INTL FCStone 2005 Annual Report Download - page 55

INTERNATIONAL ASSETS HOLDING CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements—(Continued)
September 30, 2005 and 2004
(3) Issuance of Convertible Subordinated Notes, Conversion of Subordinated Notes into Common Shares
and related Debt Issuance Costs
On March 12, 2004, the Company issued $12,000,000 in principal amount of the Company’s 7% convertible
subordinated notes due 2014 (the Notes). The Notes were issued at par and carried interest at the rate of 7% per
annum, payable semi-annually on June 30 and December 31 of each year. They were redeemable, in whole or in
part at the option of the Company, at any time on or after December 31, 2009 at a redemption price in cash equal
to 115% of the principal balance. The Notes were general unsecured obligations of the Company. The conversion
features of the Notes were approved by the shareholders on March 26, 2004. The Notes were convertible by the
holders at any time prior to the maturity date of December 31, 2014 into shares of the Company’s common stock
at a conversion price of $5.75 per share. The Company was authorized to cause the outstanding principal balance
of the Notes to be converted, in whole or in part, into shares of common stock at any time during the 90 days
following the occurrence of all of the following three events: (i) the closing price of the common stock exceeding
$8.00 per share (proportionately adjusted to reflect adjustments to conversion price) for 20 consecutive days;
(ii) the Company filing a registration statement under the Securities Act to register the issuance of the common
stock pursuant to the conversion of the Notes; and, (iii) such registration statement being declared effective by
the Securities and Exchange Commission.
On August 13, 2004, the Company converted the outstanding Notes into shares of the Company’s common
stock because the Company had fulfilled the necessary conditions set forth in the Notes allowing for such
conversion. As a result of the conversion, the Company issued 2,086,923 shares of common stock to the holders
of the Notes, in exchange for the cancellation of $12,000,000 in outstanding debt.
Debt issuance costs of $1,890,828 were incurred in connection with the issuance of the Notes. This total
included $997,707 of costs settled in cash for commissions, placement agent fees, professional fees and state
filing fees. This total also included $893,121 for the Black-Scholes valuation ($6.00 strike price, 3 year life, risk
free rate 2.27%) for the 200,000 warrants issued to the placement agent for placement agent services. Prior to the
conversion, the total debt issuance costs were being amortized over the life of the Notes (through December 31,
2014) and charged to interest expense. Upon conversion of the Notes unamortized debt issuance costs
($1,812,004) were charged to additional paid in capital as part of the capitalization of the newly issued 2,086,923
common shares.
The Notes were convertible by investors at a price lower than the fair value of the Company’s stock on
March 26, 2004 (the date that the Company’s shareholders approved the conversion terms of the Notes),
requiring accounting recognition of this beneficial conversion feature as a debt discount against the Notes. This
gave rise to an increase in the Company’s additional paid-in capital of $2,483,478 and a matching expense item
that was classified as interest, resulting in reduced net income for the year but having no effect on total
stockholders’ equity at September 30, 2004. Prior to the conversion, the total debt discount was amortized over
the life of the Notes (through December 31, 2014) and charged to interest expense. Upon conversion of the Notes
the unamortized debt discount was charged to interest expense. The result was a total interest charge relating to
the beneficial conversion feature or $2,483,478 for the year ended September 30, 2004.
(4) Investment in Asset Management Joint Venture
On May 11, 2004, the Company entered into an agreement with Consilium Investment Capital, Inc. (CIC) of
Fort Lauderdale, Florida to form INTL Consilium. INTL Consilium is an investment management firm which
primarily provides investment advice with respect to emerging market securities. In June 2004 the Company
made a capital contribution of $500,000 and CIC contributed $100,000 to INTL Consilium. The Company’s total
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