U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
Commission File Number 33-70334-A
INTERNATIONAL ASSETS HOLDING CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 59-2921318
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
250 Park Avenue South, Suite 200
Winter Park, FL 32789
(Address of principal executive offices)
(407) 629-1400
(Issuer's telephone number)
NA
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ].
The number of shares outstanding of Common Stock was 1,476,259 as of February
10, 1999.
Transitional small business disclosure format Yes [ ] No [X]
<PAGE>
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31,
1998 and September 30, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
Three Months ended December 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31, September 30,
Assets 1998 1998
------ ---- ----
Cash $ 355,577 617,628
Cash deposits with clearing broker 3,114,416 2,424,486
Foreign currency 3,955 3,961
Receivable from clearing broker, net 0 791,753
Other receivables 106,043 63,523
Securities owned, at market value 2,826,069 2,014,734
Investment in Joint Venture 18,430 0
Receivable from Joint Venture 5,168 0
Income taxes receivable 0 67,398
Deferred income tax benefit 89,744 127,065
Property and equipment, at cost:
Leasehold improvements 52,953 52,953
Furniture and equipment 911,831 902,719
-------------------- --------------------
964,784 955,672
Less accumulated depreciation and
amortization (642,686) (605,059)
-------------------- --------------------
Net property and equipment 322,098 350,613
Other assets, net of accumulated amortization
of $125,005 in December 1998 and $118,504 in
September 1998 179,311 98,920
==================== ====================
Total $ 7,020,811 6,560,081
assets
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31, September 30,
Liabilities and Stockholders' Equity 1998 1998
------------------------------------ ---- ----
Liabilities:
Foreign currency sold, but not yet purchased $ 7,811 7,206
Securities sold, but not yet purchased, at market value 512,173 290,403
Payable to clearing broker, net 56,519 0
Accounts payable 76,725 72,600
Accrued employee compensation and benefits 359,239 291,536
Accrued expenses 245,135 352,544
Income taxes payable 35,438 0
Deferred income taxes 12,218 16,797
Other liabilities 116,640 117,845
-------------------- --------------------
Total liabilities 1,421,898 1,148,931
-------------------- --------------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000
shares; issued and outstanding -0- shares - -
Common stock, $.01 par value. Authorized 3,000,000
shares; issued and outstanding 1,476,259 shares in 14,763 14,816
December
1998 and 1,481,574 shares in September 1998
Additional paid-in capital 3,553,163 3,564,648
Retained earnings 2,030,987 1,831,686
-------------------- --------------------
Total stockholders' 5,598,913 5,411,150
equity
==================== ====================
Total liabilities and stockholders' $ 7,020,811 6,560,081
equity
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997
---- ----
Revenues:
Commissions $ 1,488,626 2,063,134
Net dealer inventory and investment gains 914,533 486,041
Management and investment advisory fees 23,976 14,073
Account maintenance fees 28,034 31,278
Interest and dividends 56,153 78,870
Loss from joint venture (1,570) 0
Other 10,065 12,803
----------------- ----------------
Total revenues 2,519,817 2,686,199
----------------- ----------------
Expenses:
Commissions and clearing fees 991,334 1,187,301
Employees compensation and benefits 653,378 524,576
Communications 62,273 97,892
Promotion 156,883 359,380
Occupancy and equipment rental 104,559 70,653
Interest 201 479
Professional fees 25,561 210,898
Insurance 46,737 43,300
Depreciation and amortization 44,128 46,957
Other operating expenses 98,526 340,741
----------------- ----------------
Total expenses 2,183,580 2,882,177
----------------- ----------------
Income (loss) before income taxes 336,237 (195,978)
Income tax expense (benefit) 135,578 (61,276)
----------------- ----------------
Net income (loss) 200,659 (134,702)
================= ================
Earnings (loss) per share:
Basic $ .14 (.09)
Diluted $ .14 (.09)
Weighted average number of common shares outstanding:
Basic 1,476,596 1,548,962
Diluted 1,482,685 1,548,962
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 200,659 (134,702)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 44,128 46,957
Deferred income taxes 32,742 (89,180)
Loss from joint venture 1,570 0
Cash provided by (used for) changes in:
Receivable from clearing broker, net 791,753 405,050
Other receivables (42,520) (94,315)
Securities owned, at market value (811,335) (46,177)
Receivable from joint venture (5,168) 0
Income tax receivable 67,398 0
Other assets (86,892) 20,868
Securities sold, but not yet purchased, at market value 221,770 (396,068)
Payable to clearing broker, net 56,519 360,006
Accounts payable 4,125 128,414
Accrued employee compensation and benefits 67,703 (562,572)
Accrued expenses (107,409) 111,194
Income taxes payable 35,438 27,904
Other liabilities (1,205) 815
------------------ -----------------
Net cash provided by (used for) operating activities 469,276 (221,806)
------------------ -----------------
Cash flows from investing activities:
Investment in joint venture (20,000) 0
Acquisition of property, equipment and other assets (9,112) (38,412)
------------------ -----------------
Net cash used for investing activities $ (29,112) (38,412)
------------------ -----------------
(continued)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
For the Three Months Ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997
---- ----
Cash flows from financing activities:
Acquisition of common shares related to repurchase program 0 (22,822)
Acquisition of common shares related to terminated
ESOP and RSP participants (12,896) 0
------------------ -----------------
Net cash used for financing activities (12,896) (22,822)
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 427,268 (283,040)
Cash and cash equivalents at beginning of period 3,038,869 2,962,847
------------------ -----------------
Cash and cash equivalents at end of period $ 3,466,137 2,679,807
================== =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 201 479
================== =================
Income taxes paid $ 1,100 0
================== =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
December 31, 1998 and 1997
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions and requirements of Form 10-QSB
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations, and cash flows
in conformity with generally accepted accounting principles. In the opinion of
Management, such financial statements reflect all adjustments (consisting of
normal recurring items) necessary for a fair statement of the results of
operations, cash flows and financial position for the interim periods presented.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the full year. These condensed consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ending September 30, 1998, filed
on Form 10-KSB (SEC File Number 33-70334-A).
As used in this Form 10-QSB, the term "Company" refers, unless the context
requires otherwise, to International Assets Holding Corporation and its five
wholly owned subsidiaries; International Assets Advisory Corp. ("IAAC"), Global
Assets Advisors, Inc. ("GAA"), International Financial Products, Inc. ("IFP"),
International Trader Association, Inc. ("ITA") and International Asset
Management Corp. ("IAMC"). All significant intercompany balances and
transactions have been eliminated in consolidation.
(2) Reclassifications
Certain prior year amounts have been reclassified to conform to fiscal year end
1998 presentation. These changes had no impact on previously reported results of
operations or stockholders' equity.
(3) Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share for the three months ended December 31, 1998 and
1997, have been computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted earnings per share for the three
months ended December 31, 1998 has been computed by dividing net income by the
weighted average number of common shares and dilutive potential common shares
outstanding. Diluted loss per share for the three months ended December 31, 1997
is the same as basic loss per share because of the anti-dilutive impact of the
potential common shares, due to the net loss for the period.
8
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
Options to purchase 547,500 shares of common stock were excluded from the
calculation of diluted earnings per share for the three months ended
December 31, 1998 because their exercise prices exceeded the average
market price of common shares for the period. All options were excluded
from the calculation of diluted loss per share for the three months ended
December 31, 1997, because their inclusion would have been antidilutive.
(4) Securities Owned and Securities Sold, But Not Yet Purchased
Securities owned and Securities sold, but not yet purchased at December
31, 1998 and September 30, 1998 consist of trading and investment
securities at quoted market values as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sold, but not
Owned yet purchased
December 31, 1998:
Obligations of U.S. Government $ 360,785 -
Common stock and American Depository Receipts 2,022,579 483,663
Corporate and municipal bonds 140,884 20,321
Foreign government obligations 89,108 -
Unit investment trusts, mutual funds and other
investments 212,713 8,189
----------- ---------
Total $ 2,826,069 512,173
September 30, 1998:
Obligations of U.S. Government $ 373,841 -
Common stock and American Depository Receipts 836,057 290,403
Corporate and municipal bonds 341,066 -
Foreign government obligations 26,713 -
Unit investment trusts, mutual funds and other
investments 437,057 -
---------- ---------
Total $ 2,014,734 290,403
</TABLE>
(5) Investment in Joint Venture
In October 1998, the Company made an initial $20,000 capital contribution
to International Assets New York, LLC, a 50/50 joint venture. The Company
has recorded this investment under the equity method of accounting. For
the three months ended December 31, 1998 the Company has recorded a loss
of $1,570, for 50% of the joint venture loss for this period. As of
December 31, 1998 the Company has a receivable from the joint venture of
$5,168 related to joint venture expenditures incurred by the Company for
reimbursement by the joint venture.
9
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) Leases
The Company occupies leased office space of approximately 13,815 square
feet at 250 Park Avenue South, Winter Park, Florida. The expiration date
of the office lease is May 31, 2001. The lease includes an option to
renew for an additional three years at a rental rate determined by the
landlord.
The Company is obligated under various noncancelable operating leases for
the rental of its office facilities and certain office equipment. Rent
expense associated with operating leases amounted to $80,253 and $46,189
for the three months ended December 31, 1998, and 1997, respectively. The
future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are as follows:
Fiscal Year (12 month period) Ending September 30,
---------------------------------------------------
1999 319,100
2000 330,400
2001 236,500
2002 29,700
2003 27,700
Thereafter 3,300
________
Total future minimum lease payments $946,700
________
(7) Stock Repurchase Program
The Board of Directors has authorized the Company to continue its
repurchase of up to $500,000 in shares of the Company's common stock in
the open market through the year ended September 30, 1999. The stock
purchases will be made in the open market from time to time as market
conditions permit. The Company is required to comply with Rule 10b-18 and
Regulation M of the Securities and Exchange Commission which regulate the
specific terms in which shares may be repurchased. Since the inception of
the repurchase program on March 13, 1996 the Company has repurchased and
retired a total of 35,630 shares in the open market at a total cost of
$129,233.
In addition, concurrent with the open market repurchase program, the
Company has repurchased and retired an additional 95,072 shares from
terminated participants of the Company's Employee Stock Ownership Plan
and Retirement Savings Plan for a total cost of $256,893.
In total the Company has repurchased 130,702 shares for a total cost of
$386,126 since March 13, 1996.
10
<PAGE>
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(8) Commitments and Contingent Liabilities
The Company is party to certain litigation as of December 31, 1998 which
relates primarily to matters arising in the ordinary course of business.
Management of the Company anticipates that the final resolution of these
items will not have a material adverse effect on the Company's
consolidated financial statements.
(9) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is currently reviewing SFAS
133 to see what impact, if any, it will have on the Company.
(10) Subsequent Events
On January 6, 1999 two qualified employee incentive stock options for
5,000 shares each, with an exercise price of $1.50 per share were
authorized. The two 5,000 share options granted on January 6, 1999 have a
10 year term and vest at 20% per year beginning three years from the date
of grant.
On January 6, 1999 one non-qualified incentive stock option for 10,000
shares, with an exercise price of $1.50 per share was authorized. The
10,000 share option granted on January 6, 1999 has a 10 year term and
vests at 20% per year beginning one year from the date of grant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
Certain statements in this discussion may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks
including, but not limited to, changes in general economic and business
conditions, interest rate and securities market fluctuations, competition
from within and from outside the investment brokerage industry, new products
and services in the investment brokerage industry, changing trends in
customer profiles, Year 2000 issues and changes in laws and regulation
applicable to the Company. Although the Company believes that its
11
<PAGE>
expectations with respect to the forward-looking statements are based upon
reasonable assumptions within the bounds of its knowledge of its business
and operations, there can be no assurances that the actual results,
performance or achievement of the Company will not differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements.
The Company's assets increased from $6,560,081 at September 30, 1998, to
$7,020,811 at December 31, 1998, or an increase of $460,730. The Company's
liabilities increased from $1,148,931 at September 30, 1998, to $1,421,898
at December 31, 1998, or an increase of $272,967. The increase in the net
assets (assets less liabilities) of $187,763 relates to net income of
$200,659 for the three month fiscal period ended December 31, 1998, net of
costs related to repurchases of the Company's common stock totaling $12,896
for the same period.
The Company's condensed consolidated balance sheet at December 31, 1998,
reflects a net payable to clearing broker, for trades which had not yet
settled for cash, due to the proceeds from the purchase of securities
exceeding the cost of securities sold.
Results of Operations:
The Company's principal activities, securities brokerage and the trading of
and market-making in securities, are highly competitive and extremely
volatile. The earnings of the Company are subject to wide fluctuations since
many factors over which the Company has little or no control, particularly
the overall volume of trading and the volatility and general level of market
prices, may significantly affect its operations.
Three Months Ended December 31, 1998, as Compared to
the Three Months Ended December 31, 1997
The Company's revenues are derived primarily from commissions earned on the
sale of securities and net dealer inventory and investment gains (trading
income) in securities purchased or sold for the Company's account. For the
three months ended December 31, 1998 and 1997, 59% and 77%, respectively, of
the Company's revenues were derived from commissions earned on the sale of
securities, with 36% and 18%, respectively, of revenues coming from net
dealer inventory and investment gains. Total revenues decreased by $166,382,
or 6% to $2,519,817 for the three months ended December 31, 1998 from
$2,686,199 for the same period in 1997. This decrease was primarily
attributable to a $574,508 decrease in commission revenue which was offset
by a $428,492 increase in net dealer inventory and investment gains.
Commission revenue decreased by 28%, or $574,508 to $1,488,626 for the three
months ended December 31, 1998 from $2,063,134 for the same period in 1997.
Revenues from commissions are affected by both retail trading volume and the
12
<PAGE>
dollar amount of retail trades. Based on the number of retail trades
processed, 1998 volume decreased by 33% from 1997 levels. Partially
offsetting this 33% decrease in volume is the 8% increase in the dollar
average of retail trades for 1998 as compared with 1997. The average number
of account executives decreased from an average of 49 for the three months
ended December 31, 1997 compared to an average of 31 for the three months
ended December 31, 1998, or a decrease of 37%.
Net dealer inventory and investment gains increased by $428,492, or 88% to
$914,533 for the three months ended December 31, 1998 as compared to
$486,041 for the same period in 1997. The increase in net dealer inventory
and investment gains is primarily attributable to a 307% increase in
wholesale trading income and a 347% increase in income generated from
Company investment portfolio valuations in the three months ended December
31, 1998 as compared to the same three month period in 1997. The increase in
wholesale trading is attributable to the ongoing development of new
wholesale trading relationships by the Company as well as maintenance of
existing wholesale relationships. Partially offsetting the significant
increases in wholesale trading is a 43% decrease in retail trading income
for the three months ended December 31, 1998 as compared to the same period
in 1997. The Company's retail trading department primarily concentrates on
global securities which it believes are likely to be traded by the Company's
retail clients. By focusing on these types of securities, retail trading
income is more directly related to commission income and order flow.
Revenues from management and investment advisory fees increased by $9,903,
or 70% to $23,976 for the three months ended December 31, 1998 from $14,073
for the same period in 1997. The increase is primarily due an increase in
the dollar amount of fixed fee money under management.
Interest and dividend revenue decreased by $22,717, or 29% to $56,153 for
the three months ended December 31, 1998 from $78,870 in the same period in
1997. This decrease is primarily attributable to a lower average dollar
amount of interest bearing investments held by the Company for the three
month period.
Loss from joint venture of $1,570 for the three months ended December 31,
1998 represents the Company's 50% share of the operating loss from the
activity of International Assets New York, LLC, a 50/50 joint venture with
Lakeside Investments, LLC of New York which began its operations in December
1998.
Total expenses decreased by $698,597, or 24% to $2,183,580 for the three
months ended December 31, 1998 from $2,882,177 in the same period ended
December 31, 1997. The major expenses incurred by the Company relate to
direct costs of its securities operations such as commissions and clearing
fees, employees compensation and benefits, communications and promotion
expense.
Commissions and clearing fees decreased by $195,967, or 17% to $991,334 for
the three months 1998 from $1,187,301 in the same period in 1997. The
13
<PAGE>
decrease in commission expense is directly related to the 28% decrease in
commission revenue and the related 37% decrease in the average number of
account executives for the three month period.
Employees compensation and benefits expense increased by $128,802, or 25% to
$653,378 for the three months ended December 31, 1998 from $524,576 for the
same period in 1997. The increase in employees compensation and benefits
expense is due to the increase in performance based bonus expense and an
increase in the accrual for retirement plan profit sharing expense. The
increase in performance based bonus and retirement plan profit sharing
expense is based on the $336,237 income before income taxes incurred for the
three month period ended December 31, 1998 as compared to the $195,978 loss
before income taxes for the same three month period ended December 31, 1997.
Communications expense decreased by $35,619, or 36% to $62,273 for the three
months ended December 31, 1998 from $97,892 for the same period in 1997.
This decrease is due to decreased telephone and postage expense due to the
corresponding decrease in average account executives from 49 for the three
months ended December 31, 1997 to 31 for the same period in 1998.
Promotion expense decreased by $202,497, or 56% to $156,883 for the three
months ended December 31, 1998 from $359,380 for the same period in 1997.
This decrease is primarily due to the planned reduction of promotion
expenditures for print media, including newsletter publication, lead
generation and the related postage expense.
Occupancy and equipment rental expense increased by $33,906, or 48% to
$104,559 for the three months ended December 31, 1998 from $70,653 in the
same period in 1997. This increase was due to a negotiated, time specific
rent adjustment realized during the three months ended December 31, 1997.
Professional fees decreased by $185,337, or 88% to $25,561 for the three
months ended December 31, 1998 from $210,898 in the same period in 1997.
This decrease is primarily due to significantly higher 1997 legal fees
incurred from a closed 1997 NASD arbitration matter, as discussed in the
Company's 10KSB for the period ended September 30, 1998.
Other operating expenses decreased by $242,215, or 71% to $98,526 for the
three months ended December 31, 1998 from $340,741 in the same period in
1997. Approximately $100,000 of the decrease in other operating expenses is
for the award of the same closed arbitration matter and an additional
$100,000 of the decrease is for partial reimbursement of the claimant's
legal fees also awarded to the claimant in the same matter. Other operating
expenses included various other expenses that decreased from 1997 to 1998.
14
<PAGE>
As a result of the above, the Company is reporting net income of $200,659
for the three months ended December 31, 1998. This is compared to a net loss
of $134,702 for the three months ended December 31, 1997. The Company's
effective income tax rate was approximately 40% for the three months ended
December 31, 1998 compared to the effective income tax benefit of 31% for
the same period in 1997.
Liquidity and Capital Resources
Substantial portions of the Company's assets are liquid. At December 31,
1998, approximately 88% of the Company's assets consisted of cash, cash
equivalents and marketable securities. All assets are financed by the
Company's equity capital, short-term borrowings from securities lending
transactions and other payables.
The Company's wholly owned registered securities broker/dealer subsidiary
IAAC is subject to the requirements of the SEC and the NASD relating to
liquidity and net capital levels. At December 31, 1998, IAAC had net capital
of approximately $2,950,000, which was approximately $2,826,000 in excess of
its minimum net capital requirement at that date.
In the opinion of management, the Company's existing capital and cash flow
from operations will be adequate to meet the Company's capital needs for at
least the next twelve months in light of known and reasonably estimated
trends. In addition, management believes that the Company will be able to
obtain additional short or medium-term financing that may be desirable in
the ordinary conduct of its business. The Company has no plans for
additional financing and there can be no assurance such financing will be
available.
Year 2000 Compliance
The securities industry is, to a significant extent, technologically driven
and dependent. In addition to some internally utilized technological
applications, the Company's businesses are materially dependant upon the
performance of exchanges, market centers, counterparties, customers and
vendors (collectively "the Company's material third parties") who, in turn,
may be heavily reliant on technological applications. The securities
industry is interdependent with each other, strengthened or weakened by the
quality and performance of its attendant information and embedded
technology.
The Company is aware that the Year 2000 provides potential problems with the
programming code in existing computer systems. The Year 2000 problem is
extensive and complex as virtually every computer operation will be affected
to some degree by the change of the two digit year value to 00. The issue is
whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or fail.
The failure or faulty performance of computer systems could potentially have
a far ranging impact on the Company's business such as a diminution in its
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<PAGE>
ability to (a) ascertain information vital to strategic decision making by
both the Company and its customers; (b) perform interest rate and pricing
calculations; (c) execute and settle proprietary and customer transactions;
(d) undertake regulatory surveillance and risk management; (e) maintain
accurate books and records and provide timely reports; (f) maintain
appropriate internal financial operations and accounting; and (g) access
credit facilities for both the Company and its customers.
Accordingly it is necessary for the Company, to the extent reasonably
practicable, to identify the internal computer systems and software which
are likely to have a critical impact on its operations, make an assessment
of its Year 2000 readiness and modify or replace information and embedded
technology as needed. Some of these critical internal data processing
systems include the Company's internal Novel network, sales contact
management software, general ledger accounting software, trading income
calculation software and retail commission tracking programs. Assessment of
these internal programs is primarily completed and final remediation in
process and largely completed. In addition, the Company must make a Year
2000 readiness assessment for the Company's material third parties.
Because the Company utilizes the services of Wexford Clearing Services
Corporation ("Wexford") in its business, data processing system aspects of
the Year 2000 problem related to securities clearing, custody of client
securities, back office operations, cashiering and margin and credit will be
addressed by Wexford (a wholly owned guaranteed subsidiary of Prudential
Securities Incorporated "Prudential"). Although Wexford is the contracting
party for the provision of these critical services, Wexford in fact delivers
those services through the operations of Prudential, a leading registered
broker and dealer. Consequently, it is the readiness of Prudential that is
critical when assessing the Year 2000 compliance of the clearing and
operations capacity of the Company's active broker-dealer. Prudential has
been assessed, by internal industry standards established by the Securities
Industry Association, to be within the top tier of Year 2000 readiness. In
recent industry-wide testing conducted by the Securities Industry
Association, in which Prudential took part, Prudential and other
participants were able to input transactions and send them to the
appropriate markets for execution, confirmation and clearance under
simulated Year 2000 conditions.
Additionally, the Company has assessed the state of readiness of almost all
known technologically oriented service vendors and believes, based on
letters of certification, that the vast majority of these vendors are Year
2000 compliant with the remainder expected to be compliant before April
1999. This determination does not mean that the vast majority of the
Company's material third parties pose no Year 2000 risk to the Company.
First, the Company is relying in large measure on these parties' assessments
of their readiness. Second, there are several vendors, which account for a
substantial portion of the Company's mission critical operations, which may
be partially or largely, but not fully, Year 2000 compliant. Finally,
certain critical third parties, such as exchanges, clearing houses,
16
<PAGE>
depositaries and other service vendors have no direct functional contact
with the Company (as they operate directly with Wexford) but may impact the
Company's operations.
During fiscal year 1997 the Company began the strategic review process as it
relates to the Year 2000 process. The Board of Directors of the Company
approved the Company's Year 2000 plan at its meeting on July 17, 1998. This
plan includes all phases necessary and budgetary consideration for each
fiscal year through the Year 2000.
The Year 2000 remediation plan and process includes (1) identification,
modification and testing of non-compliant Year 2000 code; (2)
identification, inventory, assessment and, if necessary, modification of
internal ad hoc systems or applications that may be material to the
Company's operations; (3) with the exception of counterparties and
customers, documentation of the assessment of the readiness of the Company's
material third parties; and (4) a timetable for completion of all year 2000
plans implementation steps for amendment to the plan as required.
Specifically, the Company intends to test the Year 2000 readiness of its
major vendor for market data and undertake certain disaster recovery
simulations of its systems by April 1999. During the year ended September
30, 1998 the Company incurred approximately $76,000 of costs related to the
Year 2000 problem. During the three months ended December 31, 1998 the
Company incurred approximately $13,700 in costs related to the Year 2000
problem. The Company has budgeted a total of $193,000 for Year 2000 related
costs for the 20 month period from June 1998 through January 2000. These
Year 2000 costs include both capital expenditures and period expenses. This
Year 2000 budget will be funded from the working capital of the Company.
Provided there is an absence of unanticipated critical events, the Company
does not expect Year 2000 costs to have a material effect on its operating
results, financial condition or cash flows.
At this stage the Company has not developed any substantial Year 2000
contingency plans for the following reasons: (1) the Company has minimal
internally generated systems; (2) the Company's vendors have represented
that they are either currently Year 2000 compliant or will become so by
April 1999; (3) there are no alternatives in the event the exchanges or
other market centers fail to perform; and (4) the Company believes it is
highly likely that the factors which may present a particular clearing firm
from performing would similarly affect all other clearing firms which would
either preclude the availability of alternative clearing service providers
or overwhelm the resources of surviving alternative clearing services
providers. The Year 2000 presents a problem which is not likely to be
susceptible to remediation at a future date if it is not fixed in advance.
The Company will, however, continue to consider the viability of a
contingency plan on a system-by-system basis.
The Company is cautiously optimistic about its current state of readiness
and its ability to make any further necessary modifications to internal
systems in time for the Year 2000. The Company also believes that its major
17
<PAGE>
third party service provider, Prudential/Wexford, has undertaken a
systematic approach to the Year 2000 problem and will complete its plan
which is designed to achieve a state of readiness. However, there are
factors outside the control of the Company which make certainty impossible
such as: (1) the inability to assess the readiness of market counterparties
and customers; (2) the inability to achieve assurance as to any material
third parties' representations of readiness; (3) the global exposure to
material third parties to Year 2000 problems outside the United States which
have a corresponding effect within the global securities markets, such
companies and their operations; and (4) the limitations in anticipating all
aspects of a problem with which there is no prior historical experience. The
presence of any or all of these and other factors may well have a material
adverse effect on the Company's business, operating results, financial
condition and cash flows.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain arbitration and/or litigation matters as of
December 31, 1998 which relate primarily to matters arising in the ordinary
course of business. Management of the Company anticipates that the final
resolution of these additional items will not have a material adverse effect
on the Company's consolidated financial statements.
The foregoing discussion contains certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve various risks and uncertainties with
respect to current legal proceedings. Although the Company believes that its
expectation with respect to the forward-looking statements is based upon
reasonable assumptions within the bounds of its knowledge of its business
and operations, there can be no assurances that the actual results,
performance or achievement of the Company will not differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a). Exhibits
(11) The Statements of Computation of Earnings Per Share are
attached hereto as Exhibit 11.
(27) Broker-Dealers and Broker Dealer Holding Companies Financial
Data Schedule BD is attached hereto as Exhibit 27.
b). Form 8-K
No reports were filed on Form 8-K during the three months
ended December 31, 1998.
18
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNATIONAL ASSETS HOLDING CORPORATION
Date 02/11/99 /s/ Jerome F. Miceli
______________________________________
Jerome F. Miceli
President and Chief Operating Officer
Date 02/11/99 /s/ Jonathan C. Hinz
______________________________________
Jonathan C. Hinz
Chief Accounting Officer
19
<PAGE>
EXHIBIT 11
INTERNATIONAL ASSETS HOLDING CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 (1)
---- --------
Basic Earnings (Loss) Per Share
Numerator:
Net income (loss) $ 200,659 $ (134,702)
Denominator:
Weighted average number of common shares outstanding 1,476,596 1,548,962
Basic earnings (loss) per share $ 0.14 $ (0.09)
Diluted Earnings (Loss) Per Share
Numerator:
Net income (loss) $ 200,659 $ (134,702)
Denominator:
Weighted average number of common shares outstanding 1,476,596 1,548,962
Weighted average number of net common shares that would be issued upon
exercise of dilutive options and warrants assuming proceeds used to repurchase
shares pursuant to the treasury
stock method (2) 6,089
-
Weighted average number of common shares and dilutive
potential common shares outstanding 1,482,685 1,548,962
Diluted earnings (loss) per share $ 0.14 $ (0.09)
</TABLE>
- -----------------------------------------------------------------------------
(1) Diluted loss per share is the same as basic loss per share for 1997
because of the anti-dilutive impact of the dilutive potential common
shares due to the net loss for 1997.
(2) The treasury stock method recognizes the use of proceeds that could be
obtained upon exercise of options and warrants in computing diluted
earnings per share. It assumes exercise of options and warrants as of the
beginning of the period or when issued, if later, and that any proceeds
would be used to purchase common stock at the average market price during
the period.
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,466,137
<RECEIVABLES> 111,211
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 2,826,069
<PP&E> 322,098
<TOTAL-ASSETS> 7,020,811
<SHORT-TERM> 0
<PAYABLES> 773,056
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 512,173
<LONG-TERM> 0
0
0
<COMMON> 14,763
<OTHER-SE> 5,584,150
<TOTAL-LIABILITY-AND-EQUITY> 7,020,811
<TRADING-REVENUE> 914,533
<INTEREST-DIVIDENDS> 56,153
<COMMISSIONS> 1,488,626
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 52,010
<INTEREST-EXPENSE> 201
<COMPENSATION> 1,302,644
<INCOME-PRETAX> 336,237
<INCOME-PRE-EXTRAORDINARY> 336,237
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,659
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
