10-Q/A 1 ffgi10qa2103101.txt FIREBRAND 10-Q/A AMENDMENT NO. 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 2 [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended October 31, 2001 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) The Registrant hereby amends the following items, financial statements, exhibits or other portions of its Quarterly Report on Form 10-Q for the quarter ended October 31, 2001 as set forth in the pages attached hereto: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 2001 Annual Report on Form 10-K, as amended. Changes in Corporate Composition and Discontinued Operations During the fiscal year ended January 31, 2001, we made the strategic decision to de-emphasize retail securities brokerage activity. Accordingly, we arranged to transfer our full service retail brokerage accounts at GKN Securities to a series of broker/dealers, who in turn hired the GKN brokers. These broker/dealer firms are compensating GKN under arrangements discussed in footnote 3 to our consolidated financial statements in our Form 10-K for the fiscal year ended January 31, 2001, as amended. Further, in December 2000, our Board approved a plan to sell its 53.5% majority stake in Shochet Holding, whose primary activity was discount retail brokerage in South Florida through Shochet Securities, Inc. (now known as SSI Securities, Inc.). The sale of certain assets of SSI is discussed in footnotes 2 and 9 to the consolidated financial statements of this document. In October 2001, EarlyBirdCapital.com sold its ownership interest in EBCapital (Europe) AG to its managing director. This transaction is discussed in footnote 2 to the consolidated financial statements of this document. GKN and SSI are considered discontinued operations for the financial statements for the three and nine months ended October 31, 2001. Certain revenue and expense amounts in prior years have been reclassified to reflect the impact of the discontinued operations, as well as certain balance sheet items. Our operations in fiscal 2001 and the first nine months of fiscal 2002 consumed substantial amounts of cash and have generated significant net losses. We have curtailed or discontinued many of the product lines we previously offered. We anticipate that our revenue will be substantially lower in fiscal 2002 than in fiscal 2001. These matters raise doubt about our ability to continue as a going concern, as cited in footnote 1 to the consolidated financial statements. We believe that our future success is dependent upon our ability to (i) streamline our operation to reduce costs and (ii) generate new sources of revenue. We have begun reducing costs. We have also entered into a new line of business through StreetWide Asset Recovery Group, Inc.("StreetWide"). StreetWide is engaged by broker/dealers and other financial institutions to collect debt due to them from prior broker employees or from customers. The broker debts are generated through brokers reneging on employment contracts or brokers generating other losses due to their respective firms. The customer debt is usually generated through unsecured margin loans on which the customers have refused to repay the firms. StreetWide pursues the collection of these debts through the NASD Arbitration process, or through direct negotiation with the obligor. StreetWide currently employs two individuals. As of December 31, 2001 StreetWide had 14 customers under contract. For the nine months ended October 31, 2001 StreetWide had collected $583,000 of debt for clients and had generated $197,000 of operating revenue. For the period, StreetWide had an immaterial operating loss. StreetWide anticipates future growth through the solicitation of additional broker/dealers and clearing firms as customers. On November 7, 2001, the Company received an unsolicited offer from Sutter Capital Management to acquire one hundred percent of FFGI's outstanding shares at a price of $0.45 per share. Management of the Company met with representatives of Sutter to discuss the offer. The offer has now expired and the Company expects no further action on this matter. Business Environment Following the changes discussed above, our primary business activities are investment banking and asset management, with an emphasis on emerging-growth companies. These businesses are subject to general economic and market conditions and volatility of trading markets, particularly the emerging-growth sector. Our new business, asset recovery, is also subject to general economic and market conditions. It operates in a highly competitive marketplace. 2 Results of any individual period should not be considered representative of future profitability. A significant portion of our expenses are fixed and do not vary with market activity. Substantial fluctuations could occur in our revenues and net income or loss from period to period. The results of operations for the nine months ended October 31, 2001 are not necessarily indicative of the results which may be expected for the entire fiscal year. Results of Operations Three Months Ended October 31, 2001 vs. Three Months Ended October 31, 2000 The Company experienced losses from both continuing and discontinued operations for the three-month periods ended October 31, 2001 and October 31, 2000, as shown below:

Losses from continuing operations in the three months ended October 31, 2001 were incurred through the continued development of EarlyBird, the start-up of StreetWide Asset Recovery and the sale of EBCapital(Europe) AG. The loss from continuing operations was $3,013,000, or 80%, less than the loss from continuing operations in the comparable prior period. This decreased loss resulted from enhanced revenues and lower expenses in the current period. Additionally, during the prior period the Company recognized its share of the loss in an unconsolidated affiliate of $1,025,000. Losses from discontinued operations are discussed below in "Discontinued Operations." Revenues Total revenues from continuing operations increased to $480,000 for the third quarter of fiscal 2002, versus negative revenues of ($58,000) in the year-earlier period, mainly as a result of smaller losses on principal transactions and an increase in asset management fees, which were partially offset by a decrease in other revenue. Commission revenues increased from nothing in the third quarter of fiscal 2001 to $89,000 in the third quarter of fiscal 2002. This increase occurred as the result of EarlyBird adding a private client services group in fiscal 2002. Investment banking revenues decreased to $230,000 from $281,000 in the third quarter of fiscal 2001. During the third quarter of 2002 EarlyBird closed one offering and raised $3.4 million for corporate clients, compared to closing one deal and raising $2.6 million in the same quarter of the prior year. Amounts raised during the current quarter have earned a lower effective commission rate. 3 Losses from principal transactions were $12,000 in the third quarter of fiscal 2002. During the comparable quarter in the prior year a loss on principal transactions of $595,000 was recognized. This was the result of a decreased value in warrants held by the parent company during fiscal 2001. Asset management fees were $15,000 in the current quarter compared to negative fees of $282,000 in the same quarter of the prior year. During the third quarter of fiscal 2001 the Company decreased its estimate of performance fees earned during the first six months of the year. Interest income was unchanged at $96,000 for the respective quarters in both fiscal years. Other revenues were $62,000 in the fiscal 2002 quarter, versus $442,000 in the comparable quarter of fiscal 2001. This decrease was primarily attributable to a large one-time collection by StreetWide Asset Recovery in the third quarter of fiscal 2001. Expenses Total expenses from continuing operations for the third quarter of fiscal 2002 were $1,389,000, a 59% decrease from the same quarter in fiscal 2001. The decrease is attributable to decreases in compensation and benefits, occupancy and equipment, and business development expenses. These decreases were partially offset by increases in professional fees and other expenses. Compensation and benefits expense decreased 63% to $781,000. This decrease was attributable to significant decrease in the employee base at EarlyBird and at Firebrand Financial, the parent company. Occupancy and equipment expense in the fiscal 2002 quarter was ($42,000), compared to $658,000 in the prior year. The decrease reflects the recognition of certain occupancy costs by discontinued operations which were previously borne by the parent company. Brokerage, clearing and exchange fees for the fiscal 2002 quarter were $47,000, as compared to $59,000 in the comparable period of fiscal 2001. This reflects a decrease in the usage of brokerage related information sources related to principal transactions. Communications expenses were $74,000 for the fiscal 2002 quarter, compared to $53,000 in fiscal 2001. This increase reflects the addition of a private client services group at EarlyBird in the current year. Business development expenses decreased 78% to $91,000 in the third quarter of fiscal 2002. In the year earlier period EarlyBird was in the midst of a promotional brand awareness campaign. Professional fees increased by 52% to $217,000, mainly as a result of increased legal costs at EarlyBird. Other expenses for 2002 were $221,000, as compared to ($2,000) in 2001. This reflects the establishment of the StreetWide Asset Recovery, as well as the recognition of representation fees paid to EBCapital (Europe) AG, now operating as an independent company. Equity in earnings of unconsolidated affiliates Firebrand Financial, our parent company, and Dalewood Associates, Inc., a subsidiary of EarlyBirdCapital.com Inc., have investments in Dalewood Associates, LP. In aggregate they own 14.8% of the limited partnership. We treat Dalewood Associates, LP as an unconsolidated affiliate for accounting purposes. During the third quarter of fiscal 2001 management decreased the carrying value of its investment in Dalewood Associates, LP by $1,025,000, due to rapid declines in the value of certain publicly trade securities in Dalewood's portfolio. No such decline occurred in the current quarter of fiscal 2002. 4 Loss from sale of business On October 1, 2001, EarlyBird sold its ownership interest in EBCapital (Europe) AG to its managing director. This transaction resulted in a loss of $221,000. See footnote 2 to the consolidated financial statements of this document. Income taxes For the quarter ended October 31, 2001, we recognized $26,000 of state and local income taxes. We recognize a full valuation reserve on deferred tax assets primarily resulting from net operating loss carryforwards. During the comparable quarter of the prior year no provision was made, nor was any benefit recognized, for income taxes. Discontinued Operations During the fiscal year ended January 31, 2001, we made the strategic decision to de-emphasize retail securities brokerage activity. Accordingly, we arranged to transfer our full service retail brokerage accounts at GKN Securities to a series of broker/dealers, who in turn hired the GKN brokers. Further, in December 2000, our Board approved a plan to sell its 53.5% majority stake in Shochet Holding, whose primary activity is discount retail brokerage in South Florida through SSI. See footnotes 2 and 9 to the consolidated financial statements for a discussion of the sale of certain assets by Shochet. In October 2001, EarlyBirdCapital.com sold its ownership interest in EBCapital (Europe) AG. See footnote 2 to the consolidated financial statements for a discussion of this transaction. GKN and SSI are considered discontinued operations for the financial statements of the quarter ended October 31, 2001. Certain revenue and expense amounts in prior years have been reclassified to reflect the impact of the discontinued operations, as well as certain balance sheet items. For the quarter ended October 31, 2001, GKN incurred losses of $2,089,000, compared to losses of $1,819,000 in the comparable quarter of the prior year. The current year loss reflects additional rent, equipment rentals and equipment write-offs, as well as additional legal costs related to existing litigation and customer arbitrations. The prior year loss was the result of the ongoing operations of GKN. Shochet incurred a loss of $2,461,000 during the three months ended October 31, 2001. At January 31, 2001, the Company's remaining investment in Shochet was $73,000. During the first quarter of fiscal 2002, the Company recognized its portion of Shochet's net loss to the extent of its remaining investment. The Company has not recognized any loss related to Shochet in the second and third quarters of fiscal 2002. During the third quarter of fiscal 2001 we recognized losses related to Shochet of $730,000. On the sale of EBCapital (Europe) we incurred a loss of $221,000, primarily due to the recognition of the write-off of deferred compensation payments made to the managing director. 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 8,906,049 for the third quarter of fiscal 2002, compared with 9,019,387 in the prior year's period. 5 Nine Months Ended October 31, 2001 vs. Nine Months Ended October 31, 2000 The Company experienced losses from both continuing and discontinued operations for the nine month periods ended October 31, 2001 and October 31, 2000, as shown below:

Losses from continuing operations in the nine months ended October 31, 2001 were incurred through the continued development of EarlyBird, the start-up of StreetWide Asset Recovery, the termination of certain operating leases, the recognition of $1,498,000 in losses of an unconsolidated affiliate and the sale of EBCapital(Europe) AG. The loss from continuing operations was $4,221,000, or 238%, larger than the loss from continuing operations in the comparable prior period. The larger loss was caused by a $2,373,000 difference in the recognition of earnings and losses from an unconsolidated affiliate, the recognition of the loss on the sale of EBCapital(Europe) AG, a difference in the recognition of income tax benefits of $891,000 and a decreased contribution by minority interests of $760,000. Losses from discontinued operations are discussed below in "Discontinued Operations." Revenues Total revenues from continuing operations decreased by 3% to $2,802,000 for the first nine months of fiscal 2002, versus the year-earlier period, mainly as a result of a decrease in asset management fees and other revenue. Commission revenues increased from a negligible amount in the first nine months of fiscal 2001 to $462,000 in the comparable period of fiscal 2002. This increase occurred as the result of EarlyBird adding a private client services group in fiscal 2002. Investment banking revenues decreased to $1,434,000 from $1,468,000 in the first nine months of fiscal 2001. During the first nine months of fiscal 2002 EarlyBird raised $21.4 million for corporate clients, compared with raising $18.3 million in the same period of the prior year. Amounts raised during the current year have earned a lower effective commission rate. Losses from principal transactions were $56,000 in the first nine months of fiscal 2002. During the comparable period in the prior year a gain on principal transactions of $23,000 was recognized. This was the result of an increased value in warrants held by the parent company during fiscal 2001. Asset management fees decreased by 40% to $295,000. No performance fees related to Dalewood Associates, LP were earned during the first nine months of fiscal 2002, as the assets of Dalewood Associates, LP were written down. During the comparable period of the prior year asset management fees of $493,000 were earned, as there was a significant increase in the value of assets under management and the performance of those assets. The value of assets under management and accordingly the amount of revenues generated may vary significantly from period to period depending upon the market value of the underlying securities under management, which, in turn, is dependent upon economic and market conditions. 6 Interest income decreased 35% to $203,000 in the first nine months of fiscal 2002 as a result of decreased cash balances and decreased interest rates. Other revenues were $464,000 in the first three quarters of fiscal 2002, versus $582,000 in the comparable period. The revenues generated in fiscal 2001 were primarily derived from the collection of an arbitration matter, while the other revenues generated in fiscal 2002 are primarily the result of the activities of StreetWide Asset Recovery. Expenses Total expenses from continuing operations for the first nine months of fiscal 2002 were $7,709,000, versus $7,810,000 for the same period in fiscal 2001. Compensation and benefits and business development expenses decreased, while there were increases in occupancy and equipment and communication expenses, as well as professional fees. Compensation and benefits expense decreased 2% to $3,322,000. This decrease was attributable to a decreased employee base at EarlyBird and at Firebrand Financial, the parent company, during the third quarter of fiscal 2002. Occupancy and equipment expense in the first nine months of fiscal 2002 was $1,755,000, compared to $785,000 in the prior year. The increase reflects a one-time charge of $619,000 associated with the buyout of certain operating leases, the amortization of EarlyBird's website and increased occupancy costs for EarlyBird. Brokerage, clearing and exchange fees for the fiscal 2002 first nine months were $239,000, as compared to $59,000 in the comparable period of fiscal 2001. This increase reflects the addition of the private client services group at EarlyBird. Communications expenses were $689,000 for the first three quarters of fiscal 2002, compared to $84,000 in fiscal 2001. This reflects a one-time charge of $437,000 associated with the buyout of certain operating leases, the increased staffing levels at EarlyBird in the first few months of the current year, as well as the recognition of certain communication costs by the parent company which were previously borne by the discontinued GKN operations Business development expenses decreased 87% to $270,000 in the first nine months of fiscal 2002. In the year earlier period EarlyBird was in the midst of a promotional brand awareness campaign. Professional fees increased by 29% to $916,000, mainly as a result of increased legal costs related to existing litigation and customer arbitration. Other expenses for 2002 were $518,000, as compared to $721,000 in 2001, a 28% decrease. This reflects the impact of continued cost control efforts. 7 Equity in earnings of unconsolidated affiliates Firebrand Financial, our parent company, and Dalewood Associates, Inc., a subsidiary of EarlyBirdCapital.com Inc., have investments in Dalewood Associates, LP. In aggregate they own 14.8% of the limited partnership. We treat Dalewood Associates, LP as an unconsolidated affiliate for accounting purposes. During the second quarter of fiscal 2002 management wrote down the asset values of Dalewood Associates, LP by 32%. This writedown was the result of decreased valuations of the companies in which Dalewood Associates, LP held investments, and reflects valuations in general compared to the venture investment market. As a result of this writedown the Company recognized losses of $1,498,000 during the first nine months of fiscal 2002. In the comparable period of 2001, the Company recognized a gain of $875,000 on the same investment. Income taxes For the nine months ended October 31, 2001, we recognized $78,000 of state and local income taxes. We recognize a full valuation reserve on deferred tax assets primarily resulting from net operating loss carryforwards. During the comparable period of the prior year we recognized an income tax benefit of $813,000. This benefit was not realized during the year and was subsequently reversed. Discontinued Operations During the fiscal year ended January 31, 2001, we made the strategic decision to de-emphasize retail securities brokerage activity. Accordingly, we arranged to transfer our full service retail brokerage accounts at GKN Securities to a series of broker/dealers, who in turn hired the GKN brokers. Further, in December 2000, our Board approved a plan to sell its 53.5% majority stake in Shochet Holding, whose primary activity was discount retail brokerage in South Florida through SSI. See footnotes 2 and 9 to the consolidated financial statements for a discussion of the sale of certain assets by Shochet. In October 2001, EarlyBirdCapital.com sold its ownership interest in EBCapital (Europe) AG. See footnote 2 to the consolidated financial statements for a discussion of this transaction. GKN and SSI are considered discontinued operations for the financial statements of the nine months ended October 31, 2001. Certain revenue and expense amounts in prior years have been reclassified to reflect the impact of the discontinued operations, as well as certain balance sheet items. For the nine months ended October 31, 2001, GKN incurred losses of $2,734,000, compared to losses of $6,924,000 in the comparable period of the prior year. The current year loss reflects additional rent, equipment rentals and equipment write-offs, as well as additional legal costs related to existing litigation and customer arbitrations. The prior year loss was the result of the ongoing operations of GKN. Shochet incurred a loss of $5,025,000 during the nine months ended October 31, 2001. At January 31, 2001, the Company's remaining investment in Shochet was $73,000. During the first quarter of fiscal 2002, the Company recognized its portion of Shochet's net loss to the extent of its remaining investment. The Company has not recognized any loss related to Shochet in the second and third quarters of fiscal 2002. For the nine months ended October 31, 2000 we recognized losses related to Shochet of $1,747,000. On the sale of EBCapital (Europe) we incurred a loss of $221,000, primarily due to the recognition of the write-off of deferred compensation payments made to the managing director. 8 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 8,742,762 for the first nine months of fiscal 2002, compared with 8,895,603 in the prior year's period. Liquidity and Capital Resources Approximately 33% of assets at October 31, 2001 were highly liquid, consisting primarily of cash and cash equivalents, securities inventories and receivables from other broker-dealers. Additionally, approximately 38% of our assets are an investment in Dalewood Associates, LP, which we could liquidate at a discount, if necessary. Our brokerage subsidiaries, EarlyBirdCapital, Inc. and SSI Securities, Inc. (the latter treated as a discontinued operation), are subject to the net capital rules of the NASD and SEC. As such, we are subject to certain restrictions on the use of capital. EarlyBird's net capital position as of October 31, 2001 was $824,000, which was $724,000 in excess of its net capital requirement. SSI Securities' net capital position as of October 31, 2001, was $734,000, which was $701,000 in excess of its net capital requirement. In conjunction with our corporate headquarters relocation in New York in fiscal 1998, we 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 had placed $2.5 million in a restricted cash escrow account with the provider. In May 2001, the company bought out part of this lease through a payment of $1,819,000 to acquire the furniture and fixtures; as a result, the letter of credit and accompanying restricted cash escrow account was reduced to $955,000. 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. At present, there is doubt about the Company's ability to continue as a going concern and to meet its cash needs. Management believes that the Company's future success is dependent upon its ability to (i) streamline its operations to reduce costs and (ii) generate new sources of revenue. The Company has begun reducing costs and has expanded into new lines of business. Our subsidiary, GKN Securities, has recognized certain book reserves to cover exposures related to arbitrations and legal matters. GKN may not have sufficient cash balances to cover these potential liabilities. 9 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: February 8, 2002 By: /s/ Peter R. Kent ---------------------------------- Name: Peter R. Kent Title: Chief Operating Officer 10

FIREBRAND FINANCIAL GROUP INC 10-Q/A