impact our overall commission
revenues. From time to time, we take positions in an investment as part of our
merchant banking activities. Our trading activities did not generate losses
similar to those from a year ago due to a focused risk management approach to
trading with strict enforcement of our internal policies. Our other revenues
increased by $267,000 when compared to the corresponding period of the prior
year and are comprised of transaction fees charged to customers on a per trade
basis and consulting fees.
Operating Expenses. We incurred operating expenses of $5,329,000 for the
quarterly period ended September 30, 2001 as compared to operating expenses of
$10,182,000, for the corresponding period of the prior year. Compensation and
benefits typically fluctuate at a rate consistent with the change in commission
revenue and there is a minimum operating that we must maintain in order to
function as a broker dealer. For the quarterly period ended September 30, 2001,
compensation and benefits decreased by $3,187,000 or 53 percent. This is due in
part to the variable nature of compensation expense related to commission
revenue which decreased by 59 percent and in part to steps taken earlier in the
year to eliminate redundant job functions. Brokerage, clearing, exchange fees
and other also decreased by $1,164,000 or 74 percent reflecting the
substantially reduced volume of transactions during the quarterly period. Our
interest expense grew by over 111 percent when compared to the prior year. This
increase is primarily attributable to the $3,435,000 in convertible debt issued
near the end of our most recent fiscal year.
Loss from Continuing Operations. Our loss from continuing operations for
the quarterly period ended September 30, 2001 was $1,824,000 compared to loss
from continuing operations of $1,492,000 corresponding period of the prior year.
The income from continuing operations for the quarterly period ended September
30, 2000 included the one time gain from the sale of a portion of our interest
in MoneyZone.com of $925,000. This
- 18 -
profit is reflected in the consolidated statements of operations under the
caption of "Principal transactions, net" - Investments. The loss from continuing
operations for the quarterly period ended September 30, 2001 resulted from lower
revenues during the quarterly period as discussed above as well as our inability
in the very near term to further reduce our costs and expenses as discussed
above.
Net Income (Loss). Our net loss for the quarterly period ended September
30, 2001 was $1,784,000 compared to a net loss of $1,492,000 for the
corresponding period of the prior fiscal year. The net income for the six months
ended September 30, 2000 includes the one time gain on the sale of our European
operations of $1,958,000, net of taxes. The net income for fiscal 2000 also
included the one time gain from the sale of a portion of our interest in
MoneyZone of $925,000. This profit is reflected in the consolidated statements
of operations under the caption of "Principal transactions, net" - Investments.
As an inducement for Global Capital Securities Corporation to continue
negotiations towards a new clearing arrangement, Fiserv Correspondent Clearing
Services, Inc. forgave approximately $417,000 of our outstanding subordinated
debt. This has been reflected as an extraordinary item in our consolidated
statement of operations.
Liquidity and Capital Resources
On September 30, 2001, we had total assets of $11,994,000, and total
liabilities of $12,921,000, compared to $49,320,000, and $10,101,000,
respectively, on September 30, 2000, as restated.
The cash flows for the quarterly period ended September 30, 2001 reflect
the volatile nature of the securities industry and the reallocation of our
assets indicative of a growing organization.
As a broker/dealer in securities, we are subject to net capital and
liquidity requirements. As of September 30, 2001, we were in excess of our
minimum net capital and liquidity requirements. Periodically we will acquire
positions in securities on behalf of our clients. Certain of these investments
may be characterized as relatively illiquid and potentially subject to rapid
fluctuations in liquidity. We finance our operations primarily with existing
capital and funds generated from our diversified operations and financing
activities.
In September 2001, we sold in a private placement to accredited investors
an aggregate of 781,250 units, with each unit consisting of one share of our
common stock and a warrant to purchase one share of our common stock at an
exercise price of $3.16 per share. The per unit purchase price was $2.56,
resulting in proceeds to us of $2,000,000, less offering costs of approximately
$150,000. We intend to use the net proceed from this offering to strengthen our
balance sheet and for general working capital.
The financial services industry has been severely affected by the
prevailing adverse market conditions, and these adverse conditions were
magnified by the events of September 11, 2001. As a result, we have suffered
significant losses which have had a significant negative effect on our liquidity
since September 11, 2001. We expect the current weakness in the financial
markets will continue through the end of our fiscal year, March 2002. We believe
that we will withstand the current adverse conditions in the financial markets
if we raise at least $3.5 million in our proposed private placement and we
successfully implement the proposed changes in our operations described above.
We also expect that if we raise the full amount we are seeking in our private
placement, we will then be positioned to pursue opportunities for future growth.
We believe that the weakness in the financial markets provides opportunities for
us to increase our production levels at a reasonable cost with acceptable risk
tolerances, both from growth by acquisition and as a result of decreased
competition. We are actively seeking additional franchise operations to further
enhance our current production levels.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
effective date of SFAS No. 133 was deferred by the issuance of SFAS No. 137.
SFAS No. 133 was then further amended by SFAS No. 138. The deferred effective
date of SFAS No. 133 is for fiscal years beginning after June 15, 2000. We
adopted SFAS No. 133 as amended by SFAS No. 138 effective with the fiscal year
beginning April 1, 2001.
- 19 -
It is not anticipated that the adoption of SFAS No. 133
as amended by SFAS No. 138 will have any significant impact on our net income
due to our limited use of derivative instruments.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" which
requires that all business combination initiated after June 30, 2001 be
accounted for under the purchase method of accounting. The pooling of interest
method will no longer be permitted.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") which requires that goodwill be reviewed for impairment
instead of being amortized to earnings. The statement is effective for fiscals
years beginning after December 15, 2001 with early adoption permitted. It is
anticipated that the Company will adopt SFAS 142 for fiscal 2003, effective
April 1, 2002. As of the filing of this report, we do not anticipate any
transitional impairment losses related to a cumulative effect of a change in
accounting principle as a result of adopting SFAS 141 and SFAS 142.
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PART II - OTHER INFORMATION
Legal Proceedings
We and our subsidiaries are subject to several legal proceedings in various
jurisdictions throughout the United States.
Global Capital Securities Corporation also is involved in an arbitration
proceeding related to the National Family Care Life Insurance Company litigation
entitled National Family Care Life Insurance Co. v. Pauli Company, Inc., et al.,
NASDR Case No. 96-02673 (the "Arbitration"). The Arbitration panel entered an
award against Global Capital Securities Corporation in July 1998 in favor of
third-party plaintiff Pauli & Company, Inc. of approximately $370,000, which was
significantly below the initial award sought by Pauli & Company, Inc. of
approximately $1,100,000. Global Capital Securities Corporation has filed a
motion in the National Family Care Life Insurance Company litigation to vacate
this award and plans to vigorously contest this award on appeal. The award
against Global Capital Securities Corporation is a contributory award. Global
Capital Securities Corporation is only responsible to Pauli & Company, Inc. to
the extent that they remit their settlement or a portion thereof to National
Family Care Life Insurance Co. In the event that Pauli & Company, Inc. does not
remit the full amount of their settlement to National Family Care Life Insurance
Co., Global Capital Securities Corporation is only responsible for a
proportionate share of the total awarded to Pauli & Company, Inc. As of the date
of this filing, Pauli & Company, Inc. was in bankruptcy. Counsel has advised the
Company that its exposure to Pauli & Company, Inc. is minimal due to their
involvement in bankruptcy proceedings and their expected liquidation.
Lee Schlessman et al v. Global Capital Partners, Inc. and EBI Securities
Corporation, Denver County District Court, Colorado, Case No. 00 CV 1795. The
plaintiffs commenced this action in April 2000, alleging that we unlawfully
prepaid $1,350,000 of convertible secured promissory notes without affording the
plaintiffs the right to convert the notes into common stock. The notes were
issued in March 1999, and entitled the holders to convert at a price of $5.75.
We filed a registration statement covering the conversion, which was declared
effective in August 1999. In February 2000, we inquired as to whether the
noteholders intended to convert. When it was learned that they were not
intending to convert, we prepaid the notes pursuant to their terms, thereby
extinguishing the conversion privilege. The noteholders sued both GCAP and
Global Capital Securities, claiming that they have suffered damages as a result
of not being entitled to convert and sell the common stock issued upon
conversion. This litigation has been settled for approximately $1.2 million
through the carrier of our liability insurance policy.
We are involved in a number of judicial, regulatory and arbitration
proceedings (including those described above and actions that have been
separately described in previous filings) concerning matters arising in
connection with the conduct of our businesses. Some of the actions have been
brought on behalf of various classes of claimants and seek damages of material
and indeterminate amounts. We believe, based on currently available information
and advice of counsel, that the results of such proceedings, in the aggregate,
will not have a material adverse effect on our financial condition but might be
material to operating results for any particular period, depending, in part,
upon the operating results for such period.
Changes in Securities and Use of Proceeds
None
Defaults on Senior Securities
None
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Submission of Matters to a Vote of Security Holders
None
Other Information
On August 8, 2001, we disposed of approximately 46% of our interest in
Sutton Online to third parties for $1,800,000 in cash and notes in connection
with an exchange agreement between Sutton Online and Ikon Ventures. Pursuant to
the exchange agreement, the stockholders of Sutton Online exchanged all of the
outstanding shares of Sutton Online for approximately 78% of Ikon Ventures. The
closing of this transaction was conditioned upon the above referenced sale. As a
result, we own approximately 5% of Ikon Ventures.
Exhibits and Reports on Form 8-K
a. Exhibits
None
b. There was one report on Form 8-K filed during the quarterly period
ended September 30, 2001 related to the sale of a majority interest
in Sutton Online, Inc.
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SIGNATURE
In accordance with 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.
GLOBAL CAPITAL PARTNERS, INC.
(Registrant)
By /s/ Kevin D. McNeil
----------------------------------------------
Kevin D. McNeil
Executive Vice President, Treasurer,
Secretary, and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 14, 2001