As filed with the Securities and Exchange Commission on November 17, 1999
Registration No. 000-26031
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
AMENDMENT NO. 3
to
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act
of 1934
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 officers)
(Zip Code)
Registrant's telephone number, including area code: (817)267-1866
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
N/A N/A
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
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EURO TRADE & FORFAITING, INC.
FORM 10
TABLE OF CONTENTS
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PAGE
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ITEM 1. Business........................................................................... 3
ITEM 2. Financial Information.............................................................. 25
ITEM 3. Properties......................................................................... 35
ITEM 4. Security Ownership of Certain Beneficial
Owners and Management............................................................ 35
ITEM 5. Directors and Executive Officers................................................... 36
ITEM 6. Executive Compensation............................................................. 38
ITEM 7. Certain Relationships and Related Transactions..................................... 38
ITEM 8. Legal Proceedings.................................................................. 39
ITEM 9. Market Price of and Dividends on Registrant's
Common Equity and Related Stockholder Matters.................................... 39
ITEM 10. Recent Sales of Unregistered Securities............................................ 40
ITEM 11. Description of Registrant's Securities to be
Registered....................................................................... 41
ITEM 12. Indemnification of Directors and Officers.......................................... 41
ITEM 13. Financial Statements and Supplementary Data........................................ 43
ITEM 14. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................... 43
ITEM 15. Financial Statements and Exhibits.................................................. 44
Signatures ................................................................................... S-1
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FORM 10
ITEM 1. Business
History of Business
Euro Trade & Forfaiting, Inc. (the "Company") was incorporated as
Rotunda Oil and Mining, Inc. on November 19, 1980 under the laws of the State of
Utah. The Company was originally formed to engage in the oil and gas, uranium
and hard rock mining business for profit. Within approximately two years, the
Company abandoned its pursuit of mining interest and remained inactive for
several years. In approximately 1996, the Company became engaged in the
development of the "Gas Hands" product. Gas Hands is a moist towelette to be
sold at gasoline service stations and convenience stores and is used to remove
and clean gasoline odors and residue from the customers' hands as they refuel.
The Company entered into a license agreement with the inventor of Gas Hands and
in September 1997, sold an exclusive distributorship for the product in the
Nevada and Arizona markets. However, in 1998 management became concerned about
the potential market for the product and, when the opportunity to acquire Euro
Trade & Forfaiting Company Limited presented itself to the Company, the project
was abandoned. Management believed that with the new direction of the Company,
it would not be good business sense to continue with production of the Gas Hands
product. Accordingly, all rights to the Gas Hands product were assigned by the
Company to the inventor of the product.
In 1998, a representative of Euro Trade & Forfaiting Company Limited, a
privately held limited company based in, London, England ("Euro Trade Limited")
approached a principal shareholder of the Company about the possibility of the
Company acquiring Euro Trade Limited. When the proposal was made to the
Company's Board of Directors, the Board determined that the business prospects
of Euro Trade Limited presented a greater potential opportunity that the
Company's attempts to commercialize the Gas Hands product. Subsequently, on
November 20, 1998 the Company entered into an Acquisition Agreement and Plan of
Reorganization (the "Agreement") with Euro Trade Limited.
Pursuant to the Agreement, the Company acquired 100% of the capital
stock of Euro Trade Limited for 11,000,000 shares of Company's authorized but
previously unissued common stock. As a result of the acquisition, the Company
acquired all rights, title and interest to the assets and property owned by Euro
Trade Limited. The acquisition was accounted for as a recapitalization of Euro
Trade Limited and all of Euro Trade Limited's common shares were converted into
shares of the Company. Euro Trade Limited became a wholly owned subsidiary of
the Company and the Company also changed its name to Euro Trade & Forfaiting,
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Inc. All of the Company's directors submitted their resignations and were
replaced by new directors that were previously associated with the management
and operations of Euro Trade Limited. References to the Company made hereafter
will include the operations of Euro Trade Limited.
Euro Trade Limited was organized in the United Kingdom on February 25,
1997, for the purpose of servicing trade financing activities in the business
world. Euro Trade Limited's core business is based on non-recourse financing of
trade receivables. Euro Trade generates revenues by arranging and taking into
its portfolio non-recourse trade finance transactions and selling them into the
secondary market. These receivables are known as "forfaiting assets."
Euro Trade Limited was originally founded primarily to service the $1.5
billion trade finance requirements of its founding shareholders. In February
1997 Multikarsa Investama ("Multikarsa") established Euro Trade Limited with a
capitalization of $25 million dollars. Multikarsa is a holding company with
interests in many international companies. Euro Trade Limited's founders
intended that business not only would support the import-export requirements of
companies wherein Multikarsa had a financial interest, but also develop a
separate trade finance activity. When the problems of the Asian emerging market
economies developed in the third and fourth quarters of 1997, Euro Trade Limited
shifted its focus to trade finance activity, drawing increasingly on the
contacts and trade finance experience of its management team.
Upon the closing of the Agreement and the exchange of 100% of the
shares of Euro Trade Limited for the Company's common stock, Multikarsa assigned
all rights to its shares to two separate investment companies, Collingwood
Investments Limited, a Bahamas company, and North Cascade Limited, a British
Virgin Island company. Thereafter, Multikarsa, as an entity, had no direct
ownership or management control in the Company.
Description of Business
The Company's primary business is trade finance. The Company employs
banking professionals with experience across a broad range of disciplines. These
professionals structure customized trade finance solutions for the Company's
clients, both importers and exporters. The Company is actively engaged in the
business of forfaiting trade receivables (see below), arranging debt for equity
swaps and debt for commodity swaps. The Company has three traders and one
executive officer. The Three traders are John Vowell, who is also the Company's
President and C.E.O., Ray Brown, and David Ringer.
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Mr. Vowell worked for four years as a senior member of the Trade
Finance Department at Standard Bank London Limited. Previously, he worked at
Sumitomo Bank in London, and Midland Bank London. Mr. Vowell has fifteen years
experience in trade finance and banking and is responsible for day-to-day
management of the Company's trading strategy, portfolio management and
developing of marketing strategy.
Mr. Brown is Head of Trading for the Company and has over fifteen years
of trading experience in the forfaiting market. He previously worked at RaboBank
London for two years, Landesbank Baden-Wuertternburg for six years, and at
Midland Bank for nine years. Mr. Brown oversees the Company's day-to-day trading
operations.
Mr. Ringer, a forfaiting trader for the Company, has six years of
trading experience in the forfaiting market. He previously worked at Standard
Bank for two years and Hungarian International Bank and its successor, Hungarian
International Finance, for four years.
Ms. Lewis is the Company's Structured Trade Finance Specialist, dealing
with marketing and operations of Structured Trade Finance transactions. She also
supports the Company's forfaiting marketing operation and is responsible for
banking relationships in the United States, Republic of Ireland and France.
Prior to joining the Company, Ms. Lewis worked at Standard Bank London for two
years.
Although the Company's central businesses are in structured and
non-recourse trade financing of trade receivables, it has also begun refinancing
distressed trade debt held by international banks and financial institutions.
The Company has arranged and closed transactions exceeding $200 million since it
commenced dealing in trade receivables in 1997.
As a percentage of its total income for fiscal 1998, the Company
derived approximately 27% from the sale of forfaiting assets, 37% from interest,
5% from structured trade, 26% from fees and charges, and 5% from other business
including distressed debt refinancing. For fiscal 1999, the Company derived
approximately 63% of its total income from the sale of forfaiting assets, 29%
from interest, 1% from structured trade and 7% from fees and charges.
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The following table sets forth the breakdown of income for fiscal 1999:
Income Source Amount Percentage
------------- ------ ----------
(In Thousands)
Sale of Forfaiting Assets ................... $4,748 63%
Interest Income ............................. $2,218 29%
Fees and Charges ............................ $ 514 7%
Structured Trades ........................... $ 105 1%
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Total .............................. $7,585 100%
As the Company's business matures, it is expected that the majority of the
Company's future income will be derived from the sale of forfaiting assets and
fees received on the sales.
The Board of Directors sets dollar limits on the amount of exposure the
Company may have with any one bank or country at any one time. These limits are
under constant review by management. Presently, there is an overall aggregate
limit on the amount of the trading portfolio of $50,000,000, established by the
Board as a prudent bench mark in relation to the Company's share capital which
equates to a gearing (leverage) ratio of two to one, debt to equity.
Management believes that the Company was not affected as severely as
many of its competitors by the deterioration in world economic conditions during
1997 and 1998. This was due to the Company's perceived lower exposure to Central
and Eastern Europe than its competitors, both in absolute amounts and
proportionately. Further, three of the Company's largest competitors in the
forfaiting market in 1997 and 1998, experienced substantially greater losses
than the Company in 1998. In all three instances, the losses are believed to
have occurred in the financing of working capital, as opposed to trade finance
transactions, mainly in Russia and Eastern Europe. In contrast, over 85% of the
Company's transactions for this period were for the finance of Far East trade
paper, all of which has been paid in full. However, the economic events did
cause management to lower market valuations of some of some of the assets it
held, and made loss provisions of $5.7 million in 1998.
During 1997 and 1998, the Company engaged in trade financing and had
exposure primarily in the Far East , particularly in the Country of Indonesia.
Approximately 85% of the Company's transactions during this period were for the
finance of Far East trade paper, all of which has been paid in full. Because the
Company's lower exposure to Central and Eastern Europe during the economic
problems in 1997 and 1998, the Company was not affected as severely as many of
its competitors.
All of the Company's foreign currency exposure risk in relation to its
assets is hedged. This is accomplished primarily by financing non dollar
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denominated assets with borrowings in the same currency as the asset typically
being financed. The risk, which the Company takes, is that the Obligor either
becomes insolvent or it is unable to find the hard currency to meet its
obligations when due. The Company strives to minimize this risk by dealing only
with "bank obligors." A typical transaction would involve the Company purchasing
from an exporter, without recourse, an obligation of an importer and guaranteed
by its bank to pay a specific amount on a specific date through a specific bank.
Services provided by the Company are detailed below.
Forfaiting
The Company's primary business is forfaiting. Forfaiting involves the
refinancing of trade receivables on a discount basis without recourse to the
previous holder. This financial service is available in all major currencies for
export contracts in excess of $250,000. Depending on transaction parameters,
such as country and bank risk, the financing periods range between a few months
and several years.
The Company's primary market forfaiter is responsible for all normal
due diligence including documentary checks, and for ensuring that the
transaction is a bona fide and negotiable transaction. Forfaiting requires the
participants to act as principals and not brokers. This is necessary because of
the documentary complexity of each transaction and the impossibility of matching
buyers in the secondary market and sellers in the primary market in a time
efficient fashion.
The forfaiting market relates more to the individuals involved than to
the corporate or banking entities for whom they work. The Company estimates that
300 organizations, mainly international banks with departments of between five
and twenty people, participate in this aspect of trade finance. Bills of
exchange or promissory notes, referred to as assets, are placed in the secondary
market with over 1,000 banks and similar financial institutions participating
worldwide.
Forfaiting is based on non-recourse financing of trade receivables.
Non-recourse, in this instance, means that each purchaser of the assets in turn
relies on the ultimate obligor and gives up the right normally associated with
trade finance of having recourse to the previous holder. Its principal
characteristics are as follows:
* Transactions are normally comprised of bills of exchange
drawn and accepted under a letter of credit or promissory notes issued
by an importer. Bills of exchange are negotiable instruments drawn on
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the importer/obligor by the exporter and returned to the exporter as
the payment mechanism for the underlying obligation of the importer.
The usual size of transaction ranges from $l,000,000 to $5,000,000.
* Bills of exchange or promissory notes are normally "avaled" by the
importer's bank. An aval is a guarantee, usually a bank guarantee that
is separate from the underlying trade contract. In a typical
transaction, the bank avals, or makes an unconditional guarantee of
repayment, if the debtor fails to repay. An aval is the preferred form
of guarantee as it is self-evident, irrevocable and unconditional so
long as the buyer's country law does not impose specific restrictions.
Bills of exchange are usually issued in hard currencies such as U.S.
Dollars, Deutsch Marks and other recognized currencies.
* A series of notes are issued in relation to each export transaction.
These notes typically mature at six monthly intervals over periods from
six months to five years. Due to increasingly difficult market
conditions, the Company trades in shorter term trade letters of credit,
generally six to twelve months.
* Bills of exchange or promissory notes are priced relative to the
average life London Interbank Offering Rate (LIBOR), plus a margin to
reflect the credit risk and are discounted through maturity. This is an
imperfect market however, and two-way prices are not quoted.
Generally, the Company acts as a principle and purchases trade
receivables, which are payment obligations evidenced by a Bill of Exchange, a
Promissory Note, or an Acceptance Payment Obligation derived from a Letter of
Credit. These instruments typically short-term and either a direct obligation of
a bank or covered by an effective bank guarantee in the importer's country.
Risks associated with the different instruments are typically not unique. The
three main areas of risk generally associated with forfaiting are (i)
counterparty risk, (ii) Documentary risk, and (iii) payment risk. Counterparty
risks involve the assessment of the professional competence and financial
stability of those organizations from whom the Company is purchasing and to whom
it is selling. Documentary risks are those normally associated in dealing with
trade finance and include checks to avoid fraudulent transactions. Payment risk
involves an assessment of the ability of the obligor to pay the amounts due when
they are due.
The Company's forfaiting transactions are financed through a mixture of
capital, which is approximately $25,000,000 at June 30, 1999, and borrowings
from banks which are asset backed (secured) facilities totaling approximately
$25,000,000 at June 30, 1999.
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The level of gearing (leverage) that the Company undertakes is limited by the
Board of Directors to two to one, borrowings to capital, at the present time.
However, the level of leverage within this limit will depend on market
conditions and the desire of the Company to expand or constrict the size of its
trading portfolio.
Income from forfaiting comes from fees relating to the negotiation of
the transaction and capital gains on the sale of the assets. Capital gains are
the result of an improvement in the perceived credit risk or because of a
downward movement in interest rates during the period the assets are held in the
portfolio. The Company also earns a yield over and above the carrying costs of
the assets to maturity. The Company, through its team of professional bankers,
believes that it has established good relationships with banks and corporations
in Europe and the Far East.
Structured Trade and Commodity Finance
The Company's other core business is the pre-export and specialized
financing of commodities to well established small and medium size trading
companies. The Company may arrange financing for trade from and to countries
where traditional trade financing arrangements are not available.
The Company works with traders and manufacturers world-wide to provide
'pre' and 'post' shipment financing in emerging markets. Pre-shipment financing,
short-term funding to finance the inventory and production costs includes
tolling facilities, pre production finance, ex-works, on rail, in-warehouse and
on-board financing. The Company also participates in structured trade and
commodity transactions with banks and financial institutions.
Trade finance is an area of economic activity that has enjoyed
consistent growth over the last 50 years. However, the Company's management
knows of no statistics on this part of the trade finance market reflecting
either the volume of transaction or the market share of individual participants.
In the 1960's and 1970's the source of bills of exchange or promissory notes in
this market was from capital goods' exporters in Europe. These assets entered
the secondary market either through the exporter's bank, or in some countries,
through brokers. In recent years the market has developed to source paper from
the developing markets and to deal with other forms of financial transactions
not necessarily trade related. Trade finance is unregulated in the United
Kingdom, and is less subject to rescheduling when a creditor country has
external payment problems. Furthermore, trade related assets are usually priced
at a premium, compared to other financial assets with a similar risk profile. A
premium is realized because the forfaiting market was originally developed to
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finance only the transfer of capital goods and equipment. However, the
documentation, pricing technique and usance (term) has been extended to cover,
among other things, the financing of working capital and pre-export finance.
Historically, trade related transactions are treated more favorably than other
working capital, non-trade obligations when a country is forced to renegotiate
its external debt. Also, documentation needed to support a trade transaction,
including proof of deliver, make such transactions less subject to fraud.
Distressed Debt Refinancing
The Company is developing a program of debt "swaps" involving
distressed debt refinancing. As part of its normal day-to-day forfaiting trading
activities, the Company identifies distressed debt obligations of bank and other
corporate entities in emerging markets. These obligations are purchased by the
Company and then offered to organizations seeking to purchase at a discount the
equities in the same emerging market banks. Such purchasers then seek to
negotiate with the banks and corporate entities concerned to retire the
distressed debt in exchange for equity or some other form of more valued
security. The Company's profit is made between the purchase of the bank or
corporate debt in the open market and the sale to buyers. The primary risks
associated with debt swaps is the potential diminution in value between the time
that the Company agrees to purchase an asset and the time that it arranges to
sell it. In order to avoid a loss of value, the Company arranges most
transactions on a simultaneous basis, where a buyer and seller are identified
and funds are exchanged on the same value date.
The Company has launched a program to arrange the purchase of prime
bank obligations at prices significantly higher than their present market value.
The primary purpose of these purchases is for swapping into equities or
commodities that the Company has purchased at a deep discount to the market. The
difference between the purchase price for the prime bank obligations, although
greater than the normal market value, and the sale or swap price at current
market value of the basket of equities or commodities which the Company obtained
at lower prices, generates the profit margin for the Company.
Market Background
Management believes that it is generally known that since the autumn of
1997, the global economy has experienced tremendous turmoil. This has especially
effected the emerging markets. Many analysts forecast that, in the coming year
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there will be a slowdown in economic growth for both the developed and the
developing markets. This can already be seen in the reduction in capital goods'
exports from the stronger economies to the emerging markets. Also, many emerging
market exporters have been impacted and are experiencing a sharp fall in their
export prices. The major world financial markets reflect these events and
international financial institutions, such as the International Monetary Fund
("IMF") and the World Bank, have only a limited ability to deal with the
problems created in the current economic climate. Adding to the uncertainty is
the introduction of a major New World currency, the Euro. The Company's concern
with the Euro is the new currency's parity with other major international
currencies and how stable those parities will be. This is particularly important
when financing trade because parity effects both the competitiveness of
exporters competing in different currencies and the cost of funds to importers.
Market Outlook
The Company's management believes that there is an increasing need for
banking institutions to support the stability of developed and developing
economies and help maintain their most important trade relationships. As the
distressed emerging economies seek to trade their way out of recession,
management feels that the economies will put particular emphasis on building and
maintaining solid trade finance facilities. Further, management believes that
there has been a reduced interest in emerging market financial paper in banking
and equity investment institutions which is expected to remain at a reduced
level for at least the next year.
Management believes the likelihood of reduced interest rates in several
of the major currencies will increase, as the fear of inflation becomes less of
a concern than the stability of the financial markets. Accordingly, investment
in emerging markets will continue to be revalued at lower levels and should
therefore give rise to higher yields. Management also believes that many banks
in emerging markets are likely to sell their international assets to increase
their liquidity as they face the need to make higher provisions on their
domestic loan portfolios. Under this scenario, primary commodity exporters in
particular will need to manage their liquidity more stringently.
Because of these perceived economic conditions, management believes
that in countries such as Japan and Korea, capital goods' exporters and their
banks may seek to liquidate some of their trade receivables in order to provide
working capital for their ongoing businesses.
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Employees
As of the date hereof, the Company employed eight full-time
individuals, consisting of one executive officer, three market traders and four
office staff personnel. In addition to its full-time employees, the Company may
use the services of consultants on a contract basis as necessary. Management
considers the relations between the Company and its employees to be good.
Competition
To the best knowledge of the Company, the only other publicly held
company in this market is London Forfaiting Company PLC. This company has a
capital base of over $264 million, a staff of 200 and turnover in 1998 of about
$2.8 billion. This company is the only public source of financial information in
this industry and is arguably the biggest participant. Other major competitors
in this market include Standard Bank London Ltd., Westdeutsche Landesbank
(formerly West Merchant Bank), HSBC and Deutsche Bank. Also, many banks and
investment institutions, both in the United States and elsewhere, are becoming
involved in forfaiting and pose competition to the Company.
Proposed Developments
The Company has existing contacts in the primary market and
distribution to the secondary market for both of its core businesses, structured
trade and commodity finance and non-recourse finance. The Company intends to
apply its skills in trade finance selectively to both expand these core
businesses and develop new niche businesses that have been identified as natural
extensions of the core business.
Management believes that the Company is capable of expanding its
forfaiting and structured trade participation businesses to over $200 million by
the year 2000. Management anticipates that expansion can be accomplished by
increasing the Company's marketing and trading activities. This expansion, which
will lead to an increase in the size of the Company's trading portfolio, will be
financed through the extension of borrowing facilities on predominantly asset
backed borrowing facilities available from banks.
The Company intends to market to European exporters the ability to
finance exports to Indonesia. Additionally, the Company intends to develop the
ability to exchange trade debt purchased at a discount for other assets,
initially in Indonesia where the Company has experience and a market base. If
successful, the Company will consider expanding to other markets.
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Management believes that these developments would:
* Take advantage of the present world economic situation and the
existing perceived weakness of the competition, to develop the primary
market penetration of the core businesses. This would give the Company
the opportunity to earn higher fees and capital gains by dealing direct
with capital goods' and commodity exporters in countries where the
local banking system may be too illiquid to provide more traditional
methods of financing. Initially the Company would market direct from
London to the European market and establish regional offices to
identify and develop relationships with exporters in Asia and the
Americas. These regional offices would also establish relationships
with a limited number of local banks and brokers with good local
corporate contacts. As a first step, the Company is presently
negotiating a joint venture in the Far East. As of the date hereof, no
definitive agreements have been entered into.
* Develop the structured trade and commodity finance operation
concentrating on both high value products and markets where traditional
finance methods are not available. Management will focus on established
smaller and medium sized trading companies and undertake only the most
secure transactions. Transactions, such as pre-export finance and
countertrade can lead to high margin banking returns and fee income.
However these transactions are often complex and require flexible and
innovative financing arrangements.
* Enable the Company to purchase trade receivable assets at favorable
prices from distressed banks in certain developing countries and
liquidate these investments, either through arranging structured trade
finance deals or undertaking debt/equity swap business. This is similar
to re-scheduled debt developed in Latin America and Poland during the
mid 1980's. This business may concentrate initially on countries such
as Indonesia where the Company has strong existing relationships.
Although many of these activities are primarily fee generating, profits
will also be made from participating in the underlying transactions.
The Company has been advised that its core businesses do not require
supervision from the Financial Services Authority. It is possible that
some of the proposed development activities may require clearance from
or supervision by the United Kingdom regulatory authorities. However,
the Company's legal counsel believes that it is unlikely that
activities based on trade finance will be subject to any form of
financial regulation.
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Operations and Finance
Management believes that it is important to maintain a system of
internal controls to manage and communicate with the Company's traders. An
experienced trader in the Company can complete an average of about two
transactions per week. Speed of reaction to change and new business inquiry is a
key ingredient to success in this market, which requires short reporting lines
and a pro-active credit research function.
The Company's trading team use its skills and experience to source,
price and structure transactions and to develop secondary market buyers. All
traders actively assess risks on a day-to-day basis. This is accomplished by
meeting with exporters and their banks in the primary market and telephoning
banks in the secondary market in Europe, Asia and the United States. This
enables the traders to determine the current pricing structure for the risks
which they are actively seeking to either purchase or sell. Secondary market
transactions relate to exports which have already been financed by a bank, but
where that bank needs to sell the transaction either to make room within its
credit for new transactions or to realize a profit. The Company purchases such
transactions in the belief that the price does not correctly recognize the
opportunity to make a further profit before maturity, or because the yield to
maturity is attractive in relation to credit risk and funding costs. This
ability to place an asset in the secondary market plays an important part in
reducing many of the risks associated with carrying the assets in the portfolio,
including asset concentration and interest rates.
Presently the Company has one trading team consisting of three
traders/marketers. This team is actively involved in marketing, originating and
trading forfaiting and structured trade transactions. The members of the team
are experienced ex-banking professionals enabling them to market and process a
variety of transactions. (See Item 1 "Business - Description of Business"
above.)
The potential profitability of the Company's transactions are
influenced by the credit research function. In addition to reviewing
"counterparty" (a buyer or seller of assets or obligations with another party)
and individual credit risks, credit research maintains a constant review of
emerging market risks. Researchers must be able to identify improving and/or
deteriorating economic situations to ensure that purchases and sales of assets
are made in a timely fashion. Also, in order to minimize interest rate risk,
researchers provide advice on the interest rate outlook for the world's major
currencies.
The Company's research function is presently made up of one full time
advisor. However, as business warrants, the Company intends to add at least one
additional researcher as part of the planned expansion over the next year. Each
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individual new transaction considered for purchase is the subject of a full
updated written review of the country and bank risk involved. Research into bank
and country risks are initiated by inquiries made to the trading team for
purchases, which average approximately four inquiries per week. Research is also
done on a continuing review basis of risks related to transactions held in the
trading portfolio. Research involves desk-based activity reviewing economic and
financial data related to country risk and bank risk, respectively. As part of
the appraisal process, a prospective investment is scrutinized for potential
saleability into the forfaiting market. Research is augmented by conversations
with economists, diplomats, journalists and other professionals with experience
or knowledge related to the risks being reviewed. In certain instances where
country exposure is under review, visits will be made to the country under
review to better assess te underlying political and economic situation. The
Board then assesses the data made available from these review for day-to-day
decisions on what assets to buy and sell.
Trading limits, internal controls and accounting principals that have
been adopted by the Company are similar to those applicable to a small merchant
bank. Valuation of assets in the Company's portfolio, which assets are typically
unquoted and trade only in a limited market, necessarily depends on input from
the Company's directors. Management must also keep current internal financial
information concerning the Company's business including normal budgeting
procedure and production of daily and monthly management accounting data.
The size of the Company's portfolio varies considerably from
month-to-month depending on both deal flow and the Company's views on the
interest rate and macro economic outlooks. Management believes, base on past
experience, that in the primary market, the holding period for assets is often
two to three months before an asset can be safely and profitably sold. This
reality determines the minimum level of the Company's portfolio. Size of the
portfolio is also constrained by the need to act within prudent leverage limits.
During the fiscal year ended June 30, 1999, the Company's portfolio size, after
provision for impaired forfaiting assets, ranged from a high of $16 million to a
low of $11.8 million.
Risk Management
General
Trade finance is one of the oldest banking finance activities. Risks
associated with the Company's business are those most usually associated with
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and undertaken within a bank. A discussion of the various risks is set forth
below under the subheading "Risk Categories." Therefore, control mechanisms for
monitoring and limiting these risks are based on controls that would be expected
of a small merchant banking operation. However it must be emphasized that due to
the trading nature of the Company's business, it must rely on its speed of
reaction to customer inquiry and changes in market conditions to achieve
profitability. These prerequisites require a flexible management structure with
short reporting lines.
Because the Company is not a deposit taking institution and trades only
with professional counterparties, the Financial Services Authority's ("FSA")
banking supervision department does not monitor its business. In the event the
Company begins dealing in financial instruments such as bonds and equities,
management believes that the Company's business would become under the
supervision of the FSA.
Risk Categories
* Transactional. Non-recourse trade finance purchases are frequently
made "subject to receipt of satisfactory documentation" and sometimes pay under
reserve before the documentation is finally approved. If a decision is made to
commit to purchase a deal, this commitment is commonly communicated to the
seller before the purchaser has had the opportunity to review in detail the
underlying documentation. A buyer may specify certain detailed aspects of the
documentation, which it expects the seller to be able to satisfy. Thus, a buyer
is protected in the event that the detailed documentation supporting the
transaction is materially incomplete in the sense that it invalidates the
obligation of the importer or its bank to pay. This requires the Company to have
good technical skills, financial reliability and probity of its counterparties.
It is also common practice to commit to purchase a transaction from an
exporter at a pre-determined rate of interest and to hold the commitment open
for a period to allow the exporter to negotiate its contract with the importer.
These commitments are fee earning and require the Company to take an informed
view of the interest rate outlook in the particular currency concerned. The
primary forfaiter also has the duty to know his customer and ensure that the
underlying transaction is bona fide. In the event of fraud, the "non-recourse"
element of the transaction is nullified and each party may proceed against the
person from whom they purchased the commitment.
Traders with whom the Company transacts business on a daily basis are
all known personally by the Company. The Company routinely investigates the
financial strength of the counterparty from whom it is buying a deal. Also, if
-16-
<PAGE>
the transaction is a primary market deal involving an exporter with whom the
Company has not previously conducted business, the Company will make a full
credit assessment of the exporter as well as check on its previous experience
and performance as an exporter. In the case of a secondary market transaction,
the Company will most likely only be dealing with a bank or financial
institution with whom it has dealt with before. If the transaction comes through
an intermediary, the Company will make a complete check of the exporter and the
intermediary.
The Company's credit committee also makes a full assessment of the
counterparty, country, hard currency availability and bank credit risks. A
commitment to purchase the deal is made only when all these aspects have been
approved by the credit committee. As part of its documentary checks, the Company
must be assured that both the importer and its bank are permitted to arrange and
pay for the import and that the decision to import has been properly authorized,
both by the necessary authorities and by the importer's management. During
fiscal year 1999, the trading and research staff formally visited over forty
corporate and bank counterparties from whom primary business was offered.
Additional counterparties were telephoned by the Company approximately twice per
month. The creditworthiness of all counterparties with whom the Company conducts
business actively is reviewed at least annually. Company personnel will visit
all corporate customers from whom primary business is purchased before the
transaction is committed to.
Each transaction has different documentation covering such matters as
the importer's legal right to import the equipment and to finance the deal. The
primary forfaiter will need to check the importer's bank's ability to guarantee
the transaction and the confirmation that the financial obligation of the
importer and his bank are abstract from the performance of the underlying
contract for delivery of goods.
* Portfolio Management. The Company's portfolio of trading assets is
made up of bills of exchange, promissory notes and other negotiable trade
finance instruments denominated in "hard" currencies. Since the inception of the
Company, in excess of 90% of the Company's deals have been purchased on the
basis of discounting through to maturity for periods of six months to five
years. Prudent management demands that currency and interest rate risks are
minimized. The Company assesses these credit risks on a daily basis to ensure
that it buys into improving risk categories and sells assets in potentially
deteriorating categories early to avoid potential illiquidity. The Company
continually investigates bank and country risks by reviewing economic and
financial data related to each risk and by communicating with other experienced
professionals outside the Company. Results are assessed by the Board as the
basis for day-to-day decisions on what assets to buy and sell. In addition to
-17-
<PAGE>
the day-to-day maintenance of the trading assets portfolio, it is necessary to
maintain adequate liquidity to purchase new transactions as they arise. Although
the Company's capital base provides underlying funding for the portfolio, it is
important to maintain adequate funding facilities to permit prudent planning for
such an operation. Management believes that this is approximately three times
its capital and reserves. Presently, the Company has "asset-backed" (secured)
facilities of $25 million from its banks. This represents just below one times
the capital and reserves of the Company at June 30, 1999. In difficult market
conditions, it may be necessary to seek secured credit lines or to maintain a
higher level of short-term liquidity. At June 30, 1999, the Company's net
trading portfolio was approximately $16.0 million.
* Contingent Liabilities. It is common market practice from
time-to-time to issue confirmations of letters of credit and to enter into
"repo" facilities with other market participants to borrow or lend transactions.
These reciprocity arrangements make it possible for the parties to spread and
share the risk. Such arrangements are only entered into with known and reliable
counterparties. Counterparties are assessed on their performance in transactions
with the Company over time. In the primary market, counterparties will be
exporters or their banks. In the secondary market, over 90% of the Company's
counterparties are banks or subsidiaries of banks and the balance are financial
companies, typically having larger capital than the Company's. If a transaction
is undertaken with a previously unknown counterparty, the Company will make a
corporate credit assessment involving a review of historical accounting
information and an analysis of future earnings potential. The Company will also
seek other references from other parties with whom the proposed counterparty had
conducted similar business. The Company has approximately 440 conterparties with
whom it is actively in contact about trading in the forfaiting market. The
Company estimates that over 80% of these counterparties are banks or financial
institutions regulated in their country of domicile.
As of the date hereof, the Company has not entered into any arrangement
involving either confirmation of letters of credit or "repo" facilities.
Accordingly, the Company has not established any dollar limitations for these
types of transactions. The Company has, however, engaged in certain structured
trade and commodity finance activities. These transactions allow the Company to
earn fees for its involvement in transactions without having to directly finance
assets on its balance sheet.
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<PAGE>
* Structured Trade Finance. This activity is primarily fee based and
therefore less reliant on using the Company's balance sheet. Many of the
transactions are secured by cash deposits, liens over the assets being financed,
or a third party letter of credit. However, the business does involve the
Company in several contingent liabilities. One primary risk is assessing the
ability of the Company's counterparty to undertake its contractual obligations
under the underlying trade contract to deliver product or goods, which are often
from under developed countries. This assessment is often based on third party
references and, if necessary, physically visiting the operation concerned. Other
risks include the credit assessment consisting of a credit review of the
Company's counterparty's trading partner, and an assessment of the underlying
trade contract documentation. All of the Company's structured trade and
commodity finance transactions are secured. The Company presently does not have
any pre-set limits as to the optimum size of its structured trade portfolio. The
optimum size typically depends on the acceptability of the Company's counter
party to those banks which are managing the facilities on behalf of the client.
Internal Controls
* Transaction Approval. All existing or potential new counterparties
are subjected to a credit approval procedure by the Company's research
department. Credit limits are then established for the counterparty. These
limits will be authorized by two signatories including one from the research
department and at least one other designated signatory. A signatory is a
management person authorized to commit the Company to any form of contractual
liability. A form will evidence each inquiry concerning a potential transaction.
All written indication quotations in response to an inquiry must be signed by at
least two designated signatories. All firm quotes must be signed by at least one
designated signatory and may only be given after the credit has been approved
(see below). After the purchase of the transaction has been approved and the
commitment confirmed to the seller by at least one designated signatory, the
underlying internal accounting documentation must be signed by at least two
designated signatories. All correspondence confirming the sale of assets must be
signed by at least one designated signatory.
* Credit. All new deal "inquiries" are copied to the credit research
department for appraisal. In the highly competitive non- recourse market, speed
of response to inquiries is critical to success in bidding for transactions. The
three main areas of risk to be appraised are (i) country risk, (ii) bank risk,
and (iii) on an infrequent basis, corporate risk. The Company has the capability
-19-
<PAGE>
to respond to a new deal inquiry immediately, within one hour after general
consultation amongst members of the trading desk. This initial response is
dependent upon having available current information on the parties and country
involved in the proposed transaction. If this current information is not
available, the Company may not be able to make an immediate response to an
inquiry. If the Company does make an initial response, the response will express
its indication of interest and set out the basic terms and conditions of the
transaction. This indication will always be made subject top final credit
approval and acceptable documentation. A firm commitment requires credit
committee approval and may take up to 24 hours or longer, depending on the
availability of pertinent information and authorized personnel.
Credit limits are established for certain countries and for banks
within those countries to provide the trading desk with guidelines for
transactions up to a certain size. Credit limits for countries are set forth
below. Bank credit limits are set at the lesser of $3,000,000 or the unused
country limit. Limits for certain countries as established by the Company are as
follows:
(Region) / Country Credit Limit
------------------ ------------
Latin America:
--------------
Argentina $ 10 million
Brazil $ 10 million
Chile $ 10 million
Colombia $ 5 million
Ecuador Suspended
Mexico $ 12.5 million
Peru $ 2 million
Uruguay $ 2 million
Venezuela $ 2 million
Europe:
-------
Croatia Suspended
Cyprus $ 5 million
Czech Republic $ 5 million
Estonia $ 2 million
Hungary $ 10 million
Ireland $ 10 million
Latvia $ 5 million
Lithuania $ 5 million
Poland $ 10 million
Romania Suspended
Russia Suspended
Slovakia $ 2 million
Slovenia $ 2 million
Turkey $ 12.5 million
Ukraine Suspended
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<PAGE>
Asia:
-----
Bangladesh $ 1 million
China $ 10 million
India $ 10 million
Indonesia $ 12.5 million
Malaysia $ 5 million
Pakistan $ 1 million
Philippines $ 5 million
Thailand $ 10 million
Vietnam Suspended
Africa:
-------
Botswana $ 5 million
Egypt $ 10 million
Ghana $ 2 million
Kenya $ 2 million
Mauritius $ 2 million
Morocco $ 5 million
South Africa $ 5 million
Tanzania $ 2 million
Tunisia $ 5 million
Zimbabwe $ 1 million
Middle East:
------------
Bahrain $ 10 million
Iran Suspended
Israel $ 5 million
Jordan $ 5 million
Kuwait $ 10 million
Lebanon $ 2 million
Oman $ 5 million
Qatar $ 5 million
Saudi Arabia $ 10 million
UAE $ 10 million
The research facility has access to up-to-date information regarding
current situation in all relevant countries, those countries in which the
Company has an interest in doing business, and maintains a database on banks
within those countries. This information is augmented by the appointment of
selected advisors covering countries of particular interest and by regular
appraisal visits. Presently, the Company has particular interest in Indonesia,
Turkey and Thailand. Those relevant countries in which the Company has an
interest and has access to up-to-date information are as follows:
Eastern Europe Asia Africa
-------------- ---- ------
Croatia Bangladesh Botswana
Czech Republic China Ghana
Estonia Hong Kong Kenya
Hungary India Mauritius
Kazakhstan Indonesia Morocco
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<PAGE>
Macedonia Malaysia Namibia
Poland Myanmar South Africa
Romania Pakistan Tanzania
Russia Philippines Uganda
Slovak Republic Singapore Congo
Ukraine South Korea Zambia
Taiwan Zimbabwe
Thailand
Vietnam
Middle East Americas Europe
----------- -------- ------
Algeria Argentina Austria
Bahrain Bolivia Cyprus
Egypt Brazil Denmark
Iran Canada Finland
Israel Chile France
Jordan Colombia Germany
Kuwait Costa Rica Greece
Lebanon Dominican Republic Iceland
Libya Ecuador Italy
Oman Mexico Malta
Qatar Paraguay Norway
Saudi Arabia Peru Portugal
Tunisia Uruguay Spain
Turkey United States Sweden
U.A.E. Venezuela Switzerland
United Kingdom
The Company's credit approval procedures have been established to
enable it to ensure, to the extent possible, that the assets which it purchases
may be held profitably in its portfolio. In assessing any country or bank risk
or any structured trade financing, the Company adopts a policy of active credit
management. The intent of this policy is for the Company to purchase and hold
only those transactions that are deemed to be creditworthy and for which there
is a potential market for a future profitable sale. The Company's goal is to
identify and purchase ahead of the market, those assets that are improving and
to sell early, those assets which are considered likely to deteriorate in value.
For a country where there is significant potential exposure or where significant
changes are taking place, the Company may arrange a visit to that country. The
visit will include meeting with local bankers, economists, government officials
in the finance, planning and economics ministries, journalists, diplomats and
industrialists. Information obtained is augmented with telephone calls to
personnel in the World Bank, IMF and other international development
institutions.
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<PAGE>
Once the creditworthiness of a transaction is investigated, the trading
team approves the transaction and then the head of trading must approve the
transaction based on salability. This procedure is designed to guard against an
illiquid portfolio. The Company also maintains a regular, at least annual,
review of the creditworthiness of all of its counterparties. Also, the Company
makes a daily review of its portfolio and credit limits, and monitors the
outlook for interest rates in the major international currencies.
The Company has established the policy that all country credit limits
are subject to Board approval. Country and bank limits will be reviewed and may
be revised on a daily basis. This review process may be initiated by either a
trader or the credit research department. The process will involve a discussion
between the head of credit and the head of trading on the matters which have
lead to the limit being reviewed. The discussion will also review current market
conditions and liquidity within the secondary market. A written report will
outline the reasons for the review of a limit or implementation of a new limit.
When approved, copies of the report will be sent to all traders and to the
relevant country or bank file.
* Structured Trade Finance. The credit research department analyzes each
transaction and the individual risk components are assessed. Research of the
prospective transaction, a designated signature from the trading team and credit
approval must be completed before a commitment is made to the client.
* Portfolio Management. The research department maintains a continuous review of
all risks pertaining to the portfolio as well as an active review of emerging
markets generally. They seek to identify as early as possible both improving and
deteriorating risks and advise the trading team accordingly. Country and bank
credit limits for the trading team are adjusted on a day-to-day basis and
authorized in writing by the head of research and a designated signatory. All
new inquiries are evaluated against existing portfolio assets as to
profitability. The interest rate risk arising from the fixed interest nature of
the portfolio assets are minimized both by constant turnover and, where deemed
prudent, by entering into interest rate swaps or forward rate agreements for the
relevant currencies. The heads of trading and research make decisions on
interest rate swaps and forward rate agreements on a day-to-day basis and,
currencies are considered in light of interest rate trends. Management believes
that it is not cost effective to hedge the portfolio. All currency exposure on
the portfolio is matched daily either through borrowings or through currency
swaps. The Board reviews the outstanding commitments to purchase new deals, on a
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<PAGE>
daily basis to ensure that adequate room exists in the portfolio to fulfill
these obligations. This may require existing assets to be sold. The Board also
needs to ensure that adequate liquid resources exist to finance the purchase of
new deals in all market circumstances.
* Treasury. The trading team is informed daily of upcoming asset purchases and
sales in order to plan the necessary financing and foreign exchange cover. The
treasury back-up team checks all treasury transactions initiated by the
treasurer. Confirmations of individual treasury transactions are sent to
counterparties daily. All payment and receipt instructions are confirmed by a
secure coded telex and independently checked by a signatory outside the treasury
requirements. The accounts department provides daily treasury position sheets.
The treasury back up team reconciles the bank accounts on a weekly basis which
requires a designated signatory.
Finance
The basis of the production of all day-to-day management accounting
information relating to the trading activities is the "Rohirst" (trade name)
software program. This program has been developed to not only undertake the
onerous calculations needed to price the purchase and sale of deep discounted
assets, but also to provide daily summaries of the following:
* Detailed listing of deals by obligator including exposure
reports.
* Interest accruals on both assets and borrowings.
* Control account summaries.
Maturity Reports Covering Both Assets and Borrowings
The Company' secretary/treasurer is responsible for preparing budgets
and profit forecasts in conjunction with the Board. All portfolio risk exposure
and treasury positions are prepared daily and profit and loss accounts,
including updates of market values, are produced monthly.
Financial Information About Geographic Areas
The Company's operations are conducted within one business segment, the
financing of international trade credit for financial institutions and operating
companies. All of the Company's total business operations are conducted outside
of the United States.
The Company's operation are conducted in the United Kingdom. Trading is
conducted through financial institutions in other countries.
-24-
<PAGE>
The composition of the notes by country of the issuing financial
institution is as follows:
Year Ended From inception
June 30, February 25 to
Country 1999 1998 June 30 1997
- ------- ---- ---- --------------
Turkey 2.2% 5.7% 80.3%
Russia 8.8 8.6 -
Ukraine 4.5 5.0 -
Czech Republic 2.9 11.6 -
Indonesia 4.2 57.8 -
Nigeria 2.5 11.3 -
Thailand - - 12.5
Germany 4.5 - -
Japan - - 7.2
------ ------ ------
Total 100.0% 100.0% 100.0%
The country portfolios set forth above at June 30, 1997, represents the
Company's first fiscal year which consisted of only four months and comparative
lower activity. The portfolios at June 30, 1998 represent assets that were
purchased either for immediate sale or to be held to maturity, or represented
distressed assets which the Company was unable to trade in the prevailing market
conditions. These changes illustrate expected fluctuations in portfolio size and
country risk profile in reaction to prevailing market conditions. The portfolios
at June 30, 1999, were invested primarily in trading assets in Indonesia
(34.2%), Turkey (22.2%) and Nigeria (2.2%) A total of 4.5% of the assets were
held to maturity and the balance remain impaired and have been substantially
provided for. During fiscal 1999, the Company collected approximately 7% of the
1998 provisions.
ITEM 2. Financial Information
Selected Financial Data
The selected financial data set forth below have been derived from the
Company's financial statements. This data should be read in conjunction with the
Company's consolidated financial statements and notes thereto, with Management's
Discussion and Analysis of Financial Condition, and with the other financial
information of the Company included elsewhere herein.
The selected statements of operations data and balance sheet data for
the years ended June 30, 1999, 1998 and 1997 are for Euro Trade Limited (the
Successor Entity). The data set forth for the period ended November 20, 1998 and
the years ended June 30, 1998, 1997, 1996 and 1995 are for Rotunda Oil and
Mining, Inc. (the Predecessor Entity). The results of operations are not
necessarily indicative of results to be expected for any future period.
-25-
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations - Successor Entity:
(Dollars in Thousands - except earnings per share)
Year Ended June 30, From Inception
---------------------------- February 27, 1997 to
1999 1998 June, 30, 1997
---------- ---------- ------------------
<S> <C> <C> <C>
Revenue $ 7,744 $ 5,216 $ 460
Operating Expenses 3,630 3,258 88
Loss Provisions -0- 6,950 68
Net Income (Loss) 4,114 (4,922) 304
Earnings Per Share 0.28 (0.42) 0.03
Balance Sheets - Successor Entity:
(Dollars in Thousands)
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1998
------------------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Current Assets $ 42,669 $ 34,040 $ 9,453
Total Assets 42,830 35,516 9,456
Current Liabilities 18,500 15,177 9,152
Long Term Debt 24 27 -0-
Common Stock 17 11 11
Paid in Capital 25,264 25,044 25,044
Retained Deficit (630) (4,744) 248
</TABLE>
Statements of Operations - Predecessor Entity:
(Dollars in Thousands)
<TABLE>
<CAPTION>
November 20, Year Ended June 30, 1998
----------------------------------------------------------
1998 1998 1997 1996 1995
---------- ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue $ -0- $ -0- $ -0- $ -0- $ -0-
Operating Expenses -0- 11 -0- -0- -0-
Net Income (Loss) -0- (11) -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations - Predecessor Entity:
(Dollars in Thousands)
From
July 1, 1998
Through
November 20, Year Ended June 30, 1998
------------ -----------------------------------------
1998 1998 1997 1996 1995
---------- ----------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Current Assets $ -0- $ 2 $ 2 $ -0- $ -0-
Total Assets 239 2 2 -0- -0-
Current Liabilities -0- 11 2 -0- -0-
Long Term Debt -0- 2 -0- -0- -0-
Common Stock -0- -0- -0- -0- -0-
Paid in Capital 56 56 750 56 56
Retained Deficit (56) (67) (56) (56) (56)
</TABLE>
Rotunda Oil & Mining, Inc. (the Predecessor Entity) was a development
stage company from its inception at November 19, 1980 until its acquisition of
Euro Trade Limited on November 20, 1998.
Euro Trade Limited was chartered in the United Kingdom on February 25,
1997 and operated as a United Kingdom limited company until it was acquired on
November 20, 1998. The Company and its subsidiary were recapitalized into a new
corporate structure on November 20, 1998. The transactions were accounted for as
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<PAGE>
a statutory merger. On the date of the acquisition, Rotunda Oil & Mining, Inc.
had substantially the same consolidated net worth as Euro Trade Limited prior to
the reorganization.
Subsequent to the acquisition, the Company raised funds through a
private placement offering pursuant to an exemption contained in regulation D,
Rule 504, promulgated under the Securities Act of 1933, as amended. The Company
sold 3,979,750 shares at a price of $.05 per share. The offering was closed on
December 2, 1998.
On December 14 1998, John Vowell, the Managing Director of the Company,
exercised options for 750,000 shares of the Company's common stock. Mr. Vowell
had receive the options at the inception of Euro Trade Limited.
Management's Discussion and Analysis of Financial condition and
Results of Operations
The following information should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10.
Rotunda Oil & Mining Company was a development stage company in 1996.
Euro Trade Limited began operations on February 25, 1997. Inclusion of financial
information prior to February 1997 is not believed to be material and is
therefore omitted.
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 fiscal years ended June 30, 1999, 1998 and 1997. It should
be noted that percentages discussed throughout this analysis are stated on an
approximate basis.
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30,
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Total revenue................................................. 100% 100% 100%
Costs of Revenues Interest.................................... 10 21 -
Provisions for Losses....................................... 0 133 15
Gross Profit (Loss)........................................... 90 (54) 85
Selling, General and
Administrative Expenses...................................... 37 42 19
Net Income (Loss)............................................. 53 (96) 66
</TABLE>
For the year ended June 30, 1999 compared to the year ended June 30, 1998.
Revenues for 1999 increased 48% to $7.7 million from $5.2 million in
1998, primarily due to the Company's increased activities in the market. Cost of
revenues for 1999 decreased to $.7 million from $8 million in 1998, which
primarily reflects the decrease of $7.0 million in loan loss reserves charged to
income in 1998. Depreciation expense was $20,000 in 1999.
Selling, administrative and general expenses for 1999 increased 50% to
$3.3 million from $2.2 million in 1998, also due to increased operating activity
in 1999. These expenses are primarily personnel and occupancy costs.
Interest expense decreased 36% to $.7 million in 1999 from $1.1 million
in 1998, reflecting the financing of a greater number of transactions and
collection on the first round of purchases.
Net income in 1999 totaled $4.1 million, or $.28 per share of common
stock. Net loss in 1998 totaled $5.0 million, or $.42 per share of common stock.
For the year ended June 30, 1998 compared to the year ended June 30, 1997.
The Company (Euro Trade Limited) began operations on February 25, 1997.
For the period ended June 30, 1997, the Company generated $0.5 million in
revenue from interest and fees. Revenues for 1998 increased to $5.2 million,
primarily due to implementation of the Company's fundamental operating plan.
Cost of revenue for 1998 increased to $8.0 million from $68,000 in 1997
on an annualized basis. The increases in cost of revenues reflect the increased
operating activity and $7.0 million in loan loss reserves charged to income.
Depreciation expense was $20,000 in 1998.
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<PAGE>
Selling, administrative and general expenses for 1998 increased to $2.2
million in 1998 from $88,000 in 1997 also due to the increased operating
activity in 1998. These expenses are primarily personnel and occupancy costs.
Interest expense increased to $1.1 million in 1998 from $0 in 1997
reflecting the implementation of management's operation plan and increased
operating activity.
No tax provision has been made for 1999, 1998 or 1997 respectively,
based on pre-tax operation losses. The Company pays taxes under both the United
Kingdom and United States tax laws.
Net loss in 1998 totaled $5.0 million or $.42 per share of common
stock. Net income in 1997 totaled $304 thousand or $.01 per share of common
stock.
Provision for Losses
The Company's Euro Trade Limited began operations on February 25, 1997.
At June 30, 1997, initial funding from shareholders of $25 million remained as a
receivable. Thus, business operations commenced with only a bridge loan of $8.1
million, as reflected by the investment portfolio on June 30, 1997. In
comparison, following the investment by the shareholders in fiscal 1998, the
Company's investment portfolio was $20.6 million on June 30, 1998.
Factors contributing to the Company's substantial increase in reserves
at June 30, 1998 include the world economic conditions, particularly the
uncertainty of the economic future of Russia and the Ukraine. At June 30, 1998,
the Company had $7.5 million invested in trade paper of Russia and the Ukraine.
In reliance upon an independent appraisal, a $6.5 million provision was made
against the Company's assets.
As economic conditions changed in the second half of 1998 and first
half of 1999, both the Russian and Ukraine debtor made payments totaling $.7
million. Although economic reform in Russia and the Ukraine continues, these
investments are provided for at 90% of face value.
At June 30, 1999, no additional reserve was necessary. Future reserves
will depend upon the economic conditions in the countries where the debt occurs
and current limits are provided at Item 1 internal control.
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<PAGE>
Liquidity and Capital Resources
Short term trading investments and related short-term borrowings are
reported as cash flow from operating activities. Working capital accounts (cash,
short-term investments, accounts payable and short term borrowings) increased by
$10.5 million in 1999 over 1998 due to the increase in short-term borrowing of
$8.6 million and the increase in forfaiting assets of $2.6 million. Cash flow
from financing activities decreased by $7.8 million in 1999 reflecting maturity
of investments and a greater reliance on internal financing of transactions.
Cash flow from investments decreased by $1.2 million in 1999 from 1998 due to
the acquisition of equity securities for the proposed debt for equities program.
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
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comply with environmental requirements. The Company is not subject to the Clean
Air Act or its amendment of 1990.
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 registration statement 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.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share" and
Statement of Financial Accounting Standards No. 129 "Disclosures of Information
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About an Entity's Capital Structure." SFAS No. 128 provides a different method
of calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128
provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure. SFAS No. 128 and
SFAS No. 129 are effective for financial statements issued for periods ending
after December 15, 1997. Their implementation is not expected to have a material
effect on the financial statements.
The FASB has also issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributors to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that displays with the same prominence as other financial
statements. SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 establishes standards on the
way that public companies report financial information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the public.
It also establishes standards for disclosure regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Management believes that the implementation of the
new standards will not have a material effect on the Company's financial
statements.
The FASB has also issued SFAS No 132. "Employers' Disclosures about
Pensions and other Postretirement Benefits," which standardizes the disclosure
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requirements for pensions and other Postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives as assets or liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management believes the adoption of this
statement will have no material impact on the Company's financial statements.
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 private sales
of equity and short-term bank loans. For the six months ended December 31, 1998
the Company raised $198,987.50 in cash from the sale of its stock through a
private placement offering pursuant to an exemption contained in regulation D,
Rule 504 promulgated under the Securities Act of 1933, as amended. The Company
collected $25 million in cash from the sale of stock in the prior year. For the
year ended June 30, 1998 and the period from inception (February 25, 1997) to
June 30, 1997 the Company secured Bank debt of $6.5 million and $6.3 million
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respectively. At December 31, 1998 the Company had outstanding warrants/options
for 1,750,000 shares of its stock that had been paid for in a previous period.
At December 31, 1998 the Company's principal source of liquidity was
$21.8 million in cash of which $4.2 million is held as compensating balances on
Bank debt of $10.8 million. At December 31, 1998 the Company had no material
long-term debt or long term commitments.
In the six months ended December 31, 1998 cash provide by operations
was $4.8 million due to net income for the period of $2.4 million and an
increase of other assets of $2.0 million. The Company had an accumulated deficit
at December 31, 1998 of $2.3 million. The Company did not provide for any
additional loan losses in the unaudited results for the six months ended
December 31, 1998. Management believes that reserves accrued in the prior
periods are adequate to provide for loan losses in the existing forfaiting asset
portfolio.
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 1998 year-end interest rates on the fair
value of its financial instruments is provided in the following table.
Dollars in Thousands
<TABLE>
<CAPTION>
Fair
Carrying Market Incremental (1)
Value Value Incr./(Decr.)
------------------ ---------------- -------------------------
<S> <C> <C> <C>
Financial assets:
Investment in Forfaiting Assets $14,644 $14,432 $(212)
Financial liabilities:
Fixed-rate and variable rate debt
( all due within one year) $12,832 $12,941 $ 109
(1) Reflects a 10 % increase in interest rate of financial assets
and a 10% decrease in interest rates of financial liabilities.
</TABLE>
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
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<PAGE>
the variable nature of underlying interest rates. Accordingly, these items have
been excluded from the above table.
At June 30, 1998, the Company's operating portfolio included forfaiting
assets totaling $14.6 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 1998 the Company realized gains of $780
thousand and unrealized losses of $7.0 million 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.
ITEM 3. Properties
The Company leases office facilities located at 4835 North O'Connor,
Suite 134-346, Irving, Texas 75062, which it shares with other businesses. The
facility represents the Company's principal offices in the United States.
The Company's principal operations are located in London where the
Company lease the entire third floor of 9 King Street, London EC2V 8EA, United
Kingdom. The facility consists of 2,900 square feet of office space and is
leased pursuant to a ten year lease that commenced in March 1997. The lease is
subject to a rent review after five years. Currently, annual payments on the
property including rent, property taxes and service charge amount to $173
thousand per year. The Company has office equipment with a net book value of $74
thousand. Management believes that its present office facilities are adequate
for the Company's current business operations.
ITEM 4. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information, to the best knowledge of the
Company as June 30, 1999, with respect to each person known by the Company to
own beneficially more than 5% of the Company's outstanding common stock, each
director and all directors and officers as a group, and is adjusted to reflect
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the one (1) share for one hundred (100) shares reverse stock split effected by
the Company on November 20, 1998.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
- ------------------- -------------------- -----------
<S> <C> <C>
John Vowell * 750,000 4.4%
9 King Street
London EC2V 8EA
United Kingdom
Mukesh Pancholi * 10,000 .1%
6 Kilcoral Close
Espon Surrey KT17 4HX
Unite Kingdom
Collinwood Investments Ltd. 4,400,000(2) 26.0%
East Hill Street
P.O. Box 3944
Bahamas
North Cascade Limited 6,600,000(3) 39.0%
Trident Chambers
P.O. Box 146
Road Town BVI
All directors and executive
officers as a group 760,000 4.5%
(3 persons in group)
</TABLE>
* Director and/or executive officer
Note: Unless otherwise indicated in the footnotes below, the
Company has been advised that each person above has sole
voting power over the shares indicated above.
(1) As of June 30, 1999, there were 16,945,224 shares of common stock
outstanding.
(2) The directors of Collingwood Investments Limited are Colin Pearse and
Richard Baker and the secretary and principal shareholder is Richard
Baker.
(3) The director of North Cascade Limited is Robert Griffin and the
Secretary and principal shareholder is Richard Tanner.
ITEM 5. Directors and Executive Officers
As of the date hereof, the executive officers and directors of the
Company are as follows:
Name Age Position
Charles Sekar .....................41 Chairman of the Board and
director
John Vowell........................35 President, C.E.O. and Managing
Director
Mukesh Pancholi....................41 Secretary/Treasurer and director
- ----------
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<PAGE>
All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. The Company has not
compensated its directors for service on the Board of Directors or any committee
thereof, but directors are reimbursed for expenses incurred for attendance at
meetings of the Board of Directors and any committee of the Board of Directors.
Executive officers are appointed annually by the Board of Directors and each
executive officer serves at the discretion of the Board of Directors. The
Executive Committee of the Board of Directors, to the extent permitted under
Utah law, exercises all of the power and authority of the Board of Directors in
the management of the business and affairs of the Company between meetings of
the Board of Directors.
The business experience of each of the persons listed above during the
past five years is as follows:
Chandra Sekar has been the Chairman of the Company's Board of Directors
since 1997. During this period and since 1992, Mr. Sekar has also served as
executive administrator of Polysindo UK Limited. Mr. Sekar holds a Bachelor of
Industrial & System Engineering and a Master of Industrial & System Engineering
from Bandung Institute of Technology. Prior to 1992, he was associated with PT.
Caltex Pacific Oil Company in Indonesia, a joint venture among oil companies.
John Vowell is the President and Managing Director of the Company
responsible for day-to-day trading and administration activities and for
monitoring the Company's overall trading and investment portfolio exposures. He
also assists the forfaiting trading desk and in planning marketing strategy to
corporations and banks for both forfaiting and structured trade and commodity
finance transactions. Prior to joining Euro Trade Limited in 1997, Mr. Vowell
was a Senior Manager at Standard Bank London Limited from 1994 to 1997. He was
on of three founder members of the banks forfaiting team in London and developed
an active primary and secondary trading book. He was responsible for the
development and planning of the structured trade and commodity finance
department. From 1988 to 1994, Mr. Vowell was Assistant Manager of Trade Finance
for Sumitomo Bank Ltd. Mr. Vowell attended the St. Phillip Howard Secondary
School in Poplar, London from 1975 to 1980, but he does not hold any college
degrees.
Mukesh Pancholi joined Euro Trade Limited in 1997 and is the Company's
Secretary responsible for processing various forms of Trade Finance transactions
and other document controls. He is a member of the Credit Committee and
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<PAGE>
participates in all credit meetings with respect to approval of deals. Mr.
Pancholi is involved with marketing and developing customer relationships and
maintaining and developing existing and new banking relationships. He holds a
graduate diploma in Mathematics from DeMontfort University. Prior to joining the
Company, he was employed at Longulf Trading (UK) Limited from 1994 to 1997. His
responsibilities included processing various forms of trade finance transactions
and acting in a support role to the commodity trading desk. From 1988 to 1994 he
was an account officer at BCCI International, Swiss Cottage Branch.
ITEM 6. Executive Compensation
The Company does not have a bonus, profit sharing, or deferred
compensation plan for the benefit of its employees, officers or directors, nor
has the Company entered into employment contracts with any of the aforementioned
persons.
Cash Compensation
The following table sets forth all cash compensation paid by the
Company for services rendered to the Company for the fiscal years ended June 30,
1998 and 1997, to the Company's Chief Executive Officer.
Summary Compensation Table
Other All
Annual Other
Name and Compen- Compen-
Principal Position Year Salary Bonus sation sation
- ------------------ ---- ------ ----- ------ ------
John Vowell 1999 $206,260 $285,410 $-0- $16,855
C.E.O. 1998 228,000 $220,000 -0- 20,000
1997 -0- -0- -0- -0-
ITEM 7. Certain Relationships and Related Transactions
During the past two fiscal years, except as set forth below there have
been no transactions between the Company and any officer, director, nominee for
election as director, or any shareholder owning greater than five percent (5%)
of the Company's outstanding shares, nor any member of the above referenced
individuals' immediate family.
On December 14 1998 in connection with the acquisition of Euro Trade, John
Vowell, the Managing Director, of the Company, exercised options for 750,000
shares of the Company's common stock. The options were issued to Mr. Vowell at
the inception of Euro Trade Limited. Under United Kingdom regulations, the stock
had been paid for at the inception of Euro Trade Limited. Therefore, the
transaction did not result in any dilution.
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<PAGE>
ITEM 8. Legal Proceedings
There are presently no 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 9. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters
No shares of the Company's common stock have previously been registered
with the Securities and Exchange Commission (the "Commission") or any state
securities agency or authority. The Company has made an application to Nasdaq
for the Company's shares to be quoted on The Nasdaq Stock Market. The Company's
application to Nasdaq consists of current corporate information, financial
statements and other documents as required by the Securities Exchange Act of
1934, as amended, including this Registration Statement. Inclusion on The Nasdaq
Stock Market permits price quotations for the Company's shares to be published
by such service.
The Company's common stock is currently quoted on the OTC Bulletin Board
("OTCBB") under the symbol "ETFC". For an extended period of time prior to
December 1998, there was not an established trading market for its common stock
nor was there a record of any significant trading in the public market.
As of June 30, 1999 there were approximately 410 holders of record of the
Company's common stock, which figure does not take into account those
shareholders whose certificates are held in the name of broker-dealers or other
nominees.
The Company's common stock has been trading on the OTCBB since
approximately December 3, 1998. The following table sets forth the range of high
and low bid prices of the common stock for each calendar quarterly period since
the fourth quarter of 1998 as reported by the National Quotation Bureau, Inc.
("NQB"). Prices reported by the NQB represent prices between dealers, do not
include retail markups, markdowns or commissions and do not represent actual
transactions.
High Low
---- ---
1998
Fourth Quarter $ 18.00 $ 1.00
1999
First Quarter $ 35.00 $ 5.25
Second Quarter $ 18.00 $ 3.00
Third Quarter $ 7.00 $ 3.37
__________ Fourth Quarter* $ 6.06 $ 4.56
o Through November 10, 1999.
Dividend Policy
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<PAGE>
The Company has not declared or paid cash dividends or made
distributions in the past, and the Company does not anticipate that it will pay
cash dividends or make distributions in the foreseeable future. The Company
currently intends to retain and invest future earnings to finance its
operations.
ITEM 10. Recent Sales of Unregistered Securities
Securities sold by the Company within the past three years that were not
registered under the Securities Act include issuances of new issue common stock.
Subsequent to the acquisition of Euro Trade Limited, the Company raised funds
through a private placement offering pursuant to an exemption contained in
Regulation D, Rule 504, promulgated under the Securities Act of 1933, as
amended. The Company sold 3,979,750.00 shares at a price of $.05 per share
raising a total of $198,987.50 out of an aggregate offering price of
$287,500.00. The offering was self-issued by the Company and was closed on
December 2, 1998. None of the securities issued were in exchange for property,
services, or other securities, and the new securities were the result from the
modification of outstanding securities. There were no underwriting discounts or
commissions.
Pursuant to the Agreement dated November 20, 1998, the Company issued
11,000,000 shares of its authorized but previously unissued common stock. In
consideration for the shares issued, the Company received all (100%) of the
issued and outstanding common stock and preferred stock of Euro Trade Limited,
which securities the Company continues to hold. On December 14, 1998 in
connection with the Agreement, John Vowell, the Managing Director of the
Company, exercised options which he had received at the inception of Euro Trade
Limited, for 750,000 shares of the Company's common stock.
The common stock issued pursuant to the acquisition of Euro Trade Limited,
and the common stock issued to Mr. Vowell upon exercise of options, were not
registered with the Commission in reliance upon the exemption from the
registration requirements of the Act provided by Section 4(2) of the Act and are
deemed "restricted securities."
The following table sets forth information concerning the Company's use
of proceeds following the sale of shares pursuant to Regulation D.
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<PAGE>
Aggregate Offering Price of Securities
Private Placement Offered pursuant to
Rule 504................................................ $287,500
Convertible Securities................................... $1,750
Total.................................................... $289,250
Expenses:
Transfer Agent Fees...................................... $1,500
Printing & Engraving..................................... $1,500
Legal Fees............................................... $2,000
Total.................................................... $5,000
Adjusted Gross Proceeds to Euro Trade.................... $284,250
Use of Adjusted Gross Proceeds:
Acquisition expense Rotunda Oil & Mining................. $142,250
Working Capital.......................................... $85,000
Provisions for foreign currency
transactions............................................ $57,000
Total.................................................... $284,250
- -----------
Item 11. Description of Registrant's Securities to be Registered
Common Stock
The Company is authorized to issue 50,000,000 shares of Common Stock,
par value $.001 per share, of which 16,945,224 shares are issued and outstanding
as of the date hereof. On November 20, 1998, the Company effected the one (1)
share for one hundred (100) shares reverse stock split of its common Stock. All
references to the Company's common stock herein are in post-split shares. All
shares of Common Stock have equal rights and privileges with respect to voting,
liquidation and dividend rights. Each share of Common Stock entitles the holder
thereof to (i) one non-cumulative vote for each share held of record on all
matters submitted to a vote of the stockholders; (ii) to participate equally and
to receive any and all such dividends as may be declared by the Board of
Directors out of funds legally available therefor; and (iii) to participate pro
rata in any distribution of assets available for distribution upon liquidation
of the Company. Stockholders of the Company have no preemptive rights to acquire
additional shares of Common Stock or any other securities. The Common Stock is
not subject to redemption and carries no subscription or conversion rights. All
outstanding shares of Common Stock are fully paid and non-assessable.
Item 12. Indemnification of Directors and Officers.
As permitted by the provisions of the Utah Revised Business Corporation
Act (the "Utah Act"), the Company has the power to indemnify an individual made
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<PAGE>
a party to a proceeding because they are or were a director, against liability
incurred in the proceeding, if such individual acted in good faith and in a
manner reasonably believed to be in, or not opposed to, the best interest of the
Company and, in a criminal proceeding, they had no reasonable cause to believe
their conduct was unlawful. Indemnification under this provision is limited to
reasonable expenses incurred in connection with the proceeding. The Company must
indemnify a director or officer who is successful, on the merits of otherwise,
in the defense of any proceeding or in defense of any claim, issue, or matter in
the proceeding, to which they are a party to because they are or were a director
of officer of the Company, against reasonable expenses incurred by them in
connection with the proceeding or claim with respect to which they have been
successful. Pursuant to the Utah Act, the Company's Board of Directors may
indemnify its officers, directors, agents, or employees against any loss or
damage sustained when acting in good faith in the performance of their corporate
duties.
The Company may pay for or reimburse reasonable expenses incurred by a
director, officer employee, fiduciary or agent of the Company who is a party to
a proceeding in advance of final disposition of the proceeding provided the
individual furnishes the Company with a written affirmation that their conduct
was in good faith and in a manner reasonably believed to be in, or not opposed
to, the best interest of the Company, and undertake to repay the advance if it
is ultimately determined that they did not meet such standard of conduct.
Also pursuant to the Utah Act, a corporation may set forth in its
articles of incorporation, by-laws or by resolution, a provision eliminating or
limiting in certain circumstances, liability of a director to the corporation or
its shareholders for monetary damages for any action taken or any failure to
take action as a director. This provision does not eliminate or limit the
liability of a director (i) for the amount of a financial benefit received by a
director to which they are not entitled; (ii) an intentional infliction of harm
on the corporation or its shareholders; (iii) for liability for a violation of
Section 16-10a-842 of the Utah Act (relating to the distributions made in
violation of the Utah Act); and (iv) an intentional violation of criminal law.
To date, the Company has not adopted such a provision in its Articles of
Incorporation, By-Laws, or by resolution. A corporation may not eliminate or
limit the liability of a director for any act or omission occurring prior to the
date when such provision becomes effective. The Utah Act also permits a
corporation to purchase and maintain liability insurance on behalf of its
directors, officers, employees, fiduciaries or agents.
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<PAGE>
Item 13. Financial Statements and Supplementary Data
The Company's consolidated financial statements as of and for the six month
period ended December 31, 1998 and the fiscal years ended June 30, 1998 and
1997, have all been examined to the extent indicated in their report by Marc
Lumer & Company, independent certified public accountants, and have been
prepared in accordance with generally accepted accounting principles and
pursuant to Regulation S-X as promulgated by the Securities and Exchange
Commission. The aforementioned financial statements are included herein in
response to Item 13 of this Form 10.
ITEM 14. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Subsequent to the acquisition of Euro Trade Limited, the Company's Board of
Directors made the decision to change independent accountants. Previously the
Company used as its independent accountants the firm of Jones, Jensen & Company
("JJ&C"). This relationship terminated on March 1, 1999. JJ&C issued its
auditor's report for the Company's predecessor, Rotunda Oil and Mining, Inc., on
February 5, 1999 for the years ended June 30, 1998 and 1997. The Company engaged
as its new auditors Marc Lumer & Company. Euro Trade Limited is audited in the
United Kingdom by Andrew Murray and Company, Chartered Accounts. Marc Lumer &
Company has audited Euro Trade Limited since its inception for its financial
statements that are presented in conformity with United States generally
accepted accounting principles ("GAAP").
During the prior two fiscal years and through the date of JJ&C's auditor's
report on February 5, 1999 there were no disagreements between the Company,
formerly known as Rotunda Oil and Mining, Inc., and its former auditors JJ&C.
JJ&C did not issue any adverse opinion, disclaimer of opinion, modification or
qualification in any financial report prepared for the Company for the years
ended June 30, 1998 and 1997, except for a modification for a going concern
uncertainty in February 5, 1999 report for the Company's predecessor, Rotunda
Oil and Mining, Inc.
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<PAGE>
ITEM 15. Financial Statements and Exhibits
(a) The following financial statements have been included under
Item 13 hereof:
(i) Consolidated Financial Statements for fiscal years
ended June 30, 1999, 1998 and 1997 (from inception
February 23, 1997).
(b) EXHIBITS
The following exhibits are filed with this Registration Statement:
Exhibit No. Exhibit Name
- ----------- ------------
2.1* Acquisition Agreement and Plan of Reorganization with
Euro Trade & Forfaiting Company Limited
3.1* Articles of Incorporation and Amendments thereto
3.2* By-Laws of Registrant
4.* See Exhibit No. 3.1, Articles of Incorporation,
Article VI
16. Letter from former accountant
27. Financial Data Schedule
- ----------------
* Previously filed
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<PAGE>
EURO TRADE & FORFAITING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM
FEBRUARY 25, 1997 (INCEPTION) ENDED
JUNE 30, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INDEPENDENT ACCOUNTANT'S REPORT ON
CONSOLIDATED FINANCIAL STATEMENTS..........................................................1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets for June 30, 1999, 1998 and 1997...............................2
Consolidated Statements of Operation for the Years
Ended June 30, 1999 and 1998 and for the period from
February 25, 1997 (Inception) ended June 30, 1997........................................3
Consolidated Statement of Stockholder Equity...............................................4
Consolidated Statement of Cash flows for the Years Ended June 30, 1999
and 1998 and for the period from
February 25, 1997 (Inception) ended June 30, 1997........................................5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS......................................................6
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Directors of
Euro Trade & Forfaiting, Inc.
I have audited the accompanying consolidated balance sheets of Euro Trade &
Forfaiting, Inc. ("The Company") as of June 30, 1999, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years then ended and the period from February 25, 1997
(Inception) ended June 30, 1997. These financial statements are the
responsibility of The Company's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Euro Trade &
Forfaiting, Inc. and subsidiary as of June 30, 1999 and 1998 and for the period
from February 25, 1997 (Inception) ended June 30, 1997 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting.
MARC LUMER & Company
San Francisco, California
September 13, 1999
<PAGE>
<TABLE>
EURO TRADE & FORFAITING, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---- ---- ----
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash $ 9,927 $ 13,325 $ 1,367
Cash - compensating balances 13,148 5,548 --
Interest receivable 1,337 523 86
Forfaiting assets (net of allowance) 17,157 14,644 8,000
Investments in marketable securities 1,100 0 --
Prepaid expenses and deposits 106 1,383 --
-------- -------- --------
TOTAL CURRENT ASSETS 42,775 35,423 9,453
PROPERTY AND EQUIPMENT - NET 55 93 3
TOTAL ASSETS $ 42,830 $ 35,516 $ 9,456
======== ======== ========
LIABILITY AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and bank overdrafts $ 10,598 $ 1,963 $ 2,880
Accrued expenses 425 693 22
Loans payable:
Bank 7,477 12,521 --
Related party -- -- 6,250
-------- -------- --------
TOTAL CURRENT LIABILITIES 18,500 15,177 9,152
-------- -------- --------
LOAN PAYABLE - NET OF CURRENT PORTION 24 27 --
-------- -------- --------
COMMITMENT -- -- --
-------- -------- --------
TOTAL LIABILITIES 18,524 15,204 9,152
-------- -------- --------
STOCKHOLDERS' EQUITY
Common Stock, Par value $0.001, authorized,
50,000 shares; issued and outstanding 16,945
11,750 and 11,750 shares 17 12 12
Additional paid-in capital 25,264 25,044 25,044
Retained earnings (deficit) (630) (4,744) 248
Receivable from stockholder (345) -- (25,000)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 24,306 20,312 304
-------- -------- --------
TOTAL LIABILITY AND STOCK-
HOLDERS' EQUITY $ 42,830 $ 35,516 $ 9,456
======== ======== ========
</TABLE>
See accompanying notes and Accountant's Report.
Page 2
<PAGE>
<TABLE>
EURO TRADE & FORFAITING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
(In Thousands)
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUE $ 7,744 $ 5,216 $ 460
COST OF REVENUES
Interest 733 1,088 0
Provisions for losses -- 6,950 68
-------- -------- --------
TOTAL COST OF REVENUE 733 8,038 68
-------- -------- --------
GROSS PROFIT (LOSS) 7,011 (2,822) 392
Selling, general and administrative 2,897 2,170 88
-------- -------- --------
NET INCOME (LOSS) $ 4,114 $ (4,992) $ 304
======== ======== ========
BASIC AND FULLY DILUTED
NET INCOME (LOSS) PER SHARE $ .28 $ (0.42) $ 0.03
======== ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARES EQUIVALENTS
OUTSTANDING 14,468 11,945 11,945
======== ======== ========
</TABLE>
See accompanying notes and Accountant's Report.
Page 3
<PAGE>
<TABLE>
EURO TRADE & FORFAITING, INC.
STATEMENT OF STOCKHOLDER EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND FOR
THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
(In Thousands)
<CAPTION>
Common Stock Paid-in Retained Receivable
Shares Amount Capital Earnings Stockholder Total
------ ------ ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 25, 1997- -- $ -- $ -- $ -- $ -- $ --
Retroactive adjustment for transaction Of November 23, 1998:
Sale of Stock 11,750 12 24,988 -- (25,000) --
-------- -------- -------- -------- -------- --------
RESTATED BALANCE, February 25, 1997 11,750 12 24,988 -- (25,000) --
Net Income -- -- -- 304 -- 304
-------- -------- -------- -------- -------- --------
BALANCE, June 30, 1997 11,750 12 24,988 304 (25,000) 304
Payment received on Stockholder receivable -- -- -- -- 25,000 25,000
Net Loss -- -- -- (4,992) -- (4,992)
-------- -------- -------- -------- -------- --------
BALANCE, June 30, 1998 11,750 12 24,988 (4,688) -- 20,312
Sale of shares for cash 4,000 4 196 -- (200) --
Exercise of option 1,000 1 24 -- (25) --
Stockholder advance -- -- -- -- (120) (120)
Rotunda stockholder's shares, adjusted for
reverse split November 20, 1998 195 -- 56 (56) -- --
Net income -- -- -- 4,114 -- 4,114
-------- -------- -------- -------- -------- --------
BALANCE,
June 30, 1999 16,945 $ 17 $ 25,264 $ (630) $ (345) $ 24,306
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes and Accountant's Report.
Page 4
<PAGE>
<TABLE>
EURO TRADE & FORFAITING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
(In Thousands)
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) from operations $ 4,114 $ (4,992) $ 304
Purchase of forfaiting assets (94,708) (216,984) (10,865)
Cost of forfaiting assets sold 92,194 203,391 2,797
Depreciation 38 42 --
Loan loss reserves -- 6,950 68
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
(Increase) decrease in:
Interest receivable (814) (437) (86)
Prepaid expenses and deposits 1,277 (1,383) --
Increase (decrease) in:
Accounts payable and overdrafts 8,634 (917) 2,880
Accrued expenses 43 671 22
--------- --------- ---------
NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVIES 10,778 (13,659) (4,880)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans from banks (repayment) 89,421 35,358 6,250
Repayment of loans (94,773) (29,087) --
(Increase) decrease in compensating balances (7,600) (5,548) --
Equipment financing (3) 27 --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (12,955) 750 6,250
--------- --------- ---------
CASH FLOWS FROM INVESTING
Sales of stock -- 25,000 --
Purchase of equipment (3) (133) (3)
Advance to shareholder (118) -- --
Purchase of marketable securities (1,100) -- --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,221) 24,867 (3)
--------- --------- ---------
INCREASE (DECREASE) IN CASH (3,398) 11,958 1,367
CASH AT BEGINNING OF PERIOD 13,325 1,367 --
--------- --------- ---------
CASH AT END OF PERIOD $ 9,927 $ 13,325 $ 1,367
========= ========= =========
</TABLE>
See accompanying notes and Accountant's Report.
Page 5
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
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 $7.9 million and 5.5 million was on deposit in financial
institutions as compensating balances for loans. 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.
Page 6
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
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 June 30, 1999, monetary assets and liabilities of The Company are denominated
in the following currencies:
<TABLE>
<CAPTION>
U.S. Pounds Deutsche
Total Dollars Sterling Marks
----- ------- -------- -----
<S> <C> <C> <C>
Cash and Equivalents 100% 87 - 13
Forfaiting Assets 100% 73 - 27
Current Liabilities 100% 63 1 37
</TABLE>
At June 30, 1998, monetary assets and liabilities of The Company are denominated
in the following currencies:
<TABLE>
<CAPTION>
Total Dollars Sterling Marks
----- ------- -------- -----
<S> <C> <C> <C> <C>
Cash and Equivalents 100% 96 1 3
Forfaiting Assets 100% 83 11 6
Current Liabilities 100% 80 13 7
</TABLE>
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.
Page 7
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
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.
Related Parties
- ---------------
The Company paid salaries and director fees of $510,268 and $531,747 to a
principal employee and director. The Company paid management fees of $280,673
and $251,190 in fiscal 1999 and 1998, respectively, to companies controlled by
the majority shareholder.
Stock Option Plans
- ------------------
In 1997 Euro Trade established a stock option plan for the Managing Director. In
accordance with British law, the shares are purchased and held in treasury until
the options are exercised.
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.
Page 8
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
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.
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.
Page 9
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
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.
Page 10
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
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. The merger between Rotunda and Euro Trade was a purchase transaction
accounted for as a reverse acquisition. As a result of the reverse acquisition
accounting, the consideration received by Euro Trade is reflected as outstanding
for all periods presented and that the post-split shares held by Rotunda
shareholders are reflected as the consideration paid in the merger on November
20, 1998. All assets are reflected at historical cost. For purposes of the
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cost $ 136 $ 136 $ 3
Less: Accumulated depreciation 81 43 -
-------- ------- ---------
$ 55 $ 93 $ 3
======= ====== =======
Depreciation expense $ 38 $ 43 $ -
======= ====== ========
</TABLE>
NOTE D INCOME TAX
The Company has cumulative losses at June 30, 1999 and 1998, that could result
in a net operating loss carryforwards 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.
Page 11
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
ENDED JUNE 30, 1997
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) $15,676 and $11,897 and
$8,000 at June 30, 1999, 1998 and 1997, 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):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Recorded investments in impaired financial instruments $ 8,221 $ 9,765
Less allowance for losses (6,740) (7,018)
--------- ---------
Market value of impaired financial instruments $ 1,481 $ 2,747
========= =========
The activity in the allowance for losses account is as follows (in thousands):
Beginning balance $ 7,018 $ 0
Additions charged to operations 0 7,018
Reductions - sale of asset 278 0
--------- -----------
Ending balance $ 6,740 $ 7,018
========= ===========
</TABLE>
Page 12
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
THROUGH JUNE 30, 1997
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:
June 30, June 30,
Country 1999 1998
------- ---- ----
Germany 4.5% 0.0%
Turkey 22.2 5.7
Russia 28.8 8.6
Ukraine 4.5 5.0
Czech Republic 2.9 11.6
Indonesia 34.6 57.8
Nigeria 2.5 11.3
Thailand --.-- --.--
Japan --.-- --.--
--------- ---------
Total 100% 100%
========= =========
NOTE F SHORT TERM BORROWING
Short-term borrowing consisted of the following (in thousands):
June 30, June 30,
1999 1998
---- ----
Loans payable to banks $ 7,477 $12,521
Bank over drafts 1,254 1,958
Interest paid on short term borrowings for the periods ended June 30, 1999 and
1998 was .7 million and $1.1 million respectively.
Weighted average interest rates on short term borrowing from banks was 6.2% and
6.6% for the years ended June 30, 1999 and 1998.
The Company had long term debt in conjunction with the purchase of office
equipment.
Page 13
<PAGE>
EURO TRADE & FORFAITING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
AND FOR THE PERIOD FROM FEBRUARY 25, 1997 (INCEPTION)
THROUGH JUNE 30, 1997
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 June 30, 1999 and 1998 were ($6,000) and $242,000, respectively.
NOTE H COMMITMENTS
At June 30, 1999 and 1998, The Company had a commitment to purchase $5.2 million
and $11.4 million in forfaiting assets, respectively. The Company was also a
guarantor to a transaction amounting to $.8 million at June 30, 1998. The fees
earned were recorded in the period that the guarantee and 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 June 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 uncertainities, there is not
assurance that the full value of the shares could be realized at June 30, 1999.
Page 14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
EURO TRADE AND FORFAITING, INC.
(Registrant)
Date: November 17, 1999 By: /S/ JOHN VOWELL
--------------------------------
John Vowell, President, Chief
Executive Officer and Director
S-1
[Logo] Jones,Jensen & Company. LLC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
November 12, 1999
Securities and Exchange Commission
450 Fifty Street, NW
Washington, DC 20549
Ladies and Gentlemen:
We were previously the independent accountants for Euro Trade & Forfaiting, Inc.
(formerly Rotunda Oil and Mining, Inc.) and on February 5, 1999 we reported on
the financial statements of Euro Trade& Forfaiting, Inc. (formerly Rotunda Oil
and Mining, Inc.)
We have read Euro Trade & Forfaiting, Inc.'s (formerly Rotunda Oil and Mining,
Inc.) statement included under item 14 of its amendment 2 to its Form 10
registration statement dated November 12 1999, and we agree such statements
except for the following:
1st paragraph of item 14, we have no knowledge as to Marc Lumer & Company or
Andrew Murray & Company, new independent accountants or to any other
representations about and for Marc Lumer & Company and Andrew Murray & Company.
Very truly yours,
/s/Jones, Jensen & Company
- --------------------------
Jones, Jensen & Company
Salt Lake City, UT
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE EURO TRADE & FORFAITING, INC.
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 9927
<SECURITIES> 1100
<RECEIVABLES> 1337
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42775
<PP&E> 136
<DEPRECIATION> 81
<TOTAL-ASSETS> 42830
<CURRENT-LIABILITIES> 18500
<BONDS> 24
0
0
<COMMON> 17
<OTHER-SE> 25264
<TOTAL-LIABILITY-AND-EQUITY> 42830
<SALES> 0
<TOTAL-REVENUES> 7744
<CGS> 733
<TOTAL-COSTS> 2897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 733
<INCOME-PRETAX> 4114
<INCOME-TAX> 0
<INCOME-CONTINUING> 4114
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4114
<EPS-BASIC> .28
<EPS-DILUTED> .28
</TABLE>