UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 31, 1998
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
RESEARCH PARTNERS INTERNATIONAL, 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)509-3800
- ---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 1, 1998
- ------------------------------- -------------------------------
Common Stock, $.0001 par value 8,410,899 shares
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Index
Part I - Financial Information Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
October 31, 1998 (Unaudited) and January 31, 1998 3
Consolidated Statements of Operations for the three and nine
months ended October 31, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended January 31, 1998 and the nine months
ended October 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended October 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
2
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
-------------- ----------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,811,000 $ 8,111,000
Receivable from brokers and dealers 3,156,000 896,000
Securities owned, at market value 2,284,000 10,154,000
Securities owned, not readily marketable, at fair value 430,000 1,443,000
Investments 4,372,000 3,640,000
Loans receivable 1,605,000 1,404,000
Income taxes receivable 2,059,000 3,544,000
Deferred tax asset 1,070,000 -
Office furniture, equipment and leasehold improvements, net 2,135,000 1,580,000
Goodwill, net 3,722,000 3,684,000
Other assets 1,555,000 2,516,000
-------------- --------------
Total assets $ 28,199,000 $ 36,972,000
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 516,000 $ 2,320,000
Commissions payable 1,521,000 1,441,000
Deferred compensation 11,000 1,796,000
Deferred tax liability - 236,000
Accrued expenses and other liabilities 2,404,000 2,982,000
-------------- --------------
4,452,000 8,775,000
Liability subordinated to the claims of general creditors 499,000 576,000
-------------- --------------
Total liabilities 4,951,000 9,351,000
-------------- --------------
Stockholders' equity:
Preferred stock, $.10 par value; 1,200,000 shares authorized;
1,140,000 shares issued and outstanding 114,000 114,000
Common stock, $.0001 par value; 35,000,000 shares
authorized; 9,209,875 shares issued; 8,410,899 and
8,095,899 shares outstanding 1,000 1,000
Additional paid-in capital 20,912,000 20,710,000
Retained earnings 5,743,000 11,734,000
Accumulated other comprehensive income (6,000) (36,000)
-------------- --------------
26,764,000 32,523,000
Less treasury stock, at cost; 798,976 and 1,113,976 shares (3,516,000) (4,902,000)
-------------- --------------
Total stockholders' equity 23,248,000 27,621,000
-------------- --------------
Total liabilities and stockholders' equity $ 28,199,000 $36,972,000
============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended October 31, Ended October 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- --------------- ---------------- --------------
Revenues:
<S> <C> <C> <C> <C>
Commissions $ 6,831,000 $ 12,513,000 $ 28,849,000 $ 30,247,000
Investment banking 104,000 914,000 3,654,000 4,643,000
Principal transactions (1,486,000) 913,000 (1,568,000) 1,605,000
Interest 326,000 327,000 994,000 1,063,000
Other 771,000 450,000 2,411,000 903,000
--------------- --------------- ---------------- ---------------
Total revenues 6,546,000 15,117,000 34,340,000 38,461,000
--------------- --------------- ---------------- ---------------
Expenses:
Compensation and benefits 7,021,000 9,968,000 26,721,000 26,796,000
Occupancy and equipment 1,484,000 943,000 4,292,000 2,501,000
Communications 1,347,000 1,242,000 3,858,000 3,609,000
Brokerage, clearing and
exchange fees 882,000 966,000 2,737,000 2,532,000
Professional fees 525,000 271,000 1,478,000 756,000
Business development 392,000 419,000 1,580,000 1,606,000
Investigations and settlements - 204,000 - 2,192,000
Other 1,205,000 965,000 2,467,000 2,443,000
--------------- --------------- ---------------- ---------------
Total expenses 12,856,000 14,978,000 43,133,000 42,435,000
--------------- --------------- ---------------- ---------------
(Loss) income before income taxes (6,310,000) 139,000 (8,793,000) (3,974,000)
Income tax (benefit) (1,990,000) 196,000 (2,802,000) (1,468,000)
--------------- --------------- ---------------- ---------------
Net loss $ (4,320,000) $ (57,000) $ (5,991,000) $ (2,506,000)
=============== ================ ================ ===============
Basic loss per common share $ (0.53) $ (0.01) $ (0.74) $ (0.31)
=============== =============== ================ ===============
Diluted loss per common share $ (0.53) $ (0.01) $ (0.74) $ (0.31)
=============== =============== ================ ===============
Weighted average common
shares outstanding - basic 8,211,986 8,096,769 8,137,822 8,120,427
=============== =============== ================ ===============
Weighted average common
shares outstanding - diluted 8,211,986 8,096,769 8,137,822 8,120,427
=============== =============== ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Preferred Other
Common Stock Stock Additional Compre- Treasury Stock
---------------- ------------------- Paid-in Retained hensive -----------------
Shares Amt. Shares Amt. Capital Earnings Income Shares Amount Total
--------- ------ ---------- -------- ----------- ----------- ------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31, 1997 9,217,875 $1,000 - $ - $19,931,000 $18,247,000 $ (3,000) (992,363) $(3,150,000) $35,026,000
Net loss - - - - - (6,513,000) - - - (6,513,000)
Stock issued -
acquisition - - 1,140,000 114,000 1,376,000 - - 152,000 482,000 1,972,000
Stock issued -
compensation plan - - - - (1,193,000) - - 288,944 1,193,000 -
Amortization of
unearned compen-
sation - - - - 545,000 - - - - 545,000
Stock options
exercised - - - - (45,000) - - 34,443 124,000 79,000
Note receivable
forgiven - - - - 100,000 - - - - 100,000
Retirement of stock (8,000) - - - - - - 8,000 35,000 35,000
Purchase of
treasury stock - - - - - - - (605,000) (3,586,000) (3,586,000)
Translation
adjustment - - - - - - (33,000) - - (33,000)
Other - - - - (4,000) - - - - (4,000)
--------- ------ ---------- --------- ------------ ----------- --------- --------- ----------- ------------
Balance at
January 31, 1998 9,209,875 1,000 1,140,000 114,000 20,710,000 11,734,000 (36,000)(1,113,976) (4,902,000) 27,621,000
Net loss - - - - - (5,991,000) - - - (5,991,000)
Stock issued -
compensation plan - - - - (6,000) - - 15,000 66,000 60,000
Stock issued - sale - - - - (270,000) - - 300,000 1,320,000 1,050,000
Amortization of
unearned compensation - - - - 478,000 - - - - 478,000
Translation adjustment - - - - - - 30,000 - - 30,000
--------- ------ ---------- --------- ------------ ----------- --------- --------- ----------- ------------
Balance at
October 31, 1998 9,209,875 $1,000 1,140,000 $ 114,000 $ 20,912,000 $ 5,743,000 $ (6,000) (798,976) $(3,516,000) $23,248,000
========= ====== ========== ========= ============ =========== ========= ========= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
------------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Operating activities:
Net loss $ (5,991,000) $ (2,506,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 566,000 536,000
Deferred taxes (1,306,000) 506,000
Gain on sale of subsidiary (599,000) -
Other 546,000 403,000
-------------- ----------------
(6,784,000) (1,061,000)
(Increase) decrease in operating assets:
Receivable from brokers and dealers (2,260,000) 3,793,000
Securities owned, at market value 7,870,000 1,783,000
Securities owned, not readily marketable 1,013,000 (183,000)
Loans receivable (201,000) (2,287,000)
Income taxes receivable 1,485,000 (2,408,000)
Other assets 839,000 (1,284,000)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (1,804,000) (2,390,000)
Commissions payable 80,000 (283,000)
Deferred compensation (1,785,000) (353,000)
Income taxes payable - (229,000)
Accrued expenses and other liabilities (626,000) (2,575,000)
Translation adjustment 29,000 (18,000)
-------------- ----------------
Net cash used in operating activities (2,144,000) (7,495,000)
-------------- ----------------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (898,000) (160,000)
Investment in limited partnerships (732,000) (457,000)
Acquisition, net of cash acquired - (176,000)
Sale of subsidiary, net of cash sold 666,000 -
Goodwill resulting from acquisition (158,000) (58,000)
-------------- ----------------
Net cash used in investing activities (1,122,000) (851,000)
-------------- ----------------
Financing activities:
Issuance of common shares - 75,000
Sale (purchase) of treasury stock 1,050,000 (3,586,000)
Repayment of subordinated debt (84,000) (186,000)
-------------- ----------------
Net cash provided by (used in) financing activities 966,000 (3,697,000)
-------------- ----------------
Net change in cash and cash equivalents (2,300,000) (12,043,000)
Cash and cash equivalents at beginning of year 8,111,000 17,856,000
-------------- ----------------
Cash and cash equivalents at end of period $ 5,811,000 $ 5,813,000
============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include the accounts of Research Partners
International, Inc. and its subsidiaries (the "Company"). All significant
intercompany accounts and transactions are eliminated in consolidation. In the
opinion of management, the consolidated financial statements reflect all
adjustments, which are all of a normal recurring nature, necessary for a fair
statement of the Company's financial position and results of operations for the
interim periods presented. These consolidated financial statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended January 31, 1998, in its annual report on Form
10-K. Certain reclassifications have been made to the prior year amounts to
conform to the current presentation.
The financial statements conform with generally accepted accounting principles
("GAAP"). The preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could vary from these estimates.
The Company's principal business activities are affected by many factors,
including general economic and market conditions, which can result in
substantial fluctuations in the Company's revenues and net income. Therefore,
the results of operations for the nine months ended October 31, 1998, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. Sale of Subsidiary
On October 1, 1998, the Company sold its 60% majority ownership interest in one
of its Swiss subsidiaries, GKN Asset Management AG, to a Swiss investor for
1,000,000 Swiss francs, or $728,000. The Company recognized a gain of $599,000
on the sale, which is included in other income in the statement of operations.
3. Net Capital Requirements
GKN Securities Corp. (GKN), Southeast Research Partners, Inc. ("Southeast"), and
Shochet Securities, Inc. ("Shochet"), all wholly owned subsidiaries of the
Company, are registered broker-dealers with the Securities and Exchange
Commission (the "SEC") and member firms of the National Association of
Securities Dealers, Inc. ("NASD"). As such, GKN, Southeast, and Shochet are
subject to the SEC's net capital rule, which requires the maintenance of minimum
net capital.
GKN has elected to compute net capital using the alternative method permitted by
the net capital rule, which requires that it maintain minimum net capital, as
defined, to be greater than or equal to $250,000. At October 31, 1998, GKN had
net capital of $798,000.
Southeast has elected to compute net capital under the standard aggregate
indebtedness method permitted by the net capital rule, which requires that the
ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1. At October 31, 1998, Southeast had net capital of $ 657,000 and
a net capital requirement of $101,000. Southeast's net capital ratio at October
31, 1998, was 2.30 to 1.
7
<PAGE>
Shochet has also elected to compute net capital under the standard aggregate
indebtedness method permitted by the net capital rule. At October 31, 1998,
Shochet had net capital of $ 435,000 and a net capital requirement of $100,000.
Shochet's net capital ratio at October 31, 1998, was 1.73 to 1.
4. Earnings Per Share
Effective for the fiscal year ended January 31, 1998, the Company adopted SFAS
No. 128, Earnings per Share ("SFAS 128"), which established new standards for
computing and presenting earnings per share ("EPS"). This statement changes the
calculation and presentation of EPS. The new presentation consists of basic EPS,
which includes no dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period, and diluted
EPS, which is similar to the previously disclosed fully diluted EPS. SFAS 128
will result in basic EPS results higher than EPS as calculated under the
previous method. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the SFAS 128
requirements. For the three and nine month periods ended October 31, 1998 and
1997, common stock equivalents, consisting of stock options, warrants and
convertible preferred stock, were not included in the computation of diluted
EPS, as the inclusion of such shares would be anti-dilutive due to the Company's
net loss in those periods.
5. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine Months Ended October 31,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Cash paid for:
Income taxes $ 219,000 $ 731,000
================ ===============
Interest $ 9,000 $ 26,000
================ ===============
Non-cash investing transactions
relating to the Company's purchase acquisition
that is not reflected in the consolidated
statement of cash flows:
Fair value of assets acquired $ - $ 2,156,000
Goodwill acquired - 2,177,000
Liabilities assumed - (1,474,000)
Preferred stock issued - (1,094,000)
Treasury stock issued - (912,000)
---------------- ---------------
Cash paid - 853,000
Less: cash acquired - (677,000)
---------------- ---------------
Net cash paid for acquisition $ - $ 176,000
================ ===============
Non-cash financing transactions:
Treasury stock issued for Incentive Compensation Plan $ 60,000 $ 1,734,000
================ ===============
</TABLE>
6. Commitments and Contingencies
Various legal proceedings are pending against the broker-dealers. Management
believes that, other than as reflected in the consolidated financial statements,
the aggregate liability resulting from these proceedings will not be material.
8
<PAGE>
7. Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of comprehensive income and
its components. Total comprehensive income measures all changes in stockholders'
equity resulting from transactions of the period, other than transactions with
stockholders.
The components of comprehensive income for the three and nine months ended
October 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended October 31, Nine months ended October 31,
-------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net income $ (4,320,000) $ (57,000) $ (5,991,000) $ (2,506,000)
Other comprehensive income:
Foreign currency translation
adjustments 41,000 (14,000) 30,000 (33,000)
-------------- -------------- -------------- ---------------
Total comprehensive income $ (4,279,000) $ (71,000) $ (5,961,000) $ (2,539,000)
============== =============== ============== ===============
</TABLE>
8. Subsequent Event
On November 4, 1998, the Company and its wholly owned subsidiary, RPII
Acquisition Corporation ("RPII Acquisition") entered into an Agreement and Plan
of Merger with Gaines, Berland Inc. ("GBI"). The agreement provides for the
merger of RPII Acquisition with and into GBI, with GBI to be the surviving
corporation and a wholly owned subsidiary of the Company. GBI is engaged in the
business of investment banking, securities trading and brokerage and the
providing of securities research services. The merger is expected to be
consummated in the first quarter of 1999.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the consolidated results of operations and financial
condition of Research Partners International, Inc. and Subsidiaries (the
"Company") should be read in conjunction with the Consolidated Financial
Statements included elsewhere herein, and with the Management's Discussion and
Analysis of the Financial Condition and Results of Operations included in the
Company's Fiscal 1998 Annual Report on Form 10-K.
Business Environment
The Company's primary business activities, institutional research, investment
banking, securities brokerage and securities trading, with an emphasis on small-
and mid-capitalization companies, are subject to general economic and market
conditions and the volatility of trading markets, specifically the small- and
mid-capitalization market. The quarter ended October 31, 1998 saw some of the
poorest market conditions in years, with lows reached in early October, after
highs for the year reached in the previous quarter. Overseas economic
difficulties contributed to U.S. market volatility, which accounted for
significant market value losses for the Company's investment inventory. This
volatility additionally essentially dried up the IPO market and affected
investor confidence, significantly impacting the firm's investment banking and
commission revenues.
The results of operations for the quarter and for the nine months ended October
31, 1998 are not necessarily indicative of the results which may be expected for
the entire fiscal year.
Results of Operations
Three Months Ended October 31, 1998 vs. Three Months Ended October 31, 1997
- ---------------------------------------------------------------------------
Net loss for the three months ended October 31, 1998 was $4,320,000 as compared
with a $57,000 loss for the three months ended October 31, 1997. Loss per share
of common stock for the three months ended October 31, 1998 was $0.53 as
compared to $0.01 loss per share for the three months ended October 31, 1997.
The decrease was primarily attributable to lower investment banking activity in
the quarter ended October 31, 1998, and larger losses from principal
transactions and decreased commission revenue. These decreases were partially
offset by an increase in other revenue.
Revenues
Total revenues decreased by 57% to $6,546,000 for the third quarter of fiscal
1999, mainly as a result of trading and investment account losses, decreased
commission revenue and a decrease in investment banking activity, partially
offset by an increase in other income.
Commission revenues decreased by $5,682,000, or 45%, for the third quarter. The
decrease was primarily attributable to a 44% decrease in average commissions per
trade as compared to the same period in the prior year.
Investment banking revenues decreased by $810,000, or 89%. During the third
quarter of fiscal 1999 the Company raised $625,000 for a corporate client
through one private placement. In the same period in fiscal 1998 the Company
raised $3,444,000 for its clients through three private placements. The
Company's investment banking focus has shifted to being a co-manager on small
and mid-cap issues, as opposed to primarily being the sole manager on micro-cap
underwritings.
10
<PAGE>
Principal transactions generated losses of $1,486,000 in the third quarter of
fiscal 1999, as opposed to a $913,000 gain in the fiscal 1998 quarter. The
Company's investment account generated $953,000 in losses in the fiscal 1999
quarter, as compared to $2,206,000 in gains in the fiscal 1998 quarter. As the
majority of the Company's investments are in small- and mid-capitalization
stocks, the market decline which began in September and reached its lowest point
in October, before rallying slightly, negatively impacted the Company's revenues
in the current quarter as compared with the previous year when market conditions
were more favorable. Market making activities for the quarter generated losses
of $533,000 and $1,293,000 in fiscal 1999 and 1998, respectively.
Other revenues increased 71% to $771,000, primarily as a result of a gain on the
sale of one of the Company's Swiss subsidiaries.
Expenses
Total expenses for the quarter in fiscal 1999 were $12,856,000, a 14% decrease
from the same quarter in fiscal 1998. The decrease is attributable primarily to
less compensation and benefits expense, partially offset by increased occupancy
and equipment charges and professional fees.
Compensation and benefits expense decreased 30% to $7,021,000. These expenses
are primarily variable as commissions to brokers are paid as a percentage of
commission revenues generated. The expense decrease in fiscal 1999 is consistent
with the decrease in commission revenue, partially offset by personnel costs
associated with the Company's fiscal 1999 expansion into day trading and fixed
income activities.
Occupancy and equipment expenses increased $541,000, or 57% over fiscal 1998, as
a result of the addition of new branch offices, the move of the Company's
corporate headquarters, and the investment made to upgrade the Company's
technological infrastructure.
Communications expense increased by $105,000, or 8%, as a result of the
Company's new business ventures and expanded facilities.
Brokerage, clearing and exchange fees decreased by $84,000 or 9%. This decrease
was attributable to a decrease in trade volume.
Professional fees increased by $254,000 or 94%, mainly as a result of costs
associated with expanding the firm's business, complying with regulatory
requirements and supporting the firm's technological infrastructure.
Business development expenses decreased by 6% to $392,000 due to decreased
promotional activities.
Investigations and settlements were eliminated, as the SEC and NASDR
investigatory matters are settled and have been completed.
Other expenses increased $240,000, or 25% primarily due to increased reserves
for potential litigation offset by decreased amortization of recruiting payments
to brokers.
Weighted average common shares outstanding
The average number of common shares and common stock equivalents outstanding
used in the computation of basic and diluted earnings per common share was
8,211,986 for the third quarter of fiscal 1999, compared with 8,096,769 in
fiscal 1998. The change is primarily attributable to the sale of treasury stock
to a Swiss investor which occurred at the beginning of October during the
current quarter.
11
<PAGE>
Nine Months Ended October 31, 1998 vs. Nine Months Ended October 31, 1997
- -------------------------------------------------------------------------
Net loss for the nine months ended October 31, 1998 was $5,991,000 as compared
with a net loss of $2,506,000 for the nine months ended October 31, 1997. Loss
per share of common stock for the nine months ended October 31, 1998 was $0.74
as compared to $0.31 for the nine months ended October 31, 1997. The decrease in
operating results is primarily the result of trading and investment revenue
losses, offset, in part, by the elimination of expenses associated with
investigations and settlements.
The results of operations for the nine months are not necessarily indicative of
the results that may be expected for the entire fiscal year.
Revenues
Total revenues decreased $4,121,000 or 11% to $34,340,000, mainly as a result of
losses from principal transactions and decreased commission revenues. These
decreases were partially offset by an increase in other income.
Commission revenues decreased 5%, or $1,398,000, for the nine months ended
October 31, 1998. The Company executed trades during the period with an average
commission 28% lower as compared to the same period in the prior year, offset by
an increase in trade volume of 33%.
Investment banking revenues decreased by $989,000 or 21%. During fiscal 1999 the
Company raised $24.1 million for corporate clients through two public offerings
and two private placements. In the same period in fiscal 1998 the Company raised
$55.6 million for its clients through four public offerings and seven private
placements.
Principal transactions generated losses of $1,568,000 in the first nine months
of fiscal 1999, a 198% decrease from the $1,605,000 gain in the same period in
fiscal 1998. The investment account generated losses of $55,000 for the fiscal
1999 period as opposed to a $3,294,000 gain in fiscal 1998. As the majority of
the Company's investments are in small- and mid-capitalization stocks, the
market decline which began in September and reached its lowest point in October,
before rallying slightly, negatively impacted the Company's revenues in the
current quarter as compared with the previous year when market conditions were
more favorable. Market making activities generated losses of $1,513,000 and
$1,689,000 in the nine months ended October 31, 1998 and 1997, respectively.
Other revenues increased $1,508,000 to $2,411,000, mainly as a result of the
Company's revenue from merchant banking and asset management activities, as well
as a gain on the sale of one of the Company's Swiss subsidiaries.
Expenses
Total expenses for the first nine months of fiscal 1999 were $43,133,000, a
$698,000 increase over the same period in fiscal 1998. As a percentage of
revenues, these expenses increased from 110% in fiscal 1998 to 126% in fiscal
1999.
Compensation and benefits expense decreased less than 1% from fiscal 1998 to
fiscal 1999. The decrease attributable to the decrease in commission revenue is
offset by increases related to the Company's expansion into day trading and
fixed income activities.
12
<PAGE>
Occupancy and equipment expenses increased $1,791,000, or 72% over fiscal 1998,
as a result of the addition of new branch offices, the move of the Company's
corporate headquarters, and the investment made to upgrade the Company's
technological infrastructure.
Communications expense increased by $249,000, or 7%, as a result of the
Company's new business ventures and expanded facilities.
Brokerage, clearing and exchange fees increased by $205,000 or 8%. This increase
was attributable to an increase in trade volume for the first nine months of
fiscal 1999, as compared with fiscal 1998.
Professional fees increased by $722,000 or 96% mainly as a result of costs
associated with expanding the firm's business, complying with regulatory
requirements and supporting the firm's technological infrastructure.
Business development expenses decreased by 2% to $1,580,000 due to decreased
promotional activities.
Investigations and settlements were eliminated, as the SEC and NASDR
investigatory matters are settled and have been completed.
Other expenses increased $24,000, or 1% primarily due to increased reserves for
potential litigation offset by decreased amortization of recruiting payments to
brokers.
Weighted average common shares outstanding
The average number of common shares and common stock equivalents outstanding
used in the computation of basic and diluted loss per common share was 8,137,822
for the first nine months of fiscal 1999 and 8,120,427 for the first half of
fiscal 1998. The majority of the change is attributable to the issuance of
treasury stock for an employee award during the second quarter of fiscal 1999.
Liquidity and Capital Resources
Approximately 40% of the Company's assets at October 31, 1998 are highly liquid,
consisting primarily of cash and cash equivalents, securities inventories, and
receivables from other broker-dealers, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from the Company's clearing broker, turn
over rapidly. As a securities dealer, the Company may carry significant levels
of trading inventories to meet customer needs. The Company's inventory of
market-making securities is readily marketable; however, holding large blocks of
the same security may limit liquidity and prevent realization of full market
value for the securities. Securities owned, but not readily marketable,
represent underwriter warrants and the securities underlying such warrants. The
liquidity of these securities is limited. A relatively small percentage of the
Company's total assets are fixed. The Company's total assets or the individual
components of total assets may vary significantly from period to period because
of changes relating to customer demand, economic and market conditions, and
proprietary trading strategies.
GKN, Southeast, and Shochet, the Company's domestic operating broker-dealer
subsidiaries, are subject to the net capital rules of the National Association
of Securities Dealers, Inc. (NASD) and the Securities and Exchange Commission
(SEC). As such, they and the Company are subject to certain restrictions on the
use of capital and its related liquidity. GKN's, Southeast's, and Shochet's
respective net capital positions as of October 31, 1998, were $798,000,
$657,000, and $435,000, which were $548,000, $556,000 and $335,000,
respectively, in excess of their respective net capital requirements.
13
<PAGE>
In conjunction with the Company's move of its corporate headquarters in New York
City the Company has significantly upgraded its 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, the Company arranged for a standby letter of credit.
As collateral for the standby letter of credit, the Company has placed $2.4
million in a restricted cash escrow account with the provider. The Company
intends to use debt and lease financing prudently in the future.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business
units. These reviews take into account business needs as well as regulatory
capital requirements of the subsidiaries. Based upon these reviews, management
believes that the Company's capital structure is adequate for current operations
and reasonably foreseeable future needs.
Other Matters
Year 2000 Computer Issue
The Company initiated a firm-wide program to address the "Year 2000 Computer
Issue" in order to prepare its computer systems and applications for properly
processing dates after December 31, 1999. The Company's program is proceeding on
schedule and it is the Company's expectation that it will have its firm-wide
Year 2000 solution substantially in place by June 30, 1999.
All of the Company's computer programs are provided by third party vendors and
service providers. Most of the programs were purchased after the Year 2000
Computer issue became widely recognized. The Company has sought, and expects to
receive, written confirmation from its third-party program and service providers
that the Year 2000 Computer Issue has been appropriately managed. Schroder &
Co., the Company's clearing firm, is the largest and most important computer
services related vendor. Schroder & Co. has provided the Company with assurances
that it expects to appropriately manage the Year 2000 Computer Issue on a timely
basis.
The Year 2000 Computer Issue creates a risk for the Company from unforeseen
problems in its own computer systems, third-party vendors and service providers,
and from third parties with whom the Company deals worldwide. The Company is
continuing to communicate with its third-party vendors and service providers to
determine the likely extent to which the Company may be affected by
third-parties' Year 2000 plans and target dates. In this regard, while the
Company does not now expect material financial exposure as a result of the Year
2000 problem, there can be no guarantee that the systems of other entities on
which the Company relies will be remediated on a timely basis, or that a failure
to remediate by another party, would not have a material adverse effect on the
Company. Such failures could have a material impact on the Company's ability to
conduct business.
Based on information currently available, the Company does not expect its Year
2000 expenditures for 1998 and over the next two years to be a material cost to
the Company. The expected costs of the Year 2000 program are based on
management's current estimates; however, actual results could differ materially
from those plans.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128),
effective beginning in the fiscal year ending January 31, 1998. This statement
changes the calculation and presentation of earnings per common share (EPS). The
new presentation consists of basic EPS, which includes no dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding for the period, and diluted EPS, which is similar to the previous
fully diluted EPS. The financial statements reflect the implementation of SFAS
128.
14
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130), effective beginning in the
fiscal year ending January 31, 1999. This statement establishes standards for
the reporting and display of comprehensive income and its components. Total
comprehensive income measures all changes in stockholders' equity resulting from
transactions of the period, other than transactions with stockholders. The
financial statements reflect the implementation of SFAS 130.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises and standardizes
pensions and other postretirement benefit plan disclosures. The Statement is
effective for fiscal years beginning after December 15, 1997. The effect of SFAS
132 is not expected to be material to the Company's financial statement
disclosures.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 establishes standards for accounting and
reporting of derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. SFAS 133 is effective for
fiscal quarters beginning after June 15, 1999. The Company expects to adopt this
standard when required in fiscal year 2000 and is currently evaluating the
potential impact on the Company's accounting for such activities. The effect of
SFAS 133 is not expected to be material to the Company's financial statement
disclosures.
Safe Harbor Cautionary Statement
The Company occasionally makes forward-looking statements such as forecasts and
projections of expected future performance or statements of its plans and
objectives. When used in this report and in future filings by the Company with
the SEC, in the Company's press releases and in oral statements made with the
approval of an authorized executive officer of the Company, the words or phrases
"will likely result," "the Company expects," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions (including
confirmations by an authorized executive officer of the Company of any such
expressions made by a third party with respect to the Company) are intended to
identify forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which
speaks only as of the date made. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors that
could affect the Company's results of operations and cause its results to differ
from these statements include the volatility and price level of the securities
markets; the volume, size and timing of securities transactions; the demand for
investment banking services; the level and volatility of interest rates; the
availability of credit; legislation affecting the business and financial
communities; and the economy in general. For a more complete discussion of these
and other factors, see the Company's registration statement filed on Form S-1,
as amended (No. 333-05273), and the Company's periodic Form 10-K, 10-Q, and 8-K
filings with the SEC. The Company has no obligation to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.
15
<PAGE>
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Effective October 1, 1998, the Company sold to Dr. Ernst Muller-Mohl
all of the outstanding stock owned by the Company in GKN Asset
Management AG (60 shares of common stock), for Swiss francs 1 million
(U.S. $728,000).
Effective October 1, 1998, the Company also sold to Dr. Ernst
Muller-Mohl 300,000 shares of the Company's treasury Common Stock for
$1,050,000.
Each of the above-referenced sales was made by the Company, not
involving any public offering, pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule BD
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated November 4,
1998, reporting under Item 2 (Acquisition or Disposition of Assets),
the execution and a description of the Agreement and Plan of Merger
between the Company, its wholly owned subsidiary, RPII Acquisition
Corporation, and Gaines, Berland Inc.
16
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESEARCH PARTNERS INTERNATIONAL, INC.
Date: December 15, 1998 /s/ David M. Nussbaum
-------------------------------
David M. Nussbaum
Chairman of the Board and
Chief Executive Officer
/s/ Richard M. Feldman
-------------------------------
Richard M. Feldman,
Senior Vice President and
Chief Financial Officer
17
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Exhibit Index
Number Description
27 Financial Data Schedule BD (10/31/98)
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 5,811,000
<RECEIVABLES> 6,820,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 7,086,000
<PP&E> 2,135,000
<TOTAL-ASSETS> 28,199,000
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 516,000
<LONG-TERM> 499,000
0
114,000
<COMMON> 1,000
<OTHER-SE> 23,133,000
<TOTAL-LIABILITY-AND-EQUITY> 28,199,000
<TRADING-REVENUE> (1,486,000)
<INTEREST-DIVIDENDS> 326,000
<COMMISSIONS> 6,831,000
<INVESTMENT-BANKING-REVENUES> 104,000
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 0
<COMPENSATION> 7,021,000
<INCOME-PRETAX> (6,310,000)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,320,000)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
