Attached files
| file | filename |
|---|---|
| EX-21 - LIST OF THE COMPANY'S SUBSIDIARIES - StoneX Group Inc. | dex21.htm |
| EX-32.2 - CERTIFICATION - StoneX Group Inc. | dex322.htm |
| EX-31.2 - CERTIFICATION - StoneX Group Inc. | dex312.htm |
| EX-32.1 - CERTIFICATION - StoneX Group Inc. | dex321.htm |
| EX-31.1 - CERTIFICATION - StoneX Group Inc. | dex311.htm |
| EX-23.1 - CONSENT OF KPMG LLP - StoneX Group Inc. | dex231.htm |
| EX-23.2 - CONSENT OF ROTHSTEIN, KASS & COMPANY, P.C. - StoneX Group Inc. | dex232.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2010
Commission File Number 000-23554
INTERNATIONAL ASSETS HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 59-2921318 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
708 Third Avenue, Suite 1500
New York, NY 10017
(Address of principal executive offices) (Zip Code)
(212) 485-3500
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Stock, $.01 par value | NASDAQ Global Market |
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | x | |||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of March 31, 2010, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $168.6 million.
As of December 10, 2010, there were 10,612,522 shares of the registrant’s common stock outstanding.
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on February 24, 2011 are incorporated by reference into Part III of this Annual Report on Form 10-K.
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Cautionary Statement about Forward-Looking Statements
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” (refer to Part I, Item 1A). The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
| Item 1. | Business |
Overview of Business and Strategy
International Assets Holding Corporation, a Delaware corporation, together with its consolidated subsidiaries (collectively the “Company”) forms a financial services group employing 729 people in offices in eleven countries. We provide comprehensive risk management consulting services to mid-sized commercial customers, as well as utilize our expertise and capital to provide foreign exchange and treasury services, securities execution, physical commodities trading services and execution in both listed futures and option contracts as well as structured over-the counter (“OTC”) products in a wide range of commodities.
We are a customer centric organization which focuses on acquiring and building long-term relationships with our customers by providing consistent, quality execution and value added financial solutions, with the goal of earning the premium spreads that allow us to achieve our financial objectives.
We provide these services to a diverse group of more than 10,000 customers located in more than 100 countries, including producers, processors and end-users of nearly all widely-traded physical commodities to manage their risks and enhance margins; to commercial counterparties who are end-users of the firm’s products and services; to governmental and non-governmental organizations; and to commercial banks, brokers, institutional investors and major investment banks.
The Company engages in direct sales efforts to seek new customers, with a strategy of extending our services to potential customers who are similar in size and operations to our existing customer base, as well as different kinds of customers that have risk management needs that could be effectively met by our services. We plan to expand our services into new business product lines and new geographic regions, particularly in Asia, Europe, Australia, Latin America and Canada.
Our strategy is to utilize a centralized and disciplined process for capital allocation, risk management and cost control, while delegating the execution of strategic objectives and day-to-day management to experienced individuals. This requires high quality managers, a clear communication of performance objectives and strong financial and compliance controls. The Company believes this strategy will enable the Company to build a scalable and significantly larger organization that embraces an entrepreneurial approach to business, supported and underpinned by strong central controls.
Each of the Company’s businesses is volatile and their financial performance can change due to a variety of factors which are both outside of management’s control and not readily predictable. To address this volatility, the Company has sought to diversify into a number of uncorrelated businesses.
The Company’s internet address is www.intlassets.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of changes in beneficial ownership and press releases are available in the Investor Relations section of this web site. The Company’s website also includes information regarding the Company’s corporate governance, including the Company’s Code of Ethics, which governs the Company’s directors, officers and employees.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Capabilities
Clearing and Execution
The Company provides execution services on a wide variety of technology platforms in a number of markets. We provide clearing and execution of listed futures and options on futures contracts on all major commodity exchanges throughout the world and is a member of all major US commodity exchanges. The Company provides global payments and treasury services in more than 130 countries to a broad array of commercial customers, including financial institutions, multi-national corporations, and governmental and charitable organizations.
Advisory Services
We provide value added advisory services in a variety of financial markets and works with commercial clients to systematically identify and quantify exposures to commodity price risks and then develops strategic plans to effectively manage these risks with a view to protecting margins and mitigating exposures through its proprietary Integrated Risk Management Program (“IRMP”).
We provide commercial customers with a full range of investment banking services from optimizing the customer’s capital structure through the issue of loans, debt or equity securities and advisory services including mergers, acquisitions and restructurings.
Through its asset management activities, we leverage our specialist expertise in niche markets to provide institutional investors with tailored investment products.
Physical Trading
The Company trades in a variety of physical commodities, primarily precious and base metals as well as select soft commodities. The services offer customers efficient off-take or supply, as well as logistics management. Through these trading activities, the Company has the ability to offer complex hedging structures as part of each physical contract to provide customers with enhanced price risk mitigation.
Over-The-Counter (“OTC”) / Market Making
The Company offers customized and complex solutions in the OTC markets that are designed to help customers mitigate their specific market risks. These solutions are offered on a global basis across many markets, including virtually all traded commodities, foreign currencies and interest rates. This process is integrated from product design through execution of the underlying components of the structured risk product.
The Company also provides market making in a variety of financial products including commodity options, unlisted American Depository Receipts (“ADRs”), foreign common shares and foreign currencies.
Trading Revenues
In the Company’s business, purchases of individual securities, currencies, commodities or derivative instruments may be from single or multiple customers or counterparties. These purchases may be covered by a matching sale to a customer or counterparty or may be aggregated with other purchases to provide liquidity intraday, for a number of days or, in some cases, particularly the base metals business, even longer periods (during which fair values may fluctuate). Sales of individual securities, currencies, commodities or derivative instruments may also be to single or multiple customers or counterparties. They may be made from inventory, they may be covered by a simultaneous and matching purchase in the market or they may represent a short sale and be covered by a later purchase in the market.
Operating Segments
The Company’s activities are divided into five functional areas consisting of Commodity and Risk Management Services, Foreign Exchange, Securities, Clearing and Execution Services, and Other.
Commodity and Risk Management Services (“C&RM”)
We serve our commercial customers through a force of 119 risk management consultants who seek to provide high value added service that differentiates the Company from our competitors and maximizes the opportunity to retain customers. The
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
IRMP provides customers with commodity risk management consulting services with the goal of developing a customized long term hedging programs that assist customers to mitigate their exposure to commodity price risk and to maximize the amount and certainty of their operating profits. Customers are assisted in the execution of their hedging strategies through the Company’s exchange-traded futures and options on futures clearing and execution operations and through access to more customized alternatives provided by our OTC trading desk. Generally, customers direct their own trading activities and risk management consultants do not have discretionary authority to transact trades on behalf of customers. When transacting OTC contracts with a customer, the Company may offset the customer’s transaction simultaneously with one of its trading counterparties. Alternatively, the OTC trade desk will accept a customer transaction and offset that transaction with a similar but not identical position on the exchange.
We also provide a full range of trading and hedging capabilities to select producers, consumers, recylers and investors in precious metals and certain base metals and select other commodities. Acting as a principal, we commit our own capital to buy and sell these commodities on a spot and forward basis.
The risk management consultants organize their marketing efforts within this segment into customer industry product lines, and currently serve customers in the following areas:
| • | Commercial Grain—Customers in this product line include grain elevator operators, traders, processors, manufacturers and end-users. |
| • | Energy—The energy customer product line targets companies where energy represents a significant input cost into the production of their product or service. Customers in this product line include producers, refiners, wholesalers, transportation companies, convenience store chains, automobile and truck fleet operators, industrial companies, railroads and municipalities. |
| • | Renewable Fuels—The renewable fuels customer product line targets producers of ethanol and biodiesel products. |
| • | Latin America/Brazil—The customers within this product line are located predominantly in Mexico and Brazil. Customers are involved in all sectors of agribusiness, including livestock production and feeding, flour milling and baking, oilseed crushing and refining, grain merchandising, meat processing and sugar/ethanol production. |
| • | China—The China customer product line represents both Chinese future commission merchants (“FCM’s”) as well as commercial companies seeking to hedge their commodity risk exposures. The Chinese FCM’s are similar to introducing brokers, facilitating the transactions of their clients in the U.S. commodities markets. The commercial accounts generally represent significant processors of grain or other commodities. |
| • | Dairy/Food Service—The dairy and food service product line targets the dairy industry and users of agricultural commodities in the food industry. |
| • | Cotton/Textiles—The cotton product line targets both the domestic and international markets with a focus on providing trading, consulting and information services to the global fiber, textile and apparel industry. |
| • | Precious Metals—This product line targets mining producers and scrap merchants as well as wholesale jewelry manufactures and commercial concerns globally. |
| • | Base Metals—This product line has relationships with a number of small and medium-sized metals producers, refiners, recyclers, traders and manufacturing entities. We are also active in the acquisition of scrap metals which are refined under contract and sold to our customers. |
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
| • | Natural Gas—This product line focuses consumers of natural gas and has relationships with some of the largest natural gas consumers in North America, including municipalities and large manufacturing firms, as well as major utilities. |
| • | Introducing Brokers—Introducing brokers within this product line include individuals or organizations that maintain relationships with customers and intermediate transactions between the customer and FCStone. The customers within this product line are primarily agricultural producers. |
The Company records all of its physical commodities revenues on a gross basis. Operating revenues and losses from the Company’s commodities derivatives activities are recorded in ‘Trading gains’. Inventory for the commodities business is valued at the lower of cost or fair value, under the provisions of the Inventory Topic of the Accounting Standards Codification (“ASC”). The Company generally mitigates the price risk associated with commodities held in inventory through the use of derivatives. The Company does not elect hedge accounting under accounting principles generally accepted in the U.S. (“U.S. GAAP”) in accounting for this price risk mitigation. In such situations, unrealized gains in inventory are not recognized under U.S. GAAP, but unrealized gains and losses in related derivative positions are recognized under U.S. GAAP. As a result, the Company’s reported earnings from commodities trading may be subject to significant volatility.
Foreign Exchange
The Company provides treasury, global payment and foreign exchange services to financial institutions, multi-national corporations, government organizations and charitable organizations. We also assist commercial customers with the execution of foreign exchange hedging strategies. The Company transacts in over 130 currencies and specializes in smaller, more difficult emerging markets where there is limited liquidity. In addition, the Company executes trades based on the foreign currency flows inherent in the Company’s existing business activities. The Company primarily acts as a principal in buying and selling foreign currencies on a spot basis. The Company derives revenue from the difference between the purchase and sale prices.
The Company also provides spot foreign currency trading for eligible contract participants and high net worth retail customers and operates a proprietary foreign exchange desk which arbitrages the futures and cash markets.
Securities
Through INTL Trading, Inc. (“INTL Trading”), the Company acts as a wholesale market maker in select foreign securities including unlisted ADRs and foreign ordinary shares and provides execution in select debt instruments and exchange traded funds (“ETF’s”). INTL Trading provides execution and liquidity to national broker-dealers, regional broker-dealers and institutional investors.
The Company makes markets in approximately 800 ADRs and foreign ordinary shares traded in the OTC market. In addition, the Company will, on request, make prices in more than 8,000 other ADRs and foreign common shares. As a market-maker, the Company provides trade execution services by offering to buy shares from, or sell shares to, broker-dealers and institutions. The Company displays the prices at which it is willing to buy and sell these securities and adjusts its prices in response to market conditions. When acting as principal, the Company commits its own capital and derives revenue from the difference between the prices at which the Company buys and sells shares. The Company also earns commissions by executing trades on an agency basis.
While the Company’s customers are other broker-dealers and institutions, the business tends to be driven by the needs of the private clients of those broker-dealers and institutions. The size of private client trades may be uneconomical for the in-house international equities trading desks of our customers to execute. The Company is able to provide execution of smaller trades at profitable margins.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
The Company provides a full range of investment banking advisory services to commercial customers including the issue of loans or equity. On occasion we may invest our own capital in debt instruments before selling them into the market.
Clearing and Execution Services (“CES”)
We provide competitive and efficient clearing and execution of exchange-traded futures and options on futures for the institutional and professional traders through our subsidiary FCStone, LLC. Through its platform, customer orders are accepted and directed to the appropriate exchange for execution. The Company then facilitates the clearing of customers’ transactions. Clearing involves the matching of customers’ trades with the exchange, the collection and management of margin deposits to support the transactions, and the accounting and reporting of the transactions to customers. The Company seeks to leverage its capabilities and capacity by offering facilities management or outsourcing solutions to other FCM’s.
FCStone, LLC is a registered FCM and a clearing member of all major U.S. commodity futures exchanges including the Chicago Mercantile Exchange and its divisions: the Chicago Board of Trade, the New York Mercantile Exchange and the COMEX; ICE Futures US formerly known as the New York Board of Trade, Kansas City Board of Trade and the Minneapolis Grain Exchange (“MGEX”). As of September 30, 2010, FCStone, LLC was the fourth largest independent FCM in the United States, as measured by required customer segregated assets. As of September 30, 2010, FCStone, LLC had $1.2 billion in required customer segregated assets.
Other
This segment consists of the Company’s asset management and grain financing and facilitation business. The asset management revenues include fees, commissions and other revenues received by the Company for management of third party assets and investment gains or losses on the Company’s investments in funds and proprietary accounts managed either by the Company’s investment managers or by independent investment managers.
We operate a grain financing and facilitation business that makes loans to commercial grain-related companies against physical grain inventories. Sale and repurchase agreements are used to purchase grain evidenced by warehouse receipts at local grain elevators subject to a simultaneous agreements to sell such grain back to the original seller at a later date. These transactions are accounted for as product financing arrangements, and accordingly no grain inventory, grain purchases or grain sales are recorded. The Company also serves as a lender for a number of different commodities, including grain, lumber, energy products and renewable fuels.
Acquisition of FCStone Group, Inc.
On September 30, 2009, International Assets Holding Corporation completed its acquisition of FCStone Group, Inc. (“FCStone”) pursuant to the merger of FCStone and a wholly owned subsidiary of the Company (the “FCStone transaction”). As a result of this transaction, the Company issued approximately 8.2 million shares of its common stock to the former shareholders of FCStone, and FCStone became a wholly owned subsidiary of International Assets Holding Corporation.
At the time of the acquisition, FCStone and its subsidiaries provided risk management consulting and transaction execution services to commercial commodity intermediaries, users and producers. FCStone primarily assisted middle-market customers in optimizing their profit margins and mitigating commodity price risk. In addition to its risk management consulting services, FCStone operated an independent clearing and execution platform for exchange-traded futures and options contracts. All of the capabilities of FCStone have been retained and integrated into our operations.
Effect of FCStone transaction on disclosures in this Form 10-K
The FCStone transaction was consummated on September 30, 2009, the last day of the 2009 fiscal year for the Company. As a result, the consolidated income statement of the Company for the fiscal year ended September 30, 2010 includes the results of FCStone, while the consolidated income statements of the Company for the fiscal years ended September 30, 2009 and
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
2008 included in this Form 10-K do not include the results of FCStone. The consolidated balance sheets for the Company as of September 30, 2010 and 2009 included in this Form 10-K reflect the acquisition of FCStone utilizing the purchase method of accounting.
Acquisitions made in the 2010 Fiscal Year
During fiscal year 2010, the Company acquired three businesses, Risk Management Incorporated and RMI Consulting, Inc., Hanley Trading, LLC and related companies and Provident Group, none of which were significant on an individual or aggregate basis. The Company’s consolidated financial statements include the operating results of each business from the dates of acquisition.
Risk Management Incorporated and RMI Consulting, Inc.
On April 1, 2010, we acquired Risk Management Incorporated and RMI Consulting, Inc. (the “RMI Companies”). The purchase price consisted of an initial payment of $6.0 million, and three contingent payments. The estimated total purchase price, including contingent consideration, is approximately $16.7 million.
RMI provides execution and consulting services to some of the largest natural gas consumers in North America, including municipalities and large manufacturing firms, as well as major utilities. In addition to its risk-management and brokerage services, RMI also offers a wide range of other programs, including a proprietary online energy procurement platform. The acquisition adds extensive and proven expertise in the natural gas, electricity and related energy markets where RMI has a leading presence, as well as a broad range of long-term relationships with some major organizations.
Hanley Companies
On July 2, 2010, we acquired HGC Trading, LLC; HGC Asset Management, LLC; HGC Advisory Services, LLC; Hanley Alternative Trade Group, LLC and HGC Office Services, LLC; (the “Hanley Companies”). The purchase price consisted of an initial payment of $31.8 million, and three contingent payments. The estimated total purchase price, including contingent consideration, is approximately $47.4 million.
The Hanley Companies are engaged in the business of acting as market makers and dealers in exchange traded options and futures on soft commodities; executing and trading derivatives on soft commodities in the OTC market; and providing related advisory services.
Provident Group
On September 20, 2010, the Company acquired certain assets of Provident Group (“Provident”), a New York-based investment banking and advisory firm. Under terms of the acquisition agreement, the Company acquired assets and secured the services of the individual sellers as set forth in the agreement. The estimated purchase price for the assets and services of the sellers was $5.0 million.
Provident is engaged in the business of providing investment banking and advisory services. Provident is expected to play a critical role in building out a comprehensive investment banking and advisory platform delivering financing solutions to the middle market.
Subsequent acquisition
Hencorp Futures
Subsequent to the fiscal year ended September 30, 2010, the Company acquired all of the membership interests in Hencorp Becstone Futures, L.C. (“Hencorp Futures”), the futures operation of Miami-based Hencorp Group. Hencorp Futures specializes in the development and execution of risk-management programs designed to hedge price volatility in a number of widely traded commodities, including coffee, sugar, cocoa, grains and energy products. The purchase price consists of an initial payment of $2.3 million, four contingent payments which will be based on Hencorp Futures’ net income for each of the four years after the closing and a final contingent payment based on the average net income of the second, third and fourth years.
Competition
The international commodities and financial markets are highly competitive and rapidly evolving. In addition, these markets are dominated by firms with significant capital and personnel resources that are not matched by the Company’s resources. The Company expects these competitive conditions to continue in the future, although the nature of the competition may change as a result of the current global financial crisis. The crisis has produced opportunities for the Company to expand its activities and may produce further opportunities. The Company believes that it can compete successfully with other commodities and financial intermediaries in the markets it seeks to serve, based on the Company’s expertise, products and quality of consulting and execution services.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
We compete with a large number of firms in the exchange-traded futures and options execution sector and in the OTC derivatives sector. We compete primarily on the basis of price and value of service. Our competitors in the exchange-traded futures and options sector include international brokerage firms, national brokerage firms, regional brokerage firms (both cooperatives and non-cooperatives) as well as local introducing brokers, with competition driven by price level and quality of service. Many of these competitors also offer OTC trading programs. In addition, there are a number of financial firms and physical commodities firms that participate in the OTC markets, both directly in competition with us and indirectly through firms like us. We compete in the OTC market by making specialized OTC transactions available to our customers in contract sizes that are smaller than those usually available from major counter-parties.
The Company’s activities are impacted, and will continue to be impacted, by investor interest in the markets served by the Company. The instruments traded in these markets compete with a wide range of alternative investment instruments. The Company seeks to counterbalance changes in demand in specified markets by undertaking activities in multiple uncorrelated markets.
Technology has increased competitive pressures on commodities and financial intermediaries by improving dissemination of information, making markets more transparent and facilitating the development of alternative execution mechanisms. The Company competes, in certain instances, by providing technology-based solutions to facilitate customer transactions and solidify customer relationships.
Administration and Operations
The Company employs operations personnel to supervise and, for certain products, complete the clearing and settlement of transactions.
INTL Trading’s securities transactions are cleared through Broadcourt, a division of Merrill Lynch, Pierce, Fenner & Smith, Inc. INTL Trading does not hold customer funds or directly clear or settle securities transactions.
We utilize front-end electronic trading, back office and accounting systems to process transactions on a daily basis. In some cases these systems are integrated. They provide recordkeeping, trade reporting to exchange clearing, internal risk controls, and reporting to government entities, corporate managers, risk managers and customers. Our futures and options back office system is maintained by a third-party service bureau which is located in Chicago with a disaster recovery site in New York.
The Company holds customer funds in relation to certain of its activities. In regulated entities, these are segregated but in unregulated entities they are not.
The Company’s administrative staff manages the Company’s internal financial controls, accounting functions, office services and compliance with regulatory requirements.
Governmental Regulation and Exchange Membership
The Company’s activities are subject to significant governmental regulation, both in the United States and overseas. Failure to comply with regulatory requirements could result in administrative or court proceedings, censure, fines, issuance of cease-and-desist orders, suspension or disqualification of the regulated entity, its officers, supervisors or representatives. The regulatory environment in which the Company operates is subject to frequent change and these changes directly impact the Company’s business and operating results.
The securities industry in the United States is subject to extensive regulation under federal and state securities laws. The Company is required to comply with a wide range of requirements imposed by the SEC, state securities commissions and Financial Industry Regulatory Authority (“FINRA”). These regulatory bodies are charged with safeguarding the integrity of the financial markets and with protecting the interests of investors in these markets. They also impose minimum capital requirements on regulated entities.
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets, including credit and derivatives transactions. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making it difficult to assess the impact of the statute on the financial industry, including the Company, at this time. The Company will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expects to adapt successfully to any new applicable legislative and regulatory requirements.
The activities of our broker-dealer subsidiaries in the United States, INTL Trading and FCC Investments, Inc. (“FCC Investments”), are primarily regulated by FINRA and the SEC.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
The commodities industry in the United States is also subject to extensive regulation under federal law. The Company is required to comply with a wide range of requirements imposed by the Commodity Futures Trading Commission, the National Futures Association and the Chicago Mercantile Exchange, which is our designated self-regulatory organization. It is also a member of Chicago Mercantile Exchange/Chicago Board of Trade, New York Mercantile Exchange, ICE Futures US, Minneapolis Grain Exchange and the Kansas City Board of Trade. These regulatory bodies are charged with protecting customers by imposing requirements relating to capital adequacy, licensing of personnel, conduct of business, protection of customer assets, record-keeping, trade-reporting and other matters.
The USA PATRIOT Act contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers and other financial services companies. The USA PATRIOT Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside of the United States contain similar provisions. We believe that we have implemented, and that we maintain, appropriate internal practices, procedures and controls to enable us to comply with the provisions of the USA PATRIOT Act and other anti-money laundering laws.
The United States maintains various economic sanctions programs administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions take many forms, but generally prohibit or restrict trade and investment in and with sanctions targets; and in some cases require blocking of the target’s assets. Violations of any of the OFAC-administered sanctions are punishable by civil fines, as well as criminal fines and imprisonment. We have established policies and procedures designed to comply with applicable OFAC requirements. Although we believe that our policies and procedures are effective, there can be no assurance that our policies and procedures will effectively prevent us from violating the OFAC-administered sanctions in every transaction in which we may engage.
Net Capital Requirements
INTL Trading is subject to the net capital requirements imposed by SEC Rule 15c3-1 under the Securities Exchange Act of 1934. These requirements are intended to ensure the financial integrity and liquidity of broker-dealers. They establish both minimum levels of capital and liquid assets. The net capital requirements prohibit the payments of dividends, redemption of stock, the prepayment of subordinated indebtedness and the making of any unsecured advances or loans to any stockholder, employee or affiliate, if such payment would reduce the broker-dealer’s net capital below required levels.
The net capital requirements restrict the ability of INTL Trading to make distributions to the Company. They also restrict the ability of INTL Trading to expand its business beyond a certain point without the introduction of additional capital.
As of September 30, 2010, INTL Trading’s net capital and excess net capital were $1.5 million and $0.5 million, respectively. See Note 16 to the consolidated financial statements.
FCStone, LLC is subject to minimum capital requirements in the United States, under Section 4(f)(b) of the Commodity Exchange Act and Part 1.17 of the rules and regulations of the Commodity Futures Trading Commission. These rules specify the minimum amount of capital that must be available to support our clients’ open trading positions, including the amount of assets that FCStone, LLC must maintain in relatively liquid form, and are designed to measure general financial integrity and liquidity. Net capital and the related net capital requirement may fluctuate on a daily basis. FCStone, LLC currently maintains regulatory capital in excess of all applicable requirements. See Note 16 to the Consolidated Financial Statements.
Compliance with minimum capital requirements may limit our operations if we cannot maintain the required levels of capital. Moreover, any change in these rules or the imposition of new rules affecting the scope, coverage, calculation or amount of capital we are required to maintain could restrict our ability to operate our business and adversely affect our operations.
FCStone Commodities Services (Europe), Ltd. is regulated by the Financial Regulator of Ireland and is subject to a minimum capital requirement which at September 30, 2010 was 370,000 euros.
Risk Management Incorporated is regulated by the CFTC and the National Futures Association (“NFA”) and is subject to a minimum capital requirement which at September 30, 2010 was $45,000.
Foreign Operations
The Company operates in a number of foreign jurisdictions, including Canada, Ireland, the United Kingdom, Argentina, Brazil, Uruguay, Mexico, Nigeria, Dubai, China, Australia and Singapore. INTL has established wholly-owned subsidiaries in Mexico and Nigeria but does not have offices or employees in those countries.
FCStone Commodity Services (Europe) Ltd. is domiciled in Ireland and subject to regulation by the Financial Regulator of Ireland.
INTL Trading and INTL Commodities each have branch offices in the United Kingdom. As a result, their activities are also subject to regulation by the United Kingdom Financial Services Authority.
In Argentina, the activities of INTL Gainvest and Compania Inversora Bursatil S.A. Sociedad de Bolsa (“CIBSA”) are subject to regulation by the Comision de Valores and Merval.
In Brazil, the activities of FCStone do Brasil are subject to regulation by BM&FBovespa.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
The activities of INTL Capital Limited and INTL Commodities DMCC are subject to regulation by the Dubai Financial Services Authority and the Dubai Multi Commodities Centre, respectively.
FCStone Australia Pty. Ltd. is subject to regulation by the Australian Securities and Investments Commission.
Business Risks
The Company seeks to mitigate the market and credit risks arising from its financial trading activities through an active risk management program. The principal objective of this program is to limit trading risk to an acceptable level while maximizing the return generated on the risk assumed.
The Company has a defined risk policy which is administered by the Company’s risk committee, which reports to the Company’s audit committee. The Company has established specific exposure limits for inventory positions in every business, as well as specific issuer limits and counterparty limits. These limits are designed to ensure that in a situation of unexpectedly large or rapid movements or disruptions in one or more markets, systemic financial distress, the failure of a counterparty or the default of an issuer, the potential estimated loss will remain within acceptable levels. The audit committee reviews the performance of the risk committee on a quarterly basis to monitor compliance with the established risk policy.
Employees
As of September 30, 2010, we employed 729 people globally: 547 in the United States, 3 in Canada, 59 in Argentina, 36 in Brazil, 8 in Uruguay, 25 in the United Kingdom, 5 in Ireland, 16 in Dubai, 19 in Singapore, 1 in China and 10 in Australia. None of our employees operate under a collective bargaining agreement, and we have not suffered any work stoppages or labor disputes. Many of our employees are subject to employment agreements, certain of which contain non-competition provisions.
| Item 1A. | Risk Factors |
The Company faces a variety of risks that could adversely impact its financial condition and results of operations.
The risks faced by the Company include the following:
We do not have a consistent history of profitability and our ability to achieve consistent profitability in the future in subject to uncertainty. During the fiscal year ended September 30, 2010 we recorded a net income of $5.4 million, which includes a $7.0 million extraordinary loss related to purchase price adjustments and the correction of immaterial errors on the FCStone transaction, compared with net income of $27.6 million in 2009, which includes an $18.5 million extraordinary gain related to the FCStone transaction in 2009, and $27.8 million in 2008.
Our ability to achieve consistent profitability is subject to uncertainty due to the nature of our businesses and the markets in which we operate. In particular, our revenues and operating results may fluctuate significantly in the future because of the following factors:
| • | Market conditions, such as price levels and volatility in the securities, commodities and foreign exchange markets in which we operate |
| • | Changes in the volume of our market making and trading activities |
| • | Changes in the value of our financial instruments, currency and commodities positions and our ability to manage related risks |
| • | The level and volatility of interest rates |
| • | The availability and cost of funding and capital |
| • | Our ability to manage personnel, overhead and other expenses |
| • | Changes in execution and clearing fees |
| • | The addition or loss of sales or trading professionals |
| • | Changes in legal and regulatory requirements |
| • | General economic and political conditions |
Although we are continuing our efforts to diversify the sources of our revenues, it is likely that our revenues and operating results will continue to fluctuate substantially in the future and such fluctuations could result in losses. These losses could have a material adverse affect on our business, financial condition and operating results.
The manner in which we account for our commodities inventory and forward commitments may increase the volatility of our reported earning. Our net income is subject to volatility due to the manner in which we report our commodities inventory. This inventory is stated at the lower of cost or fair value. The Company generally mitigates the price risk associated with its commodities inventory through the use of derivatives. This price risk mitigation does not generally qualify for hedge
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
accounting under GAAP. In such situations, any unrealized gains in inventory are not recognized under GAAP, but unrealized gains and losses in related derivative positions are recognized under GAAP. Additionally, GAAP does not require us to reflect changes in estimated values of forward commitments to purchase and sell commodities. As a result, the Company’s reported earnings from this business segment are subject to greater volatility than the earnings from our other business segments.
Our substantial indebtedness could adversely affect our financial conditions. As of September 30, 2010, our total consolidated indebtedness to lenders and noteholders was approximately $132.1 million, and we expect to increase our indebtedness in the future as we continue to expand our business. Our indebtedness could have important consequences, including:
| • | increasing our vulnerability to general adverse economic and industry conditions |
| • | requiring that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate requirements |
| • | limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and general corporate requirements |
| • | limiting our flexibility in planning for, or reacting to, changes in our business and the securities industry |
| • | restricting our ability to pay dividends or make other payments |
| • | placing us at a competitive disadvantage to our competitors that have less indebtedness |
We may be able to incur additional indebtedness in the future, including secured indebtedness. If new indebtedness is added to our current indebtedness levels, the related risks that we now face could intensify.
Committed credit facilities currently available to the Company might not be renewed. As of December 15, 2010, we have three committed credit facilities under which we may borrow up to $290 million, consisting of:
| • | a $140 million facility available to our wholly-owned subsidiary, INTL Commodities, for its commodities trading activities, is committed until September 21, 2011 |
| • | a $75 million available to our wholly-owned subsidiary, FCStone, LLC, for short-term funding of margin to commodity exchanges, is committed until June 22, 2011 |
| • | a $75 million facility available to the Company and INTL Global Currencies, for general working capital requirements, is committed until October 1, 2013. This facility was established on October 1, 2010 and replaced two existing facilities for $60 million that were in place on September 30, 2010. |
We also have a $50 million uncommitted facility available to our wholly-owned subsidiary, FCStone Financial, for financing commodity repurchase agreements, terminating December 1, 2011. This facility was established on December 2, 2010.
It is possible that these facilities might not be renewed at the end of their commitment periods and that we will be unable to replace them with other facilities. If our credit facilities are unavailable or insufficient to support future levels of business activities, we may need to raise additional funds externally, either in the form of debt or equity. If we cannot raise additional funds on acceptable terms, we may not be able to develop or enhance our business, take advantage of future opportunities or respond to competitive pressure or unanticipated requirements, leading to reduced profitability.
The failure of the Company to successfully integrate the operations of businesses acquired by the Company in the last 15 months could have a material adverse effect on the Company’s business, financial condition and operating results. Since September 30, 2009, the Company has acquired several businesses, including FCStone, Risk Management Incorporated and RMI Consulting, Inc., Hanley Group, Provident Group and Hencorp Futures. We will need to meet significant challenges to realize the expected benefits and synergies of these acquisitions. These challenges include:
| • | integrating the management teams, strategies, cultures, technologies and operations of the acquired companies; |
| • | retaining and assimilating the key personnel of acquired companies; |
| • | retaining existing clients of the acquired companies; |
| • | creating uniform standards, controls, procedures, policies and information systems; and |
| • | achieving revenue growth because of risks involving (1) the ability to retain clients, (2) the ability to sell the services and products of the acquired companies to the existing clients of our other business segments, and (3) the ability to sell the services and products of our other business segments to the existing clients of the acquired companies. |
The accomplishment of these objectives will involve considerable risk, including:
| • | the potential disruption of each company’s ongoing business and distraction of their respective management teams; |
| • | unanticipated expenses related to technology integration; and |
| • | potential unknown liabilities associated with the acquisition. |
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
It is possible that the integration process could result in the loss of the technical skills and management expertise of key employees, the disruption of the ongoing businesses or inconsistencies in standards, controls, procedures and policies due to possible cultural conflicts or differences of opinions on technical decisions and product road maps that adversely affect the Company’s ability to maintain relationships with clients, software developers, customers and employees or to achieve the anticipated benefits of the acquisition.
We face risks associated with our market making and trading activities. We conduct our market-making and trading activities predominantly as a principal, which subjects our capital to significant risks. These activities involve the purchase, sale or short sale for customers and for our own account of financial instruments, including equity and debt securities, commodities and foreign exchange. These activities are subject to a number of risks, including risks of price fluctuations, rapid changes in the liquidity of markets and counterparty creditworthiness.
These risks may limit our ability to either resell financial instruments we purchased or to repurchase securities we sold in these transactions. In addition, we may experience difficulty borrowing financial instruments to make delivery to purchasers to whom we sold short, or lenders from whom we have borrowed. From time to time, we have large position concentrations in securities of a single issuer or issuers in specific countries and markets. This concentration could result in higher trading losses than would occur if our positions and activities were less concentrated.
The success of our market-making activities depends on:
| • | the price volatility of specific financial instruments, currencies and commodities |
| • | our ability to attract order flow |
| • | the skill of our personnel |
| • | the availability of capital |
| • | general market conditions |
To attract market-trading, market-making and trading business, we must be competitive in:
| • | providing enhanced liquidity to our customers |
| • | the efficiency of our order execution |
| • | the sophistication of our trading technology |
| • | the quality of our customer service |
In our role as a market maker and trader, we attempt to derive a profit from the difference between the prices at which we buy and sell financial instruments, currencies and commodities. However, competitive forces often require us to:
| • | match the quotes other market makers display; and |
| • | hold varying amounts of financial instruments, currencies and commodities in inventory. |
By having to maintain inventory positions, we are subject to a high degree of risk. We cannot ensure that we will be able to manage our inventory risk successfully or that we will not experience significant losses, either of which could materially adversely affect our business, financial condition and operating results.
We operate as a principal in the OTC derivatives markets which involves the risks associated with commodity derivative instruments. We offer OTC derivatives to our customers in which we act as a principal counterparty. We endeavor to simultaneously offset the commodity price risk of the instruments by establishing corresponding offsetting positions with commodity counterparties, or alternatively we may offset those transactions with similar but not identical positions on an exchange. To the extent that we are unable to simultaneously offset an open position or the offsetting transaction is not fully effective to eliminate the commodity derivative risk, we have market risk exposure on these unmatched transactions. Our exposure varies based on the size of the overall positions, the terms and liquidity of the instruments brokered, and the amount of time the positions remain open.
To the extent an unhedged position is not disposed of intra-day, adverse movements in the commodities underlying these positions or a downturn or disruption in the markets for these positions could result in a substantial loss. In addition, any principal gains and losses resulting from these positions could on occasion have a disproportionate effect, positive or negative, on our financial condition and results of operations for any particular reporting period.
Transactions involving OTC derivative contracts may be adversely affected by fluctuations in the level, volatility, correlation or relationship between market prices, rates, indices and/or other factors. These types of instruments may also suffer from illiquidity in the market or in a related market.
OTC derivative transactions are subject to unique risks. OTC derivative transactions are subject to the risk that, as a result of mismatches or delays in the timing of cash flows due from or to counterparties in OTC derivative transactions or related hedging, trading, collateral or other transactions, we or our counterparty may not have adequate cash available to fund its current obligations.
13
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
We could incur material losses pursuant to OTC derivative transactions because of inadequacies in or failures of our internal systems and controls for monitoring and quantifying the risk and contractual obligations associated with OTC derivative transactions and related transactions or for detecting human error, systems failure or management failure.
OTC derivative transactions may be modified or terminated only by mutual consent of the original parties and subject to agreement on individually negotiated terms. Accordingly it may not be possible to modify, terminate or offset obligations or exposure to the risk associated with a transaction prior to its scheduled termination date.
The current global financial crisis has heightened many of the risks to which the Company is exposed. The current financial crisis has increased many of the risks that accompany the Company’s business, including the risk of counterparty failure, the inability to obtain necessary financing and the absence of liquid markets. The continuation of the crisis may affect other aspects of the Company’s businesses for a variety of reasons. A general decrease in worldwide economic activity could reduce demand for Company’s equity market making and foreign exchange business, as well as volumes in FCStone’s commodity & risk management services and clearing and execution services segments. The substantial decline in commodities prices may affect the levels of business in the commodities trading segment. The ultimate effect of the crisis on the Company’s liquidity, financial condition and capital resources is unpredictable.
We may have difficulty managing our growth. Since October 1, 2005, we have experienced significant growth in our business. Our operating revenues grew from $35.1 million in the 2006 fiscal year to $269.0 million in 2010. The acquisition of additional businesses since September 30, 2009 is expected to increase operating revenues in 2011.
This growth has required and will continue to require us to increase our investment in management personnel, financial and management systems and controls, and facilities. In the absence of continued revenue growth, the costs associated with our expected growth would cause our operating margins to decline from current levels. In addition, as is common in the financial industry, we are and will continue to be highly dependent on the effective and reliable operation of our communications and information systems.
The scope of procedures for assuring compliance with applicable rules and regulations has changed as the size and complexity of our business has increased. In response, we have implemented and continue to revise formal compliance procedures.
It is possible that we will not be able to manage our growth successfully. Our inability to do so could have a material adverse effect on our business, financial condition and operating results.
We are exposed to the credit risk of our customers and counterparties and their failure to meet their financial obligations could adversely affect our business. We have substantial credit risk in both our securities and commodities businesses. As a market-maker of OTC and listed securities, the majority of our securities transactions are conducted as principal with broker-dealer counterparties located in the United States. We clear our securities transactions through an unaffiliated clearing broker. Substantially all of our equity and debt securities are held by this clearing broker. Our clearing broker has the right to charge us for losses that result from a counterparty’s failure to fulfill its contractual obligations.
As a clearing broker in futures and option transactions, we act on behalf of our customers for all trades consummated on exchanges. We must pay initial and variation margin to the exchanges before we receive the required payments from our customers. Accordingly, we are responsible for our customers’ obligations with respect to these transactions, including margin payments, which exposes us to significant credit risk. Customer positions which represent a significant percentage of open positions in a given market or concentrations in illiquid markets may expose us to the risk that we are not able to liquidate a customer’s position in a manner which does not result in a deficit in that customers account. A substantial part of our working capital is at risk if customers default on their obligations to us and their account balances and security deposits are insufficient to meet all of their obligations.
With over-the-counter derivative transactions we act as a principal, which exposes us to both the credit risk of our customers and the counterparties with which we offset the customer’s position. As with exchange traded transactions, our over-the-counter transactions require that we meet initial and variation margin payments on behalf of our customers before we receive the required payment from our customers. In addition, with over-the-counter transactions, there is a risk that a counterparty will fail to meet its obligations when due. We would then be exposed to the risk that a settlement of a transaction which is due a customer will not be collected from the respective counterparty with which the transaction was offset. Customers and counterparties that owe us money, securities or other assets may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons.
In this regard, during its fiscal year ended August 31, 2009, FCStone Group, Inc. recognized approximately $119.8 million in bad debt expense as a result of defaults by customer counterparties. Although the Company has adopted additional procedures that are designed to reduce the likelihood and magnitude of such credit losses, they are an inherent component of the business conducted by the Company, and the Company will continue to be subject to the risk of such losses.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
We are responsible for self-clearing our foreign exchange and precious and base metals commodities trading activities and, in addition, take principal risk to counterparties and customers in these activities. Any metals or other physical commodities positions are held by third party custodians.
Although we have procedures for reviewing credit exposures to specific customers and counterparties to address present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee including rapid changes in securities, commodity and foreign exchange price levels. Some of our risk management methods depend upon the evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible by us. That information may not, in all cases, be accurate, complete, up-to-date or properly evaluated. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. We may be materially and adversely affected in the event of a significant default by our customers and counterparties.
In our securities and commodities trading businesses we rely on the ability of our clearing brokers to adequately discharge their obligations on a timely basis. We also depend on the solvency of our clearing brokers and custodians. Any failure by a clearing broker to adequately discharge its obligations on a timely basis, or insolvency of a clearing broker or custodian, or any event adversely affecting our clearing brokers or custodians, could have a material adverse effect on our business, financial condition and operating results.
Our revenues may decrease due to changes in market volume, prices or liquidity. Our revenues may decrease due to changes in market volume, prices, or liquidity. Declines in the volume of securities, commodities and foreign exchange transactions and in market liquidity generally may result in lower revenues from market-making and trading activities. Changes in price levels of securities and commodities and foreign exchange rates also may result in reduced trading activity and reduce our revenues from market-making transactions. Changed price levels also can result in losses from changes in the fair value of securities and commodities held in inventory. Sudden sharp changes in fair values of securities and commodities can result in:
| • | illiquid markets |
| • | fair value losses arising from positions held by the Company |
| • | the failure of buyers and sellers of securities and commodities to fulfill their settlement obligations |
| • | redemptions from funds managed in our asset management business segment and consequent reductions in management fees |
| • | reductions in accrued performance fees in our asset management business segment |
| • | increases in claims and litigation |
Any change in market volume, price or liquidity or any other of these factors could have a material adverse effect on our business, financial condition and operating results.
Our revenues may decrease due to changes in customer trading volumes which are dependent in large part on commodity prices and commodity price volatility, Customer trading volumes are largely driven by the degree of volatility—the magnitude and frequency of fluctuations—in prices of commodities. Higher volatility increases the need to hedge contractual price risk and creates opportunities for arbitrage trading. Energy and agricultural commodities markets have periodically experienced significant price volatility. In addition to price volatility, increases in commodity prices lead to increased trading volume. As prices of commodities have risen, especially energy prices, new participants have entered the markets to address their growing risk-management needs or to take advantage of greater trading opportunities. Sustained periods of stability in the prices of commodities or generally lower prices could result in lower trading volumes and, potentially, lower revenues. Lower volatility and lower volumes could lead to lower customer balances held on deposit, which in turn may reduce the amount of interest revenue based on these deposits.
Factors that are particularly likely to affect price volatility and price levels of commodities include:
| • | supply and demand of commodities, |
| • | weather conditions affecting certain commodities, |
| • | national and international economic and political conditions, |
| • | perceived stability of commodities and financial markets, |
| • | the level and volatility of interest rates and inflation, and |
| • | financial strength of market participants. |
Any one or more of these factors may reduce price volatility or price levels in the markets for commodities trading, which in turn could reduce trading activity in those markets. Moreover, any reduction in trading activity could reduce liquidity which in turn could further discourage existing and potential market participants and thus accelerate any decline in the level of trading activity in these markets.
15
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Our revenues may be impacted by diminished market activity due to adverse economic, political and market conditions. The amount of our revenues depends in part on the level of activity in the securities, foreign exchange and commodities markets in which we conduct business. The level of activity in these markets is directly affected by numerous national and international factors that are beyond our control, including:
| • | economic, political and market conditions |
| • | the availability of short-term and long-term funding and capital |
| • | the level and volatility of interest rates |
| • | legislative and regulatory changes |
| • | currency values and inflation |
Any one or more of these factors may reduce the level of activity in these markets, which could result in lower revenues from our market-making and trading activities. Any reduction in revenues or any loss resulting from these factors could have a material adverse effect on our business, financial condition and operating results.
Multiple product lines of our business depend significantly on a limited group of customers. Based on management’s assessment of our business, we believe that a small number of our customers account for a significant portion of our revenues in multiple product lines of our businesses. These product lines include our equities market-making, metals trading and foreign exchange trading product lines. We are unable to measure the level of this concentration because our dealing activities do not permit us to quantify revenues generated by each customer. We expect a significant portion of the future demand for each of our market-making and trading services to remain concentrated within a limited number of customers. None of these customers is obligated contractually to use our market-making or trading services. Accordingly, these customers may direct their trading activities to other market-makers or traders at any time. The loss of or a significant reduction in demand for our services from any of these customers could have a material adverse effect on our business, financial condition and operating results.
We are dependent on our management team. Our future success depends, in large part, upon our management team who possess extensive knowledge and management skills with respect to securities, commodities and foreign exchange businesses operated by the Company. The unexpected loss of services of any of our executive officers could adversely affect our ability to manage our business effectively or execute our business strategy. Although these officers have employment contracts with us, they are generally not required to remain with us for a specified period of time. In addition, we maintain key-man life insurance policies on only two of our executive officers.
We depend on our ability to attract and retain key personnel. Competition for key personnel and other highly qualified management, sales, trading, compliance and technical personnel is significant. It is possible that we will be unable to retain our key personnel and to attract, assimilate or retain other highly qualified personnel in the future. The loss of the services of any of our key personnel or the inability to identify, hire, train and retain other qualified personnel in the future could have a material adverse effect on our business, financial condition and operating results.
From time to time, other companies in the financial sector have experienced losses of sales and trading professionals. The level of competition to attract these professionals is intense. It is possible that we will lose professionals due to increased competition or other factors in the future. The loss of a sales and trading professional, particularly a senior professional with broad industry expertise, could have a material adverse affect on our business, financial condition and operating results.
Computer systems failures, capacity constraints and breaches of security could increase our operating costs and cause us to lose clients. We are heavily dependent on the capacity and reliability of the computer and communications systems supporting our operations, whether owned and operated internally or by third parties. We receive and process a large portion of our trade orders through electronic means, such as through public and private communications networks. These computer and communications systems and networks are subject to performance degradation or failure from any number of reasons, including loss of power, acts of war or terrorism, human error, natural disasters, fire, sabotage, hardware or software malfunctions or defects, computer viruses, intentional acts of vandalism, customer error or misuse, lack of proper maintenance or monitoring and similar events. Our systems, or those of our third party providers, may fail or operate slowly, causing one or more of the following:
| • | unanticipated disruptions in service to our clients, |
| • | slower response times, |
| • | delays in our clients’ trade execution, |
| • | failed settlement of trades, |
| • | decreased client satisfaction with our services, |
| • | incomplete, untimely or inaccurate accounting, recording, reporting or processing of trades, |
| • | financial losses, |
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
| • | litigation or other client claims, and |
| • | regulatory sanctions. |
The occurrence of degradation or failure of the communications and computer systems on which we rely may lead to financial losses, litigation or arbitration claims filed by or on behalf of our customers and regulatory investigations and sanctions, including by the CFTC, which require that our trade execution and communications systems be able to handle anticipated present and future peak trading volumes. Any such degradation or failure could also have a negative effect on our reputation, which in turn could cause us to lose existing customers to our competitors or make it more difficult for us to attract new customers in the future. Further, any financial loss that we suffer as a result of such degradations or failures could be magnified by price movements of contracts involved in transactions impacted by the degradation or failure, and we may be unable to take corrective action to mitigate any losses we suffer.
We are subject to extensive government regulation. The securities and commodities futures industries are subject to extensive regulation under federal, state and foreign laws. In addition, the Securities and Exchange Commission, the Commodities Futures Trading Commission, FINRA, the NFA the CME and other self-regulatory organizations, commonly referred to as SROs, state securities commissions, and foreign securities regulators require strict compliance with their respective rules and regulations. These regulatory bodies are responsible for safeguarding the integrity of the financial markets and protecting the interests of participants in those markets.
As participants in various financial markets, we may be subject to regulation concerning certain aspects of our business, including:
| • | trade practices |
| • | the way we deal with and solicit clients |
| • | financial and reporting practices |
| • | client identification and anti-money laundering requirements |
| • | capital structure |
| • | record retention |
| • | the conduct of our directors, officers and employees |
Failure to comply with any of these laws, rules or regulations could result in adverse consequences. We and certain of our officers and employees have, in the past, been subject to claims arising from acts in contravention of these laws, rules and regulations. These claims have resulted in the payment of fines and settlements. It is possible that we and our officers and other employees will, in the future, be subject to similar claims. An adverse ruling against us or our officers and other employees could result in our or our officers and other employees being required to pay a substantial fine or settlement and could result in suspension or expulsion. This could have a material adverse effect on our business, financial condition and operating results.
The regulatory environment in which we operate is subject to change. New or revised legislation or regulations imposed by the SEC, the CFTC, other United States or foreign governmental regulatory authorities, SROs or FINRA could have a material adverse effect on our business, financial condition and operating results. Changes in the interpretation or enforcement of existing laws and rules by these governmental authorities, SROs and FINRA could also have a material adverse effect on our business, financial condition and operating results.
Additional regulation, changes in existing laws and rules, or changes in interpretations or enforcement of existing laws and rules often directly affect securities firms. We cannot predict what effect any such changes might have. Our business, financial condition and operating results may be materially affected by both regulations that are directly applicable to us and regulations of general application. Our level of trading and market-making activities can be affected not only by such legislation or regulations of general applicability, but also by industry-specific legislation or regulations.
Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act will increase our operational and compliance costs. The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets, including credit and derivatives transactions. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have. However, it is expected that at a minimum they will increase our operating and compliance costs.
We are subject to net capital requirements. The SEC, FINRA and various other regulatory agencies require our broker-dealer subsidiaries, INTL Trading and FCC Investments, Inc. to maintain specific levels of net capital. Failure to maintain the required net capital may subject these subsidiaries to suspension or revocation of registration by the SEC and suspension or expulsion by FINRA and other regulatory bodies.
The CFTC and various other self-regulatory organizations require our futures commission merchant subsidiary, FCStone, LLC, to maintain specific levels of net capital. Failure to maintain the required net capital may subject this subsidiary to limitations on its activities, including suspension or revocation of its registration by the CFTC and suspension or expulsion by the NFA and various exchanges of which it is a member.
Ultimately, any failure to meet capital requirements by our securities broker-dealer subsidiaries or our FCM subsidiary could result in liquidation of the subsidiary. Failure to comply with the net capital rules could have material and adverse consequences such as limiting their operations, or restricting the Company from withdrawing capital from these subsidiaries.
In addition, a change in the net capital rules, the imposition of new rules or any unusually large charge against net capital could limit our operations that require the intensive use of capital. They could also restrict our ability to withdraw capital from these subsidiaries. Any limitation on our ability to withdraw capital could limit our ability to pay cash dividends, repay debt and repurchase shares of our outstanding stock. A significant operating loss or any unusually large charge against net capital could adversely affect our ability to expand or even maintain our present levels of business, which could have a material adverse effect on our business, financial condition and operating results.
We are subject to margin funding requirements on short notice. Our business involves establishment and carrying of substantial open positions for customers on futures exchanges and in the OTC derivatives markets. We are required to post and maintain margin or credit support for these positions. Although we collect margin or other deposits from our customers for these positions, significant adverse price movements can occur which will require us to post margin or other deposits on short notice, whether or not we are able to collect additional margin or credit support from our customers. We maintain borrowing facilities for the purpose of funding margin and credit support and have systems to endeavor to collect margin and other deposits from customers on a same-day basis, there can be no assurance that these facilities and systems will be adequate to eliminate the risk of margin calls in the event of severe adverse price movements affecting open positions of our customers. Generally, if a customer is unable to meet its margin call, we promptly liquidate the customer’s account. However, there can be no assurance that in each case the liquidation of the account will not result in a loss to us or that a liquidation will be feasible, given market conditions, size of the account and tenor of the positions.
Low short-term interest rates negatively impact our profitability. The level of prevailing short-term interest rates affects our profitability because a portion of our revenue is derived from interest earned from the investment of funds deposited with us by our customers. At September 30, 2010, we had $1.2 billion in customer segregated assets, which are generally invested in short-term treasury securities and money market funds. Our financial performance generally benefits from rising interest rates. Higher interest rates increase the amount of interest income earned from these customer deposits. If short-term interest rates remain low or continue to fall, our revenues derived from interest will decline which would negatively impact our profitability.
Short-term interest rates are highly sensitive to factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. In particular, decreases in the federal funds rate by the Board of Governors of the Federal Reserve System usually lead to decreasing interest rates in the U.S., which generally lead to a decrease in short-term interest rates.
We may issue additional equity securities. The issuance of additional common stock or securities convertible into our common stock could result in dilution of the ownership interest in us held by existing stockholders. We are authorized to issue, without stockholder approval, a significant number of additional shares of our common stock and securities convertible into either common stock or preferred stock.
We are subject to risks relating to litigation and potential securities laws liability. We face significant legal risks in our businesses, including risks related to currently pending litigation involving both the Company and FCStone. Many aspects of our business involve substantial risks of liability, including liability under federal and state securities and commodities laws, other federal, state and foreign laws and court decisions, as well as rules and regulations promulgated by the SEC, the CFTC, FINRA and other regulatory bodies. Substantial legal liability or significant regulatory action against us and our subsidiaries could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. In addition, we face increased litigation risk as a result of the FCStone acquisition. Any such litigation could lead to more volatility of our stock price.
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INTERNATIONAL ASSETS HOLDING CORPORATION
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For a further discussion of litigation risks, see Item 3—Legal Proceedings below and “Note 15—Commitments and Contingencies” in the Consolidated Financial Statements.
We may be subject to potentially large claims for violations of environmental laws. Our base metals trading business may be subject to potential claims under certain federal, state and foreign environmental laws. This business involves the purchase and sale of base metals such as lead and other potentially hazardous materials. As part of this business, we engage third parties located both in the United States and in other countries to acquire, store, transport and recycle used automotive and industrial batteries on our behalf. In the event that these third parties fail to comply with federal, state or foreign environmental laws in handling or disposing of these batteries and other hazardous substances used in or arising from the recycling of these batteries, we may be exposed to claims for the cost of remediating sites impacted by such improper handling and disposal, as well as other related costs. We seek to mitigate this risk by dealing with third parties who we believe are in compliance with applicable laws and who have established reputations in the industry.
We are subject to intense competition. We derive a significant portion of our revenues from market-making and trading activities involving securities and commodities. The market for these services, particularly market-making services through electronic communications gateways, is rapidly evolving and intensely competitive. We expect competition to continue and intensify in the future. We compete primarily with wholesale, national, and regional broker-dealers and FCM’s, as well as electronic communications networks. We compete primarily on the basis of our expertise and quality of service.
We also derive a significant portion of our revenues from commodities risk management services. The commodity risk management industry is very competitive and we expect competition to continue to intensify in the future. Our primary competitors in this industry include both large, diversified financial institutions and commodity-oriented businesses, smaller firms that focus on specific products or regional markets and independent FCM’s.
A number of our competitors have significantly greater financial, technical, marketing and other resources than we have. Some of them may:
| • | offer alternative forms of financial intermediation as a result of superior technology and greater availability of information |
| • | offer a wider range of services and products than we offer |
| • | be larger and better capitalized |
| • | have greater name recognition |
| • | have more extensive customer bases |
These competitors may be able to respond more quickly to new or evolving opportunities and customer requirements. They may also be able to undertake more extensive promotional activities and offer more attractive terms to customers. Recent advances in computing and communications technology are substantially changing the means by which market-making services are delivered, including more direct access on-line to a wide variety of services and information. This has created demand for more sophisticated levels of customer service. Providing these services may entail considerable cost without an offsetting increase in revenues. In addition, current and potential competitors have established or may establish cooperative relationships or may consolidate to enhance their services and products. New competitors or alliances among competitors may emerge and they may acquire significant market share.
We cannot assure you that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not have a material adverse effect on our business, financial condition and operating results.
Our business could be adversely affected if we are unable to retain our existing customers or attract new customers. The success of our business depends, in part, on our ability to maintain and increase our customer base. Customers in our market are sensitive to, among other things, the costs of using our services, the quality of the services we offer, the speed and reliability of order execution and the breadth of our service offerings and the products and markets to which we offer access. We may not be able to continue to offer the pricing, service, speed and reliability of order execution or the service, product and market breadth that customers desire. In addition, once our risk management consulting customers have become better educated with regard to sources of risk and the tools available to facilitate the management of this risk and we have provided them with recommended hedging strategies, they may no longer continue paying monthly fees for these services. Furthermore, our existing customers, including IRMP customers, are not generally obligated to use our services and can switch providers of clearing and execution services or decrease their trading activity conducted through us at any time. As a result, we may fail to retain existing customers or be unable to attract new customers. Our failure to maintain or attract customers could have a material adverse effect on our business, financial condition and operating results.
We rely on relationships with introducing brokers for obtaining some of our customers. The failure to maintain these relationships could adversely affect our business. We have relationships with introducing brokers who assist us in establishing new customer relationships and provide marketing and customer service functions for some of our customers. These
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
introducing brokers receive compensation for introducing customers to us. Many of our relationships with introducing brokers are non-exclusive or may be cancelled on relatively short notice. In addition, our introducing brokers have no obligation to provide new customer relationships or minimum levels of transaction volume. Our failure to maintain these relationships with these introducing brokers or the failure of these introducing brokers to establish and maintain customer relationships would result in a loss of revenues, which could adversely affect our business.
Certain provisions of Delaware law and our charter may adversely affect the rights of holders of our common stock and make a takeover of us more difficult. We are organized under the laws of the State of Delaware. Certain provisions of Delaware law may have the effect of delaying or preventing a change in control. In addition, certain provisions of our certificate of incorporation may have anti-takeover effects and may delay, defer or prevent a takeover attempt that a stockholder might consider in its best interest. Our certificate provides for a staggered board, so that it would take three successive annual meting to replace the entire board of directors. Our certificate of incorporation authorizes the board to determine the terms of our unissued series of preferred stock and to fix the number of shares of any series of preferred stock without any vote or action by our stockholders. As a result, the board can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. In addition, the issuance of preferred stock may have the effect of delaying or preventing a change of control, because the rights given to the holders of a series of preferred stock may prohibit a merger, reorganization, sale, liquidation or other extraordinary corporate transaction.
Our stock price is subject to volatility. The market price of our common stock has been and can be expected to be subject to fluctuation as a result of a variety of factors, many of which are beyond our control, including:
| • | actual or anticipated variations in our results of operations |
| • | announcements of new products by us or our competitors |
| • | technological innovations by us or our competitors |
| • | changes in earnings estimates or buy/sell recommendations by financial analysts |
| • | the operating and stock price performance of other companies |
| • | general market conditions or conditions specific in specific markets |
| • | conditions or trends affecting our industry or the economy generally |
| • | announcements relating to strategic relationships or acquisitions |
| • | risk factors and uncertainties set forth elsewhere in this Form 10-K |
Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts, and the trading prices of our common stock could decline as a result. In addition, any negative change in the public’s perception of the securities industry could depress our stock price regardless of our operating results.
Future sales by existing stockholders could depress the market price of our common stock. If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. Such sales also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate.
Our international operations involve special challenges that we may not be able to meet, which could adversely affect our financial results. Our international operations involve special challenges that we may not be able to meet, which could adversely affect our financial results. We engage in a significant amount of business with customers in the international markets. Certain additional risks are inherent in doing business in international markets, particularly in a regulated industry. These risks include:
| • | the inability to manage and coordinate the various regulatory requirements of multiple jurisdictions that are constantly evolving and subject to unexpected change, |
| • | tariffs and other trade barriers, |
| • | difficulties in recruiting and retaining personnel, and managing international operations, |
| • | difficulties of debt collection in foreign jurisdictions, |
| • | potentially adverse tax consequences, and |
| • | reduced protection for intellectual property rights. |
Our operations are also subject to the political, legal and economic risks associated with politically unstable and less developed regions of the world, including the risk of war and other international conflicts and actions by governmental authorities, insurgent groups, terrorists and others. Specifically, we conduct business in countries whose currencies may be unstable. Future instability in such currencies or the imposition of governmental or regulatory restrictions on such currencies could impede our foreign exchange business and our ability to collect on collateral held in such currencies.
In addition, we are required to comply with the laws and regulations of foreign governmental and regulatory authorities of each country in which we conduct business. These may include laws, rules and regulations, including registration
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
requirements. Our compliance with these laws and regulations may be difficult and time consuming and may require significant expenditures and personnel requirements, and our failure to be in compliance would subject us to legal and regulatory liabilities. We have customers in numerous countries around the world in which we are not registered. As a result, we may become subject to the regulatory requirements of those countries. We may also experience difficulty in managing our international operations because of, among other things, competitive conditions overseas, established domestic markets, language and cultural differences and economic or political instability. Any of these factors could have a material adverse effect on the success of our international operations or limit our ability to grow our international operations and, consequently, on our business, financial condition and operating results.
If we are unable to manage any of these risks effectively, our business could be adversely affected.
| Item 1B. | Unresolved Staff Comments |
We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our fiscal year 2010 that remain unresolved.
| Item 2. | Properties |
The Company maintains offices in New York, New York; Winter Park, Florida; West Des Moines, Iowa; Chicago, Illinois; Kansas City, Missouri; St. Louis, Missouri; Omaha, Nebraska; Minneapolis, Minnesota; Bloomington, Illinois; Miami, Florida; New Smyrna Beach, Florida; Indianapolis, Indiana; Spirit Lake, Iowa; Bowling Green, Ohio; Nashville, Tennessee; Castle Rock, Colorado; Topeka, Kansas; Winnipeg, Canada; Calgary, Canada; Buenos Aires, Argentina; Campinas, Brazil; Sao Paulo, Brazil; Montevideo, Uruguay; London, United Kingdom; Dublin, Ireland; Dubai, United Arab Emirates; Singapore, Singapore; Beijing and Shanghai, China; and Sydney, Australia.
All of our offices and other principal business properties are leased, except for the space in Buenos Aires, which we own. We believe that our leased facilities are adequate to meet anticipated requirements for our current lines of business.
| Item 3. | Legal Proceedings |
Securities Litigation
FCStone and certain officers of FCStone were named as defendants in an action filed in the United States District Court for the Western District of Missouri on July 15, 2008. A consolidated amended complaint was subsequently filed on September 25, 2009. The action, which purports to be brought as a class action on behalf of purchasers of FCStone common stock between November 15, 2007 and February 24, 2009, seeks to hold defendants liable under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 for allegedly false statements and failure to disclose adverse facts relating to an interest rate hedge, the bad debt reserve of FCStone and losses sustained by FCStone in connection with a customer’s energy trades. FCStone filed a motion to dismiss this amended complaint, along with supporting documents, on November 24, 2009. On November 16, 2010, the Court denied FCStone’s motion to dismiss and granted the plaintiffs leave to amend the complaint on or before December 15, 2010.
A purported shareholder derivative action was filed against FCStone (solely as a nominal defendant) and certain officers and directors of FCStone in August 2008 in the Circuit Court of Platte County, Missouri, alleging breaches of fiduciary duties, waste of corporate assets and unjust enrichment. An amended complaint was subsequently filed in May 2009 to add claims based upon the losses sustained by FCStone arising out of a customer’s energy trading account. On July 2, 2009 FCStone filed a motion to dismiss and supporting documents. On July 7, 2009, the same plaintiff filed a motion for leave to amend the existing case to add a purported class action claim on behalf of the holders of FCStone common stock.
On July 8, 2009, a purported class action complaint was filed against FCStone and its directors, as well as International Assets Holding Corporation and International Assets Acquisition Corporation in the Circuit Court of Clay County, Missouri by two individuals who purported to be stockholders of FCStone. The plaintiffs purported to bring this action on behalf of all stockholders of FCStone. The complaint alleged that FCStone and its directors breached their fiduciary duties by failing to maximize stockholder value in connection with the contemplated acquisition of FCStone by International Assets Holding Corporation. The complaint also alleged that FCStone, International Assets Holding Corporation and International Assets Acquisition Corporation aided and abetted the directors’ alleged breach of fiduciary duties. The plaintiffs sought to permanently enjoin the transaction between FCStone and International Assets Holding Corporation, monetary damages in an unspecified amount attributable to the alleged breach of duties, and legal fees and expenses. The plaintiffs did not succeed in enjoining the transaction. This complaint was subsequently consolidated with the complaint filed in the Circuit Court of Platte County, Missouri, and will fall under the jurisdiction of that court. A combined, amended complaint was served on the
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
defendants in January 2010. All of the defendants intend to defend against the complaint vigorously. The defendants filed a notice to dismiss in February, 2010, the plaintiffs filed their opposition to this in April, 2010 and supplemental filings were made in September and October, 2010.
Sentinel Litigation
In August 2008, the bankruptcy trustee of Sentinel Management Group, Inc. (“Sentinel”) filed adversary proceedings against one of the Company’s subsidiaries, FCStone, LLC, and a number of other FCM’s in the Bankruptcy Court, subsequently reassigned within the United States District Court, for the Northern District of Illinois seeking avoidance of alleged transfers or withdrawals of funds received by the Company and other FCM’s within 90 days prior to the filing of the Sentinel bankruptcy petition, as well as avoidance of post-petition distributions and disallowance of the proof of claim filed by FCStone, LLC. The trustee seeks recovery of pre- and post-petition transfers totaling approximately $15.5 million and, in April, 2009, filed an amended complaint adding a claim for unjust enrichment. FCStone, LLC has answered the complaints and all parties have entered into the discovery phase of the litigation. Trial in this matter is expected to be during 2011. FCStone, LLC intends to defend the matter vigorously, and to coordinate its defense with the other FCM’s.
Convertible Noteholder Litigation
In November, 2009, an investor in a principal amount of $3.7 million of the Company’s senior subordinated convertible notes due 2011 (the “Notes”), Portside Growth and Opportunity Fund (“Portside”), managed by Ramius LLC, served a notice of motion for summary judgment on the Company, claiming that the FCStone transaction resulted in a change of control as defined in the Notes; and that, as a result, the Company should have afforded Portside the opportunity to have the Notes redeemed at a 15% premium. Portside is also claiming default interest at the rate of 15% per annum established in the Notes. Portside’s motion was denied in March, 2010. Portside filed an amended complaint in April, 2010. The remaining three holders of the notes, Highbridge International LLC, LBI Group Inc. and Iroquois Master Fund Ltd., holding Notes in an aggregate amount of $13.0 million, filed a similar lawsuit on the Company on October 20, 2010.
On December 14, 2010 Portside delivered a Conversion Notice to the Company in compliance with the terms of the relevant agreement. The principal amount and accrued interest will convert into 173,966 shares of common stock of the Company. This conversion supersedes Portside’s claim for redemption at a premium.
The Company is of the view that the FCStone transaction did not result in a change of control as defined in the Notes and intends to vigorously defend the lawsuit brought by the remaining three holders of the Notes. In the event that the Company does not prevail in this litigation, then the Company would be obligated to pay to the Noteholders the principal amount of the Notes, the premium of 15%, accrued interest and attorneys’ fees.
We are currently unable to predict the outcome of these claims and believe their current status does not warrant accrual under the guidance of the Contingencies Topic of the Accounting Standards Codification, since the amount of any liability is neither probable nor reasonably estimable. As such, no amounts have been accrued in the financial statements. We intend to vigorously defend the claims against us and will continue to monitor the litigation and assess the need for future accruals. In light of the nature of the Company’s activities, it is possible that the Company may be involved in litigation in the future, which could have a material adverse impact on the Company and its financial condition and results of operations.
From time to time and in the ordinary course of our business, we are a plaintiff or are a defendant in other legal proceedings related to various issues, including worker’s compensation claims, tort claims, contractual disputes and collections. We carry insurance that provides protection against certain types of claims, up to the policy limits of our insurance. It is the opinion of management that none of the other known legal actions will have a material adverse impact on our financial position, results of operations or liquidity.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s common stock is listed on The NASDAQ Stock Market LLC (“NASDAQ”) under the symbol ‘IAAC’. The Company’s stock trades on the NASDAQ Global Market. As of September 30, 2010, there were 272 registered holders of record of the Company’s common stock. The high and low sales prices per share of the Company’s common stock for each full quarterly period during fiscal 2010 and 2009 were as follows:
| Price Range | ||||||||
| High | Low | |||||||
| 2010: |
||||||||
| Fourth Quarter |
$ | 18.91 | $ | 15.54 | ||||
| Third Quarter |
$ | 16.96 | $ | 14.90 | ||||
| Second Quarter |
$ | 17.25 | $ | 14.20 | ||||
| First Quarter |
$ | 19.97 | $ | 14.03 | ||||
| 2009: |
||||||||
| Fourth Quarter |
$ | 18.90 | $ | 12.50 | ||||
| Third Quarter |
$ | 16.95 | $ | 9.35 | ||||
| Second Quarter |
$ | 11.82 | $ | 6.25 | ||||
| First Quarter |
$ | 27.75 | $ | 5.29 | ||||
The Company has never declared any cash dividends on its common stock, and does not currently have any plans to pay dividends on its common stock. The payment of cash dividends in the future is subject to the discretion of the Board of Directors and will depend on the Company’s earnings, financial condition, capital requirements, contractual restrictions and other relevant factors. The Company’s credit agreements currently prohibit the payment of cash dividends by the Company.
On November 20, 2008, the Company’s Board of Directors renewed the Company’s share repurchase authorization for $5.0 million in shares of the Company’s common stock. There were no repurchases during the fiscal year ended September 30, 2009 or first quarter ended December 30, 2009, and the share repurchase authorization expired November 20, 2009.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of our Annual Report on Form 10-K.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
| Item 6. | Selected Financial Data |
The following selected financial and operating data are derived from our consolidated financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 and our consolidated financial statements included in Item 8. The income statement data for 2010 reflects the results of FCStone, which was acquired on September 30, 2009. The income statement data for 2006 through 2009 does not include the results of FCStone.
| Selected Summary Financial Information (GAAP) | ||||||||||||||||||||
| Year Ended September 30, | ||||||||||||||||||||
| (in millions, except share and per share numbers) |
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
| Operating revenues |
$ | 269.0 | $ | 90.6 | $ | 114.9 | $ | 45.7 | $ | 35.1 | ||||||||||
| Interest expense |
9.9 | 8.0 | 11.2 | 9.3 | 2.1 | |||||||||||||||
| Non-interest expenses: |
||||||||||||||||||||
| —Compensation |
104.2 | 40.2 | 35.6 | 28.5 | 16.4 | |||||||||||||||
| —Clearing |
68.2 | 16.0 | 13.1 | 11.2 | 7.6 | |||||||||||||||
| —Other |
68.8 | 13.1 | 12.7 | 6.9 | 3.9 | |||||||||||||||
| Income (loss) from operations, before tax and discontinued operations |
17.9 | 13.3 | 42.3 | (10.2 | ) | 5.1 | ||||||||||||||
| Income tax expense |
6.4 | 2.6 | 16.2 | (3.4 | ) | 1.6 | ||||||||||||||
| Loss (income) from discontinued operations, net of tax |
(0.6 | ) | 1.1 | (1.0 | ) | (1.7 | ) | — | ||||||||||||
| Net income (loss) before extraordinary loss (income) |
12.1 | 9.6 | 27.1 | (5.1 | ) | 3.5 | ||||||||||||||
| Extraordinary loss (income) |
7.0 | (18.5 | ) | — | — | — | ||||||||||||||
| Net income (loss) |
5.1 | 28.1 | 27.1 | (5.1 | ) | 3.5 | ||||||||||||||
| Less: Net (loss) income attributable to noncontrolling interests |
(0.3 | ) | 0.5 | (0.7 | ) | (0.6 | ) | — | ||||||||||||
| Net income (loss) attributable to International Assets Holding Corporation common shareholders |
$ | 5.4 | $ | 27.6 | $ | 27.8 | $ | (4.5 | ) | $ | 3.5 | |||||||||
| Earnings (loss) per share: |
||||||||||||||||||||
| —Basic |
$ | 0.31 | $ | 3.11 | $ | 3.30 | $ | (0.56 | ) | $ | 0.45 | |||||||||
| —Diluted |
$ | 0.30 | $ | 2.80 | $ | 2.95 | $ | (0.56 | ) | $ | 0.41 | |||||||||
| Number of shares: |
||||||||||||||||||||
| —Basic |
17,306,019 | 8,895,697 | 8,434,976 | 8,086,837 | 7,636,808 | |||||||||||||||
| —Diluted |
17,883,233 | 10,182,586 | 9,901,706 | 8,086,837 | 8,387,761 | |||||||||||||||
| Selected Balance Sheet Information: |
||||||||||||||||||||
| Total assets |
$ | 2,021.7 | $ | 1,555.7 | $ | 438.0 | $ | 361.2 | $ | 199.9 | ||||||||||
| Convertible notes |
$ | 16.7 | $ | 16.7 | $ | 16.8 | $ | 24.9 | $ | 26.9 | ||||||||||
| Shareholders’ equity |
$ | 241.3 | $ | 238.8 | $ | 74.8 | $ | 35.6 | $ | 33.9 | ||||||||||
| Leverage ratio: Total assets : Equity |
8.4 | 6.5 | 5.9 | 10.1 | 5.9 | |||||||||||||||
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Adjusted Non-GAAP Financial Information (Unaudited)
| Year Ended September 30, | ||||||||||||||||||||
| (in millions, except ratio) |
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
| U.S. GAAP Data: |
||||||||||||||||||||
| Operating revenues |
$ | 269.0 | $ | 90.6 | $ | 114.9 | $ | 45.7 | $ | 35.1 | ||||||||||
| Income (loss) from operations, before tax and discontinued operations |
$ | 17.9 | $ | 13.3 | $ | 42.3 | $ | (10.2 | ) | $ | 5.1 | |||||||||
| Net income attributable to International Assets Holding Corporation common shareholders (a) |
$ | 5.4 | $ | 27.6 | $ | 27.8 | $ | (4.5 | ) | $ | 3.5 | |||||||||
| Shareholders’ equity (a) |
$ | 241.3 | $ | 238.8 | $ | 74.8 | $ | 35.6 | $ | 33.9 | ||||||||||
| Adjusted Non-GAAP Data (Unaudited): |
||||||||||||||||||||
| Data adjusted (on a marked to market basis): |
||||||||||||||||||||
| Operating revenues as stated above |
$ | 269.0 | $ | 90.6 | $ | 114.9 | $ | 45.7 | $ | 35.1 | ||||||||||
| Marked-to-market adjustment |
6.0 | 6.9 | (26.9 | ) | 23.4 | 7.6 | ||||||||||||||
| Adjusted operating revenues, marked to market |
$ | 275.0 | $ | 97.5 | $ | 88.0 | $ | 69.1 | $ | 42.7 | ||||||||||
| Income (loss) from operations, before tax and discontinued operations, as stated above |
$ | 17.9 | $ | 13.3 | $ | 42.3 | $ | (10.2 | ) | $ | 5.1 | |||||||||
| Marked-to-market adjustment |
6.0 | 6.9 | (26.9 | ) | 23.4 | 7.6 | ||||||||||||||
| Adjusted income from operations, before tax |
$ | 23.9 | $ | 20.2 | $ | 15.4 | $ | 13.2 | $ | 12.7 | ||||||||||
| Net income attributable to International Assets Holding Corporation common shareholders, as stated above |
$ | 5.4 | $ | 27.6 | $ | 27.8 | $ | (4.5 | ) | $ | 3.5 | |||||||||
| Marked-to-market adjustment |
6.0 | 6.9 | (26.9 | ) | 23.4 | 7.6 | ||||||||||||||
| Tax effect at blended rate of 37.5% |
(2.3 | ) | (2.5 | ) | 10.1 | (8.8 | ) | (2.9 | ) | |||||||||||
| Adjusted net income attributable to International Assets Holding Corporation common shareholders |
$ | 9.1 | $ | 32.0 | $ | 11.0 | $ | 10.1 | $ | 8.2 | ||||||||||
| Shareholders’ equity, as stated above |
$ | 241.3 | $ | 238.8 | $ | 74.8 | $ | 35.6 | $ | 33.9 | ||||||||||
| Cumulative marked-to-market adjustment |
17.0 | 11.0 | 4.1 | 31.0 | 7.6 | |||||||||||||||
| Tax effect at blended rate of 37.5% |
(6.4 | ) | (4.1 | ) | (1.6 | ) | (11.7 | ) | (2.9 | ) | ||||||||||
| Adjusted shareholders’ equity (non-GAAP) |
$ | 251.9 | $ | 245.7 | $ | 77.3 | $ | 54.9 | $ | 38.6 | ||||||||||
| Return on average adjusted stockholders’ equity (b) |
4.9 | % | 16.0 | % | 16.6 | % | 21.6 | % | 24.6 | % | ||||||||||
| Other Data: |
||||||||||||||||||||
| Employees (c) |
729 | 625 | 195 | 170 | 89 | |||||||||||||||
| Compensation and benefits / adjusted operating revenues |
37.9 | % | 41.2 | % | 40.5 | % | 41.2 | % | 38.4 | % | ||||||||||
| Leverage ratio: (total assets to adjusted shareholders’ equity) |
8.0 | 6.3 | 5.7 | 6.6 | 5.2 | |||||||||||||||
| (a) | Net income and stockholders’ equity for 2010 includes a $7.0 million extraordinary loss resulting from purchase price adjustments and the correction of immaterial errors related to the FCStone transaction. Net income and stockholders’ equity for 2009 includes an $18.5 million extraordinary gain related to the FCStone transaction. |
| (b) | Return on average adjusted stockholders’ equity for 2010 excludes the effect of the $7.0 million extraordinary loss resulting from purchase price adjustments and the correction of immaterial errors related to the FCStone transaction. Return on average adjusted stockholders’ equity for 2009 excludes the effect of an $18.5 million extraordinary gain related to the FCStone transaction. |
| (c) | The number of employees listed in 2009 includes the number of employees of FCStone as of September 30, 2009. |
As discussed in previous filings and elsewhere in this Form 10-K, U.S. GAAP requires the Company to carry derivatives at fair market value but physical commodities inventory at the lower of cost or fair value. These requirements may have a significant temporary impact on our reported earnings. Under U.S. GAAP, gains and losses on commodities inventory and derivatives which the Company intends to be offsetting are often recognized in different periods. Additionally, U.S. GAAP does not require us to reflect changes in estimated values of forward commitments to purchase and sell commodities.
For these reasons, management primarily assesses the Company’s operating results on a marked-to-market basis. Management relies on these adjusted operating results to evaluate the performance of the Company’s commodities business segment and its personnel.
The Unaudited Adjusted Data in the table above reflect the Company’s adjusted operating revenues, adjusted net income and adjusted stockholders’ equity, which have been adjusted to reflect the marked-to-market differences in the Company’s commodities business during each period (in the case of operating revenues and net income) and the cumulative differences (in the case of stockholders’ equity). The Company has also included the estimated tax liability which would have been incurred as a result of these adjustments, utilizing a blended tax rate of 37.5%.
Adjusted operating revenues, adjusted net income, and adjusted stockholders’ equity are financial measures that are not recognized by U.S. GAAP, and should not be considered as alternatives to operating revenues, net income or stockholders’ equity calculated under U.S. GAAP or as an alternative to any other measures of performance derived in accordance with
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
U.S. GAAP. The Company has included these non-GAAP financial measures because it believes that they permit investors to make more meaningful comparisons of performance between the periods presented. In addition, these non-GAAP measures are used by management in evaluating the Company’s performance.
The Company determines the fair value of physical commodities inventory on a marked-to-market basis by applying quoted market prices to the inventory owned by the Company on the balance sheet date. In the Company’s precious metals business, the Company obtains the closing COMEX nearby futures price for the last business day of the month and then adjusts that price to reflect an exchange for physical transaction, utilizing bids obtained from one or more market participants. In the Company’s base metals business, for copper inventory, the Company obtains the closing COMEX or LME nearby futures price and then adjusts that price to reflect any freight charges to the relevant delivery point. For the Company’s lead inventory, the Company obtains the closing LME nearby futures month price and then adjusts that price to reflect any tolling and freight charges to the relevant delivery point. If inventories were required to be valued using fair value instead of under U.S. GAAP at the lower of cost or market, our physical commodities inventory would be classified as Level 2 assets using the Fair Value Measurements and Disclosures Topic of the ASC.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read together with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this annual report on Form 10-K. Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under “Risk Factors” and those appearing elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligations to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.
Overview
International Assets Holding Corporation and its subsidiaries (“we” or the “Company”) form a financial services group employing 729 people in offices in eleven countries. The Company’s services include comprehensive risk management advisory services for commercial customers; execution of listed futures and option contracts on all major exchanges; the sale of structured over-the-counter (“OTC”) products in a wide range of commodities; physical trading and hedging of precious and base metals and select other commodities; trading of more than 130 foreign currencies; market-making in international equities; and debt origination and asset management.
The Company provides these services to a diverse group of more than 10,000 customers located in more than 100 countries, including producers, processors and end-users of nearly all widely-traded physical commodities; commercial counterparties who are end-users of the firm’s products and services; governmental and non-governmental organizations; and commercial banks, brokers, institutional investors and major investment banks.
Recent Legislation Affecting the Financial Services Industry
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act contains a variety of provisions designed to regulate financial markets, including credit and derivatives transactions. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making it difficult to assess the impact of the statute on the financial industry, including the Company, at this time. The Company will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act and expects to adapt successfully to any new applicable legislative and regulatory requirements.
FCStone Transaction
On September 30, 2009, the Company acquired FCStone Group, Inc. through its merger with a subsidiary of the Company in exchange for 8,239,319 shares of the Company’s common stock.
Under the terms of the merger agreement, the shareholders of FCStone received 0.2950 of a share of the Company’s common stock in exchange for each share of FCStone’s common stock. Additionally, as a result of the merger, each outstanding FCStone stock option was converted into an option to purchase shares of the Company’s common stock, with adjustments to the number of shares and the exercise price to reflect the exchange ratio. The shares of the Company’s common stock issued to FCStone stockholders in connection with the transaction represented approximately 47.5% of the outstanding shares of the Company’s common stock.
27
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
The purchase price for the transaction was approximately $137.6 million, consisting of the fair value of common stock issued in the merger of $135.5 million and estimated acquisition costs of $2.1 million.
At September 30, 2009, the acquisition of FCStone increased the Company’s total assets by $1,173.7 million, total liabilities by $1,016.0 million, minority interest by $1.6 million and stockholders’ equity by $156.1 million.
The Company recognized $7.0 million of extraordinary loss, related to purchase accounting adjustments and the correction of immaterial errors, and $18.5 million of extraordinary income for 2010 and 2009, respectively, related to the FCStone acquisition. The extraordinary income, also defined as negative goodwill, was the result of the sum of the fair values of the assets acquired less the liabilities assumed exceeding the acquisition cost. The extraordinary loss relates to adjustments to the purchase price allocation. Typically, changes within the measurement period are recognized through a corresponding adjustment to goodwill. However, in the absence of goodwill, recorded in connection with this transaction, the $7.0 million has been reported as an extraordinary loss in the consolidated financial statements. For the year ended September 30, 2010. See Note 17 to the Consolidated Financial Statements for additional information on the acquisition.
Results of Operations
Set forth below is the Company’s discussion of the results of its operations, as viewed by management, for the fiscal years 2010, 2009, and 2008, respectively. This discussion refers to both U.S. GAAP results and adjusted non-GAAP marked-to-market information, in accordance with the information presented in Item 6, ‘Selected Financial Data’. For the Foreign Exchange, Securities, Clearing and Execution Services and Other segments, there are no differences between the U.S GAAP results and the adjusted non-GAAP marked-to-market results. Only the Commodity and Risk Management Services segment has differences between the U.S GAAP results and the adjusted non-GAAP marked-to-market results. However, this means that there are differences between the U.S GAAP basis and marked-to-market basis total operating revenues, total contribution and net income. Please note that any term below that contains the word ‘adjusted’ refers to non-GAAP, marked-to-market information.
The discussion below relates only to continuing operations. All revenues and expenses relating to discontinued operations have been removed from disclosures of total revenues and expenses in all periods and are reflected in a net discontinued operations number.
Financial Overview
The following table shows an overview of our financial results.
Financial Overview (Unaudited)
| Year Ended September 30, | ||||||||||||||||||||
| (in millions) |
2010 | % Change |
2009 | % Change |
2008 | |||||||||||||||
| Operating revenues |
$ | 269.0 | 197 | % | $ | 90.6 | (21 | )% | $ | 114.9 | ||||||||||
| Marked-to-market adjustment (Non-GAAP) |
6.0 | (13 | )% | 6.9 | n/m | (26.9 | ) | |||||||||||||
| Adjusted operating revenues (non-GAAP) |
275.0 | 182 | % | 97.5 | 11 | % | 88.0 | |||||||||||||
| Interest expense |
9.9 | 24 | % | 8.0 | (29 | )% | 11.2 | |||||||||||||
| Adjusted net revenues (non-GAAP) |
265.1 | 196 | % | 89.5 | 17 | % | 76.8 | |||||||||||||
| Non-interest expenses |
241.2 | 248 | % | 69.3 | 13 | % | 61.4 | |||||||||||||
| Adjusted income from operations, before tax (non-GAAP) |
$ | 23.9 | 18 | % | $ | 20.2 | 31 | % | $ | 15.4 | ||||||||||
| Reconciliation of net revenues from GAAP to adjusted, non-GAAP numbers: |
||||||||||||||||||||
| Net revenues |
$ | 259.1 | $ | 82.6 | $ | 103.7 | ||||||||||||||
| Marked-to-market adjustment (Non-GAAP) |
6.0 | 6.9 | (26.9 | ) | ||||||||||||||||
| Adjusted net revenues (non-GAAP) |
$ | 265.1 | $ | 89.5 | $ | 76.8 | ||||||||||||||
| Reconciliation of income from operations, before tax from GAAP to adjusted, non-GAAP numbers: |
||||||||||||||||||||
| Income before income tax and minority interest |
$ | 17.9 | $ | 13.3 | $ | 42.3 | ||||||||||||||
| Marked-to-market adjustment (Non-GAAP) |
6.0 | 6.9 | (26.9 | ) | ||||||||||||||||
| Adjusted income from operations, before tax (non-GAAP) |
$ | 23.9 | $ | 20.2 | $ | 15.4 | ||||||||||||||
28
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
2010 Operating Revenues vs. 2009 Operating Revenues
The acquisition of FCStone was completed on September 30, 2009, therefore the results of FCStone are reflected in the results of operations for the Company for the year ended September 30, 2010, but are not reflected in the year ended September 30, 2009.
The Company’s operating revenues under U.S GAAP for 2010 and 2009 were $269.0 million and $90.6 million, respectively. This 197% increase in operating revenue is primarily a result of the FCStone acquisition. The operations of FCStone contributed $187.6 million in operating revenues for 2010. For the year ended August 31, 2009, FCStone reported total revenues of $248.9 million. There were increases in operating revenues of 576% in the C&RM segment and 57% in the Foreign Exchange segment, partially offset by a decrease of 47% in the Securities segment. The CES segment, which consists primarily of revenues from FCStone, contributed $61.8 million in operating revenues in 2010, while the Other segment contributed $8.9 in operating revenues compared to $3.4 in 2009.
Operating revenues increased in C&RM in 2010 with both exchange traded and OTC contract volumes increasing in the soft commodities business. Additionally, our precious metals business was affected by elevated prices, which constrained volumes and customer activity, and our base metals business was positively affected by increased customer demand and wider spreads which augmented trading profits. Operating revenues in the Foreign Exchange segment in 2010 were affected by narrower spreads, despite an increase in customer trade volumes, primarily with financial institutions. Operating revenues in the Securities segment in 2010 were affected by low levels of volume and volatility in the international equities markets, which had reached unprecedented levels in 2009. Operating revenues in the CES segment in 2010 were constrained by continued low short term interest rates, despite an increase in customer deposits, and adversely affected by a trading loss on positions acquired from an under-margined clearing customer. While the lack of demand and risk intolerance caused by the global financial crisis continues to adversely affect our debt arrangement and placement business, the acquisition of CIBSA in Argentina in April 2009 has increased our debt trading revenues. See the segmental analysis below for additional information on activity in each of the segments.
Operating revenues for 2010 include a mark-to-market gain of $2.5 million on interest rate swaps entered into during the year to manage a portion of our aggregate interest rate position.
The Company’s adjusted operating revenues were $275.0 million in 2010, compared with $97.5 million in 2009, an increase of $177.5 million. The only difference between operating revenues and adjusted operating revenues, a non-GAAP measure, is the gross mark-to-market adjustment of $6.0 million and $6.9 million for 2010 and 2009, respectively. The gross marked-to-market adjustment only affects the adjusted operating revenues in the C&RM segment. Adjusted operating revenues are identical to operating revenues in all other segments.
2009 Operating Revenues vs. 2008 Operating Revenues
The Company’s operating revenues under U.S. GAAP for 2009 and 2008 were $90.6 million and $114.9 million, respectively. The Company’s decrease in operating revenues was primarily due to a decrease in reported operating revenues in the C&RM segment (before marked to market adjustments). This decrease was due primarily to declining base metal prices, partially offset by increases in operating revenues from precious metals, foreign exchange trading, and asset management.
The decrease in operating revenues from base metals was attributable to the decline in lead prices. Precious metals operating revenues increased as a result of increased customer business in our Dubai and Singapore subsidiaries, and operating revenues from foreign exchange trading increased 28%. Wider spreads produced by the global financial crisis were part of the reason for the increased foreign exchange trading revenues. Operating revenues in the Securities segment increased 2%, mostly driven by our debt placement business as our equities market-making business enjoyed a record first half-year in 2009, partly because of near-panic conditions in the equities markets in the quarter ended December 31, 2008, however there was a steep decline during the second half-year, caused by a lack of activity and volatility, with the result that operating revenues for this business segment for the year were flat with 2008 levels. See the segmental analysis below for additional information on activity in each of the segments.
Adjusted operating revenues increased by 11% from $88.0 million in 2008 to $97.5 million in 2009. The only difference between operating revenues and adjusted operating revenues, a non-GAAP measure, is the gross marked-to-market adjustment of $6.9 million and ($26.9) million for the fiscal year ended 2009 and 2008, respectively. The gross marked-to-market adjustment only affects the adjusted operating revenues in the commodities trading segment. Adjusted operating revenues are identical to operating revenues in all other segments.
2010 Interest Expense vs. 2009 Interest Expense
Interest expense: Interest expense increased from $8.0 million in 2009 to $9.9 million in 2010. Excluding interest expense in the operations of FCStone of $3.2 million, interest expense decreased by $1.3 million, or 16%, as a result of both a
29
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
decrease in average borrowings and lower interest rates. In mid-2008, the Company entered into two three-year interest rate swaps for a total of $100 million. These were designated as cash flow hedges. The Company discontinued hedge accounting for one of the swaps during the year, which resulted in reclassifying a portion of the deferred loss to earnings during the period. See Note 7 to the Consolidated Financial Statements for further information. The Company pays a fixed 3.66% (on average), and receives a variable rate equal to one-month LIBOR. One-month LIBOR was lower than the fixed rate of 3.66% paid by the Company for much of 2010, resulting in a net interest expense on the swaps. The effective portion of the change in cash flows from the hedge of the remaining forecasted payments during 2010 had the effect of increasing the Company’s reported interest expense by $1.9 million.
2009 Interest Expense vs. 2008 Interest Expense
Interest expense: Interest expense decreased by 29% from $11.2 million in 2008 to $8.0 million in 2009 as a result of decreased average borrowings during the year, at lower absolute interest rates. Effective Q4 2008, the Company entered into two three-year interest rate swaps for a total of $100 million. These were designated as cash flow hedges. See Note 7 to the Consolidated Financial Statements for further information. The Company pays a fixed 3.66% (on average), and receives a variable rate equal to one-month LIBOR. One-month LIBOR was lower than the fixed rate of 3.66% paid by the Company during fiscal 2009, resulting in a net interest expense on the swaps. The effective portion of the interest expense on the swaps during fiscal 2009 had the effect of increasing the Company’s reported interest expense by $2.0 million.
Non-interest expenses: The following table sets forth information concerning non-interest expenses.
| Year Ended September 30, | ||||||||||||||||||||
| (in millions) |
2010 | % Change |
2009 | % Change |
2008 | |||||||||||||||
| NON-INTEREST EXPENSES |
||||||||||||||||||||
| Compensation and benefits |
$ | 104.2 | 159 | % | $ | 40.2 | 13 | % | $ | 35.6 | ||||||||||
| Clearing and related expenses |
68.2 | 326 | % | 16.0 | 22 | % | 13.1 | |||||||||||||
| Other non-interest expenses |
||||||||||||||||||||
| —Communication and data services |
11.1 | 429 | % | 2.1 | 0 | % | 2.1 | |||||||||||||
| —Introducing broker commissions |
18.9 | n/m | — | n/m | — | |||||||||||||||
| —Occupancy and equipment rental |
6.2 | 464 | % | 1.1 | 0 | % | 1.1 | |||||||||||||
| —Professional fees |
8.1 | 268 | % | 2.2 | 10 | % | 2.0 | |||||||||||||
| —Depreciation and amortization |
1.6 | 100 | % | 0.8 | 0 | % | 0.8 | |||||||||||||
| —Bad debts and impairments |
5.8 | 93 | % | 3.0 | 25 | % | 2.4 | |||||||||||||
| —Other expense |
17.1 | 338 | % | 3.9 | (9 | )% | 4.3 | |||||||||||||
| 68.8 | 425 | % | 13.1 | 3 | % | 12.7 | ||||||||||||||
| Total non-interest expenses |
$ | 241.2 | 248 | % | $ | 69.3 | 13 | % | $ | 61.4 | ||||||||||
2010 Non-Interest Expenses vs. 2009 Non-Interest Expenses
Total Non-interest expenses: Non-interest expenses increased by 248% from $69.3 million in 2009 to $241.2 million in 2010. Excluding expenses in the FCStone operations of $171.1 million, non-interest expenses increased $0.8 million.
Compensation and Benefits: Compensation and benefits expense increased by 159% from $40.2 million to $104.2 million, and represented 43% and 58% of total non-interest expenses in 2010 and 2009, respectively. Total compensation and benefits were 39% of operating revenues in 2010 compared to 44% in 2009. The variable portion of compensation and benefits increased by 158% from $17.8 million in 2009 to $45.9 million in 2010, primarily as a result of the 197% increase in operating revenues compared to the prior year. The fixed portion of compensation and benefits increased 160% from $22.4 million to $58.3 million, primarily as a result of the FCStone transaction. Administrative and executive bonuses, including deferred compensation expenses (a proportion of current year bonuses allocated to restricted stock awards is deferred and expensed as vesting occurs), were $6.1 million, compared with $6.4 million in 2009. Stock option expense in 2010 was $0.5 million, compared with $1.0 million in 2009. The number of employees in the Company grew 17% from 625 at the end of 2009 to 729 at the end of 2010, primarily as a result of several acquisitions during 2010.
Clearing and Related Expenses: Clearing and related expenses increased 326% from $16.0 million in 2009 to $68.2 million in 2010. The increase was primarily driven by the Company’s addition of the CES segment, as a result of the FCStone acquisition, and increased clearing costs in CIBSA, acquired in April 2009. This increase was partially offset by a significant decline in clearing costs in the Securities segment related to lower volumes in the international equities business.
Other Non-Interest Expenses: Other non-interest expenses increased by 425% from $13.1 million in 2009 to $68.8 million in 2010. The operations of FCStone contributed $48.2 million in other non-interest expenses in 2010. Other non-interest
30
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
expenses include bad debt expense, net, of $5.8 million. During 2010, FCStone recorded a charge to bad debt expense of approximately $2.3 million related to a disputed trade that was “given-up” to FCStone by another FCM for a customer that held an account with us. Despite expressly informing the FCM that the Company would not accept the “give-up” trade, the “give-up” trade was submitted through the electronic clearing process and erroneously cleared by FCStone, generating a deficit in the customer’s trading account. The customer lacked the financial capacity to cover the account deficit, and FCStone has filed a complaint and is seeking legal relief through arbitration against the FCM to have the “give-up” transaction rescinded, with an award of appropriate damages. In addition in the fourth quarter of fiscal 2010, the Company recorded a $2.5 million provision against a receivable from a Dubai customer to whom INTL Commodities DMCC had consigned gold to. While the Company has a security interest in property to secure the amount of the receivable, it is uncertain as to whether the entire amount of the receivable will be collected. In addition, during 2010 the Company recorded an impairment charge of $1.2 million related to it’s investment in INTL Sieramet.
Provision for Taxes: The effective income tax rate on a U.S. GAAP basis was 35.6% in 2010, compared with 19.9% in 2009. This change was primarily due to changes in the geographic mix of profits or losses. Our effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings, the level of our pre-tax earnings and the level of our tax credits.
Non-Controlling Interest: This represents the non-controlling interests in INTL Gainvest Capital Uruguay S.A., INTL Sieramet, LLC, and the Blackthorn Multi-Advisor Fund, LP (“Blackthorn Fund”), a majority interest acquired with the Hanley Companies, as discussed in Note 17—Acquisitions.
Loss or Gain from Discontinued Operations: In May 2010, the Company sold its interest in INTL Capital Limited (“INTL Capital”) to an independent third party for a purchase price equal to book value. The subsidiary operated an asset management business in Dubai. Additionally, during 2010 the Company discontinued the operations of Agora-X, LLC (“Agora-X”), as it was determined that its carrying value would no longer be recoverable and was in fact impaired. During 2009, the Company sold its interest in INTL Consilium, LLC (“INTL Consilium”). The results of operations for INTL Capital, Agora-X and INTL Consilium were previously included within the Other segment, and are presented within discontinued operations on the consolidated income statements. The company recognized an aggregate gain from discontinued operations, net of taxes of $0.6 million in 2010 and an aggregate loss on discontinued operations, net of taxes of $1.1 million in 2009.
2009 Non-Interest Expenses vs. 2008 Non-Interest Expenses
Non-interest expenses: Non-interest expenses increased by 13% from $61.4 million in 2008 to $69.3 million in 2009.
Compensation and Benefits: Compensation and benefits expense grew by 13% from $35.6 million to $40.2 million. These represented 58% of total non-interest expenses in both 2009 and 2008. The variable portion of compensation and benefits increased 5% from $17.0 million in 2008 to $17.8 million in 2009. Administrative and executive bonuses, including deferred compensation expenses (a proportion of current year bonuses allocated to restricted stock awards is deferred and expensed as vesting occurs), were $6.4 million, compared with $1.9 million in 2008. Stock option expense in 2009 was $1.0 million, compared with $0.8 million in 2008. Salaries and benefits were unchanged from $16.0 million in 2008 to $16.0 million in 2009. The number of employees in the Company grew 221% from 195 at the end of 2008 to 625 at the end of 2009, primarily as a result of the FCStone acquisition. Excluding the FCStone transaction, the number of employees in the Company declined to 193 from 195 at the end of 2008.
Clearing and Related Expenses: Clearing and related expenses increased by 22% from $13.1 million in 2008 to $16.0 million in 2009. The increase was mainly a result of increased equities volumes and commissions paid in the foreign exchange trading business. Clearing and related expenses include bank charges, which increased from $1.2 million in 2008 to $1.7 million in 2009. Bank charges include commitment and arrangement fees paid to banks.
Other Non-Interest Expenses: Other non-interest expenses increased by 3% from $12.7 million in 2008 to $13.1 million in 2009. Business development costs decreased 14% from $2.2 million in 2008 to $1.9 million in 2009. $2.4 million of the other non-interest expenses in 2008 relates to the write-off of a receivable from one of the Company’s customers, compared with $3.0 million in 2009 which included an impairment charge of $1.1 million relating to the Company’s INTL Sieramet, LLC partnership.
Provision for Taxes: The effective income tax rate on a U.S. GAAP basis was 19.5% in 2009, compared with 39% in 2008. This change was primarily due to changes in the geographic mix of profits or losses. Our effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings, the level of our pre-tax earnings and the level of our tax credits.
31
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Non-controlling Interest: This represents the non-controlling interests in INTL Gainvest Capital Uruguay S.A. and INTL Commodities DMCC. During February 2009, the Company acquired the 50% interest held by our joint venture partner in INTL Commodities DMCC, making this company a wholly-owned subsidiary for part of the year.
Loss or Gain from Discontinued Operations: In May 2010, the Company sold its interest in INTL Capital to an independent third party for a purchase price equal to book value. The subsidiary operated an asset management business in Dubai. During 2009, the Company sold its interest in INTL Consilium. The results of operations for INTL Capital and INTL Consilium were previously included within the Other segment, and are presented within discontinued operations on the consolidated income statements. During 2008, the Company discontinued operations related to the Company’s margin foreign exchange trading operations in Hong Kong. The Company recognized an aggregate loss on discontinued operations, net of taxes of $1.1 million in 2009 and an aggregate gain from discontinued operations, net of taxes of $1.3 million in 2008.
Effective May 1, 2010, the Company sold its interest in INTL Capital Limited (“INTL Capital”) to an independent third party for a purchase price equal to book value. The subsidiary operated an asset management business in Dubai. The results of operations for INTL Capital, which were previously included within the Other segment, are included within discontinued operations on the consolidated income statements.
Variable vs. Fixed Expenses
| Year Ended September 30, | ||||||||||||||||||||||||
| (in millions) |
2010 | % of Total |
2009 | % of Total |
2008 | % of Total |
||||||||||||||||||
| VARIABLE vs. FIXED EXPENSES |
||||||||||||||||||||||||
| Variable clearing and related expenses |
$ | 66.4 | 28 | % | $ | 15.9 | 23 | % | $ | 12.9 | 21 | % | ||||||||||||
| Variable compensation |
45.9 | 19 | % | 17.8 | 26 | % | 17.0 | 28 | % | |||||||||||||||
| Introducing broker commissions |
18.8 | 8 | % | — | 0 | % | — | 0 | % | |||||||||||||||
| Total variable expenses |
131.1 | 54 | % | 33.7 | 49 | % | 29.9 | 49 | % | |||||||||||||||
| Fixed expenses |
104.7 | 43 | % | 32.6 | 47 | % | 31.5 | 51 | % | |||||||||||||||
| Bad debts and impairments |
5.4 | 2 | % | 3.0 | 4 | % | — | 0 | % | |||||||||||||||
| Total non-variable expenses |
110.1 | 46 | % | 35.6 | 51 | % | 31.5 | 51 | % | |||||||||||||||
| Total non-interest expenses |
$ | 241.2 | 100 | % | $ | 69.3 | 100 | % | $ | 61.4 | 100 | % | ||||||||||||
The Company aims to make its non-interest expenses variable to the greatest extent possible, and to keep its fixed costs as low as possible. The table above shows an analysis of the Company’s total non-interest expenses for 2010, 2009, and 2008. Variable expenses consist of clearing and clearing related expenses, variable compensation paid to traders and risk management consultants, bonuses paid to operational employees, introducing broker commissions and bad debt and impairment expenses. As a percentage of total non-interest expenses, variable expenses increased from 49% in 2008 and 2009 to 54% in 2010.
32
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Segment Information: The following table sets forth information concerning the Company’s principal business segments.
| Year Ended September 30, | ||||||||||||||||||||
| (in millions) |
2010 | % Change |
2009 | % Change |
2008 | |||||||||||||||
| SEGMENTAL RESULTS |
||||||||||||||||||||
| Commodity & Risk Management Services (C&RM) | ||||||||||||||||||||
| Operating revenues |
$ | 129.8 | 576 | % | $ | 19.2 | (63 | )% | $ | 51.2 | ||||||||||
| Gross marked-to-market adjustment (non-GAAP) |
6.0 | (13 | )% | 6.9 | n/m | (26.9 | ) | |||||||||||||
| Adjusted operating revenues (non-GAAP) |
135.8 | 420 | % | 26.1 | 7 | % | 24.3 | |||||||||||||
| —Interest expense |
6.2 | 170 | % | 2.3 | (60 | )% | 5.7 | |||||||||||||
| —Variable direct expenses |
52.7 | 675 | % | 6.8 | 48 | % | 4.6 | |||||||||||||
| Adjusted net contribution (non-GAAP) |
76.9 | 352 | % | 17.0 | 21 | % | 14.0 | |||||||||||||
| —Non-variable direct expenses |
36.5 | 356 | % | 8.0 | 54 | % | 5.2 | |||||||||||||
| Adjusted segment income (non-GAAP) |
40.4 | 349 | % | 9.0 | 2 | % | 8.8 | |||||||||||||
| Foreign Exchange | ||||||||||||||||||||
| Operating revenues |
$ | 47.5 | 57 | % | $ | 30.3 | 25 | % | $ | 24.2 | ||||||||||
| —Interest expense |
0.7 | 75 | % | 0.4 | (56 | )% | 0.9 | |||||||||||||
| —Variable direct expenses |
18.8 | 96 | % | 9.6 | 41 | % | 6.8 | |||||||||||||
| Net contribution |
28.0 | 38 | % | 20.3 | 23 | % | 16.5 | |||||||||||||
| —Non-variable direct expenses |
6.0 | 28 | % | 4.7 | (2 | )% | 4.8 | |||||||||||||
| Segment income |
22.0 | 41 | % | 15.6 | 33 | % | 11.7 | |||||||||||||
| Securities | ||||||||||||||||||||
| Operating revenues |
$ | 20.8 | (47 | )% | $ | 39.1 | 2 | % | $ | 38.2 | ||||||||||
| —Interest expense |
0.5 | n/m | — | n/m | (0.1 | ) | ||||||||||||||
| —Variable direct expenses |
8.9 | (45 | )% | 16.2 | (4 | )% | 16.8 | |||||||||||||
| Net contribution |
11.4 | (50 | )% | 22.9 | 7 | % | 21.5 | |||||||||||||
| —Non-variable direct expenses |
6.1 | 56 | % | 3.9 | 22 | % | 3.2 | |||||||||||||
| Segment income |
5.3 | (72 | )% | 19.0 | 4 | % | 18.3 | |||||||||||||
| Clearing & Execution Services (CES) | ||||||||||||||||||||
| Operating revenues |
$ | 61.8 | n/m | $ | — | n/m | $ | — | ||||||||||||
| —Interest expense |
1.8 | n/m | — | n/m | — | |||||||||||||||
| —Variable direct expenses |
49.3 | n/m | — | n/m | — | |||||||||||||||
| Net contribution |
10.7 | n/m | — | n/m | — | |||||||||||||||
| —Non-variable direct expenses |
9.3 | n/m | — | n/m | — | |||||||||||||||
| Segment income |
1.4 | n/m | — | n/m | — | |||||||||||||||
| Other | ||||||||||||||||||||
| Operating revenues |
$ | 8.9 | 162 | % | $ | 3.4 | 467 | % | $ | 0.6 | ||||||||||
| —Interest expense |
0.2 | (83 | )% | 1.2 | 33 | % | 0.9 | |||||||||||||
| —Variable direct expenses |
1.6 | 60 | % | 1.0 | (44 | )% | 1.8 | |||||||||||||
| Net contribution |
7.1 | 492 | % | 1.2 | n/m | (2.1 | ) | |||||||||||||
| —Non-variable direct expenses |
3.0 | 58 | % | 1.9 | 27 | % | 1.5 | |||||||||||||
| Segment income |
4.1 | n/m | (0.7 | ) | (81 | )% | (3.6 | ) | ||||||||||||
| Total Segmental Results | ||||||||||||||||||||
| Operating revenues |
$ | 268.8 | 192 | % | $ | 92.0 | (19 | )% | $ | 114.2 | ||||||||||
| Gross marked-to-market adjustment (non-GAAP) |
6.0 | (13 | )% | 6.9 | n/m | (26.9 | ) | |||||||||||||
| Adjusted operating revenues (non-GAAP) |
274.8 | 178 | % | 98.9 | 13 | % | 87.3 | |||||||||||||
| —Interest expense |
9.4 | 141 | % | 3.9 | (47 | )% | 7.4 | |||||||||||||
| —Variable direct expenses |
131.3 | 291 | % | 33.6 | 12 | % | 30.0 | |||||||||||||
| Adjusted net contribution (non-GAAP) |
134.1 | 118 | % | 61.4 | 23 | % | 49.9 | |||||||||||||
| —Non-variable direct expenses |
60.9 | 229 | % | 18.5 | 26 | % | 14.7 | |||||||||||||
| Adjusted net segment income (non-GAAP) |
$ | 73.2 | 71 | % | $ | 42.9 | 22 | % | $ | 35.2 | ||||||||||
| Reconciliation of C&RM net contribution from GAAP to adjusted, non-GAAP numbers: |
||||||||||||||||||||
| Total C&RM net contribution |
$ | 70.9 | $ | 10.1 | $ | 40.9 | ||||||||||||||
| Gross marked-to-market adjustment (non-GAAP) |
6.0 | 6.9 | (26.9 | ) | ||||||||||||||||
| C&RM adjusted net contribution (non-GAAP) |
$ | 76.9 | $ | 17.0 | $ | 14.0 | ||||||||||||||
| Reconciliation of C&RM segment income from GAAP to adjusted, non-GAAP numbers: |
||||||||||||||||||||
| Total C&RM segment income |
$ | 34.4 | $ | 2.1 | $ | 35.7 | ||||||||||||||
| Gross marked-to-market adjustment (non-GAAP) |
6.0 | 6.9 | (26.9 | ) | ||||||||||||||||
| C&RM adjusted segment income (non-GAAP) |
$ | 40.4 | $ | 9.0 | $ | 8.8 | ||||||||||||||
| Reconciliation of total operating revenues from GAAP to adjusted, non-GAAP numbers: |
||||||||||||||||||||
| Total operating revenues |
$ | 269.0 | $ | 90.6 | $ | 114.9 | ||||||||||||||
| Gross marked-to-market adjustment (non-GAAP) |
6.0 | 6.9 | (26.9 | ) | ||||||||||||||||
| Operating revenue not assigned to a segment |
(0.2 | ) | 1.4 | (0.7 | ) | |||||||||||||||
| Adjusted segment operating revenues (non-GAAP) |
$ | 274.8 | $ | 98.9 | $ | 87.3 | ||||||||||||||
| Reconciliation of net contribution from GAAP to adjusted, non-GAAP numbers: |
||||||||||||||||||||
| Total net contribution |
$ | 128.1 | $ | 54.5 | $ | 76.8 | ||||||||||||||
| Gross marked-to-market adjustment (non-GAAP) |
6.0 | 6.9 | (26.9 | ) | ||||||||||||||||
| Adjusted net contribution (non-GAAP) |
$ | 134.1 | $ | 61.4 | $ | 49.9 | ||||||||||||||
| Reconciliation of segment income from GAAP to adjusted, non-GAAP numbers: |
||||||||||||||||||||
| Total net segment income |
$ | 67.2 | $ | 36.0 | $ | 62.1 | ||||||||||||||
| Gross marked-to-market adjustment (non-GAAP) |
6.0 | 6.9 | (26.9 | ) | ||||||||||||||||
| Adjusted net segment income (non-GAAP) |
$ | 73.2 | $ | 42.9 | $ | 35.2 | ||||||||||||||
33
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
2010 vs. 2009 Segmental Analysis
The net contribution of all the Company’s business segments was $128.1 million in 2010, compared with $54.5 million in 2009. The adjusted net contribution of all the Company’s business segments was $134.1 million in 2010, compared with $61.4 million in 2009. The operations of FCStone contributed $74.5 million to both net contribution and adjusted net contribution in 2010.
Net contribution is one of the key measures used by management to assess the performance of each segment and for decisions regarding the allocation of the Company’s resources. Net contribution is calculated as revenue less direct cost of sales, interest expense, clearing and related expenses, introducing broker commissions and variable compensation. Variable compensation paid to traders represents a fixed percentage of an amount equal to revenues produced less clearing and related charges, base salaries and an overhead allocation.
Total segment income was $67.2 million in 2010, compared with $35.0 million in 2009. Total adjusted segment income was $73.2 million in 2010, compared with $41.9 million in 2009. The operations of FCStone contributed $38.7 million to both total segment income and adjusted segment income for 2010.
Segment income is calculated as net contribution less certain non-variable direct expenses of the segment. These non-variable direct expenses include trader base compensation and benefits, operational employee compensation and benefits, communication and data services, travel, professional fees and bad debt expense.
Commodity and Risk Management Services—Operating revenues under U.S. GAAP increased from $19.2 million in 2009 to $129.8 million in 2010. Adjusted operating revenues increased by 420% from $26.1 million in 2009 to $135.8 million in 2010. The operations of FCStone contributed $99.0 million to both operating revenues and adjusted operating revenues in 2010.
During 2010, the soft commodity business, which includes primarily agricultural and energy commodities, has been constrained by global economic conditions, however an increase in underlying volatility, particularly in agricultural commodities, as well as the effect of rising prices has resulted in year over year increases in exchange traded volumes. OTC volumes are slightly higher than the prior year driven primarily by increases in OTC transactions in the energy markets early in the fiscal year and the international markets in the second half of the fiscal year primarily in Brazil. Increases in customer assets on deposit have been more than offset by continued historically low short term interest rates, which continued to negatively affect the level of interest income earned on customer deposits during 2010.
Precious metals operating revenues decreased from $18.3 million in 2009 to $14.0 million in 2010. Precious metals adjusted operating revenues decreased from $18.1 million in 2009 to $16.5 million in 2010. These declines were primarily a result of reduced business activity caused by higher prices.
Base metals operating revenues increased from $0.9 million in 2009 to $8.6 million in 2010. Base metals adjusted operating revenues increased from $8.0 million in 2009 to $12.1 million in 2010. Base metals operating revenues increased primarily due to increased demand from the Far East and wider spreads augmenting trading profits while rising lead prices contributed to greater arbitrage opportunities.
Segment income increased from $1.1 million in 2009 to $34.4 million in 2010. Adjusted segment income increased from $8.0 million in 2009 to $40.4 million in 2010. Segment income in 2010 was effected by a $2.5 million bad debt provision related to a receivable from a Dubai customer to whom the Company had consigned gold. The operations of FCStone contributed $29.5 million to both segment income and adjusted segment income for 2010.
Foreign Exchange Trading—Operating revenues increased by 57% from $30.3 million in 2009 to $47.5 million in 2010. The operations of FCStone contributed $21.7 million to operating revenues in this segment in 2010. The volume of trades in the Company’s global payments business increased from the prior year period, however a narrowing of spreads in the currencies in which we deal which were affected by the global economic crisis in the prior year period, offset the increase in volumes. The volumes in the global payments business continued to benefit from an increase in customers consisting primarily of financial institutions and our ability to offer an electronic transaction order system to our customers.
In 2010, the customer speculative foreign exchange business experienced low volumes which were offset by activity on the proprietary foreign exchange arbitrage desk which capitalized on arbitrage opportunities in the cash versus futures markets.
34
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Segment income increased 41% from $15.6 million to $22.0 million, with FCStone operations contributing $7.3 million in 2010. Variable expenses expressed as a percentage of operating revenues increased from 32% to 40%, primarily as a result of the FCStone acquisition.
Securities—Operating revenues decreased by 47% from $39.1 million in 2009 to $20.8 million in 2010. Operating revenues in the equities market-making business decreased 49% from the prior year, or $16.7 million. Operating revenues in the debt capital markets business decreased by 32% from the prior year, or $1.7 million.
Operating revenues in the equities market-making business are largely dependent on overall volume and volatility, which reached unprecedented levels during the beginning of 2009 in response to the global financial crisis. Volume and volatility declined considerably by mid-2009 and remained in abatement through 2010. Equity market-making operating revenues include the trading profits earned by the Company before the related expense deduction for ADR conversion fees. These ADR fees are included in the consolidated income statements as clearing and related expenses.
Operating revenues in the debt capital markets business declined as a result of reduced business activity which continues as a result of negative sentiment stemming from the financial crisis as well as trading losses in the third quarter on Argentinean fixed income securities, partially offset by the acquisition of CIBSA. The business focuses on the arranging and placing of debt issues and asset backed securitization, and debt trading in the newly-acquired CIBSA and in Singapore.
Segment income decreased 72% from $19.0 million to $5.3 million. Variable expenses expressed as a percentage of operating revenues increased from 41% to 43%.
Clearing and Execution Services—Operating revenues in the CES segment, resulting from the acquisition of FCStone were $61.8 million for 2010 and are primarily generated from two sources: commission and clearing fee revenues from the execution and clearing of exchange-traded futures and options contracts, and interest income derived from cash balances in our customers’ accounts.
Operating revenues were affected by low volatility in the exchange-traded markets as a result of the macro-economic conditions, as well as historically low short term interest rates. In addition, volumes in this segment were significantly lower than the prior as a result of the Company’s intentional reduction in the number of high volume professional trading customers which it provided clearing services to in the prior year. Operating revenues for 2010 include a trading loss of $2.7 million related to open commodity positions acquired from an under-margined customer.
Segment income was $1.4 million for 2010, which included a $2.3 million bad debt expense provision recorded in the third quarter of 2010, related to a disputed trade that was “given-up” to FCStone by another FCM for a customer that held an account with us as well as the trading loss noted above. Variable expenses, which are primarily clearing and related expenses, represented 80% of operating revenues.
Other—The Company’s asset management segment revenues include management and performance fees, commissions and other revenues received by the Company for management of third party assets and investment gains or losses on the Company’s investments in funds or proprietary accounts managed either by the Company’s investment managers or by independent investment managers. With the acquisition of FCStone, the Other segment’s revenues now include interest income and fees earned in relation to commodity financing transactions as well as a limited amount of principal physical commodity sales transactions related to inputs to the renewable fuels industry.
Operating revenues were $8.9 million in 2010 compared to $3.4 million in 2009. The operations of FCStone contributed $1.5 million to operating revenues in 2010. Assets under management at September 30, 2010 were approximately $349.3 million compared with approximately $353.4 million at September 30, 2009. Management fees decreased by 9% from $3.8 million in 2009 to $3.5 million in 2010, primarily as a decrease in rates on assets managed. Fees and commissions increased by 149% from $1.3 million in 2009 to $3.2 million in 2010 as the environment in Argentina for asset-backed securitizations improved.
Segment income was $4.1 million in 2010 compared to a segment loss of $0.7 million in 2009. During 2009, the Company sold its partnership interest in INTL Consilium, LLC (“INTL Consilium”), and the results of INTL Consilium, previously consolidated, have been reclassified as discontinued operations in the consolidated financial statements.
35
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
2009 vs. 2008 Segmental Analysis
The net contribution of all the Company’s business segments decreased 29% from $76.8 million in 2008, to $54.5 million in 2009. The adjusted net contribution of all the Company’s business segments increased 23% from $49.9 million in 2008 to $61.4 million in 2009. Net contribution consists of operating revenues less direct clearing and clearing related charges and variable compensation paid to traders. Variable compensation is paid to traders on the basis of a fixed percentage of the aggregate of revenues less clearing and related charges, base salaries and a fixed overhead allocation. Net contribution is one of the key measures used by management to assess the performance of each segment.
Total segment income was $35.0 million in 2009, compared with $62.1 million in 2008. Total adjusted segment income was $41.9 million in 2009, compared with $35.2 million in 2008. Segment income is calculated as net contribution less certain non-variable direct expenses of the segment. These non-variable direct expenses include trader base compensation and benefits, operational employee compensation and benefits, communication and data services, travel, professional fees and bad debt expense.
Commodity and Risk Management Services—Operating revenues under U.S. GAAP decreased from $51.2 million in 2008 to $19.2 million in 2009. Adjusted operating revenues increased by 7% from $24.3 million in 2008 to $26.1 million in 2009. The only difference between operating revenues and adjusted operating revenues, a non-GAAP measure, is the gross marked-to-market adjustment of $6.9 million and ($26.9) million for the fiscal year ended 2009 and 2008, respectively.
Precious metals operating revenues increased from $10.7 million in 2008 to $18.3 million in 2009. Precious metals adjusted operating revenues increased 70% from $10.6 million in 2008 to $18.1 million in 2009, as a result of increased customer business in our Dubai and Singapore subsidiaries.
Base metals operating revenues decreased 98% from $40.5 million in 2008 to $0.9 million in 2009. Base metals adjusted operating revenues decreased 34% from $12.2 million in 2008 to $8.0 million in 2009. The decrease in base metals operating revenues was primarily due to the decline in lead prices within our base metals division. Base metals operating revenues benefited during the first half of 2008 from a disparity between the price of auto batteries, which the Company recycles for their lead content, and the price at which it was able to sell lead to customers. With the rapid decline in lead prices during calendar 2008 and persistently low prices during much of 2009, this disparity also declined to the extent that recycling became less attractive in the second half of fiscal 2008 and most of fiscal 2009. Within base metals, increased copper revenues to some extent compensated for the decline in lead revenues.
Segment income decreased from $35.7 million in 2008 to $2.1 million in 2009. Adjusted segment income decreased from $8.8 million in 2008 to $9.0 million in 2009. Variable expenses expressed as a percentage of adjusted operating revenues increased from 19% to 26%.
Foreign Exchange Trading—Operating revenues increased by 25% from $24.2 million in 2008 to $30.3 million in 2009 due to a larger customer base and wider spreads in developing market currency exchange rates.
Segment income increased 33% from $11.7 million in 2008 to $15.6 million in 2009. Variable expenses expressed as a percentage of operating revenues increased from 28% to 32%, mainly as a result of commissions paid to third-party introducers
Securities—Operating revenues increased by 2% from $38.2 million in 2008 to $39.1 million in 2009. Operating revenues in the equities market-making business decreased marginally from $33.9 million in 2008 to $33.8 million in 2009. Operating revenues in the debt capital markets business increased by 26% from $4.2 million in 2008 to $5.3 million in 2009.
Operating revenues in the equities market-making business are largely dependent on overall volume and volatility. Volume and volatility declined considerably by mid-2009 and remained in abatement through 2010. More than half of the revenues, $18.5 million, were produced during the first fiscal quarter ended December 31, 2008, demonstrating the extreme volatility in the equity markets during fiscal 2009. The volume of trades was 4% higher in 2009 than in 2008. Equity market-making operating revenues include the trading profits earned by the Company before the related expense deduction for ADR conversion fees. These ADR fees are included in the consolidated income statements as clearing and related expenses.
Operating revenues in the debt capital markets business include the arranging and placing of debt issues, asset backed securitization and debt trading, which grew off an insignificant base with effect from the third fiscal quarter of 2009, with the acquisition of CIBSA in April 2009 and the hiring of a debt trading team in Singapore. Fee revenues have been adversely affected by the lack of market demand and intolerance for risk caused by the global financial crisis but segmental revenues have been augmented by the new trading activities. Fee revenues were $2.2 million and trading revenues $2.7 million in 2009, compared with $3.9 million and $0.3 million, respectively, in 2008.
36
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Segment income increased 4% from $18.3 million to $19.0 million. Variable expenses expressed as a percentage of operating revenues decreased from 44% to 41%.
Other—The Company’s asset management segment revenues include management and performance fees, commissions and other revenues received by the Company for management of third party assets and investment gains or losses on the Company’s investments in funds or proprietary accounts managed either by the Company’s investment managers or by independent investment managers. Operating revenues increased by 467% from $0.6 million in 2008 to $3.4 million in 2009.
The segment loss was $0.7 million in 2009 as compared to a segment loss of $3.6 million in 2008. During 2009, the Company sold its partnership interest in INTL Consilium, LLC (“INTL Consilium”), and the results of INTL Consilium, previously consolidated, have been reclassified as discontinued operations in the consolidated financial statements.
Liquidity, Financial Condition and Capital Resources
Overview
Liquidity is of critical importance to us and imperative to maintain our operations on a daily basis. In FCStone, LLC, the Company’s FCM subsidiary, we have responsibilities to meet margin calls at all exchanges on a daily basis and intra-day basis, if necessary. Our customers are required to make any required margin deposits the next business day, and we require our largest customers to make intra-day margin payments during periods of significant price movement. Margin required to be posted to the exchanges is a function of the net open positions of our customers and the required margin per contract.
In addition, in our commodities trading, C&RM over-the-counter, securities and foreign exchange trading activities, we may be called upon to meet margin calls with our various trading counterparties based upon the underlying open transactions we have in place with those counterparties.
The Company continuously reviews its overall credit and capital needs to ensure that its capital base, both stockholders’ equity and debt, as well as available credit facilities can appropriately support the anticipated financing needs of its operating subsidiaries.
At September 30, 2010, the Company had total equity capital of $241.3 million, bank loans of $114.9 million, subordinated debt of $0.5 million and convertible subordinated notes of $16.7 million.
A substantial portion of the Company’s assets are liquid. At September 30, 2010, approximately 92% of the Company’s assets consisted of cash; deposits and receivables from exchange-clearing organizations, broker-dealers, clearing organizations, FCM’s, and counterparties; customer receivables; marketable financial instruments and investments; and physical commodities inventory, at cost. All assets that are not customer and counterparty deposits, are financed by the Company’s equity capital, convertible subordinated notes, subordinated debt, bank loans, short-term borrowings from financial instruments sold, not yet purchased, and other payables.
Customer and Counterparty Credit and Liquidity Risk
Our operations expose us to credit risk of default of our customers and counterparties. The risk includes liquidity risk to the extent our customers or counterparties are unable to make timely payment of margin or other credit support. These risks expose us indirectly to the financing and liquidity risks of our customers and counterparties, including the risks that our customers and counterparties may not be able to finance their operations. Throughout the commodities and securities industries, continued volatility in commodity prices has required increased lines of credit, and placed a strain on working capital debt facilities. In many cases, our customers have been forced to increase leverage to unprecedented levels in order for them to continue to carry inventory and properly execute hedging strategies. Continuing volatility in the financial markets has tightened credit further.
As a clearing broker, we act on behalf of our customers for all trades consummated on exchanges. We must pay initial and variation margin to the exchanges before we receive the required payments from our customers. Accordingly, we are responsible for our customers’ obligations with respect to these transactions, which exposes us to significant credit risk. Our customers are required to make any required margin deposits the next business day, and we require our largest customers to make intra-day margin payments during periods of significant price movement. Our clients are required to maintain initial margin requirements at the level set by the respective exchanges, but we have the ability to increase the margin requirements for customers based on their open positions, trading activity, or market conditions.
37
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
With over-the-counter derivative transactions, we act as a principal, which exposes us to the credit risk of both our customers and the counterparties with whom we offset our customer positions. As with exchange-traded transactions, our over-the-counter transactions require that we meet initial and variation margin payments on behalf of our customers before we receive the required payment from our customers. Over-the-counter customers are required to post sufficient collateral to meet margin requirements based on Value at Risk models as well as variation margin requirement based on the price movement of the commodity or security in which they transact. Our customers are required to make any required margin deposits the next business day, and we may require our largest clients to make intra-day margin payments during periods of significant price movement. We have the ability to increase the margin requirements for customers based on their open positions, trading activity, or market conditions.
In addition, with over-the-counter transactions, we are at the risk that a counterparty will fail to meet its obligations when due. We would then be exposed to the risk that the settlement of a transaction which is due a customer will not be collected from the respective counterparty with whom the transaction was offset. We continuously monitor the credit quality of our respective counterparties and mark our positions held with each counterparty to market on a daily basis. FCStone has primarily carried trade credit insurance in amounts in excess of its exposure to each of its counterparty and will adjust levels of insurance or positions with a given counterparty based on the exposure to that counterparty.
As a result of the acquistion of FCStone, the Company acquired notes receivable from certain customers and an introducing broker which arose from previous customer account deficits. At September 30, 2010, notes receivable related to these customer account deficits were $125.1 million. The Company is uncertain as to the full collectability of the contractual amounts, and no assurances can be given as to the amount and timing of recovery that may be obtained under the promissory notes. The Company estimates the collectability on these notes to be $13.6 million at September 30, 2010.
During 2010, the Company recorded a charge to bad debt expense of approximately $2.3 million related to a disputed trade that was “given-up” to FCStone by another FCM for a customer that held an account with FCStone. Despite expressly informing the FCM that the Company would not accept the “give-up” trade, the “give-up” trade was submitted through the electronic clearing process and erroneously cleared by FCStone, generating a deficit in the customer’s trading account. The customer lacked the financial capacity to cover the account deficit, and FCStone has filed a complaint and is seeking legal relief through arbitration against the FCM to have the “give-up” transaction rescinded, with an award of appropriate damages.
Primary Sources and Uses of Cash
The Company’s assets and liabilities may vary significantly from period to period due to changing customer requirements, economic and market conditions and the growth of the Company. The Company’s total assets at September 30, 2010 and September 30, 2009, were $2,021.7 million and $1,555.7 million, respectively. The Company’s operating activities generate or utilize cash as a result of net income or loss earned or incurred during each period and fluctuations in its assets and liabilities. The most significant fluctuations arise from changes in the level of customer activity, commodities prices and changes in the balances of financial instruments and commodities inventory. FCStone, LLC, our FCM subsidiary, occasionally uses its margin line credit facilities, on a short-term basis, to meet intraday settlements with the commodity exchanges prior to collecting margin funds from our customers. FCStone, LLC has historically utilized subordinated debt to increase its excess regulatory capital, however that practice ceased during 2010, as discussed further below.
We have liquidity and funding policies and processes in place that are intended to maintain significant flexibility to address both company-specific and industry liquidity needs. The majority of our excess funds are held with high quality institutions, under highly-liquid reverse repurchase agreements, with a maturity of typically three days or less, U.S. Government Treasury and Agency securities and AA-rated money market investments.
At September 30, 2010, approximately $6.6 million of the Company’s financial instruments owned and $7.5 million of financial instruments sold, not yet purchased, are exchangeable foreign equities and American Depository Receipts.
On June 21, 2010, the Company’s subsidiary, FCStone, LLC amended and restated its $75.0 million syndicated margin line credit facility available for funding daily and intraday margin calls at exchanges, committed through June 22, 2011. During September 2010, the Company’s subsidiary, INTL Commodities, amended its revolving syndicated loan facility, increasing the amount available under the facility to $140.0 million, and the facility is committed until September 21, 2011.
At September 30, 2010, the Company’s subsidiary, INTL Global Currencies Limited, had a $25.0 million facility, committed until December 17, 2010 and the Company had its own $35.0 million facility, committed until December 17, 2010. As of September 30, 2010, the Company had bank facilities of $275.0 million, of which $114.9 million was outstanding. Subsequent to September 30, 2010, and effective October 29, 2010, the Company amended these two bilateral facilities into a single three year senior secured revolving credit facility in the amount of $75 million, committed until October 1, 2013.
38
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
On December 2, 2010, the Company entered into a Credit Agreement with Bank of Montreal, as Agent, and BMO Capital Markets Financing, Inc., as lender, which provides a $50 million uncommitted borrowing facility. Borrowings under the facility will be used to finance traditional commodity financing arrangements, and the credit agreement expires on December 1, 2011.
Prior to April 1, 2010, the Company had a subordinated debt facility with a syndicate of lenders that was being utilized as capital for regulatory purposes. On April 1, 2010, the Company repaid in full the outstanding subordinated debt, and the commitment was terminated as the ability of the Company to draw on this subordinated debt facility expired on July 22, 2009. The Company does not expect to replace this facility, and management believes the termination of this subordinated debt facility will not significantly impact our overall business operations. We expect to increase excess regulatory capital, if needed, through income from operations and available internal cash reserves.
The Company’s facility agreements contain covenants relating to financial measures such as minimum net worth, minimum working capital, minimum regulatory capital and minimum interest coverage ratios. Failure to comply with any such covenants could result in the debt becoming payable on demand. The Company and its subsidiaries are in compliance with all of its covenants under these facilities.
The Company collected $37.1 million during 2010, relating to the net operating loss of FCStone Group, Inc. for its fiscal year ended August 31, 2009. The Company elected to carry back the net operating loss to recapture taxes paid in the prior two fiscal years.
In September 2006, the Company completed a private placement of $27 million of 7.625% subordinated convertible notes (the “Notes”). The Notes mature in September 2011. They are convertible at any time at the option of the noteholder at a current conversion price of $21.79 per share. The Notes contain customary anti-dilutive provisions. During the 2006 fiscal year, $2.0 million in principal amount of the Notes, together with accrued interest, were converted into a total of 79,562 shares of common stock of the Company. During the 2008 fiscal year, approximately $8.2 million in principal amount of the Notes, together with accrued interest, were converted into a total of 325,755 shares of common stock of the Company. During the 2009 fiscal year, approximately $0.1 million in principal amount of the Notes, together with accrued interest, were converted into a total of 4,359 shares of common stock of the Company, leaving $16.7 million in principal amount of Notes outstanding. At the current conversion price, conversion would result in the issue of 767,886 new shares of common stock. The Company may require conversion at any time if the dollar volume-weighted average share price exceeds $38.25 for 20 out of any 30 consecutive trading days. Noteholders could redeem their Notes at par if the interest coverage ratio set forth in the Notes was less than 2.75 for the twelve-month period ending December 31, 2009. The consolidated net interest coverage ratio for the twelve-month period ended December 31, 2009 exceeded 2.75, so the holders were not entitled to early redemption of their Notes.
Set forth below is the calculation of consolidated EBITDA and consolidated cash interest expense, as defined in the Notes, for the trailing twelve month period ended September 30, 2010:
| (in millions) |
For the Trailing Twelve Months Ended September 30, 2010 (non-GAAP) |
|||
| Income from continuing operations |
$ | 12.0 | ||
| Noncontrolling interests |
(0.3 | ) | ||
| Income tax |
5.9 | |||
| Depreciation and amortization |
1.6 | |||
| Stock compensation amortization |
1.8 | |||
| Interest expense |
9.9 | |||
| Change in unrealized fair market value gain in physical commodities inventory |
4.7 | |||
| Other marked-to-market adjustments |
1.3 | |||
| Consolidated EBITDA (non-GAAP) |
$ | 36.9 | ||
| Interest expense |
$ | 9.9 | ||
| Less: amortization of deferred financing costs |
(0.2 | ) | ||
| Consolidated cash interest expense (non-GAAP) |
$ | 9.7 | ||
39
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Adjusted consolidated EBITDA is a financial measure that is not recognized by U.S. GAAP, and should not be considered as an alternative to any other measures of performance derived in accordance with U.S. GAAP. The Company has included this non-GAAP financial measure because it required under the terms of the Notes.
During fiscal 2010, one of the noteholders commenced litigation against the Company, alleging that the transaction with FCStone constituted a change of control under the Notes and that, as a result, the Company should have afforded the noteholder the opportunity to redeem the Notes at a 15% premium. The remaining three holders of the notes holding Notes in an aggregate amount of $13.0 million, filed a similar lawsuit on the Company on October 20, 2010. The Company is of the view that the FCStone transaction did not result in a change of control as defined in the Notes and intends to continue to defend the matter vigorously. Refer to Item 3—Legal Proceedings, for additional information.
Effective May 2007, the Company acquired a group of companies (together ‘INTL Gainvest’) that conduct a specialist local markets securitization and asset management business in South America. In addition to the initial purchase price, the Company agreed to make a further payment to the sellers of INTL Gainvest on June 1, 2008 equal to 25% of the aggregate revenues of INTL Gainvest earned in the year to April 30, 2008; and a further payment on June 1, 2009 equal to 25% of the aggregate revenues of INTL Gainvest earned in the year to April 30, 2009. Accordingly, the Company paid $1.4 million to the sellers of INTL Gainvest on June 1, 2008 and a further $1.4 million on June 1, 2009. No further payments are required to be made by the Company to the sellers of INTL Gainvest.
On December 31, 2007, FCStone LLC acquired Downes-O’Neill, LLC, a registered brokerage group and risk management consulting firm specializing in serving the dairy industry. Under the terms of the purchase agreement, FCStone LLC is obligated to pay additional consideration if specific conditions and earnings targets are met annually, based on a calendar year period, through December 31, 2010. If the earnings targets are met, additional consideration of $1.0 million is triggered, plus an additional twenty percent of the excess over the earnings target. For the calendar year period ended December 31, 2009, the specific conditions and earnings targets were reached and additional consideration of $1.2 million was distributed during the quarter ended March 31, 2010. The additional consideration was a pre-acquisition contingency, and reported as an extraordinary loss in the consolidated income statement.
On April 7, 2009, the Company acquired CIBSA, a leading securities broker-dealer based in Argentina. The Company paid approximately $1.7 million on the date of purchase and is obligated to make additional payments over the next two years, depending on the level of revenues achieved. Under the purchase agreement, the Company was obligated to pay an amount equal to 25% of the net revenues if such revenues are in excess of $2.5 million and up to $3.0 million, 35% of the net revenues in excess of $3.0 million up to $4.0 million, and 40% of the net revenues in excess of $4.0 million for each of the two twelve-month periods ending March 31, 2010 and 2011 to the sellers as additional consideration. For the twelve-month period ended March 31, 2010, the specific net revenue target was reached and additional consideration of $0.8 million was distributed in May of 2010. Any amounts paid under this agreement are recorded as goodwill.
On April 1, 2010, the Company acquired Risk Management Incorporated and RMI Consulting, Inc. (the “RMI Companies”). The purchase price consisted of an initial payment of $6.0 million, and three contingent payments which will be based on the combined net income of the RMI Companies for each of the three years after the closing. The estimated total purchase price, including contingent consideration is approximately $16.7 million. The fair value of the additional consideration is recognized as a contingent liability as of the acquisition date. The acquisition date fair value of additional consideration is estimated to be approximately $10.7 million. The contingent liability represents the fair value of the expected consideration to be paid based on the forecasted sales during the three year period and a discount rate being applied to those future payments.
On July 2, 2010, the Company, acquired HGC Trading, LLC; HGC Asset Management, LLC; HGC Advisory Services, LLC; Hanley Alternative Trade Group, LLC and HGC Office Services, LLC (the “Hanley Companies”). The purchase price consisted of cash payments totaling $31.8 million and three additional contingent payments equal to 15% of the adjusted earnings before interest and taxes of the soft commodities derivatives business of the Hanley Companies and FCStone Trading LLC, subsequently renamed INTL Hanley, LLC, (the “Derivatives Division”) for each twelve month period during the three year period commencing on July 1, 2010. The estimated total purchase price, including contingent consideration is approximately $47.4 million. The fair value of the additional consideration is recognized as a contingent liability as of the acquisition date. The acquisition date fair value of additional consideration is estimated to be approximately $15.6 million. The contingent liability represents the fair value of the expected consideration to be paid based on the forecasted sales during the three year period and a discount rate being applied to those future payments.
On September 20, 2010, the Company acquired certain assets of Provident Group (“Provident”), a New York-based investment banking and advisory firm. Under terms of the acquisition agreement, the Company acquired assets and secured the services of the individual sellers as set forth in the agreement. The purchase price for the assets and services of the sellers was $5.0 million.
40
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Subsequent to the fiscal year ended September 30, 2010, the Company acquired all of the membership interests in Hencorp Becstone Futures, L.C. (“Hencorp Futures”), the futures operation of Miami-based Hencorp Group. Hencorp Futures specializes in the development and execution of risk-management programs designed to hedge price volatility in a number of widely traded commodities, including coffee, sugar, cocoa, grains and energy products. The purchase price consists of an initial payment of $2.3 million, four contingent payments which will be based on Hencorp Futures’ net income for each of the four years after the closing and a final contingent payment based on the average net income of the second, third and fourth years.
Other Capital Considerations
Our FCM subsidiary, FCStone LLC is subject to various regulations and capital adequacy requirements. Pursuant to the rules, regulations, and requirements of the CFTC and other self-regulatory organizations, FCStone LLC is required to maintain certain minimum net capital as defined in such rules, regulations, and requirements. Net capital will fluctuate on a daily basis. FCStone LLC had adjusted net capital at September 30, 2010 of $77.8 million, which was $25.0 million in excess of its minimum net capital requirement of $52.8 million. Subsequent to September 30, 2010, the business activities of FCStone Forex, LLC have been transferred to FCStone, LLC. The transfer has not had a material impact on the net capital of FCStone, LLC.
INTL Trading, the Company’s broker-dealer subsidiary, is subject to the net capital requirements of the SEC relating to liquidity and net capital levels. At September 30, 2010, INTL Trading had regulatory net capital of $1.5 million, which was $0.5 million in excess of its minimum net capital requirement of $1.0 million. The Company’s ability to receive distributions from INTL Trading is restricted by regulations of the SEC. The Company’s right to receive distributions from its subsidiaries is also subject to the rights of the subsidiaries’ creditors, including customers of INTL Trading. During 2010 INTL Trading paid dividends of $3.9 million to the Company.
FCStone Australia Pty Ltd is regulated by the Australian Securities and Investment Commission and is subject to a minimum capital requirement which at September 30, 2010 was $50,000.
FCC Investments, Inc., a broker-dealer subsidiary of FCStone, is subject to the net capital requirements of the SEC relating to liquidity and net capital levels. At September 30, 2010, FCC Investments, Inc. had regulatory net capital of $0.4 million, and its minimum net capital requirement was $0.3 million.
FCStone Commodities Services (Europe), Ltd. is regulated by the Financial Regulator of Ireland and is subject to a minimum capital requirement which at September 30, 2010 was 370,000 euros.
Risk Management Incorporated is regulated by the CFTC and the National Futures Association (“NFA”) and is subject to a minimum capital requirement which at September 30, 2010 was $45,000.
The Company expects to contribute $0.8 million to its defined benefit pension plans during fiscal 2011, which represents the minimum funding requirement.
Cash Flows
The Company’s cash and cash equivalents increased from approximately $60.5 million at September 30, 2009 to approximately $81.9 million at September 30, 2010, a net increase of approximately $21.4 million. Net cash of $111.8 million was provided by operating activities, $41.0 million was used in investing activities and net cash of $49.2 million was used in financing activities, of which approximately $6.1 million was from a reduction in amounts payable to lenders under loans and overdrafts and $56.0 million was used in repayment of subordinated debt. Fluctuations in exchange rates had a negative effect of $0.2 million on the Company’s cash and cash equivalents.
The Company is continuously evaluating opportunities to expand its business. Expansion of the Company’s activities will require funding and will have an effect on liquidity.
Apart from what has been disclosed above, there are no known trends, events or uncertainties that have had or are likely to have a material impact on the liquidity, financial condition and capital resources of the Company.
Commitments
Information about the Company’s commitments and contingent liabilities is contained in Note 15 of the Consolidated Financial Statements.
The Company’s senior subordinated convertible notes, as described in note 14 of the Notes to the Consolidated Financial Statements, are due in September 2011 if they are not converted or redeemed prior to their due date. Refer to Item 3- Legal Proceedings, for information on litigation commenced in November 2009 against the Company by a noteholder.
Off Balance Sheet Arrangements
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 and futures commission merchant and from its market making and proprietary trading in the foreign exchange and commodities trading business. As part of these activities, the Company carries short positions. For example, it sells financial instruments that it does not own, borrows the financial instruments to make good delivery, and
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
therefore is obliged to purchase such financial instruments at a future date in order to return the borrowed financial instruments. The Company has recorded these obligations in the consolidated financial statements at September 30, 2010 and 2009 at the fair value of the related financial instruments, totaling $189.6 million and $127.5 million, respectively. These positions are held to offset the risks related to financial assets owned and reported on the Company’s consolidated balance sheets under ‘Financial instruments owned, at fair value’, and ‘Physical commodities inventory, at cost’. The Company will incur losses if the fair value of the financial instruments sold, not yet purchased, increases subsequent to September 30, 2010, which might be partially or wholly offset by gains in the value of assets held at September 30, 2010. The total of $189.6 million and $127.5 million includes a net liability of $87.6 million and $30.8 million for derivatives, based on their fair value as of September 30, 2010 and 2009, respectively.
In the Company’s foreign exchange and commodities trading business segments, the Company holds options and futures contracts resulting from market-making and proprietary trading activities in the Company’s foreign exchange/commodities trading business segment. The Company assists its customers in its commodities trading business to protect the value of their future production (precious or base metals) by selling them put options on an OTC basis. The Company also provides its commodities trading business customers with sophisticated option products, including combinations of buying and selling puts and calls. The Company mitigates its risk by effecting offsetting options with market counterparties or through the purchase or sale of exchange traded commodities futures. The risk mitigation of offsetting options is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC.
In the Company’s C&RM segment, the Company will generally offset the customer’s transaction simultaneously with one of our trading counterparties when transacting OTC and foreign exchange contracts with our customers. On a limited basis, our OTC and foreign exchange trade desks will accept a customer transaction and will offset that transaction with a similar but not identical position on the exchange. These unmatched transactions are intended to be short-term in nature and are conducted to facilitate the most effective transaction for our customer.
Derivative contracts are traded along with cash transactions because of the integrated nature of the markets for such products. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firm-wide risk management policies.
The Company is a member of various commodity exchanges and clearing organizations. Under the standard membership agreement, all members are required to guarantee the performance of other members and, accordingly, in the event another member is unable to satisfy its obligations to the exchange, may be required to fund a portion of the shortfall. Our liability under these arrangements is not quantifiable and could exceed the cash and securities we have posted as collateral at the exchanges. However, management believes that the potential for us to be required to make payments under these arrangements is remote. Accordingly, no contingent liability for these arrangements has been recorded in the consolidated balance sheets as of September 30, 2010.
Effects of Inflation
The Company’s assets are not significantly affected by inflation because they are, to a large extent, liquid in nature. Increases in the Company’s expenses, such as compensation and benefits, clearing and related expenses, occupancy and equipment rental, due to inflation, may not be readily recoverable from increasing the prices of services offered by the Company. In addition, to the extent that inflation results in rising interest rates or has other adverse effects on the financial markets and on the value of financial instruments, currency and commodities positions, it may adversely affect the Company’s financial position and results of operations.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. The most significant of these estimates and assumptions relate to fair value measurements for financial instruments and investments and the provision for potential losses from bad debts. Provisions for estimated bad debts are recorded on a specific identification basis. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
The Company believes that, of its significant accounting policies, those described below may, in certain instances, involve a high degree of judgment and complexity. Therefore, understanding these policies is important in understanding the reported results of operations and the financial position of the Company.
Valuation of Financial Instruments and Foreign Currencies. Substantially all financial instruments are reflected in the consolidated financial statements at fair value or amounts that approximate fair value. These financial instruments include: cash, cash equivalents, and financial instruments purchased under agreements to resell; deposits with clearing organizations; financial instruments owned; and financial instruments sold but not yet purchased. Unrealized gains and losses related to these financial instruments, which are not customer owned positions, are reflected in earnings. Where available, the Company uses
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
prices from independent sources such as listed market prices, or broker or dealer price quotations. Fair values for certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. In some cases, even though the value of a security is derived from an independent market price or broker or dealer quote, certain assumptions may be required to determine the fair value. However, these assumptions may be incorrect and the actual value realized upon disposition could be different from the current carrying value. The value of foreign currencies, including foreign currencies sold, not yet purchased, are converted into its U.S. dollar equivalents at the foreign exchange rates in effect at the close of business at the end of the accounting period. For foreign currency transactions completed during each reporting period, the foreign exchange rate in effect at the time of the transaction is used.
The application of the valuation process for financial instruments and foreign currencies is critical because these items represent a significant portion of the Company’s total assets. Valuations for substantially all of the financial instruments held by the Company are available from independent publishers of market information. The valuation process may involve estimates and judgments in the case of certain financial instruments with limited liquidity and OTC derivatives. Given the wide availability of pricing information, the high degree of liquidity of the majority of the Company’s assets, and the relatively short periods for which they are typically held in inventory, these factors mitigate the risk of changes in estimates having a material effect on the Company. The basis for estimating the valuation of any financial instruments has not undergone any change.
Revenue Recognition. The revenues of the Company are derived principally from realized and unrealized trading income in securities, derivative instruments, commodities and foreign currencies purchased or sold for the Company’s account. Realized and unrealized trading income is recorded on a trade date basis. Securities owned and securities sold, not yet purchased and foreign currencies sold, not yet purchased, are stated at fair value with related changes in unrealized appreciation or depreciation reflected in ‘Trading gains’. Fee and interest income are recorded on the accrual basis and dividend income is recognized on the ex-dividend date.
Revenue on commodities that are purchased for physical delivery to customers and that are not readily convertible into cash is recognized at the point in time when the commodity has been shipped, title and risk of loss has been transferred to the customer, and the following conditions have been met: persuasive evidence of an arrangement exists, the price is fixed and determinable, and collectability of the resulting receivable is reasonably assured.
The critical aspect of revenue recognition for the Company is recording all known transactions as of the trade date of each transaction for the financial period. The Company has developed systems for each of its businesses to capture all known transactions. Recording all known transactions involves reviewing trades that occur after the financial period that relate to the financial period. The accuracy of capturing this information is dependent upon the completeness and accuracy of data capture of the operations systems and the Company’s clearing firm.
Physical Commodities Inventory. Physical commodities inventory is stated at the lower of cost or fair value, determined using the weighted-average price method. The Company generally mitigates the price risk associated with physical commodities held in inventory through the use of derivatives. The Company does not elect hedge accounting under U.S. GAAP in accounting for this price risk mitigation. Any unrealized gains in physical commodities inventory are not recognized under U.S. GAAP, but unrealized gains and losses in related derivative positions are recognized under U.S. GAAP. As a result, the Company’s reported commodities trading earnings are subject to volatility.
Recently Issued Accounting Standards
The details for recently issued accounting standards can be found under Note 2 of the Consolidated Financial Statements.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Market Risk
The Company conducts its market-making and trading activities predominantly as a principal, which subjects its capital to significant risks. These risks include, but are not limited to, absolute and relative price movements, price volatility and changes in liquidity, over which the Company has virtually no control. The Company’s exposure to market risk varies in accordance with the volume of customer-driven market-making transactions, the size of the proprietary positions and the volatility of the financial instruments traded.
We seek to mitigate exposure to market risk by utilizing a variety of qualitative and quantitative techniques:
| • | diversification of business activities and instruments |
| • | limitations on positions |
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
| • | allocation of capital and limits based on estimated weighted risks |
| • | daily monitoring of positions and mark-to-market profitability |
The Company utilizes derivative products in a trading capacity as a dealer, to satisfy customer needs and mitigate risk. The Company manages risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with the Company’s other trading activities.
Management believes that the volatility of revenues is a key indicator of the effectiveness of its risk management techniques. The graph below summarizes volatility of the Company’s daily revenue, determined on a marked-to-market basis, during fiscal year 2010.
In the Company’s securities market-making and trading activities, the Company maintains inventories of equity and debt securities. In the Company’s commodities market-making and trading activities, the Company’s positions include physical inventories, forwards, futures and options. The Company’s commodity trading activities are managed as one consolidated book for each commodity encompassing both cash positions and derivative instruments. The Company monitors the aggregate position for each commodity in equivalent physical ounces or metric tons.
Margin Risk
Our customers with exchange-traded positions, including OTC trades submitted for clearing, are required to maintain margin sufficient to support their open trading positions. While we initially establish each client’s margin requirement at the level set by the respective exchanges, we have the ability to increase the requirements to levels we believe are sufficient to cover their open positions. A client’s subsequent trading activity or adverse market changes may cause that client’s previous margin payments to be inadequate to support their trading obligations, which, in instances where we serve as the exchange clearing member for the trade, would require us to cover any shortfall and thereby expose us to potential losses. When we act as a principal in the OTC markets, we are responsible for the performance of both our customers as well the counterparty with which we have offset the customer’s transactions.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Interest Rate Risk
In the ordinary course of our operations, we have interest rate risk from the possibility that changes in interest rates will affect the values of financial instruments and impact interest income earned. We generate interest income from the positive spread earned on customer deposits. We typically invest in U.S. Treasury and Agency securities, reverse repurchase agreements involving U.S. Treasury and Agency securities or AA rate money market funds. We have an investment policy which establishes acceptable standards of credit quality and limits the amount of funds that can be invested within a particular fund and institution.
In April 2010, we implemented an interest rate risk management strategy using derivative financial instruments in the form of interest rate swaps to manage a portion of our aggregate interest rate position. Our objective is to invest the majority of customer segregated deposits in high quality, short-term investments and swap the resulting variable interest earnings into the medium-term interest stream, by using a strip of interest rate swaps that mature every quarter, and enable us to achieve the two year moving average of the two year swap rate. These interest rate swaps are not designated for hedge accounting treatment, and changes in the marked-to-market valuations of the financial instruments are recorded in earnings on a quarterly basis.
We manage interest expense using floating rate debt and through interest rate swap transactions. Refer to Note 7 to the Consolidated Financial Statements for information on the interest rate swap transactions. The debt instruments are carried at their unpaid principal balance which approximates fair value. All of the debt outstanding at September 30, 2010, has a variable interest rate.
| Item 8. | Financial Statements and Supplementary Data |
The financial statements of International Assets Holding Corporation are as follows:
Management’s Report on the Consolidated Financial Statements
Our management is responsible for the preparation of the consolidated financial statements and related information that are presented in this report. The consolidated financial statements, which include amounts based on management’s estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities and careful selection and training of qualified personnel.
The consolidated financial statements have been audited by KPMG, LLP, an independent registered public accounting firm, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). The independent registered public accounting firm’s responsibility is to express an opinion as to whether such financial statements fairly present, in all material respects, our financial position, results of operations and cash flows in accordance with U.S. generally accepted accounting principles.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
| Item 9A. | Controls and Procedures |
In connection with the filing of this Form 10-K, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2010. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010.
There were no changes in the Company’s internal controls over financial reporting during 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As a result, there can be no assurance that a control system will succeed in preventing all possible instances of error and fraud. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the conclusions of our Chief Executive Officer and Chief Financial Officer are made at the “reasonable assurance” level.
Management’s report on internal control over financial reporting and the report of KPMG, LLP are contained in Part II, Item 8 of this report.
The Company’s Chief Executive Officer and Chief Financial Officer filed with the SEC as exhibits to the Form 10-K for the year ended September 30, 2010 and are filing as exhibits to this report, the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
A list of our executive officers and biographical information about them and our directors will be included in the definitive Proxy Statement for our 2011 Annual Meeting of Shareholders to be held on February 24, 2011, which will be filed within 120 days of the end of our fiscal year ended September 30, 2010 (the “2011 Proxy Statement”) and is incorporated herein by reference. Information about our Audit Committee may be found in the Proxy Statement. That information is incorporated herein by reference.
We have adopted a code of ethics that applies to the directors, officers and employees of the Company and each of its subsidiaries. The code of ethics is publicly available on our Website at www.intlassets.com/ethics.aspx. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer, or Chief Accounting Officer, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
| Item 11. | Executive Compensation |
Information relating to our executive officer and director compensation and the compensation committee of our board of directors will be included in the 2011 Proxy Statement and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of our management will be included in the 2011 Proxy Statement and is incorporated herein by reference.
The following table provides information generally as of September 30, 2010, the last day of fiscal 2010, regarding securities to be issued on exercise of stock options, and securities remaining available for issuance under our equity compensation plans that were in effect during fiscal 2010.
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
| Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans |
|||||||||
| Equity compensation plans approved by shareholders |
1,476,500 | $ | 20.42 | 744,871 | ||||||||
| Equity compensation plans not approved by shareholders |
— | — | — | |||||||||
| Total |
1,476,500 | $ | 20.42 | 744,871 | ||||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information regarding certain relationships and related transactions and director independence will be included in the 2011 Proxy Statement and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
Information regarding principal accountant fees and services will be included in the 2011 Proxy Statement and is incorporated herein by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
| (a) | Consolidated Financial Statements and Financial Statement Schedules. See “Part II—Item 8. Financial Statements and Supplementary Data. |
(c) Exhibit No.
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference from the Company’s Form 8-K filed with the SEC on October 9, 2009).
3.2 Amended and Restated By-laws (incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2007).
4.1 International Assets Holding Corporation 1993 Stock Option Plan (incorporated by reference from the Company’s Registration Statement on Form SB-2 (No. 33-70334-A) filed with the SEC on February 2, 1994).
4.2 Amendment dated December 28, 1995 to the International Assets Holding Corporation 1993 Stock Option Plan (incorporated by reference from the Registration Statement on Form S-8 (No. 333-10727) filed with the SEC on August 23, 1996).
4.3 Amendment dated October 28, 1998 to the International Assets Holding Corporation 1993 Stock Option Plan (incorporated by reference from Company’s Proxy Statement on Form 14A filed with the SEC on January 15, 1999).
4.4 Amendment dated June 9, 2000 to the International Assets Holding Corporation 1993 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on January 12, 2001).
4.5 International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on Schedule 14A filed on January 14, 2003).
4.6 Amendment to International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on February 11, 2004).
4.7 Amendment to International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on January 23, 2006).
4.8 FCStone Group, Inc. 2006 Equity Incentive Plan (incorporated by reference from the Registration Statement on Form S-8 filed by FCStone Group, Inc. with the SEC on June 12, 2006).
10.1 Employment Agreement, dated October 22, 2002, by and between the Company and Sean O’Connor (incorporated by reference from the Company’s Form 8-K filed with the SEC on October 24, 2002).
10.2 Employment Agreement, dated October 22, 2002, by and between the Company and Scott Branch (incorporated by reference from the Company’s Form 8-K filed with the SEC on October 24, 2002).
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INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
10.3 Registration Rights Agreement, dated October 22, 2002, by and between the Company, and Sean O’Connor (incorporated by reference from the Company’s Form 8-K filed with the SEC on October 24, 2002).
10.4 First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and Sean O’Connor (incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
10.5 Registration Rights Agreement, dated October 22, 2002, by and between the Company and Scott Branch (incorporated by reference from the Company’s Form 8-K filed with the SEC on October 24, 2002).
10.6 First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and Scott Branch (incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
10.7 Registration Rights Agreement, dated October 22, 2002, by and between the Company and John Radziwill (incorporated by reference from the Company’s Form 8-K filed with the SEC on October 24, 2002).
10.8 First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and John Radziwill (incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
10.9 Clearing Agreement, effective November 23, 2005, by and between the Company and Broadcort, a division of Merrill Lynch, Pierce, Fenner & Smith, Inc. (incorporated by reference from the Company’s Form 8-K filed with the SEC on December 6, 2005).
10.10 Employment Agreement, effective December 1, 2004, by and between the Company and Brian T. Sephton (incorporated by reference from the Company’s Form 8-K, as filed with the SEC on November 24, 2004).
10.11 International Assets Holding Corporation form of Senior Subordinated Convertible Note (incorporated by reference from the Company’s Form 8-K filed with the SEC on September 15, 2006).
10.12 International Assets Holding Corporation form of Securities Purchase Agreement (incorporated by reference from the Company’s Form 8-K filed with the SEC on September 15, 2006).
10.13 International Assets Holding Corporation form of Lock Up Agreement (incorporated by reference from the Company’s
Form 8-K filed with the
SEC on September 15, 2006).
10.14 International Assets Holding Corporation form of Registration Rights Agreement (incorporated by reference from the Company’s Form 8-K filed with the SEC on September 15, 2006).
10.15 2007 Restricted Stock Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on January 18, 2007).
10.16 2007 Executive Compensation Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on January 18, 2007).
10.17 Chief Executive Officer Employment Agreement, effective September 1, 2007, between FCStone Group, Inc. and Paul G. Anderson (incorporated by reference from the Current Report on Form 8-K filed by FCStone Group, Inc. with the SEC on July 15, 2008)
10.18 Executive Employment Agreement, effective September 1, 2008, between FCStone Group, Inc. and William J. Dunaway (incorporated by reference from the Current Report on Form 8-K filed by FCStone Group, Inc. with the SEC on November 12, 2008)
10.19 CEO Deferred Compensation Plan for Paul G. Anderson dated February 22, 2002 (incorporated by reference from the Registration Statement on Form S-4 filed by FCStone Group, Inc. with the SEC on August 18, 2004)
10.20 Farmers Commodities Corporation Supplemental Nonqualified Pension Plan (incorporated by reference from Amendment No. 2 to the Registration Statement on Form S-4 filed by FCStone Group, Inc. with the SEC on December 9, 2004)
10.21 Executive Short-Term Incentive Plan (incorporated by reference from Amendment No. 2 to the Registration Statement on Form S-1, filed by FCStone Group, Inc. with the SEC on February 27, 2007)
10.22 FCStone Group, Inc. Executive Long Term Incentive Plan Effective Fiscal Year 2008 (incorporated by reference from the Current Report on Form 8-K filed by FCStone Group, Inc. with the SEC on July 15, 2008)
10.23 FCStone Group Inc. Change In Control Severance Plan (incorporated by reference from Amendment No. 2 to the Registration Statement on Form S-1, filed by FCStone Group, Inc. with the SEC on February 27, 2007)
48
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
10.24 FCStone Group, Inc. Staff Incentive Plan (incorporated by reference from Amendment No. 2 to the Registration Statement on Form S-1, filed by FCStone Group, Inc. with the SEC on February 27, 2007 )
10.25 FCStone Group, Inc. Amended and Restated Mutual Commitment Compensation Plan (incorporated by reference from Amendment No. 2 to the Registration Statement on Form S-4 filed by FCStone Group, Inc. with the SEC on December 9, 2004)
10.26 Form of Director Indemnification Agreement (incorporated by reference from Amendment No. 3 to the Registration Statement on Form S-4 filed by FCStone Group, Inc. with the SEC on December 30, 2004)
10.27 Agreement and Plan of Merger dated as of July 1, 2009, by and among International Assets Holding Corporation, International Assets Acquisition Corp. and FCStone Group, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 2, 2009).
10.28 Support Agreement dated as of July 1, 2009, by and among International Assets Holding Corporation, International Assets Acquisition Corp. and FCStone Group, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 2, 2009).
10.29 Option Agreement dated as of July 1, 2009, by and among International Assets Holding Corporation and FCStone Group, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 2, 2009).
10.30 Stock Purchase Agreement dated as of April 1, 2010, by and among FCStone Group, Inc.; Risk Management Incorporated; RMI Consulting, Inc.; John Snell; Daniel Conrath and Shane Mathis (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on April 5, 2010).
10.31 Amended and Restated Credit Agreement, made as of June 21, 2010, by and between FCStone, LLC, as borrower, FCStone Group, Inc., as a guarantor, International Assets Holding Corporation, as a guarantor, Bank of Montreal, as administrative agent, BMO Capital Markets, as Sole Lead Arranger, and the lenders party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 24, 2010).
10.32 Purchase Agreement dated as of July 2, 2010, by and among FCStone Group, Inc.; Hanley Group Holdings, LLC; HGC Trading, LLC; HGC Asset Management, LLC; HGC Advisory Services, LLC; Hanley Alternative Trade Group, LLC; HGC Office Services, LLC; George P. Hanley; George P. Hanley Trust and George P. Hanley GRAT (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2010).
10.33 Option Agreement by and among International Assets Holding Corporation and Hanley Group Holdings, LLC (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2010).
10.34 Amended and Restated Credit Agreement, made as of September 22, 2010, by and between INTL Commodities, Inc. as borrower, International Assets Holding Corporation, as a guarantor, BNP Paribas as Administrative Agent, Collateral Agent, an Issuing Bank and the Swing Line Lender, ABN AMRO Bank N.V. and Rabobank Nederland, New York Branch, as additional Issuing Banks, and the lenders party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on September 28, 2010).
10.35 Credit Agreement, effective on October 29, 2010, by and between International Assets Holding Corporation and INTL Global Currencies Limited as borrowers, the subsidiaries identified therein as guarantors, Bank of America, N.A. and additional lenders (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2010).
10.36 Credit Agreement, made as of December 2, 2010, by and between FCStone Financial, Inc. as borrower, International Assets Holding Corporation, as guarantor, Bank of Montreal, as Administrative Agent and a Lender, and the lenders party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on Decemebr 7, 2010).
14 International Assets Holding Corporation Code of Ethics (incorporated by reference from the Company’s Form 10-KSB filed with the SEC on December 29, 2003).
| 21 | List of the Company’s subsidiaries. * |
| 23.1 | Consent of KPMG LLP* |
| 23.2 | Consent of Rothstein, Kass & Company, P.C. * |
| 31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a—14(a). * |
| 31.2 | Certification of Chief Financial Officer, pursuant to Rule 13a—14(a). * |
49
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
| * | Filed as part of this report. |
Schedules and Exhibits Excluded
All schedules and exhibits not included are not applicable, not required or would contain information which is included in Consolidated Financial Statements, Summary of Significant Accounting Policies, or the Notes to the Consolidated Financial Statements.
50
INTERNATIONAL ASSETS HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
In accordance with Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INTERNATIONAL ASSETS HOLDING CORPORATION | ||
| By: | /S/ SEAN M. O’CONNOR | |
| Sean M. O’Connor, | ||
| Chief Executive Officer | ||
| Dated: December 15, 2010 | ||
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 |
Director and Chairman of the Board | December 15, 2010 | ||
| Diego J. Veitia | ||||
| /S/ SEAN M. O’CONNOR |
Director and Chief Executive Officer | December 15, 2010 | ||
| Sean M. O’Connor | (Principal Executive Officer) | |||
| /S/ SCOTT J. BRANCH |
Director and Chief Operating Officer | December 15, 2010 | ||
| Scott J. Branch | ||||
| /S/ PAUL G. ANDERSON |
Director and President | December 15, 2010 | ||
| Paul G. Anderson | ||||
|
|
Director | |||
| Robert A. Miller | ||||
|
|
Director | |||
| John Radziwill | ||||
| /S/ JUSTIN R. WHEELER |
Director | December 15, 2010 | ||
| Justin R. Wheeler | ||||
| /S/ JOHN M. FOWLER |
Director | December 15, 2010 | ||
| John M. Fowler | ||||
| /S/ BRENT BUNTE |
Director | December 15, 2010 | ||
| Brent Bunte | ||||
|
|
Director | |||
| Bruce Krehbiel | ||||
| /S/ DARYL HENZE |
Director | December 15, 2010 | ||
| Daryl Henze | ||||
| /S/ ERIC PARTHEMORE |
Director | December 15, 2010 | ||
| Eric Parthemore | ||||
| /S/ JACK FRIEDMAN |
Director | December 15, 2010 | ||
| Jack Friedman | ||||
| /S/ WILLIAM J. DUNAWAY |
Chief Financial Officer | December 15, 2010 | ||
| William J. Dunaway | (Principal Financial Officer and Chief Accounting Officer) | |||
51
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
International Assets Holding Corporation:
We have audited International Assets Holding Corporation’s (the Company) internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company and subsidiaries as of September 30, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended, and our report dated December 15, 2010 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
December 15, 2010
F - 1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
International Assets Holding Corporation:
We have audited the accompanying consolidated balance sheet of International Assets Holding Corporation and subsidiaries (the Company) as of September 30, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides 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 the Company as of September 30, 2010, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 15, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
December 15, 2010
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
International Assets Holding Corporation
We have audited the accompanying consolidated balance sheet of International Assets Holding Corporation and Subsidiaries (collectively, the “Company”) as of September 30, 2009, and the related consolidated income statements, statements of stockholders’ equity, and cash flows for each of the years in the two-year period ended September 30, 2009. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 the Company as of September 30, 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2009 in conformity with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of expressing an opinion on the basic consolidated financial statements taken as a whole. The accompanying financial statement schedule is presented for the purpose of additional analysis. The financial statement schedule has be subjected to the auditing procedures applied in the audit of the basic financial statement and, in our opinion, is fairly stated in all material respects, in relation to the basic consolidated financial statements taken as a whole.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
December 14, 2009
F - 3
INTERNATIONAL ASSETS HOLDING CORPORATION
Consolidated Balance Sheets
(In millions, except par value and share amounts)
| September 30, 2010 |
September 30, 2009 |
|||||||
| ASSETS | ||||||||
| Cash and cash equivalents |
$ | 81.9 | $ | 60.5 | ||||
| Cash and securities segregated under federal and other regulations (including $0.8 and $2.0 at fair value at September 30, 2010 and 2009, respectively) |
15.3 | 14.9 | ||||||
| Securities purchased under agreements to resell |
342.0 | — | ||||||
| Deposits and receivables from: |
||||||||
| Exchange-clearing organizations (including $906.4 and $727.9 at fair value at September 30, 2010 and 2009, respectively) |
903.4 | 899.0 | ||||||
| Broker-dealers, clearing organizations and counterparties (including $56.1 and $20.4 at fair value at September 30, 2010 and 2009, respectively) |
173.9 | 69.6 | ||||||
| Receivable from customers, net |
78.0 | 56.3 | ||||||
| Notes receivable, net |
29.2 | 22.2 | ||||||
| Income taxes receivable |
9.4 | 44.9 | ||||||
| Financial instruments owned, at fair value |
159.8 | 209.8 | ||||||
| Physical commodities inventory, at cost |
125.0 | 106.9 | ||||||
| Deferred income taxes |
21.0 | 29.6 | ||||||
| Property and equipment, net |
7.3 | 4.7 | ||||||
| Goodwill and intangible assets, net |
53.4 | 13.7 | ||||||
| Other assets |
22.1 | 23.6 | ||||||
| Total assets |
$ | 2,021.7 | $ | 1,555.7 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: |
||||||||
| Accounts payable and other accrued liabilities |
$ | 99.4 | $ | 63.7 | ||||
| Payables to: |
||||||||
| Customers |
1,351.0 | 935.8 | ||||||
| Broker-dealers, clearing organizations and counterparties |
3.9 | 4.0 | ||||||
| Lenders under loans and overdrafts |
114.9 | 108.7 | ||||||
| Income taxes payable |
2.8 | 2.3 | ||||||
| Financial instruments sold, not yet purchased, at fair value |
189.6 | 127.5 | ||||||
| 1,761.6 | 1,242.0 | |||||||
| Subordinated debt |
0.5 | 56.5 | ||||||
| Convertible subordinated notes payable |
16.7 | 16.7 | ||||||
| Total liabilities |
1,778.8 | 1,315.2 | ||||||
| Commitments and contingencies (see Note 12) |
||||||||
| Equity: |
||||||||
| International Assets Holding Corporation stockholders’ equity: |
||||||||
| Preferred stock, $.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding |
— | — | ||||||
| Common stock, $.01 par value. Authorized 30,000,000 shares; 17,612,792 issued and 17,601,535 outstanding at September 30, 2010 and 17,361,884 issued and 17,350,627 outstanding at September 30, 2009 |
0.2 | 0.2 | ||||||
| Common stock in treasury, at cost - 11,257 shares at September 30, 2010 and September 30, 2009 |
(0.1 | ) | (0.1 | ) | ||||
| Additional paid-in capital |
184.6 | 187.0 | ||||||
| Retained earnings |
59.7 | 54.3 | ||||||
| Accumulated other comprehensive loss |
(3.1 | ) | (2.6 | ) | ||||
| Total International Assets Holding Corporation stockholders’ equity |
241.3 | 238.8 | ||||||
| Noncontrolling interests |
1.6 | 1.7 | ||||||
| Total equity |
242.9 | 240.5 | ||||||
| Total liabilities and equity |
$ | 2,021.7 | $ | 1,555.7 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
INTERNATIONAL ASSETS HOLDING CORPORATION
Consolidated Income Statements
(In millions, except share and per share amounts)
| Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Revenues: |
||||||||||||
| Sales of physical commodities |
$ | 46,709.2 | $ | 43,554.0 | $ | 18,255.2 | ||||||
| Trading gains |
86.5 | 39.1 | 79.7 | |||||||||
| Commission and clearing fees |
118.0 | 6.5 | 5.3 | |||||||||
| Consulting and management fees |
19.1 | 1.9 | 2.4 | |||||||||
| Interest income |
7.0 | 1.8 | 3.2 | |||||||||
| Other income |
0.5 | 0.4 | 0.6 | |||||||||
| Total revenues |
46,940.3 | 43,603.7 | 18,346.4 | |||||||||
| Cost of sales of physical commodities |
46,671.3 | 43,513.1 | 18,231.5 | |||||||||
| Operating revenues |
269.0 | 90.6 | 114.9 | |||||||||
| Interest expense |
9.9 | 8.0 | 11.2 | |||||||||
| Net revenues |
259.1 | 82.6 | 103.7 | |||||||||
| Non-interest expenses: |
||||||||||||
| Compensation and benefits |
104.2 | 40.2 | 35.6 | |||||||||
| Clearing and related expenses |
68.2 | 16.0 | 13.1 | |||||||||
| Communication and data services |
11.1 | 2.1 | 2.1 | |||||||||
| Introducing broker commissions |
18.9 | — | — | |||||||||
| Occupancy and equipment rental |
6.2 | 1.1 | 1.1 | |||||||||
| Professional fees |
8.1 | 2.2 | 2.0 | |||||||||
| Depreciation and amortization |
1.6 | 0.8 | 0.8 | |||||||||
| Bad debts and impairments |
5.8 | 3.0 | 2.4 | |||||||||
| Other |
17.1 | 3.9 | 4.3 | |||||||||
| Total non-interest expenses |
241.2 | 69.3 | 61.4 | |||||||||
| Income from operations, before tax |
17.9 | 13.3 | 42.3 | |||||||||
| Income tax expense |
6.4 | 2.6 | 16.2 | |||||||||
| Net income before discontinued operations |
11.5 | 10.7 | 26.1 | |||||||||
| (Income) loss from discontinued operations, net of tax |
(0.6 | ) | 1.1 | (1.0 | ) | |||||||
| Income before extraordinary loss |
12.1 | 9.6 | 27.1 | |||||||||
| Extraordinary (gain) loss |
7.0 | (18.5 | ) | — | ||||||||
| Net income |
5.1 | 28.1 | 27.1 | |||||||||
| Less: Net income (loss) attributable to noncontrolling interests |
(0.3 | ) | 0.5 | (0.7 | ) | |||||||
| Net income attributable to International Assets Holding Corporation common shareholders |
$ | 5.4 | $ | 27.6 | $ | 27.8 | ||||||
| Basic earnings (loss) per share: |
||||||||||||
| Income from continuing operations attributable to International Assets Holding Corporation common shareholders |
$ | 0.68 | $ | 1.16 | $ | 3.14 | ||||||
| (Loss) income from discontinued operations attributable to International Assets Holding Corporation common shareholders |
0.03 | (0.13 | ) | 0.16 | ||||||||
| Extraordinary (loss) income attributable to International Assets Holding Corporation common shareholders |
(0.40 | ) | 2.08 | — | ||||||||
| Net income attributable to International Assets Holding Corporation common shareholders |
$ | 0.31 | $ | 3.11 | $ | 3.30 | ||||||
| Diluted earnings (loss) per share: |
||||||||||||
| Income from continuing operations attributable to International Assets Holding Corporation common shareholders |
$ | 0.66 | $ | 1.10 | $ | 2.81 | ||||||
| (Loss) income from discontinued operations attributable to International Assets Holding Corporation common shareholders |
0.03 | (0.12 | ) | 0.14 | ||||||||
| Extraordinary (loss) income attributable to International Assets Holding Corporation common shareholders |
(0.39 | ) | 1.82 | — | ||||||||
| Net income attributable to International Assets Holding Corporation common shareholders |
$ | 0.30 | $ | 2.80 | $ | 2.95 | ||||||
| Weighted-average number of common shares outstanding: |
||||||||||||
| Basic |
17,306,019 | 8,895,697 | 8,434,976 | |||||||||
| Diluted |
17,883,233 | 10,182,586 | 9,901,706 | |||||||||
| Amounts attributable to International Assets Holding Corporation common shareholders: |
||||||||||||
| Income from continuing operations, net of tax |
$ | 11.8 | $ | 10.2 | $ | 26.5 | ||||||
| Loss from discontinued operations, net of tax |
(0.6 | ) | 1.1 | (1.3 | ) | |||||||
| Extraordinary loss |
7.0 | (18.5 | ) | — | ||||||||
| Net income |
$ | 5.4 | $ | 27.6 | $ | 27.8 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
INTERNATIONAL ASSETS HOLDING CORPORATION
Consolidated Cash Flow Statements
(In millions)
| Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net income |
$ | 5.1 | $ | 28.1 | $ | 27.1 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
| Depreciation and amortization |
1.7 | $ | 0.7 | $ | 1.2 | |||||||
| Provision for bad debts |
3.5 | — | — | |||||||||
| Deferred income taxes |
3.7 | (3.7 | ) | 7.8 | ||||||||
| Amortization of debt issuance costs and debt discount |
0.2 | 0.2 | 0.3 | |||||||||
| Convertible debt interest settled in company stock upon partial conversion |
— | — | 0.1 | |||||||||
| Noncontrolling interest |
— | 0.7 | 1.1 | |||||||||
| Amortization of stock-based compensation expense |
1.9 | 1.9 | 1.5 | |||||||||
| Unrealized investment gains from INTL Consilium managed funds |
— | (2.0 | ) | 3.5 | ||||||||
| Loss on disposition of INTL Consilium, LLC |
— | 0.4 | — | |||||||||
| Extraordinary loss (gain) on acquisition of FCStone |
7.0 | (18.5 | ) | — | ||||||||
| Impairment of INTL Sieramet |
1.1 | 1.1 | — | |||||||||
| Deconsolidation and impairment of Agora-x subsidiary |
(2.9 | ) | — | — | ||||||||
| Changes in operating assets and liabilities: |
||||||||||||
| Cash and securities segregated under federal and other regulations |
(0.3 | ) | — | — | ||||||||
| Deposits and receivables from exchange-clearing organizations |
(4.2 | ) | — | — | ||||||||
| Deposits and receivables from broker-dealers, clearing organizations and counterparties |
(57.6 | ) | 11.2 | 11.2 | ||||||||
| Receivable from customers, net |
(18.2 | ) | 1.9 | (19.5 | ) | |||||||
| Notes receivable from customers, net |
(7.0 | ) | — | — | ||||||||
| Income taxes receivable |
35.4 | (4.6 | ) | 1.1 | ||||||||
| Financial instruments owned and securities purchased under agreements to resell, at fair value |
(212.7 | ) | 44.9 | (26.2 | ) | |||||||
| Physical commodities inventory, at cost |
(18.1 | ) | (49.6 | ) | (17.8 | ) | ||||||
| Other assets |
3.9 | (2.2 | ) | (2.3 | ) | |||||||
| Accounts payable and other accrued liabilities |
1.9 | (6.0 | ) | (1.3 | ) | |||||||
| Payable to customers |
415.3 | 26.1 | 8.0 | |||||||||
| Payable to broker-dealers, clearing organization and counterparties |
(0.4 | ) | (22.5 | ) | 10.5 | |||||||
| Income taxes payable |
0.4 | 0.6 | (2.0 | ) | ||||||||
| Financial instruments sold, not yet purchased, at fair value |
(46.7 | ) | (26.1 | ) | (32.9 | ) | ||||||
| Net cash provided by (used in) operating activities |
$ | 113.0 | $ | (17.4 | ) | $ | (28.6 | ) | ||||
| Cash flows from investing activities: |
||||||||||||
| Capital contribution of consolidated joint venture partner |
— | 0.2 | — | |||||||||
| Capital distribution to consolidated joint venture partner |
— | (2.8 | ) | (2.8 | ) | |||||||
| (De-consolidation) / consolidation of affiliates |
(0.3 | ) | (8.2 | ) | 16.4 | |||||||
| Disposition of affiliates |
0.2 | 0.4 | — | |||||||||
| Investment withdrawals from (in) managed funds |
— | 17.9 | (10.0 | ) | ||||||||
| Cash acquired with acquisition of FCStone |
— | 24.2 | — | |||||||||
| Cash paid for other acquisitions, net |
(37.6 | ) | (1.1 | ) | (1.4 | ) | ||||||
| Purchase of property and equipment |
(4.7 | ) | (2.8 | ) | (1.1 | ) | ||||||
| Net cash (used in) provided by investing activities |
(42.4 | ) | 27.8 | 1.1 | ||||||||
| Cash flows from financing activities: |
||||||||||||
| Net change in payable to lenders under loans and overdrafts |
6.1 | (13.8 | ) | 34.7 | ||||||||
| Repayment of subordinated debt |
(56.0 | ) | — | — | ||||||||
| Share repurchase |
— | (0.1 | ) | — | ||||||||
| Exercise of stock options |
0.7 | 0.4 | 1.4 | |||||||||
| Income tax benefit on stock awards exercised |
— | 0.3 | 1.3 | |||||||||
| Net cash used in financing activities |
(49.2 | ) | (13.2 | ) | 37.4 | |||||||
| Effect of exchange rates on cash and cash equivalents |
— | 0.5 | (0.8 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents |
21.4 | (2.3 | ) | 9.1 | ||||||||
| Cash and cash equivalents at beginning of period |
60.5 | 62.8 | 53.7 | |||||||||
| Cash and cash equivalents at end of period |
$ | 81.9 | $ | 60.5 | $ | 62.8 | ||||||
| Supplemental disclosure of cash flow information: |
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| Cash paid for interest |
$ | 7.4 | $ | 8.8 | $ | 10.2 | ||||||
| Income taxes paid, net of refunds |
$ | (33.3 | ) | $ | 8.3 | $ | 9.4 | |||||
| Supplemental disclosure of non-cash investing and financing activities: |
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| Conversion of subordinated notes to common stock, net |
$ | — | $ | 0.1 | $ | 8.1 | ||||||
| Release of trust certificates |
$ | — | $ | — | $ | 11.2 | ||||||
| Estimated beginning fair value of assets and (liabilities) received on consolidation: |
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| Assets acquired |
— | $ | 1,178.9 | $ | 50.9 | |||||||
| Liabilities assumed |
— | (1,020.5 | ) | (43.7 | ) | |||||||
| Noncontrolling interests |
— | 1.6 | (7.2 | ) | ||||||||
| Total net assets acquired |
$ | — | $ | 160.0 | $ | — | ||||||
| Identified intangible assets on acquisitions |
$ | — | $ | 0.7 | $ | — | ||||||
| Additional consideration payable related to acquisitions |
$ | 26.3 | $ | — | $ | — | ||||||
| Issuance of common stock related to acquisitions |
$ | — | $ | 135.6 | $ | — | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
INTERNATIONAL ASSETS HOLDING CORPORATION
Consolidated Statements of Stockholders’ Equity
(In millions)
| Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Noncontrolling Interests |
Total | ||||||||||||||||||||||
| Balances as of September 30, 2007 |
$ | 0.1 | $ | — | $ | 36.6 | $ | (1.1 | ) | $ | — | $ | 3.1 | $ | 38.7 | |||||||||||||
| Components of comprehensive income: |
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| Net income |
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