INTL FCStone 2005 Annual Report Download - page 31

obligation to repay the loan is deferred until these requirements can be satisfied. These inter-company loans, and
the related interest income and income expense, have been eliminated from the consolidated balance sheet and
statements of operations of the Company as of September 30, 2005.
The Company’s assets and liabilities may vary significantly from period to period because of changes
relating to customer needs and economic and market conditions. The Company’s total assets at September 30,
2005 and September 30, 2004, were $147,019,000 and $67,692,000, respectively. The Company’s operating
activities generate or utilize cash resulting from net income or loss earned during each period and fluctuations in
its assets and liabilities. The most significant fluctuations arise from changes in the level of customer activity and
changes in the inventory of financial instruments.
In addition to normal operating requirements, capital is required to satisfy financing and regulatory
requirements. The Company’s overall capital needs are continually reviewed to ensure that its capital base can
appropriately support the anticipated capital needs of its operating subsidiaries. The excess regulatory net capital
of the Company’s broker-dealer subsidiary may fluctuate throughout the year reflecting changes in inventory
levels and balance sheet composition.
In March 2004, the Company completed a private placement of $12,000,000 of 7% convertible notes. These
notes were converted to 2,086,923 shares of common shares in August, 2004.
In July 2004 the Company completed the acquisition of the foreign exchange business of Global Currencies
Limited. The acquisition agreement required the Company to make certain earn-out payments to the sellers. The
first earn-out installment of $1,562,158 was paid in August 2005. The second earn-out installment of $400,000
was paid in November, 2005. Five additional minimum payments of $390,540 each are due on or by March 1,
2006, May 30, 2006, August 29, 2006, November 29, 2006 and March 1, 2007. These quarterly payments have a
maximum ceiling of $400,000. Further payments may be due, calculated at 10% of revenues exceeding
$10,000,000 in the annual period ending June 30, 2006, and 10% of revenue exceeding $5,000,000 in the six
month period ending December 31, 2006. The Company anticipates that the future earn-out payments will be
funded from working capital.
Recent Trends
As discussed above, the Company’s business during 2005 was affected by tighter spreads in the equity
market-making and debt trading businesses; and substantial growth in the foreign exchange/commodities trading
businesses stemming from a wider range of activities and expanding customer relationships. Although these
factors affected the Company’s results in 2005, the Company is uncertain whether these factors will continue to
impact the Company’s business in the future.
Cash Flows
The Company’s cash and cash equivalents decreased from $21,084,000 at September 30, 2004 to
$20,242,000 at September 30, 2005.
The major sources of cash were:
• $2,400,000 from demand bank loans payable
• $2,748,000 from net income of $2,614,000, adjusted upwards by $134,000 for non-cash items
• $612,000 from net decrease in the Company’s financial instruments position (financial instruments
owned, foreign currency sold, not yet purchased and financial instruments sold, not yet purchased)
• $1,081,000 from net increase in accounts payable, accrued expenses, income taxes payable and other
liabilities
• $693,000 from the exercise of stock options
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