53
Form 10-KSB
U.S. Securities and Exchange Commission
Washington D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIE
EXCHANGE ACT OF 1934
Commission File Number 33-70334-A
INTERNATIONAL ASSETS HOLDING CORPORATION
(Exact name of small business issuer as specified in its charter)
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Delaware 59-2921318
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(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)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
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 [ ].
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $12,301,621
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the last sale price of such stock as of December
16, 1997: $2,065,112
The number of shares outstanding of Common Stock was 1,406,553 as of
December 16, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants Proxy Statement, to be filed, for the Annual
Meeting of Stockholders to be held on February 12, 1998 are incorporated by
reference into Part III.
Transitional small business disclosure format Yes [ ] No [X]
INTERNATIONAL ASSETS HOLDING CORPORATION
1997 FORM 10-KSB
TABLE OF CONTENTS
PART I Page
Item 1. Description of Business............................................3
Item 2. Description of Property...........................................10
Item 3. Legal Proceedings.................................................10
Item 4. Submission of Matters to a Vote of Security Holders...............11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................12
Item 6. Management's Discussion and Analysis or Plan of Operation.........13
Item 7. Consolidated Financial Statements.................................17
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................18
Item 10. Executive Compensation...........................................19
Item 11. Security Ownership of Certain Beneficial Owners and Management...19
Item 12. Certain Relationships and Related Transactions...................19
Item 13. Exhibits and Reports on Form 8-K.................................20
Signatures.......................................................22
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The following discussion contains certain "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 and changes in laws and regulation applicable to the Company.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "believe", "anticipate",
"continue", and similar terms, variations of these terms or the negative of
those terms. Although the Company believes that its 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.
General
International Assets Holding Corporation is a Delaware corporation formed
in October 1987 for the purpose of serving as a holding company for
International Assets Advisory Corp. ("IAAC") and other subsidiaries.
Currently, the Company has five wholly owned subsidiaries, IAAC, Global
Assets Advisors, Inc. ("GAA"), International Asset Management Corp.
("IAMC"), International Financial Products, Inc. ("IFP") and GlobalNet
Securities, Inc. ("GNSI"). All of the Company's subsidiaries are Florida
corporations. As used in this Form 10-KSB, the term "Company" refers,
unless the context requires otherwise, to International Assets Holding
Corporation and its subsidiaries IAAC, GAA, IAMC, IFP and GNSI. IAAC
operates a full-service securities brokerage firm specializing in global
investing on behalf of its clients. GAA provides investment advisory and
money management services. IAMC functions as the manager of the physical
assets of the Company. IFP was formed as a financial publishing and
marketing group to sell products that are not investments, but are related
to the global financial market. GNSI was formed to take advantage of future
technology developments within the securities industry.
IAAC was formed in April 1981 by the Company's Chairman of the Board, Diego
J. Veitia. During its first two years of business, IAAC focused primarily
on private placements. In 1982, IAAC entered the securities brokerage
business and became a member of the National Association of Securities
Dealers("NASD"). In 1982 IAAC began to focus on the sale of global equity
and debt securities to high net worth private clients and, to a lesser
degree, small to medium size financial institutions. Management believes
that, until the last four to six years, the global securities market has
been relatively neglected by the major securities firms and is a growing
segment of the securities business.
The Company believes that it has developed an effective approach for
attracting the investment capital of high net worth private clients. This
approach centers on the need for such investors to diversify their
investment portfolios by purchasing global equity and debt securities. We
believe it is proper for investors to become increasingly global in their
investment activities, to correspond to the increasingly globalized
economy. On the equity side, the Company emphasizes both capital and
currency appreciation. In the sale of debt securities, the higher yields
available overseas and the potential for currency appreciation are
stressed.
Historically, the securities industry's focus for channeling private client
funds into international investments has been through mutual funds. While
the Company believes that its expertise in the international markets puts
it in a unique position to add value in the sale of global products such as
mutual funds, its main focus is on the direct investment in carefully
selected international securities by its private clients. The Company has
developed an experienced team specializing in the research, selection,
trading, currency exchange and execution of individual equity and fixed
income products on a global basis.
3
The Company acts as an introducing broker in that it does not clear its own
securities transactions, but instead contracts to have such transactions
cleared through a clearing broker on a fully disclosed basis. In a fully
disclosed clearing transaction, the identity of the Company's client is
known to the clearing broker. Generally, a clearing broker physically
maintains the client's account and performs a variety of services as agent
for the Company, including clearing all securities transactions (delivery
of securities sold, receipt of securities purchased and transfer of related
funds).
IAAC is currently registered as a securities broker-dealer under the
Securities Exchange Act of 1934 and the state securities statutes of 49
states and the District of Columbia. IAAC is a member of the NASD, which is
a self-regulatory body exercising broad supervisory powers over securities
broker-dealers operating in the United States. IAAC is also a member of the
Securities Investor Protection Corporation ("SIPC"), which is a public
corporation established to afford a measure of protection to the account
balances of customers of securities broker-dealers that become insolvent.
GAA is registered with the Securities and Exchange Commission ("SEC"), the
State of Florida and the State of California as an investment advisor.
Investment advisor registration in other states will proceed as is required
by the various states. This investment advisor's primary focus is on the
development of specialized accounts for high net worth private clients. GAA
is dedicated to providing the individual investor with domestic and inter-
national money management and offers a series of investment portfolios
tailor-made for the individual investor seeking investment diversifica-
tion across a variety of economies and currencies in order to provide the
opportunity for higher overall investment returns. GAA's strategy is to
capitalize on its experienced teams specializing in the research, selection
trading, currency exchange and execution of individual equity and fixed
income products on a global basis.
IAMC was formed by the Company in 1988 to hold certain equipment and, in
turn, lease such equipment to IAAC. IAMC's present function is to hold all
of the physical assets of the Company.
IFP was formed in 1995 to publish, advertise, and sell a wide range of in-
formational investment tools, such as books, newsletters, tapes, and faxes
targeted at knowledge-seeking individual global investors. As of October
1996, Company funding for all current IFP operating activities has ceased
due to the unsuccessful efforts to date in generating revenues. However,
the legal entity will remain active in its state of incorporation.
GNSI was formed by the Company in 1995 to capitalize on the use of recent
and future technology developments that relate to the securities industry.
As of December 23, 1997, no operating activities have been commenced by
this subsidiary.
Business Strategy
The Company's business strategy is to use its marketing and global
securities expertise to take advantage of opportunities for growth in the
global securities market. Management believes that there are significant
opportunities for growth in the specialized account and institutional sales
areas of the international securities market.
The Company believes that its expertise in the global securities area
presents an opportunity for the Company to expand its market niche into
small institutional sales. The Company further believes that this market
niche has been relatively minimized by the major international brokerage
firms. Examples of the type of institutions the Company intends to target
are pension funds of corporations or municipalities, money managers, and
the trust departments of smaller commercial banks and other independent
broker-dealers.
4
The Company expects to continue creating discretionary accounts with
specifically designated objectives in a defined investment area. The
Company also intends to continue to expand its activities in both the
private client and institutional sectors of international securities. In
addition, the Company plans to continue to sponsor the development of
proprietary unit investment trusts, where management believes it can add
value for its clients.
The International Securities Markets
The Company believes that investment in the international markets by U.S.
investors will continue to grow in the coming years, as international
investments become a larger portion of the world equity markets. According
to the International Finance Corporation, a member of the World Bank Group,
in 1984 the United States stock markets' share of the world market
capitalization was approximately 54%. At the end of 1996, that share had
fallen to approximately 42%. In the thirteen years from 1984 to 1996,
non-U.S. market capitalization grew by approximately 631%, from
approximately U.S. $1.6 trillion to approximately U.S. $11.7 trillion.
Similarly, in 1984, U.S. trading volume comprised approximately 62% of the
world's trading volume, while in 1996 this percentage had fallen to
approximately 52%. From 1984 to 1996, non-U.S. trading volume grew
approximately 1,233% from approximately U.S. $486 billion to approximately
U.S. $6.5 trillion.
Management believes that the two main justifications for the rapid growth
in international investing by U.S.investors are diversification and potent-
ally superior investment returns. In a study performed by the Company, the
returns of 28 global equity markets were measured from December 1987 to
September 1997. Over that time, 8 of the 28 foreign markets provided
returns higher than those of the U.S. stock market, while over the same
time period, all but two of the stock markets exhibited correlation to the
U.S. market of less than 60%. As the vast majority of foreign markets
continue to exhibit a low correlation to the U.S. market (and therefore
potential diversification benefits), while offering the potential for
return enhancement, management believes that an increased number of
investors will ultimately see the benefits of investing globally.
While investing in international markets also involves risk considerations
not typically associated with investing in securities of U.S. issuers, the
Company believes that such considerations are outweighed by the benefits of
diversification and potentially superior returns.
Among the risk considerations involved in investing in international
markets are that less information may be available about foreign companies
than about domestic companies. Foreign companies are also generally not
subject to uniform accounting, auditing and financial reporting standards
or to other regulatory practices and requirements comparable to those
applicable to domestic companies. In addition, unlike investing in U.S.
companies, securities of non-U.S. companies are generally denominated in
foreign currencies, thereby subjecting each security to changes in value
when the underlying foreign currency strengthens or weakens against the
U.S. dollar. Currency exchange rates generally are determined by the forces
of supply and demand in the foreign exchange markets and the relative
merits of investments in different countries as seen from an international
perspective. Currency exchange rates can also be affected unpredictably by
intervention of U.S.or foreign governments or central banks or by currency
controls or political developments in the U.S. or abroad.
The value of international fixed income products also responds to interest
rate changes in both the U.S. and abroad. In general, the value of such
products will rise when interest rates fall, and fall when interest rates
rise. Interest rates in the U.S. and other foreign countries may change
independently of each other. Thus foreign fixed income products may
increase in value while U.S. fixed income products decrease in value and
vice versa.
International markets and securities may also not be as liquid as U.S.
securities and their markets. Investing in international securities may
further result in higher expense than investing in domestic securities
because of the cost of converting foreign currencies to U.S. dollars and
expenses relating to foreign custody. Investment in international
securities may also be subject to local economic or political risks,
including instability of some foreign governments, the possibility of
currency blockage or the imposition
5
of withholding taxes on dividend or interest payments and the potential for
expropriation, nationalization or confiscatory taxation and limitations on
the use or removal of funds or other assets.
As an example of the types of risk discussed above, recent market declines
in the emerging markets, particularly those of Southeast Asia, have result-
ed in substantial declines in the valuation of Southeast Asian portfolios.
While these market declines can provide low cost buying opportunities for
clients of IAAC, declines in these markets can also cause client concerns
and a reluctance to make further investments in foreign markets. Any such
reluctance could lead to reduced commission revenues to the Company as well
as trading losses from market price declines and overall volatility.
The Brokerage Business
For the fiscal years ended September 30, 1997 and 1996, approximately 75%
and 74%, respectively, of the Company's total revenues were derived from
commissions earned from transactions with its retail clients. The Company's
client base is composed primarily of high net worth individuals. The
average age of its clients is approximately 56 and a substantial portion is
retirees. Clients are distributed nationwide. However, a particularly large
number of clients reside in Florida, California, New York, Texas and
Pennsylvania. The Company has approximately 9,650 active client accounts at
September 30, 1997.
Retail commissions are charged on both exchange and over-the-counter agency
transactions based on a schedule, which is subject to change, that the
Company has formulated in accordance with guidelines promulgated by the
NASD. During fiscal 1995, the Company also began selling proprietary Unit
Investment Trust ("UIT") products. The Company acts as the underwriter for
these UIT products.
The Company also earned commission income from institutional transactions
directed to its trading department by a closed-end management investment
company managed by a company affiliated through common ownership. During
the years ended September 30, 1997 and 1996, the institutional commissions
earned from this investment company amounted to $246 and $22,362,
respectively. As of October 1996, the management of the investment company
changed ownership and the Company will no longer receive such institutional
commissions. The termination of this institutional relationship has no
material effect on the Company due to the small amount of these commission
revenues, less than .003% and .3% of total commission revenues for 1997 and
1996, respectively. Nevertheless, the Company is also commencing expanded
efforts to enhance its institutional revenues by the dedication of staff
and other resources towards seeking new institutional revenue sources. This
new business strategy is unrelated to the loss of the nominal institutional
revenue discussed above.
The Company has also developed a niche market in the sale of international
debt securities. The Company uses its capital to buy a block of debt
securities and, in turn, makes offerings as low as $10,000 available to its
private clients.
Transactions in securities may be effected on either a cash or margin
basis. Through its clearing agent, the Company allows its clients to
maintain margin accounts for securities purchased or sold short through the
Company.
Principal Transactions
In addition to executing trades as agent, the Company acts as a principal
in executing trades in over-the-counter debt and equity securities. When
transactions are executed by the Company on a principal basis, the Company
receives, in lieu of commissions, markups or markdowns that constitute
revenues from principal transactions. To facilitate trading by its clients,
the Company buys, sells and maintains inventories of approximately 150
primarily international securities.
6
The Company places its capital at risk by also trading as a "market maker"
in a select group of approximately 75 international securities which are
traded by the Company's clients. The Company's emphasis in such trades is
on earning revenues from the spread between customer buy and sell orders.
Revenues from principal transactions depend upon the general trend of
prices and level of activity in the securities markets, the skill of
employees responsible for managing the Company's trading accounts and the
size of its inventories. The activities of the Company in trading as a
principal require the commitment of capital and create an opportunity for
profit and risk of loss due to market fluctuations.
The level of securities positions carried in the Company's trading accounts
fluctuates significantly. The size of such positions on any one date may
not be representative of the Company's exposure on any other date because
the securities positions vary substantially depending upon economic and
market conditions, the allocation of capital among types of inventories,
customer demands and trading volume. The aggregate value of the securities
in the Company's inventory is limited by certain requirements of the SEC
Net Capital Rule. See "Net Capital Requirements."
Marketing
The Company believes that its ability to deliver its global securities
message in a cost-effective manner is a key element to its operations. The
Company uses a variety of marketing tools. These include presenting
seminars, writing articles for various publications, public appearances by
Mr. Veitia, the Company's Chairman and Chief Executive Officer, advertising
in various media and using targeted direct mail.
After some experimentation with a variety of marketing tools in the
Company's early years, management has found direct mail marketing to be the
most cost-effective mechanism for attracting customers. The Company
believes that it has developed an expertise in attracting high net worth
clients through the use of low cost, direct mail marketing techniques. The
Company further believes that the most important aspect of its direct mail
marketing effort is its database of potential clients. The Company's
database currently has access to approximately 1,000,000 names, including
approximately 10,000 clients, 60,000 subscribers to the Company's
newsletters and other potential clients.
In addition to direct mail marketing, the Company uses several other marke-
ing tools. The Company presents seminars and provides clients with two
monthly newsletters, "Global Insights" and "The International Assets
Advisory". The Company also sends existing clients separate mailings, such
as research reports, with a narrower focus than its newsletters.
Competition
The Company encounters competition in conducting its business and such
competition is expected to continue. Although the securities industry, in
general, is intensely competitive, the Company believes that competition is
less intense in its niche market. However, the Company competes with many
firms with capital and personnel resources far in excess of those which are
presently available to the Company or which are expected to be available to
the Company in the future. Additionally, the Company is affected and will
continue to be affected by the investing public's interest in internation-
al securities. In this regard, international securities are in competition
with other investment vehicles offered by other securities broker-dealers
and financial intermediaries such as commercial banks, savings banks,
insurance companies and similar institutions. The Company believes that the
principal competitive factors in the securities industry are the quality
and ability of professional personnel and the relative prices of services
and products offered. The Company believes that, to date, it has been able
to compete favorably with other broker-dealers and financial intermediaries
primarily on the basis of the quality of its services and the depth of its
expertise in the international securities market.
7
Research Services
The Company's research activities include reviewing general market
conditions, specific industries, and individual companies and providing
information with respect thereto in monthly newsletters, which discuss
international economic and currency trends and give readers specific
investment recommenation and ideas. These services are made available
without charge to clients.
The Company's investment research committee (the "Investment Committee")
makes decisions concerning the overall investment policy of the Company
based on its assessment of macro-economic and macro-market factors. The
Investment Committee also makes determinations regarding the allocation of
Company and client assets into geographic, currency, and security type
(debt, equity and cash) categories. After this allocation decision has been
made, the Investment Committee recommends individual securities for
investment. The focus is on the analysis of a particular company and its
debt or equity securities.
Once the investment committee has made its initial recommendations, a sub-
committee analyzes such recommendations to determine which recommendations
are appropriate for the Company's client base. The subcommittee focuses on
equity securities which are priced at a retail level, generally $50 per
share or less. In addition, since private clients are less diversified than
institutions, there is an emphasis on blue-chip and higher quality
investments. Following its analysis of these factors, the subcommittee
creates an approved list of international securities from which account
executives can make recommendations to their clients.
Administration and Operations
The Company's trading and operations personnel are responsible for
executing orders, transmitting information on all transactions to its
clearing broker, mailing confirmations to clients, receiving all funds and
securities, depositing all client funds into a bank account in the name of
the clearing broker and transmitting securities to the Company's clearing
broker for custody.
The Company also utilizes the services of a securities clearing broker. The
Company's clearing broker performs many back office functions for the
Company in connection with its duties as custodian of all client funds and
securities. When a new account is established, the new account information
is sent to the clearing broker, which in turn sets up and maintains the
information for the account. All securities and monies are held in custody
by the clearing broker. The clearing broker prepares and mails account
statements directly to clients on behalf of the Company. Transaction
confirmations for customers are formatted through the clearing broker's
wire system for printing and mailing by IAAC. The Company's brokers and
operations staff is able to receive on-line account information from the
clearing broker. By engaging the processing services of a clearing broker,
the Company is exempt from certain reserve requirements imposed by Rule
15c3-3 under the Securities Exchange Act of 1934, as amended. See "Net
Capital Requirements."
The Company's clearing broker also extends credit to the Company and its
customers to enable them to purchase securities on margin. Margin accounts
allow customers to deposit less than the full cost of a security purchased
with the balance of the purchase price being provided as a loan to the
customer secured by the securities purchased. The amount of the loan in
purchasing securities on margin is subject to both the margin regulations
("Regulation T") of the Board of Governors of the Federal Reserve System
and the Company's clearing broker's internal policies. In most transactions
Regulation T limits the amount loaned to a client for the purchase of a
particular security to 50% of the purchase price.
The Company maintains internal records of all transactions, which are
compared on a daily basis to clearing transaction generated reports. The
Company uses automated computer capabilities for these functions, which it
will continue to expand.
The Company believes that its internal controls and safeguards against
securities theft are adequate. As required by the NASD and other
authorities, the Company carries a fidelity bond covering any loss or theft
of securities, as
8
well as embezzlement and forgery. The Company annually assesses the total
required bond coverage and carries a $180,000 limit. The Company believes
total coverage of $180,000 (with a $5,000 deductible provision) is adequate
for the upcoming year.
The Company's administrative staff oversees internal financial controls,
accounting functions, office services and compliance with regulatory
requirements.
Regulation
The securities industry in the United States is subject to extensive
regulation under Federal and state laws. The SEC is the Federal agency
charged with administration of the Federal securities laws. Much of the
regulation of broker-dealers, however, has been delegated to
self-regulatory organizations, principally the NASD and the national
securities exchanges. The self-regulatory organizations adopt rules (which
are subject to approval by the SEC) that govern the industry and conduct
periodic examinations of member broker-dealers. Securities firms are also
subject to regulation by state securities commissions in the states in
which they do business. IAAC is currently registered as a broker-dealer in
49 states and the District of Columbia.
The regulations to which broker-dealers are subject cover all aspects of
the securities business, including sales methods, trading practices among
broker-dealers, capital structure of securities firms, uses and safekeeping
of customers' funds and securities, record keeping, the conduct of
directors, officers and employees and supervision of branches and
registered representtives. Lack of adequate supervision could subject the
broker-dealer to regulatory sanctions. Additional legislation, changes in
rules promulgated by the SEC and by self-regulatory organizations, or
changes in the interpretation or enforcement of existing laws and rules
often directly affect the method of operation and profitability of
broker-dealers. The SEC, the self-regulatory organizations and state
securities commissions may conduct administrative proceedings, which can
result in censure, fine, suspension or expulsion of a broker-dealer, its
officers or employees. Such administrative proceedings, whether or not
resulting in adverse findings, can require substantial expenditures. The
principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets, rather than the
protection of creditors and stockbrokers of broker-dealers.
IAAC is required by Federal law to belong to SIPC. The SIPC fund provides
protection for securities held in customer accounts of up to $500,000 per
customer, with a limitation of $100,000 on claims for cash balances. In
addition, securities in an account at the Company's clearing broker ar
afforded additional protection by the clearing broker of up to $9,500,000.
During IAAC's 1991 examination by the NASD, several administrative and
operations violations were alleged. IAAC, without admitting or denying the
allegations, settled the matter in June 1992 by paying a fine of $15,500
and instituting procedures to prevent future deficiencies in specified
areas.
Net Capital Requirements
IAAC is subject to the SEC's uniform net capital rule(Rule 15c3-1(the
"Rule"), which is designed to measure the liquidity of a broker-dealer and
the maintenance of minimum net capital deemed necessary to meet its
commitments to its customers. The Rule provides that a broker-dealer doing
business with the public must not permit its aggregate indebtedness to
exceed 15 times its net capital (the "Basic Method") or, alternatively,
that it not permit its net capital to be less than 2% of aggregate debit
items computed in accordance with the Rule (the "Alternative Method"). The
Rule requires IAAC to maintain minimum net capital at an amount equal to
the greater of $100,000, 6-2/3% of aggregate indebtedness of $2,500 for
each security in which it makes a market (unless a security in which it
makes a market has a market value of $5 or less, in which event the amount
of net capital shall not be less than $1,000 for each such security) with a
ceiling of $1,000,000.
Any failure to maintain the required net capital may subject a
broker-dealer to expulsion by the NASD, the SEC or other regulatory bodies,
and may ultimately require its liquidation.
9
IAAC is in compliance with the Rule, as well as the applicable minimum net
capital requirement of the NASD. IAAC has elected to compute its net
capital under the Basic Method. In computing net capital under the Rule,
various adjustments are made to net worth with a view to excluding assets
not readily convertible into cash and to providing a conservative statement
of other assets, such as a firm's position in securities. To that end, a
deduction is made against the market value of securities to reflect the
possibility of a market decline before their disposition. For every dollar
that net capital is reduced, by means of such deductions or otherwise (for
example, through operating losses or capital distributions), the maximum
aggregate indebtedness a firm may carry is reduced. Thus, net capital
rules, which are unique to the securities industry, impose financial
restrictions upon the Company's business that are more severe than those
imposed on other types of businesses. Compliance with the net capital rules
may limit the operations of the Company because they require minimum
capital for such purposes as underwriting securities distributions, and
maintaining the inventory required for trading in securities.
Net capital changes from day to day, but at September 30, 1997 and 1996,
IAAC had excess net capital of $2,331,202 and $2,267,549, respectively, and
a ratio of aggregate indebtedness to net capital of .51 to 1 for both
periods.
Pursuant to paragraph(k)(2)(ii)of SEC Rule 15c3-3, IAAC is exempt from
customer reserve requirements and providing information relating to
possession or control of securities.
Employees
At September 30, 1997, the Company employed 91 employees, of which 88 were
full time employees. Of such employees, 9 had managerial responsibilities,
51 were account executives and 31 had administrative duties,including
persons engaged in other service areas such as research, money management,
trading, accounting, operations, compliance and marketing. The Company
considers its relationship with its employees to be good.
Compliance with Environmental Regulations
The Company must comply with various federal, state and local regulations
relating to the protection of the environment. Federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of
the environment will not, in the opinion of the Company, have a material
effect on the capital expenditures, earnings, or the competitive position
of the Company.
ITEM 2. DESCRIPTION OF PROPERTY.
Currently the Company occupies leased office space of approximately 13,815
square feet at 250 Park Avenue South, Winter Park, Florida. The lease
expires in May, 2001. The Company believes that suitable additional space
will be available as needed to accommodate the expansion of its operations.
ITEM 3. LEGAL PROCEEDINGS.
During the year ended September 30, 1997, the Company settled certain
client matters arising in the normal course of business totaling $146,000
which has been included in other operating expenses in the accompanying
consolidated statement of operations.
The Company is involved in an arbitrated claim which management believes to
be without merit and that any expected award on the claim will not be
material to the consolidated financial statements of the Company. The
arbitration hearing concluded on November 7, 1997 and the arbitration panel
has not yet rendered its decision on the claim. The amount of the claim
ranges from $300,000 to $465,000, legal fees, plus treble damages and
interest. The
10
arbitrators' decision may award less than the claim, any part of the claim
or make no award on the claim.
The Company is party to certain litigation as of September 30, 1997 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.
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 believe
that its expectation 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock trades on the NASDAQ SmallCap Market under the
symbol IAAC. The Company's Redeemable Warrants which traded separately on
the NASDAQ SmallCap Market under the symbol IAACW expired unexercised on
February 11, 1997. The Common Stock began trading independently from the
Redeemable Warrants on NASDAQ effective February 11, 1995. Prior to
February 11, 1995, one share of Common Stock and one Warrant, which when
exercised enabled the holder thereof to purchase one share of the Company's
Common Stock, traded as one Unit on the NASDAQ SmallCap Market under the
symbol IAACU. The Units began trading on NASDAQ in March, 1994 and ceased
trading in February, 1995.
The following table sets forth, for the periods indicated, the range of
high and low sales prices per Common Share and Warrant as reported by
NASDAQ, which prices do not include retail mark-ups, mark-downs, or
commissions and represent prices between dealers and not necessarily actual
transactions.
High . Low
The Company's Common Stock, as traded under the symbol IAAC
Fiscal Year 1996
First Quarter........................................ 3 1/2 2 1/4
Second Quarter.........................................4 1/4 2 1/2
Third Quarter.........................................4 1/2 3 1/2
Fourth Quarter ...................................... 4 1/2 3 1/2
Fiscal Year 1997
First Quarter..........................................4 3/8 2 3/4
Second Quarter.........................................3 7/16 2 5/8
Third Quarter.........................................3 9/16 2 3/4
Fourth Quarter........................................ 5 1/4 3 1/8
The Company's Warrants, as traded under the symbol IAACW, expired February
11, 1997
Fiscal Year 1996
First Quarter ........................................... 1/16 1/32
Second Quarter ...........................................1/16 1/32
Third Quarter .......................................... 3/16 1/16
Fourth Quarter .......................................... 1/8 1/8
Fiscal Year 1997
First Quarter ........................................... 1/8 1/32
Second Quarter .......................................... 1/32 1/32
There were approximately 194 shareholders of record of the Common Stock at
September 30, 1997. The total shareholders of record stated does not
include the approximate number of total beneficial shareholders.
On November 14, 1997 the Board of Directors of the Company declared a 10%
stock dividend for shareholders of record on December 26, 1997 and payable
on January 20, 1998.
The Company has never paid or declared cash dividends on its Common Stock
and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of cash dividends, if any, on its Common Stock in the future is
subject
12
to the discretion of the Board of Directors and will depend on the
Company's earnings, financial condition, capital requirements and other
relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in onjunction 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 invest brokerage industry, new
products and services in the investment brokerage industry, changing trends
in customer profiles and changes in laws and regulation applicable to the
Company. Although the Company believes that its expectation 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, perfor- mance 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 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.
The Company's assets have increased from $7,625,462 in 1996 to $7,928,214
in 1997 and the Company's liabilities decreased from $2,383,081 to
$2,100,820 in 1996. The increase in assets is primarily attributable to a
$167,914 increase in the receivable from clearing broker and a $128,972
increase in net property and equipment. The decrease in total liabilities
is primarily attributable to a $347,027 decrease in securities sold, but
not yet purchased.
Recent market declines in the emerging markets, particularly those of
Southeast Asia, have resulted in substantial declines in the valuation of
Southeast Asian portfolios. While these market declines can provide low
cost buying opportunities for clients of IAAC, declines in these markets
can also cause client concerns and a reluctance to make further investments
in foreign markets. Any such reluctance could lead to reduced commission
revenues to the Company as well as trading losses from market price
declines and overall volatility.
The Company is currently developing a Year 2000 plan to address issues
relating to its business which may result from computer changes referencing
the year 2000. These potential issues arise because software written
earlier in this century accepts only two numbers in the date field, such as
'97 for 1997, and counts lesser numbers as coming before higher numbers.
Accordingly, when the year 2000 is entered in such software as "00", the
date is read as 1900, not 2000. This issue, which potentially impacts all
types of businesses, has been termed the "Year 2000 problem" by some
commentators. The estimated completion date for the Company's plan to
address these issues is December, 1998. 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). Wexford has assured the Company that it will be prepared for
the Year 2000 problem. The Company also currently employs a part-time
systems consultant and plans to add a full-time employee to supplement its
anticipated staffing needs to address the Year 2000 problem. The amount
expended on the Year 2000 problem during the year ended September 30, 1997
is not material. The Company has not yet determined the range of expense
that may be incurred and the Company does not believe the amount to be
expended will have a material
13
impact on the financial performance of the Company.
Results of Operations: 1997 Compared to 1996
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
years ended September 30, 1997 and 1996, approximately 75% and 74%,
respectively, of the Company's revenues were derived from commissions
earned on the sale of securities, with approximately 20% and 21%,
respectively, of revenues coming from net dealer inventory and investment
gains.
Total revenues increased by approximately 9% to $12,301,621 in 1997 from
$11,321,295 in 1996. This increase was derived primarily from a $862,433
increase in commission revenue primarily due to an increase in security
order flow. Commission revenue increased by approximately 10% to $9,249,261
for 1997 from $8,386,828 for 1996. Revenues from commissions are affected
by both trading volume and the dollar amount of trades. Based on the number
of trades processed, 1997 volume increased by approximately 15% from 1996
levels. However, this 15% increase in trades processed volume was somewhat
offset by a 4% decrease in the dollar average of trades for 1997 as
compared with 1996. The average number of account executives increased from
40 in 1996 to 44 in 1997, or an increase of approximately 10%.
Net dealer inventory and investment gains increased by approximately 4% to
$2,436,212 for 1997 from $2,340,719 for 1996. The increase in net dealer
inventory and investment gains is primarily attributable to increases in
both fixed income trading and increases in the volume of wholesale trading
activities. The Company's trading department primarily concentrates on
global securities which it believes are likely to be traded by the
Company's clients. By focusing on these types of securities, trading income
is more directly related to commission income and order flow.
Revenues from money management fees increased by approximately 43% to
$81,302 for 1997 from $56,694 for 1996. The increase is primarily due to
increases in the dollar amount of money under management as well as
increases in investment supervisory fees.
Interest and dividend revenue increased by approximately 6% to $279,041 for
1997 from $263,951 in 1996. This increase is partly attributable to
somewhat higher yields on securities and investments held by the Company
throughout the 1997 fiscal year. The increase is also attributable to
increases in invested funds from profitable operations of the Company.
Total expenses increased by $975,235, or approximately 10% from 1996 as
compared to 1997. This increase in total expense is partially offset by the
approximate 9% increase in total revenues. The major expenses incurred by
the Company relate to employees' compensation and benefits, direct costs of
securities operations, such as commissions and clearing fees, and
communications and promotions expense.
Commissions and clearing fees increased by $557,454, or approximately 12%
from 1996 as compared to 1997. This increase in commissions and clearing
fees is directly related to the 10% increase in commission revenue and the
4% increase in net dealer inventory and investment gains.
Employee compensation and benefits increased by $137,539, or approximately
6% from 1996 as compared to 1997. The increase in employee compensation and
benefit expense is primarily due to the cost of additional employees hired
by the Company and overall wage increases.
Promotion expense decreased by $74,790, or approximately 6% from 1996 as
compared to 1997. This decrease is primarily due to the elimination of
funding from the Company to IFP for promotional activities. As of October
1996, Company funding for all IFP promotional activities was ceased due to
the unsuccessful efforts of IFP in generating revenues.
14
Communications expense increased by $15,476, or approximately 4% from 1996
as compared to 1997. This increase is due to increased telephone and
general corporate use printing activities. Occupancy and equipment rental
expense decreased by $25,514, or approximately 7% from 1996 as compared to
1997. This decrease was due to a rent reduction negotiated with the owner
of the Company's leased premises.
As a result of the above, income before income taxes increased by $5,091,
or approximately .4% in 1997 over 1996. Income tax expense increased by
$13,583, or approximately 3% from 1996 as compared to 1997. The increase in
income tax expense is due to the $5,091 increase in income before income
taxes and an increase in the effective income tax rate, due to the increase
in several non deductible expenses. As a result of the above net income
decreased by $8,492, or approximately 1% in 1997 as compared to 1996. The
Company's effective income tax rate was approximately 41.2% and 40.2% for
1997 and 1996, respectively.
1996 Compared to 1995
Total revenues increased by approximately 22% to $11,321,295 in 1996 from
$9,265,994 in 1995. This increase was derived primarily from a $1,160,278
increase in commission revenue primarily due to an increase in security
order flow. Commission Revenue increased by approximately 16% to $8,386,828
for 1996 from $7,226,550 for 1995. Revenues from commissions are affected
by both trading volume and the dollar amount of trades. The average number
of account executives decreased from 41 in 1995 to 40 in 1996, or a
decrease of approximately 2%. Based on the number of trades processed, 1996
volume increased approximately 13% from 1995 levels. This 13% increase in
trades processed volume is directly related to the 16% increase in
commission revenue for 1996 over 1995 levels. The increase in commission
revenue was also favorably impacted by a higher dollar average of trades
for 1996 over 1995 amounts.
Net dealer inventory and investment gains increased by approximately 51% to
$2,340,719 for 1996 from $1,554,891 for 1995. The increase in net dealer
inventory and investment gains is primarily attributable to increases in
both retail and wholesale trading activities. The Company's trading
department primarily concentrates on global securities which it believes
are likely to be traded by the Company's clients. By focusing on these
types of securities, trading income is more directly related to commission
income and order flow.
Interest and dividend revenue increased by approximately 17% to $263,951
for 1996 from $226,351 in 1995. This increase is primarily attributable to
higher yields on securities and investments held by the Company throughout
the 1996 fiscal year.
Total expenses increased by $1,783,821, or approximately 21% from 1995 as
compared to 1996. This increase in total expense is proportional to the
overall 22% increase in total revenues. The major expenses incurred by the
Company relate to employees' compensation and benefits, direct costs of
securities operations, such as commissions and clearing fees, and
communications and promotions expense.
Commissions and clearing fees increased by $635,411, or approximately 16%
from 1995 as compared to 1996. This increase in commissions and clearing
fees is directly related to the corresponding 16% increase in commission
revenue. Employee compensation and benefits increased by $591,432, or
approximately 31% from 1995 as compared to 1996. Approximately $250,000 of
the increase in employee compensation and benefit expense is due to
increases in performance based bonus accruals, based on the increase in
income before taxes and trading revenue by the Company, during 1996 as
compared to 1995. Approximately $271,000 of the increase in employee
compensation and benefits is due to additional employees hired by the
company and overall wage increases and the remaining approximate $70,000 is
due to increases in the cost of benefits and other compensation.
Promotion expense increased by 340,600, or 35% from 1995 as compared to
1996. This increase is primarily due to promotional expenses incurred by
IFP
15
during fiscal 1996. The Company anticipates a reduction in overall
promotional expenses for fiscal year 1997 due to termination of internal
funding for this subsidiary's promotional activities as of October 1996.
Communications expense decreased by $23,531, or approximately 6% from 1995
as compared to 1996. This decrease was due to reduced general corporate use
printing activities. Occupancy and equipment rental expense increased by
$70,203, or 25% from 1995 as compared to 1996. This increase was due to an
expansion of office space as well as scheduled annual lease increases.
As a result of the above, income before income taxes increased by $271,480,
or approximately 29% in 1996 over 1995. The Company's effective income tax
rate was approximately 40% for 1996.
Liquidity and Capital Resources
A substantial portion of the Company's assets are liquid. At September 30,
1997, approximately 84% of the Company's assets consisted of cash, cash
equivalents, and marketable securities including marketable investments.
All assets are financed by the Company's equity capital, short-term
borrowings from securities lending transactions and other payables.
IAAC is subject to the requirements of the SEC and the NASD relating to
liquidity and net capital levels. At September 30, 1997, IAAC had net
capital of $2,467,702, which was $2,331,202 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 12 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.
Effects of Inflation
Because the Company's assets are, to a large extent, liquid in nature, they
are not significantly affected by inflation. Increases in the Company's
expenses, such as employee compensation, rent and communications, due to
inflation, may not be readily recoverable in the prices of services offered
by the Company. In addition, to the extent that inflation results in rising
interest rates and has other adverse effects on the securities markets and
on the value of the securities held in inventory, it may adversely affect
the Company's financial position and results of operations.
16
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report......................................... F-1
Consolidated Balance Sheets as of
September 30, 1997 and 1996..................................... F-2
Consolidated Statements of Operations for the Years Ended
September 30, 1997 and 1996......................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997 and 1996..................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997 and 1996.................................... F-7
Notes to Consolidated Financial Statements.......................... F-9
17
Independent Auditors' Report
The Board of Directors
International Assets Holding Corporation
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
International Assets Holding Corporation and Subsidiaries as of September
30, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Assets Holding Corporation and Subsidiaries as of September
30, 1997 and 1996 and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/S/ KPMG Peat Marwick LLP
Orlando, FL
November 7, 1997
F-1
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
Assets 1997 1996
----- ---- ----
Cash $ 551,257 446,936
Cash deposits with clearing broker 2,415,582 2,479,289
Foreign currency - 428
Investments (note 3) 1,300,384 1,318,997
Receivable from clearing broker, net 405,050 237,136
Receivable from affiliated company (note 2) - 26,542
Other receivables 58,602 108,085
Securities owned, at market value (note 4) 2,528,260 2,470,595
Income taxes receivable 3,655 -
Deferred income tax benefit 48,851 27,599
Property and equipment, at cost:
Leasehold improvements 52,953 40,404
Furniture and equipment 843,995 606,448
-------- --------
896,948 646,852
Less accumulated depreciation (456,822) (335,698)
-------- --------
Net property and equipment 440,126 311,154
Other assets, net of accumulated amortization of
$88,750 in 1997 and $47,752 in 1996 176,447 198,701
-------- --------
Total assets $ 7,928,214 7,625,462
________ ________
See accompanying notes to consolidated financial statements.
F-2
Liabilities and Stockholders' Equity 1997 1996
------------------------------- ---- ----
Liabilities:
Foreign currency sold, but not yet purchased $ 3,992 -
Securities sold, but not yet purchased,
at market value (note 4) 682,054 1,029,081
Accounts payable 116,067 111,033
Accrued employee compensation and benefits 900,973 843,944
Other accrued expenses 268,314 156,321
Income taxes payable - 121,318
Deferred income taxes 20,059 16,651
Other 109,361 104,733
-------- --------
Total liabilities (note 6) 2,100,820 2,383,081
-------- --------
Stockholders' equity (notes 7, 11 and 12):
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 1,411,262 and 1,450,787
shares in 1997 and 1996, respectively 14,113 14,508
Additional paid-in capital 3,125,043 3,237,125
Retained earnings 2,688,238 1,990,748
-------- --------
Total stockholders' equity 5,827,394 5,242,381
Commitments and contingent liabilities (notes 5, 8 and 13)
-------- --------
Total liabilities and stockholders' equity $ 7,928,214 7,625,462
________ ________
See accompanying notes to consolidated financial statements.
F-3
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 1997 and 1996
1997 1996
---- ----
Revenues:
Commissions $ 9,249,261 8,386,828
Net dealer inventory and investment gains 2,436,212 2,340,719
Management fees 81,302 56,694
Maintenance fees 148,395 125,034
Interest and dividends 279,041 263,951
Other 107,410 148,069
--------- ---------
Total revenues 12,301,621 11,321,295
--------- ---------
Expenses:
Commissions and clearing fees 5,226,823 4,669,369
Employees compensation and benefits 2,610,285 2,472,746
Communications 373,307 357,831
Promotion 1,228,344 1,303,134
Occupancy and equipment rental (note 8) 325,484 350,998
Interest 3,543 6,118
Professional fees 363,988 188,608
Insurance 219,823 203,706
Depreciation and amortization 162,122 126,017
Other operating expenses 567,650 427,607
--------- ---------
Total expenses 11,081,369 10,106,134
--------- ---------
Income before income taxes 1,220,252 1,215,161
Income tax expense (note 9) 502,383 488,800
--------- ---------
Net income $ 717,869 726,361
_________ _________
(Continued)
F-4
-2-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
1997 1996
---- ----
Earnings per common and dilutive common equivalent
share
Primary $ .43 .40
Fully diluted $ .42 .40
Weighted average number of common and dilutive common
shares outstanding:
Primary and fully diluted 1,835,541 2,172,849
See accompanying notes to consolidated financial statements.
F-5
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1997 and 1996
Additional Total
Preferred Common paid-in Retained Treasury stockholder's
stock stock capital earnings Stock equity
----- ----- ------ ------- ------
- ----- ----
Balances at September 30, 1995 $ - $ 14,609 3,292,574 1,250,305 - 4,557,488
Acquisition of 10,100 common
shares (note 13) - - - - (41,468) (41,468)
Retirement of 10,100 common
shares held in treasury - (101) (55,449) 14,082 41,468 -
Net income - - - 726,361 - 726,361
----- ---- ------ ------ ------- ---------
Balances at September 30, 1996 - 14,508 3,237,125 1,990,748 - 5,242,381
Acquisition of 24,025 common
shares (note 10) - - - - (75,700) (75,700)
Acquisition of 15,500 common
shares (note 13) - - - - (57,156) (57,156)
Retirement of 39,525 common
shares held in treasury - (395) (112,082) (20,379) 132,856 -
Net income - - - 717,869 717,869
-------- ---- ------ ------- --------- -------
Balances at September 30, 1997 - 14,113 3,125,043 2,688,238 - 5,827,394
$ ________ ____ ____ _________ ________ _______
See accompanying notes to consolidated financial statements.
F-6
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1997 and 1996
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 717,869 726,361
Adjustments to reconcile net income to net cash provided
by operating activities:
Net amortization and appreciation of investments (87,316) (93,582)
Depreciation and amortization 162,122 126,017
Deferred income taxes (17,843) 3,740
Cash provided by (used for) changes in:
Receivable from clearing broker, net (167,914) (84,402)
Receivable from affiliated company 26,542 14,230
Other receivables 49,483 14,817
Securities owned, at market value (57,665) (471,499)
Income taxes receivable (3,655) -
Other assets (18,744) (45,068)
Securities sold, but not yet purchased, at market
value (347,027) 613,377
Accounts payable 5,034 14,226
Accrued employee compensation and benefits 57,029 172,984
Other accrued expenses 111,993 (9,535)
Income taxes payable (121,318) (47,940)
Other liabilities 4,627 97,342
--------- ---------
Net cash provided by operating activities 313,217 1,031,068
--------- ---------
Cash flows from investing activities:
Disposal of investments 7,921,075 11,029,000
Acquisition of investments (7,815,146) (10,493,838)
Acquisition of property and equipment and other assets (250,096) (202,980)
--------- ---------
Net cash provided by (used for) investing activities (144,167) 332,182
--------- ---------
(Continued)
F-7
-2-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1997 1996
---- ----
Cash flows from financing activities:
Acquisition of common shares related to repurchase
program (57,156) (41,468)
Acquisition of common shares related to terminated
ESOP participants (75,700) -
--------- ---------
Net cash used for financing activities (132,856) (41,468)
--------- ---------
Net increase in cash and cash equivalents 36,194 1,321,782
Cash and cash equivalents at beginning of year 2,926,653 1,604,871
--------- ---------
Cash and cash equivalents at end of year $ 2,962,847 2,926,653
_________ _________
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,543 6,118
_________ ________
Income taxes paid $ 645,200 533,000
_________ ________
See accompanying notes to consolidated financial statements.
F-8
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statement
September 30, 1997 and 1996
(1 Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of International
Assets Holding Corporation (the Company) and its five wholly-owned
subsidiaries, International Assets Advisory Corp., International Assets
Management Corp., Global Assets Advisors, Inc., Global Net Securities, Inc.
and International Financial Products, Inc. International Assets Advisory
Corp. is a registered broker/dealer under the Securities Act of 1934. Its
securities transactions are cleared through Wexford Clearing Services
Corporation (a wholly-owned, guaranteed subsidiary of Prudential Securities
Incorporated) on a fully disclosed basis. International Assets Management
Corp. was formed to manage the physical assets of the Company. Global
Assets Advisors, Inc. provides investment advisory and management services.
Global Net Securities, Inc. was formed to capitalize on the use of recent
and future technology developments that relate to the securities industry.
International Financial Products, Inc. markets products which are not
investments, but are related to the financial world. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Cash Equivalents
Cash equivalents consist of cash deposits with clearing broker, foreign
currency and foreign currency sold, but not yet purchased. Cash deposits
with clearing broker consist of cash and money market funds stated at cost
which approximates market. The money market funds earn interest at varying
rates on a daily basis. For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
(c) Financial Instruments
As of September 30, 1997 and 1996 the carrying value of the Company's
financial instruments including cash, cash deposits with clearing broker,
foreign currency, receivables, account payable and accrued expenses
approximate their fair values, based on the short-term maturities of these
instruments. Additionally, the carrying value of investments, securities
owned and any securities and foreign currency sold, but not yet purchased,
approximate their fair value at September 30, 1997 and 1996 as they are
based on quoted market prices. (Continued)
F-9
-2-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Stateme
(d) Investments
As of September 30, 1997, investments consist of a U.S. Federal Home Loan
note, a U.S. corporate bond fund, a foreign corporate bond and a limited
partnership ownership interest. The U.S. Federal Home Loan note is recorded
at amortized cost, which approximates market value. The U.S. corporate bond
fund and foreign corporate bond are recorded at market value. The limited
partnership ownership interest is recorded at fair value, which has been
determined by management. These investments are for the Company's investing
purposes and are not held for sale to the Company's customers
(e) Valuation of Securities and Foreign Currency
Each listed security is valued at the last reported sale price. Listed
securities not traded on an exchange that day, and other securities, which
are traded in the over-the-counter market, are valued at the market's
current bid price for securities owned and current asked price for
securities sold, but not yet purchased. The value of a foreign security is
determined in its national currency on the exchange on which it is traded,
which value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect following the close of the stock exchange
in the country where the security is issued and traded.
The value of a foreign currency, including a foreign currency sold, but not
yet purchased, is converted into its U.S. dollar equivalent at the foreign
exchange rate in effect at the close of business on the measurement date.
(f) Revenue Recognition
The revenues of the Company are derived principally from commissions earned
on the sale of securities, from maintenance fees charged to customers and
from realized and unrealized trading income in securities purchased or sold
for the Company's account. Commission and trading income are recorded as of
the trade date of the securities. Interest income is recorded on the
accrual basis and dividend income is recognized upon receipt.
(Continued)
F-10
-3-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(g) Depreciation and Amortization
Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets which
range from five to seven years. Leasehold improvements are amortized using
the straight-line method over the estimated period of benefit to be
received from the assets, which approximates six years.
Intangible assets, included in other assets in the accompanying
consolidated balance sheets, are amortized using the straight-line method
over the estimated period of benefit to be received from the assets, which
approximates five years.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates as expected toapply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to an amount that, in the opinion of management, is more likely than
not to be realized.
The Company and its subsidiaries file consolidated federal and state income
tax returns.
(i) Advertising
The Company expenses costs of advertising as incurred. Advertising costs
for the years ended September 30, 1997 and 1996 were $816,835 and $891,125,
respectively.
(Continued)
F-11
-4-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(j) Stock Option Plan
Prior to October 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On October 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation", which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the
period. Actual results could differ from these estimates.
(l) Earnings Per Common Share
Earnings per common and dilutive common equivalent share have been computed
by dividing adjusted net income by the weighted average number of common
and dilutive common equivalent shares outstanding. Common equivalent shares
included in the computation represent shares issuable upon assumed exercise
of stock options and warrants. The adjustment to net income assumes the
investment of excess proceeds received from the assumed exercise of common
stock equivalents, net of income taxes.
(Continued)
F-12
-5-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) Future Application of Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" Statement
128 supersedes APB Opinion No. 15, "Earnings Per Share," and specifies the
computation, presentation, and disclosure requirements for earnings per
share "EPS") for entities with publicly held common stock or potential
common stock. Statement 128 was issued to simplify the computation of EPS.
It requires dual presentation of basic and diluted EPS on the face of the
statements of operations for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation.
Statement 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior period EPS data presented shall be
restated to conform to Statement 128. Under Statement 128, basic EPS would
be $.50 for each of the years ended September 30, 1997 and 1996. Diluted
EPS would be $.48 for each of the years ended September 30, 1997 and 1996.
(2) Related Party Transactions
Receivable from an affiliated company represents the Company's payment of
costs on behalf of a company affiliated through common ownership. The
receivable is non-interest bearing and due on demand. As of September 30,
1997 and 1996, $-0- and $26,542, respectively, was receivable from the
affiliated company.
During the year ended September 30, 1997, the Board of Directors of the
Company approved the reimbursement of approximately $100,000 of expenses
incurred in connection with responding to issues raised during a Securities
and Exchange Commission ("SEC")inspection of an affiliated company.
(Continued)
F-13
-6-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3)Investments
Investments at September 30, 1997 and 1996 consist of the following:
Cost or
amortized cost Market value
------------ ------------
1997:
U.S. Federal Home Loan note $ 648,711 648,711
U.S. corporate bond fund 368,221 411,404
Foreign corporate bond 143,750 142,969
Limited partnership ownership interest 97,300 97,300
-------- --------
$ 1,257,982 1,300,384
________ ________
1996:
U.S. Federal Home Loan note 749,266 749,266
U.S. corporate bond fund 280,495 306,267
Foreign corporate bond 92,462 93,000
Foreign government obligation 71,162 70,464
Limited partnership ownership interest 100,000 100,000
-------- --------
$ 1,293,385 1,318,997
________ ________
(Continued)
F-14
-7-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4)Securities Owned and Securities Sold, But Not Yet Purchased
Securities owned and securities sold, but not yet purchased at
September 30, 1997 and 1996 consist of trading and investment securities
at market values as follows:
Sold, but not
Owned yet purchased
------ ------------
1997:
Obligations of U.S. Government $ 285,055 -
Common stock and American Depository Receipts 1,302,419 682,054
Corporate bonds 283,285 -
Foreign government obligations 68,591 -
Proprietary unit investment trusts 588,910 -
-------- --------
$ 2,528,260 682,054
________ _________
1996:
Obligations of U.S. Government 1,047,097 -
Common stock and American Depository Receipts 864,884 1,029,081
Corporate bonds 99,462 -
Foreign government obligations 23,050 -
Proprietary unit investment trusts 436,102
------- ---------
$ 2,470,595 1,029,081
__________ ________
(5)Financial Instruments with Off-Balance Sheet Risk
The Company is party to certain financial instruments with off-balance
sheet risk in the normal course of business as a registered securities
broker/dealer. As of September 30, 1997 and 1996 the Company remains liable
for a number of equity securities it has sold, which are owned by outside
parties (see note 4). Risks arise from movements in the value of these
securities which the Company must purchase to cover those previously sold.
(Continued)
F-15
-8-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6)Liabilities Subordinated to Claims of General Creditors
During the years ende September 30, 1997 and 1996, International Assets
Advisory Corp. (IAAC) did not have any liabilities which were sub-
ordinated to the claims of general creditors.
(7)Capital and Cash Reserve Requirements
As of September 30, 1997 and 1996, IAAC is subject to the SEC uniform net
capita rule (Rule 15c3-1), which requires the maintenance of minimum net
capital at an amount equal to the greater of $100,000, 6-2/3% of aggregate
indebtedness, or $2,500 for each security in which a market is made with a
bid price over $5 and $1,000 for each security in which a market is made
with a bid price of $5 or less with a ceiling of $1,000,000, and requires
that the ratio of aggregate indebtedness to net capital not exceed 15 to 1.
At September 30, 1997, IAAC had excess net capital of approximately
$2,331,202 and a ratio of aggregate indebtedness to net capital of
approximately .51 to 1.
IAAC is exempt from customer reserve requirements and providing information
relating to possession or control of securities pursuant to Rule 15c3-3 of
the Securities and Exchange Actof 1934. IAAC meets the exemptive provisions
of Paragraph (k)(2)(ii).
(8) Leases
The Company is obligated under various noncancelable operating leases for
the rental of its office facilities and certain office equipment. Rent
expense associated with these operating leases amounted to $264,045 and
$296,153 for the years ended September 30, 1997 and 1996, respectively. The
future minimum lease payments under noncancelable operating leases as of
September 30, 1997 are as follows: (Continued)
F-16
-9-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year ending September 30,
-----------------------
1998 $ 313,398
1999 308,470
2000 319,991
2001 231,250
2002 17,503
-----------
Total future minimum lease payments $ 1,190,612
___________
(9)Income Taxes
Income taxes for the years ended September 30, 1997 and 1996 consists of:
Current Deferred Total
------- -------- -----
1997:
Federal $ 444,439 (15,244) 429,195
State 75,787 (2,599) 73,188
------- ------ -------
$ 520,226 (17,843) 502,383
_______ ______ _______
1996
Federal 414,419 3,194 417,613
State 70,641 546 71,187
------- ----- -------
$ 485,060 3,740 488,800
_______ ______ _______
(Continued)
F-17
-10-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Total income tax expense for the years ended September 30, 1997 and
1996 differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to income before income taxes as a result of the
following:
1997 1996
---------------- ---------------
% of % of
pretax pretax
Amount income Amount income
-------
Computed "expected" tax expense $ 414,885 34.0% 413,154 34.0
Increase (decrease) in income
tax expense resulting from:
State income taxes, net of
federal income tax benefit 46,927 3.9 44,073 3.6
Officers life insurance premium 2,539 .2 2,527 .2
not deductible for tax purpose
Meals and entertainment
expense not deductible
for tax purposes 27,034 2.2 21,253 1.7
Memberships, net 10,002 .8 6,787 .6
Other, net 996 .1 1,006 .1
------- ---- ------- ----
$ 502,383 41.2% $488,800 40.2%
Deferred income taxes as of September 30, 1997 and 1996 reflect the impact
of "temporary differences" between amounts of assets and liabilities for
financial statement purposes and such amounts as measured by tax laws. The
temporary differences give rise to deferred tax assets and liabilities,
which are summarized below as of September 30, 1997 and 1996:
(Continued)
F-18
-11-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1997 1996
---- ----
Gross deferred tax liabilities:
Accumulated depreciation and amortization $ (20,059) (16,651)
------ ------
Gross deferred tax assets:
Accrued reserves 11,400 7,600
Rent abatement 14,144 19,999
Amortization of other assets 23,307 -
------ ------
Total gross deferred tax assets 48,851 27,599
------ ------
Total net deferred tax assets $ 28,792 10,948
______ ______
There was no valuation allowance for deferred tax assets as of September
30, 1997 and 1996. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income or the reversal of deferred tax liabilities during
the periods in whichthose temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. As of September 30, 1997, based upon the level of historical
taxable income and projections for future taxable income, management
believes it is more likely than not that the Company will realize the
benefits of these deductible differences.
(10) Employee Benefit Plans
IAAC has an Employee Stock Ownership Plan (ESOP) with 401(k) features which
enables generally all Company employees who have completed one year of
continuous service and who have attained the age of twenty-one to acquire
shares of the parent Company's common stock. The 401(k) feature allows
employees to elect to defer a portion of their salary into the ESOP. The
amount contributed reduces the employee's taxable compensation. IAAC has
the option to make a matching contribution based on a percentage of the
participants' contributions. The ESOP is a "nonleveraged" ESOP as of
September 30, 1997 and 1996.
(Continued)
F-19
-12-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
IAAC implemented a defined contribution Retirement Savings Plan (the
"Plan") effective January 1, 1995. All employees who have completed one
year of continuous service and who have attained the age of twenty-one are
eligible for the Plan. The contributions to the Plan are at the sole
discretion of IAAC.
IAAC's contributions to the various employee benefit plans for the years
ended September 30, 1997 and 1996 are summarized as follows:
1997 1996
---- ----
Retirement Savings Plan $ 64,600 78,524
ESOP - 401(k) portion 59,864 58,545
------- -------
$ 124,464 137,069
_______ _______
Benefits under the ESOP feature of the Plan, which gradually vest over
seven years, and benefits under the 401(k) feature of the Plan relative to
participant contributions, which are fully vested at all times, are paid
upon death, disability, retirement or termination of employment.
As of September 30, 1997 and 1996, 336,690 and 360,715 common shares of the
Company were allocated to ESOP participants, respectively.
During the year ended September 30, 1997 and 1996, 24,025 and -0- common
shares of the Company were purchased from terminated ESOP participants.
(11) Stock Options
The International Assets Holding Corporation Stock Option Plan (the
"Plan")was adopted by the Board of Directors of the Company and approved by
the Company's stockholders during January 1993. The Plan permits the
granting of awards to employees and directors of the Company and its
subsidiaries in the form of stock options. Stock options granted under the
Plan may be "incentive stock options" meeting the requirements of Section
422 of the Internal Revenue Code of 1986, as amended, or nonqualified
options which do not meet the requirements of Section 422. As of September
30, 1997 a total of 500,000 shares of the Company's common stock had been
reserved for issuance pursuant to options granted under the Plan.
(Continued)
F-20
-13-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Plan is administered by the Company's Board of Directors or a committee
thereof. The Plan gives broad powers to the Board of Directors to
administer and interpret the Plan, including the authority to select the
individuals to be granted options and rights and to prescribe the
particular form and conditions of each option or right granted. All options
are granted at an exercise price equal to the fair market value or 110
percent of the fair market value of the Company's common stock on the date
of the grant. Awards may be granted pursuant to the Plan through January,
2003. The Plan may be terminated earlier by the Board of Directors at its
sole discretion.
At September 30, 1997, there were 35,000 additional shares available for
grant under the Plan. Using the Black Scholes option-pricing model, the per
share weighted-average fair value of stock options granted during 1997
where exercise price equals the market price of the stock on the grant date
was $2.36. The per share weighted-average fair value of stock options
granted during 1996 where exercise price equals the market price of the
stock on the grant date or exercise price is greater than the market price
of the stock on the grant date was $1.72 and $1.62, respectively.
The following weighted average assumptions were used:
1997 1996
---- ----
Exercise price = market price on grant date
Expected risk-free interest rate 6.40% 6.09%
Expected life 7.0 years 5.2 years
Expected volatility 60.10% 76.90%
Expected dividend yield 0.00% 0.00%
Exercise price > market price on grant date
Expected risk-free interest rate - 6.08%
Expected life - 5.0 years
Expected volatility - 77.20%
Expected dividend yield - 0.00%
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
(Continued)
F-21
-14-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1997 1996
---- ----
Net income As reported $ 717,869 726,361
Pro forma 626,736 663,527
Primary EPS As reported $ 0.43 0.40
Pro forma 0.38 0.37
Fully diluted EPS As reported $ 0.42 0.40
Pro forma $ 0.37 0.37
Pro forma net income reflects only options granted in 1997 and
1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro
forma net income amounts presented above because compensation
cost is reflected over the options' vesting period of 7 years and
compensation cost for options granted prior to October 1, 1995 is
not considered.
Stock option activity during the periods indicated is as follows:
Number of Weighted-average
shares exercise price
----- ------------
September 30, 1995 190,000 $ 5.28
Granted 265,000 2.63
Exercised - -
Forfeited (30,000) 5.50
Expired - -
------- ------
September 30, 1996 425,000 3.61
Granted 40,000 3.56
Exercised - -
Forfeited - -
Expired - -
------- ------
September 30, 1997 465,000 $ 3.61
_______ ______
(Continued)
F-22
-15-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.50 - $5.63 and
7.49 years, respectively.
At September 30, 1997 and 1996, the number of options exercisable was
145,500 and 57,500, respectively, and the weighted-average exercise price
of those options was $4.28 and $5.12, respectively.
Qualified Incentive Stock Options
As of September 30, 1997, the following options were outstanding under
qualified incentive stock options, including their grant date, exercise
price and expiration date:
Options Grant Exercise Expiration
outstanding date price date
----------- ---- ---- ----
100,000 January 23,1993 $ 5.10 January 23, 2003
40,000 August 12, 1994 5.50 August 12, 2004
10,000 December 21, 1995 3.00 December 21, 2005
110,000 December 28, 1995 2.75 December 28, 2005
105,000 December 28, 1995 2.50 December 28, 2005
5,000 March 7, 1996 3.00 March 7, 2006
30,000 December 11,1996 3.31 December 11, 2006
10,000 August 26, 1997 4.31 August 26, 2007
---
410,000
_______
The options granted on January 23, 1993 are exercisable at 25% per year
beginning two years from the date of grant. The options granted on August
12, 1994, December 21, 1995, March 7, 1996, December 11, 1996 and August
26, 1997, are exercisable at 20% per year beginning three years from the
date of grant. The options granted on December 28, 1995 are exercisable at
20% per year beginning one year from the date of grant.
As of September 30, 1997 and 1996, no options have been exercised and
126,000 and 50,000 options, respectively, were exercisable under quali-
fied incentive stock options.
(Continued)
F-23
-16-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nonqualified Options
As of September 30, 1997, the following options were outstanding under
nonqualified options, including their grant date, exercise price and
expiration date:
Options Grant Exercise Expiration
outstanding date price date
----------- ---- --- ----
10,000 January 23, 1993 $ 5.10 January 23, 2003
10,000 May 13, 1994 5.63 May 13, 2004
35,000 December 28, 1995 2.50 December 28, 2005
------
55,000
______
The nonqualified options granted January 23, 1993 and May 13, 1994 are
exercisable at 25% per year beginning two years from the date of grant. The
nonqualified options granted December 28, 1995 are exercisable at 20% per
year beginning one year from the date of grant.
As of September 30, 1997 and 1996, no options have been exercised and
19,500 and 7,500 options, respectively, were exercisable under non-
qualified stock options.
(12) Warrants
The Company had reserved 634,456 shares of its common stock for issuance
upon exercise of 634,456 outstanding warrants. The warrants, which were
issued in connection with the Company's initial offering of common stock to
the public in March of 1994, expired unexercised on February 11, 1997.
(Continued)
F-24
-17-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13)Commitments and Contingent Liabilities
The Company has entered into employment agreements with its chief executive
officer and chief operating officer which expire March 25, 1999. Under the
terms of the agreements, the two officers will receive a specified annual
compensation, a bonus to each officer equal to 10% of consolidated income
before income taxes, monthly automobile allowances and reimbursement for
personal income tax preparation fees. In the event of termination of the
agreements by the Company other than for cause, as defined, or if the
executives resign as a result of a breach by the Company, the agreements
provide for payments to such individuals in an amount equal to 100% of
their total compensation for 24 months following the date of termination.
In addition, upon termination of the agreements by the Company other than
for cause or if the executives resign as a result of a breach by the
Company, the Company has agreed, at the option of the executives, to the
extent such payments may be made under applicable law, to repurchase within
60 days of such termination at market value (average of bid and asked
prices) all shares of stock of the Company owned by the executives,
including ESOP shares, which amount to approximately 528,000 common shares
as of September 30, 1997. In addition, these executives have 220,000 option
shares granted of which 88,000 are vested at September 30, 1997. The
agreements also contain nondisclosure and noncompetition provisions.
On March 13, 1996, the Company announced that the Board of Directors
authorized the Company to repurchase up to $500,000 of its common stock in
the open market for the remainder of fiscal year 1996. On October 1, 1996,
the Company being authorized by the Board of Directors, extended the
buyback program through the end of fiscal year 1997. On September 2, 1997,
the Company, being authorized by the Board of Directors, extended the
buyback program through December 31, 1997. 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 of the Securities and
Exchange Commission which regulates the specific terms in which shares may
be repurchased. As of September 30, 1997, the Company had repurchased a
total of 25,600 shares under this program since its inception at a total
repurchase cost of $98,624.
F-25
(Continued)
-18-
INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the year ended September 30, 1997, the Company settled certain
client matters arising in the normal course of business totaling $146,000
which has been included in other operating expenses in the accompanying
consolidated statement of operations.
The Company is involved in an arbitrated claim which management believes to
be without merit and that any expected award on the claim will not be
material to the consolidated financial statements of the Company. The
arbitration hearing concluded on November 7, 1997 and the arbitration panel
has not yet rendered its decision on the claim. The amount of the claim
ranges from $300,000 to $465,000, legal fees, plus treble damages and
interest. The arbitrators' decision may award less than the claim, any part
of the claim or make no award on the claim.
The Company is party to certain litigation as of September 30, 1997 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.
F-26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table lists certain information about the directors,
executive officers and significant employees of the Company:
Director Officer
Name Age Since Since Position
Diego J. Veitia 54 1987 1987 Director, Chairman of the
Board and Chief Executive
Officer
Jerome F. Miceli 54 1990 1991 Director, President, Chief
Operating Officer and
Treasurer
Stephen A. Saker 51 1990 1991 Director, Vice President and
Secretary
Donald A. Halliday 54 1990 - Director of the Company
Elmer L. Jacobs 62 1994 - Director of the Company
Jonathan C. Hinz 35 - 1995 Vice President and Controller
Each of the Company's directors have been elected to serve until the next
annual meeting of stockholders and until his respective successor is
elected and qualified. Officers are elected annually by the Board of
Directors.
Diego J. Veitia founded the Company in 1987 to serve as a holding company
for IAAC and other subsidiaries. He has served as Chairman of the Board,
director and Chief Executive Officer of the Company since its inception. He
also served as President of the Company from 1987 until 1991. Mr. Veitia
founded IAAC in 1981 and has served as Chairman of the Board and director
since that time. Mr. Veitia is also currently serving as Chairman and Chief
Executive Officer of GAA, IAMC, IFP and GNSI. Mr. Veitia also serves as
Chairman of Veitia and Associates, Inc., a inactive registered investment
advisor. Mr. Veitia serves as a director of America's All Seasons Income,
Fund, Inc., an inactive management investment company. Mr. Veitia served as
Chairman of All Seasons Global Fund, Inc., a publicly held closed-end
management investment company from October 1987 until October 1996. During
the last five years Mr. Veitia has also served as director and Chairman of
Global Advisors, Inc., an investment advisor that has been dissolved.
Jerome F. Miceli has been a director of the Company since 1990 and has
served as President, Chief Operating Officer and Treasurer of the Company
since 1991. Mr. Miceli has also served as President, Chief Executive
Officer, Treasurer and director of IAAC since 1990. Mr. Miceli also
currently serves as President, Treasurer and Director of GAA, IAMC, IFP and
GNSI.
18
In addition, from December 1990 until October 1996, Mr. Miceli served as
Treasurer and director of All Seasons Global Fund Inc., a publicly held
closed-end management investment company. Mr. Miceli is also President of
Veitia and Associates, Inc., a inactive registered investment advisor.
Stephen A. Saker has been a director of the Company since 1990 and has
served as Secretary and Vice President of the Company since 1991. Mr. Saker
has also served as Director, Executive Vice President and Secretary of IAAC
since 1985. Mr. Saker currently serves as Vice President , Secretary and
Director of GAA, IAMC and GNSI. Since November 1991, Mr. Saker has served
as Vice President and Secretary of Veitia and Associates, Inc. Mr. Saker
also served as Secretary and director of All Seasons Global Fund, Inc. from
October 1987 until October 1996.
Donald A. Halliday has served as a director of the Company since 1990.
Since 1976, he has served as President of D. Halliday and Co., Inc., an
international trading company, and also serves as a consultant on business
development and trade financing issues for the tropical agribusiness and
shipping industries.
Elmer L. Jacobs became a director of the Company in May 1994. He has served
as an independent consultant on agribusiness development and bulk
transportation issues for agribusiness since 1990. From 1987 to 1990, he
was a partner with the Sparks Group, a consulting company. Before entering
private consultation, Mr. Jacobs was Group President of six divisions of
Continental Grain,a leading worldwide agribusiness firm.
Jonathan C. Hinz joined the Company in October 1995 and serves as Vice
President and Controller for the Company and Controller of IAAC and GAA.
Prior to joining the Company, Mr. Hinz served as Chief Financial Officer
and Controller of Computer Science Innovations, Inc. from 1987 to 1995.
Mr. Hinz is a certified public accountant.
Compliance with Section 16(a) of the Exchange Act
Pursuant to Section 16(a) of the Exchange Act and the rules issued
thereunder, the Company's executive officers, directors and owners of in
excess of 10% of the issued and outstanding common stock are required to
file with the SEC reports of ownership and changes in ownership of the
common stock of the Company. Copies of such reports are required to
furnished to the Company. Based solely on the review of such reports
furnished to the Company, the Company believes that during fiscal year
1997, all of its executive officers and directors complied with the Section
16(a) requirements.
ITEM 10. EXECUTIVE COMPENSATION.
Information with respect to this item will be contained in the Proxy
Statement for the 1998 Annual meeting of Shareholders, which is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information with respect to this item will be contained in the Proxy
Statement for the 1998 Annual meeting of Shareholders, which is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement for the 1998 Annual meeting of Shareholders, which is
incorporated herein by reference.
19
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The Company's consolidated financial statements are listed in the index
set forth in Item 7 on this Form 10-KSB. Financial statement schedules are
not required under the related instructions of the SEC or are inapplicable,
and therefore, have been omitted.
(b) There were no reports filed on Form 8-K.
(c) The following exhibits are incorporated by reference herein unless
otherwise indicated:
(3.1) The Company's Certificate of Incorporation and amendments are
incorporated by reference to Exhibits 3.1, 3.2, and 3.3 of the Registrant's
Registration Statement on Form SB-2 (No. 33-70334-A), as amended, filed
with the SEC on February 2, 1994.
(3.2) The Company's By-laws are incorporated by reference to Exhibit 3.4,
of the egistrant's Registration Statement on Form SB-2 (No. 33-70334-A), as
amended, filed with the SEC on February 2, 1994.
(4.1) The Company's Form of Common Stock Certificate is incorporated by
reference to Exhibit 4.1, of the Registrant's Registration Statement on
Form SB-2 (No. 33-70334-A), as amended, filed with the SEC on February 2,
1994.
(4.2) The Company's Revised Form of Warrant Certificate is incorporated by
reference to Exhibit 4.2, of the Registrant's Registration Statement on
Form SB-2 (No. 33-70334-A), as amended, filed with the SEC on February 2,
1994.
(4.3) The Company's Warrant Agreement dated January 31, 1994, between the
Company and Chemical Bank is incorporated by reference to Exhibit 4.3, of
the Registrant's Registration Statement on Form SB-2 (No. 33-70334-A), as
amended, filed with the SEC on February 2, 1994.
(4.4) The Company's Revised Form of Subscription Agreement is incorporated
by reference to Exhibit 4.4, of the Registrant' Registration Statement on
Form SB-2 (No. 33-70334-A), as amended, filed with the SEC on February 2,
1994.
(10.1) The Company's International Assets Holding Corporation Stock Option
Plan is incorporated by reference to Exhibit 10.2, of the Registrant's
Registration Statement on Form SB-2 (No. 33-70334-A), as amended,filed with
the SEC on February 2, 1994.
(10.1.a) The Company's International Assets Holding Corporation Stock
Option Plan, Amendment dated December 28, 1995, is incorporated by
reference to Exhibit 10.2 (a), of the Registrant's Registration Statement
on Form S-8 (No. 333-10727), filed with the SEC on August 23, 1996.
(10.2) The Company's International Assets Advisory Corporation Employee
Stock Ownership Plan and Trust ("ESOP") is incorporated by reference to
Exhibit 10.3, of the Registrant's Registration Statement on Form SB-2 (No.
33-70334-A), as amended, filed with the SEC on February 2, 1994.
(10.2.a) The Company's International Assets Advisory Corporation Employee
Stock Ownership Plan and Trust ("ESOP"), First Amendment dated November 4,
1993, is incorporated by reference to Exhibit 10.3(a), of the Registran's
Registration Statement on Form S-8 (No. 333-10727), filed with the SEC on
August 23, 1996.
(10.2.b) The Company's International Assets Advisory Corporation Employee
Stock Ownership Plan and Trust ("ESOP"), Amendment 1994-1, dated July 19,
1994, is incorporated by reference
20
to Exhibit 10.3(b),of the Registrant's Registration Statement on
Form S-8 (No. 333-10727), filed with the SEC on August 23, 1996.
(10.2.c) The Company's International Assets Advisory Corporation
Employee Stock Ownership Plan and Trust "ESOP"), Amendment
1994-1, dated December 30, 1994, is incorporated by reference to
Exhibit 10.3(c), of the Registrant's Registration Statement on
Form S-8 (No. 333-10727), filed with the SEC on August 23, 1996.
(10.2.d) The Company's International Assets Advisory Corporation
Employee Stock Ownership Plan and Trust ("ESOP"), Amendment
1995-1, dated July 21, 1995, is incorporated by reference to
Exhibit 10.3(d), of the Registrant's Registration Statement on
Form S-8 (No. 333-10727), filed with the SEC on August 23, 1996.
(10.3) The Company's $200,000 ESOP Loan Agreement dated as of
December 30, 1992, is incorporated by reference to Exhibit 10.4,
of the Registrant's Registration Statement on Form SB-2 (No.
33-70334-A), as amended, filed with the SEC on February 2, 1994.
(10.4) The Company's $200,000 ESOP Note dated December 30, 1992,
payable to the Company, is incorporated by reference to Exhibit
10.5, of the Registrant's Registration Statement on Form SB-2
(No. 33-70334-A), as amended, filed with the SEC on February 2,
1994.
(10.5) The Company's ESOP Pledge Agreement dated December 30,
1992, between the Company and the ESOP, is incorporated by
reference to Exhibit 10.6, of the Registrant's Registration
Statement on Form SB-2 (No. 33-70334-A), as amended, filed with
the SEC on February 2, 1994.
(10.6) The Company's Clearing Agreement dated February 29, 1984,
between Prudential Securities, Inc. and IAAC, as amended, is
incorporated by reference to Exhibit 10.10, of the Registrant's
Registration Statement on Form SB-2 (No. 33-70334-A),as amended,
filed with the SEC on February 2, 1994.
(10.7) The Company's Revised Form of Employment Agreement,
between the Company and Jerome F. Miceli is incorporated by
reference to Exhibit 10.11, of the Registrant's Registration
Statement on Form SB-2 (No. 33-70334-A), as amended, filed with
the SEC on February 2, 1994.
(10.8) The Company's Revised Form of Employment Agreement,
between the Company and Diego J. Veitia is incorporated by
reference to Exhibit 10.12, of the Registrant's Registration
Statement on Form SB-2 (No. 33-70334-A), as amended, filed with
the SEC on February 2, 1994.
(10.9) The Company's Lease dated November 5, 1993, by and between
Barnett Bank of Central Florida and IAAC is incorporated by
reference to Exhibits 10.15, of the Registrant's Registration
Statement on Form SB-2 (No. 33-70334-A), as amended, filed with
the SEC on February 2, 1994.
(11)* The Statement of Computation of per share earnings is
attached hereto as Exhibit 11.
(21)* List of Subsidiaries of the Company.
(23)* Consent of KPMG Peat Marwick LLP
(99) The Articles of Incorporation, and amendments thereto, and
the By-laws of IAAC are incorporated by reference to Exhibits
99.1, 99.2 and 99.3 of the Registrant's Registration Statement on
Form SB-2 (No. 33-70334-A), as amended, filed with the SEC on
February 2, 1994.
_______________
*Filed herewith
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the under signed, thereunto duly authorized.
INTERNATIONAL ASSETS HOLDING
CORPORATION
Dated: December 23, 1997 By: /s/ Jerome F. Miceli
Jerome F. Miceli, President
and Chief Operating Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934
this report has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Diego J. Veitia Chief Executive Officer and December 23, 1997
Diego J. Veitia Chairman of the Board
/s/ Jerome F. Miceli President, Chief Operating Officer, December 23, 1997
Jerome F. Miceli Treasurer and Director
/s/ Stephen A. Saker Vice President, Secretary, December 23, 1997
Stephen A. Saker and Director
/s/ Donald A. Halliday Director December 23, 1997
Donald A. Halliday
/s/ Elmer L. Jacobs Director December 23, 1997
Elmer L. Jacobs
/s/ Jonathan C. Hinz Vice President and Controller December 23, 1997
Jonathan C. Hinz (Person Performing Similar Functions
of Principal Financial Officer and
Principal Accounting Officer)
22
EXHIBIT 11
INTERNATIONAL ASSETS HOLDING CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
For the Year Ended September 30, 1997 and 1996
1997 1996
Adjustment of shares outstanding:
Weighted average number of actual common shares outstanding 1,435,424 1,458,073
Weighted average number of additional common shares outstanding
assuming the exercise of common stock equivalents (1) 400,117 714,776
Weighted average number of common and dilutive
============== ================
common equivalent shares outstanding 1,835,541 2,172,849
============== ================
Adjustment of net income, for primary earnings per share
Actual net income $717,869 $726,361
Adjustment to net income assuming the investment of
excess proceeds received from the assumed exercise
of common stock equivalents at weighted average
stock prices, net of income taxes $72,647 $144,549
============== ================
Adjusted net income, for primary earnings per share $790,516 $870,910
============== ================
Adjustment of net income, for fully diluted earnings per share
Actual net income $717,869 $726,361
Adjustment to net income assuming the investment of
excess proceeds received from the assumed exercise
of common stock equivalents at end of period stock
prices, net of income taxes $57,040 $139,389
============== ================
Adjusted net income, for primary earnings per share $774,909 $865,750
============== ==============
Earnings per common and dilutive common equivalent share:
Primary: $.43 $.40
Fully diluted: $.42 $.40
- ---------------------------------------------------------------------------------------------------------------------
(1) This calculation assumes that of all the additional common shares outstanding, assuming the
exercise of all common stock equivalents, 282,252 shares of common stock are re-acquired
with the proceeds therefrom as of October 1, 1996 and 290,157 shares are re-acquired as of
October 1, 1995.
23
EXHIBIT 21
INTERNATIONAL ASSETS HOLDING CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
International Assets Advisory Corp. Florida
International Asset Management Corp. Florida
Global Assets Advisors, Inc. Florida
International Financial Products, Inc. Florida
GlobalNet Securities, Inc. Florida
24
EXHIBIT 23
Independent Accountants' Consent
The Board of Directors
International Assets Holding Corporation:
We consent to the incorporation by reference in the Registration Statement
(No. 333-20553) on Form S-3 of International Assets Holding Corporation
(the "Company") of our report dated November 7, 1997 relating to the
consolidated balance sheets of the Company and its subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended
September 30, 1997 and 1996, which report appears in the September 30, 1997
annual report on Form 10-KSB of the Company.
/s/ KPMG Peat Marwick LLP
Orlando, Florida
December 23, 1997
25
BD
1
YEAR
SEP-30-1997
OCT-01-1996
SEP-30-1997
2,962,847
463,652
0
0
3,828,644
440,126
7,928,214
0
1,017,040
0
0
682,054
0
0
0
14,113
5,813,281
7,928,214
2,436,212
279,041
9,249,261
0
229,697
3,543
6,591,720
1,220,252
1,220,252
0
0
717,869
.43
.42
