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, 1999
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 13, 1999
- ------------------------------- --------------------------------
Common Stock, $.0001 par value 8,612,747 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, 1999 (Unaudited) and January 31, 1999 3
Consolidated Statements of Operations for the three and nine
months ended October 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Changes in Stockholders'
Equity for the year ended January 31, 1999 and the
nine months ended October 31, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended October 31, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 19
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,
1999 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 8,393,000 $ 10,553,000
Receivable from brokers and dealers 1,592,000 2,251,000
Securities owned, at market value 1,767,000 1,695,000
Securities owned, not readily marketable, at fair value 1,145,000 955,000
Investments 2,227,000 2,035,000
Income taxes receivable 340,000 1,909,000
Loans receivable 1,083,000 1,563,000
Office furniture, equipment and leasehold improvements, net 1,818,000 2,088,000
Goodwill, net 1,611,000 3,681,000
Other assets 1,954,000 1,550,000
-------------- --------------
Total assets $ 21,930,000 $ 28,280,000
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 115,000 $ 506,000
Commissions payable 1,394,000 2,658,000
Accrued expenses and other liabilities 3,194,000 3,162,000
-------------- --------------
Total liabilities 4,703,000 6,326,000
-------------- --------------
Stockholders' equity:
Preferred stock, $.10 par value; 1,200,000 shares authorized;
no and 1,140,000 shares issued and outstanding - 114,000
Common stock, $.0001 par value; 35,000,000 shares
authorized; 9,209,875 shares issued; 8,612,747 and
8,410,899 shares outstanding 1,000 1,000
Additional paid-in capital 20,244,000 21,022,000
(Accumulated deficit) retained earnings (374,000) 4,351,000
Accumulated other comprehensive loss (24,000) (18,000)
-------------- --------------
19,847,000 25,470,000
Less treasury stock, at cost; 597,128 and 798,976 shares (2,620,000) (3,516,000)
-------------- --------------
Total stockholders' equity 17,227,000 21,954,000
-------------- --------------
Total liabilities and stockholders' equity $ 21,930,000 $ 28,280,000
============== ==============
</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,
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 7,434,000 $ 5,197,000 $ 28,312,000 $ 24,442,000
Investment banking 579,000 40,000 2,982,000 1,916,000
Principal transactions (1,013,000) (1,660,000) (920,000) (2,214,000)
Interest 406,000 301,000 1,163,000 928,000
Other 130,000 768,000 1,079,000 2,393,000
------------- ------------- ------------- -------------
Total revenues 7,536,000 4,646,000 32,616,000 27,465,000
------------- ------------- ------------- -------------
Expenses:
Compensation and benefits 6,436,000 5,283,000 22,806,000 21,412,000
Occupancy and equipment 1,312,000 1,272,000 3,794,000 3,708,000
Communications 832,000 1,042,000 2,513,000 3,063,000
Brokerage, clearing and exchange fees 730,000 625,000 2,477,000 2,060,000
Professional fees 1,048,000 480,000 2,093,000 1,341,000
Business development 205,000 281,000 708,000 1,209,000
Other 478,000 1,080,000 1,237,000 2,169,000
------------- ------------- ------------- -------------
Total expenses 11,041,000 10,063,000 35,628,000 34,962,000
------------- ------------- ------------- -------------
Loss before income taxes (3,505,000) (5,417,000) (3,012,000) (7,497,000)
Income tax (benefit) 142,000 (1,730,000) 177,000 (2,508,000)
------------- -------------- ------------- -------------
Loss from continuing operations (3,647,000) (3,687,000) (3,189,000) (4,989,000)
------------- ------------- -------------- -------------
Discontinued operations:
Loss from operations of the discontinued
Institutional and Research segment, net of
income tax benefit of $0 and $223,000,
and $0 and $213,000, respectively - (554,000) (322,000) (771,000)
Loss from disposal of the Institutional and
Research segment - - (750,000) -
Loss from operations of the discontinued
On-site Day Trading segment, net of
income tax benefit of $0 and $37,000
and $0 and $81,000, respectively - (79,000) (465,000) (231,000)
------------- -------------- ------------- -------------
- (633,000) (1,537,000) (1,002,000)
------------- -------------- ------------- -------------
Net loss $ (3,647,000) $ (4,320,000) $ (4,726,000) $ (5,991,000)
============= ============= ============= =============
Weighted average common shares
outstanding - basic and diluted 8,623,180 8,211,986 8,565,581 8,137,822
============= ============= ============= =============
Basic and diluted EPS from:
Loss from continuing operations $ (0.42) $ (0.45) $ (0.37) $ (0.62)
Loss from discontinued operations - (0.08) (0.18) (0.12)
------------- -------------- -------------- --------------
Net loss $ (0.42) $ (0.53) $ (0.55) $ (0.74)
============ ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended January 31, 1999 and the Nine Months Ended October 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
(Accumulated Compre-
Preferred Stock Common Stock Additional Deficit) hensive Treasury Stock
----------------- ----------------- Paid-in Retained (Loss) ----------------------
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, 1998 1,140,000 $114,000 9,209,875 $ 1,000 $ 20,710,000 $ 11,734,000 $(36,000)(1,113,976) $(4,902,000) $27,621,000
Net loss - - - - - (7,383,000) - - - (7,383,000)
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 compen-
sation - - - - 588,000 - - - - 588,000
Translation
adjustment - - - - - - 18,000 - - 18,000
-------- ------- --------- ------- ------------- ------------ -------- ---------- ---------- -----------
Balance at
January 31, 1999 1,140,000 $114,000 9,209,875 $ 1,000 $21,022,000 $ 4,351,000 $(18,000) (798,976) $(3,516,000)$ 21,954,000
Net loss - - - - - (4,726,000) - - - (4,726,000)
Starting bonuses
awarded - - - - (147,000) - - 79,746 351,000 204,000
Stock options
exercised - - - - (80,000) - - 50,165 221,000 141,000
Forfeiture of
stock issued -
compensation plan - - - - 112,000 - - (27,046) (112,000) -
Stock issued -
deferred compen-
sation plan - - - - (93,000) - - 34,676 153,000 60,000
Stock issued -
401(k) plan - - - - (131,000) - - 48,179 212,000 81,000
Preferred stock
conversion (100,800) (10,000) - - (61,000) - - 16,128 71,000 -
Cancellation of
preferred stock (1,039,200)(104,000) - - (894,000) - - - - (998,000)
Note receivable paid - - - - 121,000 - - - - 121,000
Amortization of
unearned
compensation - - - - 396,000 - - - - 396,000
Translation
adjustment - - - - - - (6,000) - - (6,000)
-------- ------- -------- ------- ------------ ------------ -------- -------- ---------- -----------
Balance at
October 31, 1999 - - 9,209,875 1,000 20,245,000 (375,000) (24,000) (597,128) (2,620,000) 17,227,000
======== ======= ========= ======= ============ ============ ======== ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
24
7450.1
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
---------------- ----------------
1999 1998
---------------- ----------------
<S> <C> <C>
Operating activities:
Net loss $ (4,726,000) $ (5,991,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 523,000 566,000
Deferred taxes - (1,306,000)
Gain on sale of subsidiary - (599,000)
Loss on sale of subsidiary 750,000 -
Translation adjustment (6,000) 29,000
Other 388,000 546,000
---------------- ----------------
(3,071,000) (6,755,000)
(Increase) decrease in operating assets:
Receivable from brokers and dealers 659,000 (2,260,000)
Securities owned, at market value (72,000) 7,870,000
Securities owned, not readily marketable (190,000) 1,013,000
Income taxes receivable 1,569,000 1,485,000
Loans receivable 336,000 (201,000)
Other assets (574,000) 839,000
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (391,000) (1,804,000)
Commissions payable (1,264,000) 80,000
Deferred compensation - (1,785,000)
Accrued expenses and other liabilities 267,000 (626,000)
---------------- ----------------
Net cash used in operating activities (2,731,000) (2,144,000)
---------------- ----------------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (280,000) (898,000)
Investment in limited partnerships (192,000) (732,000)
Sale of subsidiary, net of cash sold 875,000 666,000
Goodwill resulting from acquisition - (158,000)
---------------- ----------------
Net cash provided by (used in) investing activities 403,000 (1,122,000)
---------------- ----------------
Financing activities:
Issuance of treasury stock for option exercise 140,000 -
Sale of treasury stock - 1,050,000
Payment of subscription receivable 121,000 -
Repayment of subordinated debt (93,000) (84,000)
---------------- ----------------
Net cash provided by financing activities 168,000 966,000
---------------- ----------------
Net change in cash and cash equivalents (2,160,000) (2,300,000)
Cash and cash equivalents at beginning of year 10,553,000 8,111,000
---------------- ----------------
Cash and cash equivalents at end of period $ 8,393,000 $ 5,811,000
================ ================
</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 activities of Research
Partners International, Inc. and its subsidiaries (the "Company"). The Company
is primarily engaged in the following segments: full service retail and
discounted retail. These segments provide securities brokerage, investment
banking and trading services for individuals and corporations through the
Company's wholly owned subsidiaries.
In June 1999, Shochet Holding Corp. ("Shochet Holding"), a wholly owned
subsidiary of the Company, entered into a letter of intent with Gaines, Berland
Inc. for the public sale of its common stock. On November 30, 1999, in a
corporate reorganization, Shochet Holding acquired all of the outstanding common
stock of Shochet Securities Inc. ("Shochet Securities") from the Company in
exchange for 1,200,000 shares of Shochet Holding's common stock. The acquisition
was accounted for in a manner similar to a pooling of interests since both
Shochet Holding and Shochet Securities were under common control.
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, 1999, 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, 1999, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. Segment and Geographic Area Data and Discontinued Operations
The Company currently operates in two principal segments: Full Service Retail
and Discounted Retail Brokerage. Each segment is managed separately based on
types of products and services offered and the related client bases. The Company
evaluates the performance of its segments based primarily on income before
income taxes.
o Full Service Retail - provides full service securities brokerage and
trading services, through GKN Securities Corp. ("GKN"), to a clientele
which primarily consists of individuals who invest in OTC equity
securities.
7
<PAGE>
o Discounted Retail - provides full service discount brokerage services,
through Shochet Securities, to a clientele consisting primarily of retired
individuals who invest in exchange-listed equity securities, fixed income
securities and mutual funds.
On June 25, 1999, the Company discontinued the operations of the Institutional
and Research segment and sold certain assets, including the name "Southeast
Research Partners", of the discontinued segment to an unaffiliated third party.
The segment had $4,075,000 and $6,845,000 in gross revenues for the nine months
ended October 31, 1999 and 1998, respectively. Southeast Research Partners,
Inc., which provided the institutional brokerage and research services was
re-named EarlyBirdCapital.com Inc. ("EarlyBird").
In fiscal 2000, management segregated the operations of the On-site Day Trading
segment which had previously been included in the results of the Discounted
Retail segment. During the quarter ended July 31, 1999, the Company discontinued
the operations of the On-site Day Trading segment. The segment had $153,000 and
$30,000 in gross revenues for the nine months ended October 31, 1999 and 1998,
respectively.
The Company allocates to segments, certain overhead expenses based upon
specified agreed-upon amounts. Certain of the segments incur interest expense on
subordinated debt payable to the Company at contract rates. All such amounts are
eliminated in consolidation. Operating and balance sheet data for both
discontinued segments is not separately disclosed, but included as "other" in
the following segment information.
<TABLE>
<CAPTION>
Eliminations
Full Service Discounted and
Retail Retail all other Total
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Three months ended:
October 31, 1999
Revenues from external sources $ 5,823,000 $ 1,672,000 $ 41,000 $ 7,536,000
Intersegment revenues $ 57,000 $ - $ (57,000) $ -
Loss before income taxes $ (2,831,000) $ (324,000) $ (350,000) $ (3,505,000)
October 31, 1998:
Revenues from external sources $ 2,192,000 $ 1,713,000 $ 741,000 $ 4,646,000
Intersegment revenues $ 57,000 $ - $ (57,000) $ -
(Loss) income before income taxes $ (5,855,000) $ (112,000) $ 550,000 $ (5,417,000)
Nine months ended:
October 31, 1999
Revenues from external sources $ 25,275,000 $ 6,002,000 $ 1,339,000 $ 32,616,000
Intersegment revenues $ 171,000 $ - $ (171,000) $ -
(Loss) income before income taxes $ (3,237,000) $ (644,000) $ 869,000 $ (3,012,000)
October 31, 1998
Revenues from external sources $ 18,903,000 $ 5,610,000 $ 2,952,000 $ 27,465,000
Intersegment revenues $ 171,000 $ - $ (171,000) $ -
(Loss) income before income taxes $ (9,496,000) $ (53,000) $ 2,052,000 $ (7,497,000)
Balance Sheet data:
October 31, 1999
Segment assets $ 9,128,000 $ 3,820,000 $ 8,982,000 $ 21,930,000
January 31, 1999
Segment assets $ 11,427,000 $ 3,915,000 $ 12,938,000 $ 28,280,000
</TABLE>
Included in "other" in the segment assets data above is $576,000 in deferred
costs for EarlyBird, which is still in its developmental stage.
8
<PAGE>
The following is a reconciliation of the Company's reported loss before
provision for income taxes to the Company's consolidated totals:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Total loss before provision for
income taxes for reported segments $ (3,155,000) $ (5,967,000) $ (3,881,000) $ (9,549,000)
All other (loss) income (687,000) 104,000 (393,000) 1,837,000
Consolidation/elimination 337,000 446,000 1,262,000 215,000
-------------- --------------- -------------- ---------------
Total loss before provision for
income taxes $ (3,505,000) $ (5,417,000) $ (3,012,000) $ (7,497,000)
============== =============== =============== ===============
</TABLE>
The Company's principal operations are located in the United States. The Company
maintains an office in Europe. Gross revenues from operations in Europe
represent less than 4% of the Company's overall revenues.
3. Net Capital Requirements
GKN, EarlyBird and Shochet Securities, 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, EarlyBird and Shochet
Securities 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, 1999, GKN had
net capital of $1,680,000.
EarlyBird 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, 1999, EarlyBird had net capital of $ 645,000 and
a net capital requirement of $100,000. EarlyBird's net capital ratio at October
31, 1999, was 0.03 to 1.
Shochet Securities has also elected to compute net capital under the standard
aggregate indebtedness method permitted by the net capital rule. At October 31,
1999, Shochet Securities had net capital of $496,000 and a net capital
requirement of $100,000. Shochet Securities' net capital ratio at October 31,
1999, was 1.50 to 1.
9
<PAGE>
4. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted EPS:
Loss from continuing operations $ (3,647,000) $ (3,687,000) $ (3,189,000) $ (4,989,000)
Loss from discontinued operations - (633,000) (1,537,000) (1,002,000)
------------- ------------- ------------- --------------
Net loss $ (3,647,000) $ (4,320,000) $ (4,726,000) $ (5,991,000)
============= ============= ============= ==============
Denominator for basic EPS 8,623,180 8,211,986 8,565,581 8,137,822
------------- ------------- ------------- --------------
Denominator for diluted EPS 8,623,180 8,211,986 8,565,581 8,137,822
============= ============= ============= ==============
Basic EPS from:
Loss from continuing operations $ (0.42) $ (0.45) $ (0.37) $ (0.62)
Loss from discontinued operations - (0.08) (0.18) (0.12)
------------- ------------- ------------- --------------
Net loss $ (0.42) $ (0.53) $ (0.55) $ (0.74)
============= ============ ============= =============
Diluted EPS from:
Loss from continuing operations $ (0.42) $ (0.45) $ (0.37) $ (0.62)
Loss from discontinued operations - (0.08) (0.18) (0.12)
------------- ------------- ------------- --------------
Net loss $ (0.42) $ (0.53) $ (0.55) $ (0.74)
============= ============ ============= =============
</TABLE>
5. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine months ended
October 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash paid for:
Income taxes $ 187,000 $ 219,000
Interest $ - $ 9,000
Non-cash financing transactions:
Treasury stock issued
- for compensation plan $ 204,000 $ 60,000
- to 401(k) plan $ 81,000 $ -
- to deferred compensation plan $ 60,000 $ -
</TABLE>
6. Commitments and Contingencies
The Company's broker-dealer subsidiaries are involved in various legal
proceedings arising from its securities activities. Management believes that
resolution of these proceedings will have no material adverse effect on the
Company's consolidated financial position or results of operations.
10
<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 loss for the three and nine months ended October
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net loss $ (3,647,000) $ (4,320,000) $ (4,726,000) $ (5,991,000)
Other comprehensive income (loss):
Foreign currency translation
adjustments 13,000 41,000 (6,000) 30,000
-------------- --------------- -------------- ---------------
Total comprehensive loss $ (3,634,000) $ (4,279,000) $ (4,732,000) $ (5,961,000)
============== =============== ============== ===============
</TABLE>
8. Subsequent Events
In August 1999, Shochet Securities and certain of its employees were found
jointly and severally liable with respect to an arbitration claim by a former
customer against Shochet Securities and certain past and present employees
during the period from 1995 through November 1996. The plaintiff was awarded
approximately $211,000 in compensatory and punitive damages, interest and
expenses. In November 1999, Shochet Securities settled the customer's claim for
attorney's fees of $200,000. The total amount of $411,000 was paid by the
Company on Shochet Securities' behalf. The Company believes that it has a claim
against the former owners of Shochet Securities for reimbursement of the
settlement amount, pursuant to an indemnification agreement. While the Company
intends to vigorously pursue payment of the settlement amount, there can be no
assurance as to its ultimate collection. At October 31, 1999, management
recorded a reserve against possible future losses from this settlement of
$225,000.
On December 8, 1999, Shochet Holding filed a registration statement on Form SB-2
with the SEC in connection with its plan for the public sale of its common
stock.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the consolidated results of operations and financial
condition of Research Partners International, 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 our company's Fiscal
1999 Annual Report on Form 10-K.
Business Environment
Our primary business activities, 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, 1999, continued to enjoy the benefits of favorable
market conditions which have existed through much of fiscal year 2000 to date.
This compares with the negative effects of a volatile market overseas which
plagued the U.S. economy for much of fiscal 1999.
Our company's focus on a return to profitability led to the decision to
discontinue the On-Site Day Trading segment which had proven unprofitable. In
addition, the Institutional and Research segment was sold to an unaffiliated
third party through a sale of certain assets, including the segment's trade
name. This sale allows us to benefit from on-going research services, through an
arrangement with the buyer, while significantly reducing overhead expenses. The
sale occurred on June 25, 1999, and we anticipate continuing decreases in our
expenses during the remainder of fiscal 2000. The results of operations of both
the On-site Day Trading and the Institutional and Research segments, as well as
the loss on the sale of the Institutional and Research segment have been
separately disclosed in the statement of operations as discontinued operations.
The results of operations for the nine months ended October 31, 1999 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
Results of Operations
Three Months Ended October 31, 1999 vs. Three Months Ended October 31, 1998
Net loss for the three months ended October 31, 1999 was $3,647,000 as compared
with $4,320,000 for the three months ended October 31, 1998. Loss from
continuing operations for the fiscal 2000 quarter was $3,647,000 as compared
with $3,687,000 for the comparable fiscal 1999 quarter. Basic and diluted loss
per share of common stock was $0.42 for the third quarter of fiscal 2000 as
compared to $0.53 for the fiscal 1999 quarter. Basic and diluted loss from
continuing operations per share of common stock was $0.42 for the third quarter
of fiscal 2000 as compared to $0.45 for the fiscal 1999 quarter.
Revenues
Total revenues increased by 62% to $7,536,000 for the third quarter of fiscal
2000, mainly as a result of an increase of commission revenues and investment
banking fees and decreased losses from principal transactions, offset by a
decrease in other income.
12
<PAGE>
Commission revenues increased by $2,237,000, or 43%, in the third quarter.
Trading volume increased 28% and was augmented by a 12% increase in average
commissions per ticket, resulting in part from increased mutual fund and
insurance annuity business.
Investment banking revenues increased by $539,000 to $579,000 for the third
quarter of fiscal 2000. During the third quarter of fiscal 2000 our company
raised $2,965,000 for corporate clients through one private placement as
compared to $700,000 raised in the third quarter of fiscal 1999 also through one
private placement. The increase is attributable to greater deal fees generated
and an increase in fees generated from investment advisory contracts.
Losses from principal transactions decreased by $647,000 or 39% for the third
quarter of fiscal 2000 from the third quarter of fiscal 1999. Investment account
losses were $292,000 and $953,000 for the quarters ended October 31, 1999 and
1998, respectively. Market making activities generated $721,000 and $707,000 in
losses for the third quarter of fiscal 2000 and 1999, respectively.
Interest income increased 35% to $406,000 in fiscal 2000 as a result of
increased interest on customer balances held at our clearing firm.
Other revenues decreased 83% to $130,000 in fiscal 2000 from $768,000 in fiscal
1999 The decrease is attributable to a gain on the sale of one of our company's
Swiss subsidiaries in the third quarter of fiscal 1999.
Expenses
Total expenses for the third quarter in fiscal 2000 were $11,041,000, a 10%
increase from the same quarter in fiscal 1999. The increase is attributable to
increases in compensation and benefits, brokerage, clearing and exchange fees
and professional fees, offset by decreased communications, business development
and other expenses. As a percentage of revenue, expenses decreased from 217% in
the fiscal 1999 quarter to 147% in the fiscal 2000 quarter.
Compensation and benefits expense increased 22% to $6,436,000. These expenses
are primarily variable as commissions to brokers are paid as a percentage of
commission revenues generated.
Occupancy and equipment expense in the fiscal 2000 quarter was fairly consistent
with the fiscal 1999 quarter as office closings resulted in one-time charges and
equipment costs increased in other branches.
Communications expenses decreased 20% or $210,000 primarily as a result of
office closings.
Brokerage, clearing and exchange fees increased by $105,000 or 17%. This
increase is consistent with the increase in trade volume.
Professional fees increased by $568,000 or 118%, mainly as a result of increased
consulting and legal fees.
Business development expenses decreased by 27% to $205,000 due to decreased
promotional activities.
Other expenses decreased by $602,000, or 56% primarily due to decreased charges
for errors and unsecured debits.
13
<PAGE>
Income taxes
For the quarter ended October 31, 1999, our company incurred no income tax
expense, other than tax on capital for state and local purposes, due to our net
operating loss for the year to date. Additionally, our company takes a full
valuation on deferred tax assets primarily resulting from net operating loss
carryforwards.
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 8,623,180 for the third quarter
of fiscal 2000, compared with 8,211,986 in fiscal 1999. These changes are
primarily attributable to the sale of treasury stock to a Swiss investor which
occurred during October, 1998 and stock awards granted to employees in fiscal
2000.
Nine Months Ended October 31, 1999 vs. Nine Months Ended October 31, 1998
Net loss for the nine months ended October 31, 1999 was $4,726,000 as compared
with $5,991,000 for the nine months ended October 31, 1998. Loss from continuing
operations for the nine months ended October 31, 1999 was $3,189,000 as compared
with a loss of $4,989,000 for the same period in fiscal 1999. Basic and diluted
loss per share of common stock was $0.55 for the first nine months of fiscal
2000 as compared to $0.74 for the first nine months of fiscal 1999. Basic and
diluted loss from continuing operations per common share was $0.37 for the first
nine months of fiscal 2000 and $0.62 per common share for the first nine months
of fiscal 1999.
Revenues
Total revenues increased by 19% to $32,616,000 for the first nine months of
fiscal 2000, mainly as a result of increased commission revenue and investment
banking fees and decreased losses from principal transactions, offset by a
decrease in other revenue.
Commission revenues increased by $3,870,000, or 16%, in the nine months period
ended October 31, 1999. Trade volume increased 31% while average commissions per
ticket decreased 12%. The decrease in average commissions per ticket is a result
of the competitive impact of electronic brokers.
Investment banking revenues increased by $1,066,000, or 56%. During the first
nine months of fiscal 2000 our company raised $28.2 million for corporate
clients through one public offering and five private placements as compared to
$24.1 million raised in the comparable period in fiscal 1999 through two public
offerings and two private placements. The increase is attributable to greater
deal management fees and to an increase in fees generated from investment
advisory contracts.
Losses from principal transactions decreased 58% for the nine months ended
October 31, 1999. Investment account losses totaled $213,000 and $55,000 for the
first nine months of fiscal 2000 and fiscal 1999, respectively. Market making
activities generated $707,000 and $2,159,000 in losses for the nine months ended
October 31, 1999 and 1998, respectively.
Interest income increased 25% to $1,163,000 in fiscal 2000 as a result of
increased interest on customer balances held at our clearing firm.
Other revenues decreased 55% to $1,079,000 from $2,393,000 in fiscal 1999 when
our company had a gain on the sale of one of our Swiss subsidiaries.
Additionally, merchant banking revenues decreased as a result of a smaller
investment in a limited partnership.
14
<PAGE>
Expenses
Total expenses for the nine months ended October 31, 1999 were $35,628,000, a 2%
increase from the same period in fiscal 1999. As a percentage of revenues, these
expenses decreased from 127% in fiscal 1999 to 109% in fiscal 2000.
Compensation and benefits expense increased 7% or $1,394,000 from fiscal 1999 to
fiscal 2000. Higher commission expense was offset by a decrease in personnel
costs associated with closed offices.
Occupancy and equipment expense in fiscal 2000 was fairly consistent with fiscal
1999 as office closings resulted in one-time charges and equipment costs
increased in other branches.
Communications expense decreased 18% or $550,000 for the nine months ended
October 31, 1999 primarily as a result of office closings.
The 20% or $417,000 increase in brokerage, clearing and other fees is consistent
with the increase in trade volume.
Professional fees increased $752,000 or 56% due to increased litigation costs
and consulting fees.
Business development expense decreased 41% to $708,000 in fiscal 2000 from
$1,209,000 in fiscal 1999 due to decreased promotional activities.
Other expense decreased $932,000 or $43% in the first nine months of fiscal 2000
as compared with the same period in fiscal 1999 due primarily to credits
resulting from the collection of previously written-off loans from terminated
brokers.
Income taxes
For the nine months ended October 31, 1999, our company incurred no income tax
expense, other than tax on capital for state and local purposes, due to our net
operating loss for the year to date. Additionally, our company takes a full
valuation on deferred tax assets primarily resulting from net operating loss
carryforwards.
Weighted average common shares outstanding
The average number of common shares outstanding used in the computation of basic
and diluted loss per common share was 8,623,180 for the first nine months of
fiscal 2000, compared with 8,565,581 in fiscal 1999. This change is primarily
attributable to the option exercises and stock awards, offset by stock award
forfeitures.
Liquidity and Capital Resources
Approximately 54% of our company's assets at October 31, 1999 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 our clearing broker, turn over rapidly.
As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. Our inventory of market-making securities is
readily marketable; however, holding large blocks of the same security may limit
liquidity and prevent realization of full market value for the securities.
Securities owned, but not readily marketable, represent underwriter warrants and
the securities underlying such warrants. The liquidity of these securities is
15
<PAGE>
limited. A relatively small percentage of our total assets are fixed. The total
assets or the individual components of total assets may vary significantly from
period to period because of changes relating to customer demand, economic and
market conditions, and proprietary trading strategies.
Our brokerage subsidiaries, GKN, Shochet Securities and EarlyBird, our company's
domestic operating broker-dealer subsidiaries, are subject to the net capital
rules of the NASD and the SEC. They and our company, therefore, are subject to
certain restrictions on the use of capital and its related liquidity. GKN's,
Shochet Securities' and EarlyBird's respective net capital positions as of
October 31, 1999, were $1,680,000, $496,000, and $645,000, which were
$1,430,000, $396,000 and $545,000, respectively, in excess of their respective
net capital requirements.
In conjunction with our corporate headquarters relocation in New York we have
significantly upgraded our technological infrastructure. The combined costs of
the move and the technological investment were financed through a series of
operating leases. These leases total $4.8 million. As security for these leases,
we arranged for a standby letter of credit. As collateral for the standby letter
of credit, we have placed $2.5 million in a restricted cash escrow account with
the provider.
Our overall capital and funding needs are continually reviewed to ensure that
our capital base can support the estimated needs of its business units. These
reviews take into account business needs as well as regulatory capital
requirements of the subsidiaries. Based upon these reviews, management believes
that our capital structure is adequate for current operations and reasonably
foreseeable future needs.
EarlyBird, still in its developmental stage, intends to offer services over the
internet. Launching this enterprise, as well as others, may require us to raise
additional capital. On December 8, 1999, Shochet Holding, the direct parent of
Shochet Securities and a wholly owned subsidiary of our company, filed a
registration statement on Form SB-2 with the SEC in connection with its plan for
the public sale of its common stock. Shochet Holding, which intends to offer
services over the internet, intends to finance its plans for expansion through
this external source of capital.
Other Matters
Year 2000 Computer Issue
We initiated a firm-wide program to address the "Year 2000 Computer Issue" in
order to prepare our computer systems and applications for properly processing
dates after December 31, 1999. This program consists of a series of steps to
identify all critical & non-critical systems, determine Y2K compliance through
inquiries and testing and change non-compliant systems. Our program was
sbustantially in place by December 1, 1999.
We have completed our identification phase. Third party vendors and service
providers provide all of our computer programs and services. Most of the
programs were purchased after the year 2000 Computer Issue became widely
recognized. We have contacted approximately 99% of our third party vendors and
service providers and have received written confirmation from approximately 99%
of them that the Year 2000 Computer Issue has been appropriately managed.
Schroder, our clearing firm, is our largest and most important computer services
related vendor. Schroder has provided us 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 us from unforeseen problems in
our own computer systems, third-party vendors and service providers, and from
third parties with whom we deal. We are continuing to communicate with our
16
<PAGE>
third-party vendors and service providers to determine the likely extent to
which we may be affected by third parties' Year 2000 plans and target dates. In
this regard, while we do 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 we rely will be remediated on a timely basis, or that a
failure to remediate by another party, would not have a material adverse effect
on us. Such failures could have a material impact on our ability to conduct
business.
We are developing contingency plans in the event that significant external
parties fail to achieve their Year 2000 plans by the targeted dates. We
anticipate that beginning on January 1, 2000, Year 2000 related failures may
result in sporadic disruption of communications, power or other external
infrastructure worldwide that could compromise the timely performance of
specific business functions and/or limit the flow of business opportunities
across the organization. We intend to have contingency plans and crisis
management teams in place to coordinate our response to those events likely to
present material risks to us. The process is currently underway, but there can
be no assurance that any such contingency plans will fully mitigate the effects
of any third party failure.
Based on information currently available, we do not expect our Year 2000
expenditures for fiscal 2000 to be a material cost to us. To date, we have spent
less than $150,000, and expect that the entire program will not exceed $200,000.
The expected costs of the Year 2000 program are based on management's current
estimates; however, actual results could differ materially from those plans.
Quantitative and qualitative disclosures about market risk
Our market making, investing and underwriting activities often involve the
purchase, sale or short sale of securities as principal. Such activities subject
our capital to significant risks from markets that may be characterized by
relative illiquidity or may be particularly susceptible to rapid fluctuations in
liquidity. Such market conditions could limit our ability to resell securities
purchased or to purchase securities sold short. These activities subject our
capital to significant risks, including market, credit counterparty and
liquidity risks. Market risk relates to the risk of fluctuating values based on
market prices without action on our part. Our primary credit risk is settlement
or counterparty risk, which relates to whether a counterparty will fulfill its
contractual obligations, such as delivery of securities or payment of funds.
Liquidity risk relates to our inability to liquidate assets or redirect the
deployment of assets contained in illiquid investments. In addition, our market
and liquidity risks associated with asset revaluation are increased because
these risks associated with asset revaluation are increases because these risks
for us are concentrated and thus subject us to increased risks if market
conditions deteriorate.
New Accounting Pronouncement
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1. "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". SOP 98-1, effective for financial
statements for fiscal years beginning after December 15, 1998, requires that
entities capitalize certain internal-use software costs once certain criteria
are met and amortize those costs over the estimated useful life of the software.
Our financial statements reflect the implementation of SOP 98-1.
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 was originally
effective for fiscal quarters beginning after June 15, 1999; however, in June
1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and
17
<PAGE>
Hedging Activities - Deferral of the Effective Date of FASB Statement No.133"
which amended SFAS 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. We expect to adopt this standard when
required in fiscal year 2001. The effect of SFAS 133 is not expected to be
material to our financial statement disclosures.
Safe Harbor Cautionary Statement
We occasionally make forward-looking statements such as forecasts and
projections of expected future performance or statements of our plans and
objectives. When used in this quarterly report and in future filings with the
SEC, in our press releases and in oral statements made with the approval an
authorized executive officer, the words or phrases "will likely result," "the
Company expects," "we intend or expect," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions, including
confirmations by one of our authorized executive officers of any such
expressions made by a third party regarding us with respect to the company are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. We want to caution you not to
place undue reliance on these forward-looking statements, each of which speaks
only as of the date made. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors that
could affect our results of operations and cause its results to differ from
these statements include:
o the volatility and price level of the securities markets
o the volume, size and timing of securities transactions
o the demand for investment banking services
o the level and volatility of interest rates
o the availability of credit
o legislation affecting the business and financial communities, and
o the economy in general.
For a more complete discussion of these and other factors, see our registration
statement filed on Form S-1, as amended (No. 333-05273). We have no obligation
to publicly release the result of any revisions that may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of these statements.
18
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Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule BD
(b) Reports on Form 8-K:
None
19
<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 14, 1999 /s/ David M. Nussbaum
--------------------------------
David M. Nussbaum
Chairman of the Board
/s/ Peter R. Kent
--------------------------------
Peter R. Kent
President
20
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RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Exhibit Index
Number Description
27 Financial Data Schedule BD (10/31/99)
21
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 8,393,000
<RECEIVABLES> 1,592,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 5,139,000
<PP&E> 1,818,000
<TOTAL-ASSETS> 21,930,000
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 115,000
<LONG-TERM> 0
0
0
<COMMON> 1,000
<OTHER-SE> 17,226,000
<TOTAL-LIABILITY-AND-EQUITY> 21,930,000
<TRADING-REVENUE> (920,000)
<INTEREST-DIVIDENDS> 1,163,000
<COMMISSIONS> 28,312,000
<INVESTMENT-BANKING-REVENUES> 2,982,000
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 0
<COMPENSATION> 22,806,000
<INCOME-PRETAX> (3,012,000)
<INCOME-PRE-EXTRAORDINARY> (3,189,000)
<EXTRAORDINARY> (1,537,000)
<CHANGES> 0
<NET-INCOME> (1,537,000)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
