INTL FCStone 2005 Annual Report Download - page 30

The amortization of the debt discount was not deductible for tax purposes. Coupon interest of $378,000 paid to
note-holders during the year was also treated as not deductible for tax accrual purposes. The Company has fully
utilized its federal net operating loss carryforwards and partially utilized the Company’s state net operating loss
carryforwards, due to continued ongoing profitability. The net deferred tax asset as of September 30, 2005 was
$82,000 and relates to various timing differences and state operating loss carryforwards, compared to $363,000
as of September 30, 2004.
Net Income (Loss)
As a result of the factors described above, the Company reported a net income of $2,614,000 in 2005, which
equates to earnings of $0.33 per diluted share, compared to a net loss of $118,000 in 2004, a loss of $0.02 per
diluted share. While the decline in the Company’s equity market-making and debt trading activities that began in
the second half of 2004 continued into 2005, this decline was more than offset by growth in the Company’s
foreign exchange/commodities trading businesses. The Company primarily achieved this growth through the
acquisition of INTL Global Currencies in the fourth quarter of 2004. The Company’s net loss in 2004 of
$118,000 was principally attributable to the Company’s write off of $2,483,000 in debt discount arising from the
conversion of the convertible notes issued by the Company in March 2004. The Company recorded the debt
discount on the date the conversion feature of the notes became effective because the conversion price of the
notes was less than the fair value of the Company’s common stock. Net income in 2004, before accounting for
this non-cash item, was $2,365,000, as shown in the table below.
Fiscal year
2004
Net income as previously reported .......................................... $2,525,000
Lease accounting adjustment ............................................... $ (10,000)
Incometaxadjustment .................................................... $ (150,000)
Net income before accounting for beneficial conversion feature ................... 2,365,000
Beneficial conversion feature amortization adjustment .......................... (2,483,000)
Net income (loss) as restated ............................................... (118,000)
Liquidity and Capital Resources
A substantial portion of the Company’s assets are liquid. The majority of the assets consist of inventories of
financial instruments, which fluctuate depending on the level of customer business. At September 30, 2005,
approximately 75% of the Company’s assets consisted of cash, cash equivalents, and receivables from brokers,
dealers and clearing organization, customer receivables and marketable financial instruments. All assets are
financed by the Company’s equity capital, short-term borrowings from financial instruments sold, not yet
purchased, demand loans payable and other payables.
The Company’s ability to receive distributions from INTL Trading, the Company’s broker-dealer
subsidiary, is restricted by regulations of the SEC and the NASD. 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. It is the Company’s intention to reinvest the undistributed earnings of INTL Global Currencies,
amounting to approximately $2,060,000 at September 30, 2005, in the United Kingdom.
INTL Trading is subject to the net capital requirements of the SEC and the NASD relating to liquidity and
net capital levels. At September 30, 2005, INTL Trading had regulatory net capital of $4,521,000, which was
$3,521,000 in excess of its minimum net capital requirement on that date. INTL Trading’s net capital at
September 30, 2005 included two subordinated loans made by the Company to INTL Trading. A loan for
$500,000 was made on January 31, 2003, has a scheduled repayment date of February 28, 2006, and an interest
rate of 3%. A second loan for $2,500,000 was made on June 5, 2004, has a scheduled repayment date of June 30,
2006, and an interest rate of 3%. INTL Trading is not obligated to repay the loans at scheduled maturity if
repayment would cause INTL Trading to violate its net capital requirements. If this occurs, INTL Trading’s
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