10-Q 1 b317387_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2002. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _____________ Commission file number 000-28461 HIGHLAND HOLDINGS INTERNATIONAL, INC. ---------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 98-0179679 -------------------------------- ------------------------------ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 480 Route 9 North Englishtown, NJ 07726 ---------------------------------------- ------------- (Address of principal executive offices) (Zip code) Issuer's telephone number 732-536-8510 ------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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__. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of October 31, 2001 there were 31,891,160 shares of common stock outstanding. Transitional Small business Disclosure Format (check one): Yes___ No X. HIGHLAND HOLDINGS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See accompanying notes to unaudited consolidated financial statements HIGHLAND HOLDINGS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to unaudited consolidated financial statements HIGHLAND HOLDINGS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes to unaudited consolidated financial statements HIGHLAND HOLDINGS INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS January 31, 2002 and 2001 1. GENERAL Basis of Presentation - The unaudited consolidated financial statements include the accounts of Highland Holdings International, Inc. (Corporation) and its wholly-owned subsidiaries of Highland Resources Honduras, S.A., E Street Access, Inc. and ESA Securities, Inc. (collectively, the "Company"). All material intercompany balances and transactions are eliminated in consolidation. The Company uses the accrual method of accounting for both financial and tax reporting purposes. The Company's year end is April 30. Organization And Nature of Operations - The Corporation, through its subsidiary E Street Access, Inc., is engaged in financial software development and licensing, hardware and network architecture and business development, which services are used primarily by ESA Securities, Inc. ESA Securities, Inc., doing business as E Street Access, is registered as a broker-dealer under the Securities Exchange Act of 1934, and is a member of the National Association of Securities Dealers, Inc. (NASD) and the Securities Investor Protection Corp. (SIPC). ESA Securities, Inc. is authorized to conduct a general securities business comprising several classes of services, including principal transactions, agency transactions, investment banking and market making. The Corporation has a gold mining concession in Honduras, but has not done sufficient geologic exploration to determine the reserves, if any. Until the Corporation completes the necessary geologic exploration, there is no assurance that any of the Corporation's properties contain commercially viable ore bodies (reserves). Pursuant to an agreement between ESA Securities, Inc. and Robb Peck McCooey Clearing Corporation (Robb Peck), all securities transactions of ESA Securities, Inc. are cleared through Robb Peck, and its customers are introduced and cleared on a fully disclosed basis. The consolidated balance sheet reflects 20,000,000 shares authorized and 29,122,776 shares issued and outstanding, reflecting the Corporation's intention to increase its authorized shares in the near future. Although the Corporation has 15,890,121 shares outstanding at January 31, 2002, the Corporation has included in its outstanding the 13,232,655 shares issuable upon conversion of its preferred shares. The preferred shares were issued to the officers of E Street Access, Inc. at the time of the acquisition because the Corporation's Certificate of Incorporation did not permit common share issuances in excess of 20,000,000 shares. For financial statement purposes, the Corporation has ignored the need for the technical amendment to increase its authorized shares above 20,000,000. The following consolidated financial data for the Company should be read in conjunction with the financial statements of the Company and those of its recent acquisition, E Street Access, Inc., including the related footnotes contained in the Company's Form 8-K, Amendment No. 1, filed September 27, 2001. The information as of January 31, 2002 and for the nine months ended January 31, 2002 and 2001, and for the quarters ended January 31, 2002 and 2001 is derived from unaudited consolidated financial statements. The unaudited accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. HIGHLAND HOLDINGS INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS January 31, 2002 and 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments - Substantially all of the Company's assets and liabilities are carried at fair value or contracted amounts which approximate fair value. Receivables-brokers/dealers - Amounts receivable from other brokers/dealers arising in the ordinary course of the Company's securities business. The Company routinely performs ongoing assessments of collectibility of its receivables. No allowance is provided herein as management deems this amount collectible. Revenues - Trading gains/(losses) - The Company trades securities for its own account recording regular-way trades on the settlement date, which is not materially different than trade date. Commissions - Commissions are recorded on settlement date, which is not materially different then trade date. Securities, At Fair Value - The Company's investments are carried at fair market value. Prepaid Interest - In the first quarter, the Company borrowed $ 500,000 at 5.6% per annum, with interest and principal payable in two-hundred, ten days. As an inducement to the borrower to lend the money, the Company issued lender 400,000 shares of its common stock that was valued $0.35 per share, or $140,000, and has been accounted for as prepaid interest that is amortizable over the term of the loan. In the nine months ended January 31, 2002, the Company amortized $140,000 and has included this amount as interest expense. Investment, At Cost - The Company has an investment in restricted stock, recording and carrying its investment at cost as there is no readily determinable fair value. Fixed Assets - The Company's fixed assets, its depreciation/amortization policies and interim expense are set out below: HIGHLAND HOLDINGS INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS January 31, 2002 and 2001

Annually, the Company reviews its fixed assets to determine their recoverability in the ordinary course of business. In the event impairment is indicated, the Company will reduce or totally remove the carrying value. The Company records its fixed assets at cost. Developed software is recorded at the cost of consultant, programmers, etc. and consists of a system to route and collect customer information and trading data. Income Taxes - The Company and its subsidiary file a consolidated federal income tax return but file separate state income tax returns. For the nine months ended January 31, 2002, the Company has a current net operating loss, and, therefore a provision for federal income taxes has not been provided. At January 31, 2002, the Company has net operating loss carry forwards of approximately $5.6 million available to offset future consolidated federal taxable income, which if unused, expire through 2022 in varying amounts. The Corporation and its subsidiaries are subject to state income taxes on their separate taxable incomes, if any. The Company's loss carry forwards give rise to a deferred tax benefit, which has been fully offset by a valuation allowance due to uncertainties as to whether the results of future operations will enable the Company to realize the tax benefits arising from this loss carry forwards. Basic and Diluted Net (Loss) Per Common Share - Basic and diluted net (loss) per common share has been computed by dividing the net (loss) by the weighted average number of common shares outstanding during the period. 3. UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS The accompanying unaudited consolidated interim financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Consolidated operating results for the three and nine months ended January 31, 2002 and 2001 may not be indicative of the consolidated results for the full fiscal years. 4. BORROWINGS During the nine months ended January 31, 2002 and 2001, the Company borrowed $350,504 and $553,000, respectively, for working capital at nominal interest. In addition the Company received $1,587,050 from convertible notes that were converted into common shares. The convertible notes had a stated interest rate of 12%. HIGHLAND HOLDINGS INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS January 31, 2002 and 2001 In the first fiscal quarter 2001, the Corporation borrowed $500,000 from a stockholder at the going money market interest rate with repayment in two hundred, ten days. In addition to the stated interest rate, the lender also received 400,000 shares of the Corporation's common stock. The 400,000 shares were recorded as prepaid interest based on the agreed upon per share rate of $0.35 per share. Interest expense will be recorded over the life of the loan based on the money market interest rate and amortization of the prepaid interest. During the nine months ended January 31, 2002, the Company recorded interest expense of $140,000. 5. STOCKHOLDERS' EQUITY In the nine months ended January 31, 2002, the Company received $1,587,050 from convertible notes that were converted into approximately 4.4 million common shares. The Company also issued 490,015 shares for interest and 46,657 shares in return for $35,000 in cash. 6. LEASES The Company has operating leases for facilities and automobiles in New Jersey. The terms of the facilities lease runs through February 2004 while the automobile leases vary from expiring in October 2003 to May 2004. The minimum lease payments under the leases are as follows: Fiscal year ending Amount ------------------- ------------------ 2001 $ 51,021 2001 132,446 2002 147,300 2003 146,350 2004 124,919 7. CONCENTRATIONS OF CREDIT RISK ESA Securities, Inc. is engaged in various trading and brokerage activities. These activities may expose the firm to off-balance sheet risk in the event the customer or broker-dealer (collectively "counterparties") are unable to fulfill their contractual obligations. As a result, the Company's exposure to credit risk can be directly impacted by volatile markets, which may impair the customers' or broker-dealers' ability to satisfy their obligations. The Company seeks to control the risk associated with nonperformance by reviewing, as considered necessary, the credit standing of counterparties with which it conducts business. HIGHLAND HOLDINGS INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS January 31, 2002 and 2001 8. NET CAPITAL REQUIREMENTS The subsidiary is subject to the Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934, which requires the maintenance of minimum net capital of $100,000 and requires that the ratio of aggregate indebtedness to net capital, as defined, shall not exceed 15 to 1. At January 31, 2002, the subsidiary's net capital of $505,848 exceeded the minimum requirement by $405,848. Subsidiary's percentage of aggregate indebtedness to net capital was 7%. 9. REVERSE TAKEOVER Effective July 16, 2001, the Corporation agreed to an exchange offer from Highland Holdings International, Inc. (HHII) (a development stage company) wherein the Corporation's shareholders receive one share of HHII's common stock for each share of the Corporation's they own. The transaction, as contemplated, will result in the Corporation being a wholly-owned subsidiary of HHII. Although HHII is the surviving entity, the business of the consolidated entity is principally that of the Company's with its stockholders owning substantially all of HHII. For these reasons, the transaction has been accounted for as the acquisition of HHII's net liabilities by the Corporation at HHII's book value followed by the recapitalization of the entity. 10. HISTORICAL QUARTERLY FINANCIAL DATA - UNAUDITIED

The following discussion of the Company's unaudited consolidated balance sheets and unaudited consolidated results of operations should be read in conjunction with the unaudited consolidated Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report on Form 10-QSB. For the three months ended January 31, 2002 compared with the three months ended January 31, 2001. Total consolidated revenues for the quarter ended January 31, 2002 were $123,731; an 87.0% decrease from the $965,868 reported for the quarter ended January 31, 2001. Total revenues are attributed solely to the revenue stream of ESA Securities, Inc. This comparison is based on unusually heavy trading volumes experienced during the quarter ended January 31, 2001. The decrease is attributable mainly to a decrease in trading volume, changes in trading dynamics, market pricing and the effects of an ongoing bear market. Nine Months Ended January 31, 2002 compared with nine Months Ended January 31, 2001. Total consolidated operating losses for the nine months ended January 31, 2002 increased from 998,221 to 2,852,627. These increases were attributed to mainly an increase in professional fees from $65,023 to $199,252 this increase reflects additional fees associated to the acquisition of E Street Access, Inc., an increase in quote and exchange fees from $53,652 to $277,925 which reflects an additional quote and exchange cost associated with the implementation of E Street Access online trading software, and a increase in communication costs from $42,552 to $113,157 associated with the addition of scalable network architecture along with a decrease in consolidated revenue. Revenue decreases are attributed mainly to continued lower trading volume due to the events of September, 2001, coupled with the effects of the ongoing bear market. In addition, we experienced limited trading profits and additional decreases in retail services, and interest. Total consolidated revenues for the quarter ended January 31, 2001 were $122,731; a 65.0% increase from the $80,436 reported for the quarter ended October 31, 2001. Total revenues are attributed solely to the revenue stream of ESA Securities, Inc. This increase is attributable mainly to a decrease in trading losses and a slight increase in institutional trading volume. Viability of Operating Results The Company's decrease in consolidated revenue was attributed mainly to operating results of its subsidiary ESA Securities, Inc. Like other securities firms, is directly affected by general economic and market conditions, including trading losses, fluctuations in volume and price levels of securities, changes in levels of interest rates and demand for the Company's retail and institutional services. All of these factors have an impact on the Company's net gain from securities transactions, and commission revenues. In periods of reduced market activity, profitability is adversely affected because certain expenses, consisting primarily of non-commission compensation and benefits, communications and occupancy and equipment remain relatively fixed. The Company continues to focus on vertical integration through the expansion of its other subsidiaries. Liquidity and Capital Resources The Company finances its operations primarily with existing capital, funds generated from operations and additional capital raised. However, in light of recent market conditions, the Company is trying to raise additional capital to bolster its capital base, expand market making/trading, expand and develop proprietary systems, cultivate and expand business development, and develop investment banking and venture capital initiatives. The Company converted $1,587,050 in short-term borrowings into the Company's restricted common stock . SIGNATURES In accordance with the requirements of the Securities Exchange Act, the Registrant caused this report to be signed on its behalf by the undersinged, thereunto duly auhtorized. HIGHLAND HOLDINGS INTERNATIONAL, INC. Date: March 25, 2002 by: /s/ Warren Benjamin Minton, Jr. ----------------------------------------- Warren Benjamin Minton, Jr. Vice President and Chief Operating Officer

HIGHLAND HOLDINGS INTERNATIONAL INC 10-Q