UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 000-26031
EURO TRADE & FORFAITING, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0571580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4835 North O'Connor, Suite 134-346, Irving, Texas 75062 (Address
of principal executive offices)
Registrant's telephone no., including area code: (817) 267-1866
Indicate by check mark whether the registrant (1) 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding as of November 15, 1999
Common Stock, $.001 par value 16,945,224
-1-
TABLE OF CONTENTS
Heading Page
- ------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................................17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.....................................................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................23
Item 2. Changes in Securities and Use of Proceeds..........................................23
Item 3. Defaults Upon Senior Securities....................................................23
Item 4. Submission of Matters to a Vote of
Security Holders.................................................................23
Item 5. Other Information..................................................................23
Item 6. Exhibits and Reports on Form 8-K...................................................23
SIGNATURES.........................................................................24
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PART I
Item 1. Financial Statements
The following unaudited Financial Statements for the period ended
September 30, 1999, have been prepared by the Euro Trade & Forfaiting, Inc. (the
"Company").
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EURO TRADE & FORFAITING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
EURO TRADE & FORFAITING, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, June 30,
1999 1999
ASSETS
CURRENT ASSETS
Cash $ 12,517 $ 9,927
Cash - compensating balances 5,200 13,148
Interest receivable 280 1,337
Forfaiting assets (net of allowance) 6,046 17,157
Investments in marketable securities 1,100 1,100
Other assets and prepaid expenses 4,360 106
-------- --------
TOTAL CURRENT ASSETS 29,503 42,775
PROPERTY AND EQUIPMENT - NET 45 55
-------- --------
TOTAL ASSETS $ 29,548 $ 42,830
======== ========
LIABILITY AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and bank overdrafts $ 1,063 $ 10,598
Accrued expenses 264 425
Loans payable
Bank 3,573 7,477
-------- --------
TOTAL CURRENT LIABILITIES 4,900 18,500
-------- --------
LOAN PAYABLE - NET OF CURRENT PORTION 18 24
COMMITMENT -- --
-------- --------
TOTAL LIABILITIES 4,918 18,524
-------- --------
STOCKHOLDERS' EQUITY
Common Stock, Par value $0.001, authorized,
50,000 shares; issued and outstanding
16,945 shares 17 17
Additional paid-in capital 25,264 25,264
Retained earnings (deficit) (306) (630)
Receivable from stockholder (345) (345)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 24,630 24,306
-------- --------
TOTAL LIABILITY AND STOCKHOLDERS' EQUITY $ 29,548 $ 42,830
======== ========
See accompanying notes
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EURO TRADE & FORFATING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands)
September 30, September 30,
1999 1998
REVENUE $ 1,074 $ 1,524
COST OF REVENUES
Interest 257 238
------- -------
TOTAL COST OF REVENUE 257 238
------- -------
GROSS PROFIT 817 1,286
Selling, general and administrative 493 428
------- -------
NET INCOME $ 324 $ 858
======= =======
PRIMARY AND FULLY DILUTED
NET INCOME PER SHARE $ 0.02 $ 0.06
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARES EQUIVALENTS OUTSTANDING 14,468 14,468
======= =======
See accompanying notes
-5-
See accompanying notes EURO TRADE & FORFAITING,
INC.
STATEMENT OF STOCKHOLDER EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION) TO
JUNE 30, 1999
(In Thousands)
Paid-in Retained Receivable
Shares Amount Capital Earnings Stockholder Total
------ ------ ------- -------- ----------- -----
BALANCE, February 25, 1997 $ -- $ -- $ -- $ -- $ -- $ --
Retroactive adjustment for transaction
of November 23, 1998:
Sale of Stock 11,750 12 24,988 (25,000) -- --
Recapitalization 195 -- 56 (56) -- --
-------- -------- -------- -------- -------- --------
RESTATED BALANCE, February 25, 1997 11,945 12 25,044 (56) (25,000) --
Net Income -- -- -- 304 -- 304
-------- -------- -------- -------- -------- --------
BALANCE, June 30, 1997 11,945 12 25,044 248 (25,000) 304
Payment received on Stockholder receivable 25,000 25,000
Net Loss -- -- -- (4,992) -- (4,992)
-------- -------- -------- -------- -------- --------
BALANCE, June 30, 1998 11,945 12 25,044 (4,744) 0 20,312
Net income -- -- -- 858 -- 858
-------- -------- -------- -------- -------- --------
BALANCE
September 30, 1998 (unaudited) 11,945 12 25,044 (3,886) -- 21,170
Sale of shares for cash 4,000 4 196 -- (200) --
Exercise of option 1,000 1 24 -- (25) --
Stockholder advance -- -- -- -- (120) (120)
Net income -- -- -- 3,256 -- 3,256
-------- -------- -------- -------- -------- --------
BALANCE, June 30, 1999 16,945 17 25,264 (630) (345) 24,306
Net Income -- -- -- 324 -- 324
-------- -------- -------- -------- -------- --------
BALANCE
September 30, 1999 (unaudited) $ 16,945 $ 17 $ 25,264 $ (306) $ (345) $ 24,630
======== ======== ======== ======== ======== ========
See accompanying notes
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EURO TRADE & FORFAITING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands)
September 30, September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income from operations 324 858
Purchases of forfaiting assets (11,328) (5,987)
Cost of forfaiting assets sold and sale proceeds 22,439 4,691
Depreciation 10 9
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
(Increases) decrease in:
Interest receivable 1,057 45
Other assets and prepaid expenses (4,254) (2,348)
Increase (decrease) in:
Accounts payable and overdrafts (9,535) (612)
Accrued expenses (161) (567)
-------- --------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES (1,448) (3,911)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Loans from banks (repayment) (3,910) 1,903
(Increase) decrease in compensating balances 7,948 (1,551)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,038 352
-------- --------
CASH FLOWS FROM INVESTING
Sales of stock -- --
Purchases of marketable securities -- --
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES -- --
-------- --------
INCREASE (DECREASE)IN CASH 2,590 (3,559)
CASH AT BEGINNING OF PERIOD 9,927 13,325
-------- --------
CASH AT END OF PERIOD $ 12,517 $ 9,766
======== ========
See accompanying notes
-7-
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE A ORGANIZATION AND ACCOUNTING BASIS
Rotunda Oil and Mining, Inc., incorporated under the Laws of Utah on November
19, 1980, was a development stage company until November 20, 1998 when it
acquired Euro Trade & Forfaiting Co. Limited in exchange for 100% of its
outstanding shares. See Note B. As a result of the merger, Rotunda Oil and
Mining, Inc. changed its name to Euro Trade & Forfaiting, Inc. (The Company) on
December 1, 1998. Euro Trade & Forfaiting Co. Limited is a wholly owned
subsidiary, incorporated under the laws of United Kingdom on February 25, 1997.
Significant Accounting Policies Basis Of Consolidation
- -------------------------------------------------------
The consolidated financial statements include the accounts of the company and
its wholly owned subsidiary. The company is engaged in a single line of business
as a financier in connection with international trade and the arrangement and
syndication of transferable export letters of credit. Any pre-consolidation
inter-company balances have been eliminated.
Accounting Method
- -----------------
The Company maintains its books on the accrual basis of accounting.
Cash and Cash Equivalents
- -------------------------
The Company considers all purchases from financial institutions of demand,
deposits, time deposits and certificate of deposits to be cash equivalents.
Compensating Balances
- ---------------------
Cash in the amount of $5.2 million was on deposit in financial institutions as
compensating balances for loans and commitments. The amount is based on the
financial institutions assessment of risk. See Note F. The Company borrows the
funds necessary to purchase forfaiting assets. The lenders require that cash be
deposited in interest bearing accounts until the corresponding loan matures.
Collateral
- ----------
The Company reports assets that it has pledged as collateral in secured
borrowing and other arrangements when the secured party cannot sell or re-pledge
the assets, or when Euro Trade can substitute collateral or otherwise redeem it
on short notice.
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EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE A ORGANIZATION AND ACCOUNTING BASIS (Continued)
Transactions of Foreign Currencies
- ----------------------------------
The Company and its subsidiary treat the U.S. dollar as their functional
currency. Accordingly, gains and losses resulting from the translation of
accounts designated in other than the functional currency are reflected in the
determination of net income.
At September 30, 1999, monetary assets and liabilities of The Company are
denominated in the following currencies:
U.S. Pounds Deutsche
Total Dollars Sterling Marks
----- ------- -------- -----
Forfaiting Assets 100% 66 2 32
Current Liabilities 100% 1 26 73
At June 30, 1999, monetary as
sets and liabilities of The Company are denominated
in the following currencies: U.S. Pounds Deutsche Total Dollars Sterling Marks
U.S. Pounds Deutsche
Total Dollars Sterling Marks
----- ------- -------- -----
Forfaiting Assets 100% 73 -- 27
Current Liabilities 100% 63 1 37
Income Taxes
- ------------
The Company and its subsidiary will not be included in a consolidated federal
income tax return filed by the parent. Federal income taxes are calculated as if
the companies filed on a separate return basis, and the amount of current tax or
benefit calculated is either remitted to or received from The Company. The
amount of current and deferred taxes payable or refundable is recognized as of
the date of the financial statements, using currently enacted tax laws and
rates. Deferred tax expenses of benefits are recognized in the financial
statements for the changes in deferred tax liabilities or assets between years.
-9-
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE A ORGANIZATION AND ACCOUNTING BASIS (Continued)
Depreciation
- ------------
Depreciation is calculated to write down the cost of tangible fixed assets to
their residual values over the period of their estimated useful lives using the
straight-line method as follows:
Computer Equipment 3 years
Furniture, Fixtures and Fittings 4 years
Net Income Per Share
- --------------------
Net income per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the respective periods.
Common shares equivalents consist of The Company's preferred stock and shares
issuable upon the exercise of stock options. All stock options have been treated
as if they were outstanding for all periods.
Forfaiting Transactions
- -----------------------
Proprietary transactions are recorded on the trade date. Profits and losses
arising from sales entered into for the account and risk of the subsidiary are
recorded on the settlement date basis. Amounts receivable and payable for
forfaiting transactions that have not yet reached their contractual settlement
date are recorded net on the balance sheet.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of financial instruments such as cash and cash equivalents
and accrued interest income approximate their fair market value using the
specific identification method.
-10-
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE A ORGANIZATION AND ACCOUNTING BASIS (Continued)
Revenue Recognition
- -------------------
Interest income on forfaiting assets is recognized based on principal amounts
outstanding, at applicable interest rates. Accrual of interest on loans is
discontinued (non-accrual status) when reasonable doubt exists as to the full,
timely collection of interests or principle, or when payment of principle or
interest is past due 90 days, unless the loan is currently in the process of
collection. When a loan is placed on non-interest income in the current period,
income recognition on such loans is on the cash basis, unless the reasonable
doubt is reversed. All cash receipts on reasonable doubt loans are applied to
the principal balance
Because forfaiting assets typically mature in less than one year, the company's
policy is to recognize fees and costs associated with these assets in the year
received or paid.
Allowance for Loan Losses
- -------------------------
Management makes regular credit reviews of the forfaiting portfolio on an
individual loan basis. Past experience, current economic conditions, and
problems associated with specific lenders, are all factors in determining the
adequacy of the allowance balance. The allowance is increased by provision
charged to operating expense and by recoveries on loans previously charged off,
and reduced by charge-offs.
Interim Financial Information (Unaudited)
- -----------------------------------------
The accompanying unaudited financial statements for the three months ended
September 30, 1999 and 1998 have been prepared in accordance with generally
accepted principles for interim financial information. In the opinion of
management, all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation, have been included. Results for the interim
period are not necessarily indicative of the results to be expected for a full
year.
Accrued Compensated Absences
- ----------------------------
The Company has not established a policy with respect to compensated absences.
Accordingly, no accrual has been made as prescribed by Statement of Financial
Accounting Standards No. 43.
Use of Estimates
- ----------------
The preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
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EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE B REORGANIZATION
The following are the principal terms with respect to the exchange of shares of
capital stock of Euro Trade & Forfaiting, Inc. (The Company), a Utah corporation
(formerly Rotunda Oil and Mining, Inc.) for the shares of Euro Trade &
Forfaiting Co. Limited (Euro Trade) a United Kingdom corporation.
Pre-Exchange Capitalization
- ---------------------------
On November 10, 1998, The Company declared a reverse stock split of 1 for 1,000
of the outstanding shares. As a result, 19.5 million outstanding shares were
reduced to 195 thousand outstanding shares.
Euro Trade issued 15 million preferred shares and 9.2 million common shares for
cash on February 25, 1997. An option for .8 million shares of the common stock
was issued on the same date and funded as required by United Kingdom law.
The option was exercised immediately prior to the exchange.
Equity Conversion Mechanics
- ---------------------------
At the closing of the exchange, The Company issued and exchanged 11.8 million
shares of restricted Rule 144 common stock for all of the outstanding common and
preferred shares of Euro Trade.
After the closing, two options were granted for .5 million shares each of the
company's common stock at a price of $.025. The options were exercised
immediately.
Additionally, The Company issued an aggregate of 4 million new shares of common
stock at $.05 per share.
The Company will hold the shares of Euro Trade, which will continue to operate
as a subsidiary.
Post Exchange Capitalization
- ----------------------------
After the exchange and the subsequent offering of 5 million shares of common
stock, the capitalization consisted of 16.9 million shares of common stock of
which 11.8 million are restricted.
-12-
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE B REORGANIZATION (Continued)
Basis of Consolidation
- ----------------------
The accompanying financial statements have been prepared to give effect to the
exchange completed on November 20, 1998. The two companies in the exchange are:
Euro Trade & Forfaiting, Inc., a Utah corporation,
(formerly Rotunda Oil and Mining, Inc.), "The Company"
Euro Trade & Forfaiting Co. Limited
a United Kingdom corporation, "Euro Trade"
After the exchange, The Company owned all of the outstanding shares of Euro
Trade. The exchange is accounted for as if The Company purchased Euro Trade for
stock. All assets are reflected at historical cost. For purposes of the proforma
statement of stockholders' equity, multiple transactions are considered to have
taken place concurrently. All subsequent references to the company mean the
combined entity.
NOTE C PROPERTY AND EQUIPMENT
Property and equipment consists of office furniture and computer equipment as
follows:
September 30, June 30,
1999 1999
------------ -------------
Cost $ 136 $ 136
Less: Accumulated depreciation 91 81
------------ -------------
$ 45 $ 55
============ ============
Depreciation expense $ 10 $ 38
============ ============
NOTE D INCOME TAX
The Company has cumulative losses at September 30, and June 30, 1999, that could
result in a net operating loss carry forwards for federal income and United
Kingdom tax purposes. Ownership changes in The Company may result in an annual
limitation on the utilization of operating loss carryforwards.
-13-
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE E FORFAITING ASSETS
Forfaiting is a method of financing international trade. The Company purchases
from an exporter the debt due by an importer when credit is required. The debt
is usually evidenced by a series of negotiable financial instruments such as
promissory notes or by deferred payment letters of credit opened by a bank. The
notes are usually guaranteed by a bank in the importer's country and, subject to
the quality of the guarantor, become marketable amongst international banks and
other financial institutions. In forfaiting, the notes are purchased without
recourse to the exporter.
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosure about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by The Company and independent experts using available market
information and appropriate valuation methodologies.
The fair value of the non-impaired financial instruments approximate carrying
value due to the short-term maturity of the instruments. The fair values of the
non-impaired financial instruments are (in thousand) $4,582 and $15,676 at
September 30 and June 30, 1999 respectively.
The following disclosure of the financial instruments which are impaired is made
in accordance with the requirements of SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures. The carrying values of
the impaired financial instruments are measured at market value.
The market value of the impaired financial instruments is as follows (in
thousands):
September 30, June 30,
1999 1999
------------------- ---------------
Recorded investments in impaired financial instruments $ 8,221 $ 8,221
Less allowance for losses $ (6,740) (6,740)
------------------- ---------------
Market value of impaired financial instruments $ 1,481 $ 1,481
==================== ===============
The activity in the allowance for losses account is as follows (in thousands):
September 30, June 30,
1999 1999
------------------- ---------------
Beginning balance $ 6,740 $ 7,018
Additions charged to operations 0 0
Reductions - sale of asset 0 278
------------------- ---------------
Ending balance $ 6,740 $ 6,740
============== ===============
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EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE E FORFAITING ASSETS (Continued)
The Company does not accrue interest on its impaired financial instruments.
Therefore, no interest income was recognized during the impairment period. Any
cash receipts on these financial instruments are recorded as income when
collected.
The composition of the notes by country of issuers bank was:
September 30, June 30,
Country 1999 1999
------------ ------------ ------------
Germany 6.1% 4.5%
Turkey 26.1 22.2
Russia 48.8 28.8
Ukraine 7.5 4.5
Czech Republic 9.1 2.9
Indonesia -.-- 34.6
Nigeria 2.4 2.5
Thailand --.-- --.--
Japan --.-- --.--
------------ ------------
Total 100% 100%
============ ============
NOTE F SHORT TERM BORROWING
Short-term borrowing consisted of the following (in thousands):
September 30, June 30,
1999 1999
------------ --------
Loans payable to banks $ 3,573 $7,477
Bank over drafts 650 1,254
Interest paid on short term borrowings for the periods ended September 30, and
June30, 1999 was 0.3 million and $0.7 million respectively.
Weighted average interest rates on short term borrowing from banks was 6.2% for
the periods ended September 30, and June 30, 1999.
The Company had long term debt in conjunction with the purchase of office
equipment.
-15-
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE G FOREIGN EXCHANGE
The Company is subject to foreign exchange risk through future foreign currency
cash flow as movement in currency exchange rates impact: 1) the U.S. dollar
value of foreign currencies and 2) the U.S. dollar value of cost incurred in
foreign currencies.
Foreign exchange gains (losses) included in the consolidated financial
statements at September 30, 1999 was 9,200.
NOTE H COMMITMENTS
At September 30, 1999, The Company had a commitment to purchase $5.2 million and
$9.0 million in forfaiting assets. The fees earned were recorded in the period
that the commitments were given.
NOTE I MINIMUM FUTURE RENTALS
The Company occupies premises provided under a lease agreement through February
27, 2002. The lease future minimum rentals are summarized below:
Year Ending June, 30 Amount
-------------------- ------------
2000 $ 165,500
2001 165,500
2002 110,400
Thereafter 0
The lease has an option to renew for five years.
NOTE J INVESTMENTS IN MARKETABLE SECURITIES
All securities held at September 30, 1999 are classified as "Available for Sale"
as defined by Statement of Financial Accounting Standards No. 115. "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115). The
securities are summarized as follows (in thousands):
Cost Market Value
------------ ------------
Common stock 1,100 1,100
Given the large number of shares and other uncertainties, there is not assurance
that the full value of the shares could be realized at September 30, 1999.
-16-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
The following information should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Form 10-Q.
Results of Operations
Acquisitions
The Company continues to pursue strategic alternatives to maximize the
value of its portfolio of businesses. Some of these alternatives have included,
and will continue to include selective acquisitions, divestitures and sales of
certain assets. The Company has provided, and may from time to time in the
future, provide information to interested parties regarding portions of its
businesses for such purposes.
The following table sets forth the percentage relationship to total
revenues of principal items contained in the Company's Consolidated Statements
of Operations for the three month periods ended September 30, 1999 and 1998. It
should be noted that percentages discussed throughout this analysis are stated
on an approximate basis.
Three Months Ended
September 30,
-----------------------------
1999 1998
--------- ---------
(Unaudited)
Total revenue.................................................... 100% 100%
Cost of revenues - interest...................................... 24 16
Provision for losses.............................................. - -
Gross profit...................................................... 76 84
Selling, general and administrative
expenses........................................................ 46 28
Net income (loss)................................................. 30 56
For the three months ended September 30, 1999 compared to the three
months ended September 30, 1998.
Revenues for the three month period ended September 30, 1999 ("first
quarter of 1999") decreased 27% to $1.1 million from $1.5 million in for the
three month period ended September 30, 1998 ("first quarter of 1998"). This
decrease in revenue is attributed primarily to reduction in trading activity due
to deteriorating market conditions, resulting in a decrease in the portfolio of
forfaiting assets during the quarter and an increase in cash and cash
equivalents at the end of the quarter. Revenue in the first quarter arose from
the sale of Indonesian assets and proceeds received from another asset held to
-17-
maturity. The Indonesian assets were sold in the period due to deteriorating
market conditions in East Timor. During the first quarter of 1998, there were no
negative external factors affecting the sale of assets.
Cost of revenues increased 8% for the first quarter of 1999 compared to
the 1998 period. This result is due to interest expense increasing to $257,000
in the first quarter of 1999 from $238,000 in 1998, reflecting higher interest
costs due a higher level of borrowing related to financing a greater number of
transactions during the 1999 period.
Selling, general and administrative expenses for the first quarter of
1999 increased 15% to $493,000 from $428,000 in 1998. This result is attributed
to increased operating activity and increased legal and accounting costs
incurred in filing the Company's registration statement with the Securities and
Exchange Commission in 1999.
Net income for the first quarter of 1999 totaled $324,000, or $.02 per
share of common stock, compared to net income for the first quarter of 1998 of
$858,000 or $.05 per share of common stock.
No tax provision has been made for three month period ended September
30, 1999, or for the fiscal years ended June 30, 1999, 1998 or 1997, based on
pre-tax operation losses. The Company pays taxes under both the United Kingdom
and United States tax laws.
Liquidity and Capital Resources
Short term trading investments and related short-term borrowings are
reported as cash flow from operating activities. Working capital at September
30, 1999 was a $24.0 million compared to $33.2 million at June 30, 1999. This
28% decrease in working capital is attributed to the $5.4 million (23%) decrease
in cash due to increases in other current assets and loans, and $11.1 million
(65%) decrease in forfaiting assets, reflecting sale and maturity of assets
during the quarter with no corresponding further acquisition of assets.
Partially offsetting the decrease in working capital was the $9.5 million (90%)
decrease accounts payable due to reduction of overdrafts and short-term loans,
achieved from the sales proceeds from forfaiting assets, and the $3.9 million
decrease in bank loans payable, reflecting repayment made from sale and/or
maturity of corresponding forfaiting assets.
Net cash used in operating activities for the first quarter of 1999 was
$1.4 million compared to $3.9 million used in the first quarter of 1998. This
was due primarily to a comparative reduction in trading activity during the
quarter.
-18-
Net cash used in financing activities for the first quarter of 1999 was
$900,000 compared to $2.0 million provided by financing activities for the
comparable 1998 period. This is attributed primarily to the $7.9 million
decrease in compensating balances during the first quarter of 1999. The Company
did not use or realize any cash flow from investing in either the first quarter
of 1999 or 1998.
At September 30, 1999 the Company had total assets of $29.5 million and
stockholders' equity of $24.6 million. In comparison, at June 30, 1999, the
Company had total assets of $42.8 million and total stockholders' equity of
$24.3 million.
Inflation
In the opinion of management, inflation has not had a material effect
on the operations of the Company.
Year 2000
Year 2000 issues may arise if computer programs have been written using
two digits (rather than four) to define the applicable year. Thus, on January 1,
2000 any clock or date recording mechanism including date sensitive software
that uses only two digits to represent the year, may recognize a date of 00 as
1900 instead of 2000. This could result in a system failure or miscalculations
causing disruption of operations, including among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activity.
The Company has checked all of its computer hardware and believes that
the hardware is year 2000 compliant. The Company's software was recently
upgraded and management believes that all software, including internal systems
for databases, are year 2000 compliant and use the four-digit year. Management
believes that the Company's equipment currently in operation including fax
machines and personal computers, will function properly with respect to dates in
the year 2000 and no adverse issues are anticipated. It is the Company's policy
that all equipment and software purchased will be year 2000 compliant.
Failure to correct a year 2000 problem could result in an interruption
of certain normal business activities or operations. Management does not expect
any issues that would cause such an interruption. The Company has not developed
any contingent plans regarding failure of any year 2000 operation of the
business. No substantial capital and maintenance expenditures will be required
to maintain and, or, upgrade operating facilities to remain competitive and to
comply with environmental requirements. The Company is not subject to the Clean
Air Act or its amendment of 1990.
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The Company has contacted 100% of its significant third party business
contacts to determine the extent to which the Company's operations may be
impacted by a third party's failure to make their own systems year 2000
compliant. All of those third parties contacted have responded that they are
either Year 2000 compliant, or anticipate achieving compliance well before
January 1, 2000. The Company reviewed the third party responses with the view of
the significance of that particular party to the operation of the Company.
Accordingly, the Company has concluded that it is unlikely its operations will
be effected by a potential third party Year 2000 compliance problem.
The Company has very little or no control over third parties and have
little ability to verify or enforce their claims to being year 2000 ready. As a
result, management believes that the Company's most reasonably likely worst case
scenarios involve areas where it relies on third parties, including utility
companies and other service providers. If any of the Company's significant
service providers or third parties do not successfully and timely become year
2000 ready, the Company's business or its operations could be adversely
affected. This would most likely consist of a loss of communication
capabilities.
As of the date hereof, the Company has expended approximately $3,000
associated with year 2000 compliance expenses. This includes the purchase of
Centennial 2000 Pro Software, attendance at free government sponsored year 2000
courses, and time spent by the Company's office manager in assessing year 2000
issues.
Risk Factors and Cautionary Statements
This report contains certain forward-looking statements. The Company
wishes to advise readers that actual results may differ substantially from such
forward-looking statements. Forward- looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: trading market risks, currency fluctuations, wold economic conditions
and risks generally associated with the trading of financial instruments.
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Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Foreign Currency Exchange Rate Risk
The Company is subject to the risk of price fluctuations related to
anticipated revenues, operating costs and expenditures incurred in currencies
other than US dollars. The Company has not generally used derivative instruments
to manage this risk.
Equity Price Risk
The Company is not currently subject to equity price risk resulting
from investments in marketable equity securities of unrelated parties. Any
future investments will be accounted for in accordance with Statement of
Financial Accounting Standards No. 115. Accounting for Certain Investments in
Debt and Equity Securities "SFAS 115".
The Company has financed its operations primarily through purchase and
sale of forfaiting assets. In the three months ended September 30, 1999, cash
used in operations was $1.4 million. This is attributed to net income for the
period of $324,000 and a decrease in forfaiting assets accounts payable and
overdrafts by $11.1 million and $9.5 million respectively, and an increase of
other assets of $4.2 million. The Company had an accumulated deficit at
September 30, 1999 of $317,000. The Company did not provide for any additional
loan losses in the unaudited results for the three months ended September 30,
1999. Management believes that reserves accrued in the prior periods are
adequate to provide for loan losses in the existing forfaiting asset portfolio.
At September 30, 1999 the Company's principal source of liquidity was
$17.7 million in cash, of which $5.2 million is held as compensating balances on
Bank debt of $3.6 million. At September 30, 1999 the Company had no material
long-term debt or long term commitments.
There can be no assurance that either the net income for the period or
the current loan loss provisions are indicative of future operations. There are
no assurances that continuing financing will be available at terms favorable to
the Company. The Company has no current plans to raise capital from the sale of
its stock.
Interest Rate Risk
The Company is subject to the effects of interest rate fluctuations on
its financial instruments. A sensitivity analysis of the projected incremental
effect of a hypothetical 10% change in the 1999 period-end interest rates on the
fair value of its financial instruments is provided in the following table.
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Dollars in Thousands
Fair
Carrying Market Incremental (1)
Value Value Incr./(Decr.)
------------------ ---------------- -------------------------
Financial assets:
Investment in Forfaiting Assets $6,046 $5,959 $(87)
Financial liabilities:
Fixed-rate and variable rate debt
( all due within one year) $3,573 $3,604 $ 31
(1) Reflects a 10 % increase in interest rate of financial assets and a 10%
decrease in interest rates of financial liabilities.
Fair value of cash and cash equivalents, receivables, short-term
borrowings, accounts payable, accrued interest and variable- rate long-term debt
approximate their carrying values. These items are relatively insensitive to
changes in interest rates due to the short-term maturity of the instruments or
the variable nature of underlying interest rates. Accordingly, these items have
been excluded from the above table.
At September 30, 1999, the Company's operating portfolio included
forfaiting assets totaling $6.0 million after allowance for $7.0 million loan
reserves. The fair value of these instruments will increase or decrease as a
result of changes in market interest rates. The Company accounts for these
financial instruments in accordance with SFAS 107. Accordingly, each year the
Company adjusts the balances of its portfolio to fair market value. With any
resulting adjustment being charged or credited to income as an unrealized loss
or gain and included in cost of revenue. Realized gains and losses resulting
from the disposition of such assets are recorded as income in the period during
which such disposition takes place. During the first quarter of 1999, the
Company realized gains of $790,000 in connection with its forfaiting asset
portfolio. The Company provides no assurance that these results are
representative on a going forward basis.
The Company's exposure to increases in interest rates that might result
in a corresponding decrease in the fair value of its forfaiting assets portfolio
could have an unfavorable effect on the Company's results of operations and cash
flows.
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PART II
Item 1. Legal Proceedings
There are presently no other material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of its
property is subject and, to the best of its knowledge, no such actions against
the Company are contemplated or threatened.
Item 2. Changes In Securities and Use of Proceeds
This Item is not applicable to the Company.
Item 3. Defaults Upon Senior Securities
This Item is not applicable to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
This Item is not applicable to the Company.
Item 5. Other Information
This Item is not applicable to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedules
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three month period ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EURO TRADE & FORFAITING, INC.
Date: November 23, 1999 By: /S/ JOHN VOWELL
-----------------------------
John Vowell, President,
Chief Executive Officer
and Director
Date: November 23, 1999 By: /S/ MUKESH PANCHOLI
-----------------------------
Mukesh Pancholi
Secretary, Treasurer
and Director
Date: November 23, 1999 By: /S/ NAREN DESAI
-----------------------------
Naren Desai
Principal Accounting
Officer
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