<PAGE>
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB/A NO. 1
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------
Amending Part I - Item 1. Financial Statements
Management's Discussion and Analysis or Plan of Operation
and Exhibit 27 - Financial Data Schedule
Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
-----------------------
DELAWARE 52-1807562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15245SHADY GROVE ROAD, SUITE 340, ROCKVILLE, MARYLAND 20850 (Address
of principal executive offices) (Zip Code)
(301) 527-1110
(Registrant's telephone number, including area code)
CZECH INDUSTRIES, INC.
(Former name, if changed since last report)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Transitional Small Business Disclosure Format: Yes [ ] No [x]
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on February 1, 1997, was 2,826,000.
===============================================================================
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Historical Financial Statements
Consolidated Statements of Financial Condition ................. 2
Consolidated Statements of Operations
Quarter Ended December 31, 1996 ............................. 3
Nine Months Ended December 31, 1996 ......................... 3
Consolidated Statements of Cash Flows .......................... 4
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 13
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 19
Item 5. Other Information.............................................. 19
Item 6. Exhibits and Reports on Form 8-K .............................. 21
Signature ............................................................. 22
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1995 1996
---------------- ----------------
(AS RESTATED)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,316,991 $ 5,011,917
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations - 67,230
Securities purchased under agreements to resell - 2,126,603
Receivables
Customers 325,942 6,076,554
Broker dealers and other - 399,897
Affiliated companies - 43,486
Other 1,225,500 972,134
Securities owned, at value
Equities and other - 3,172,553
Buildings, furniture and equipment, at cost (net of
accumulated depreciation and amortization of
$604,374 and $682,224 respectively) 18,560,155 2,213,747
Deferred taxes 82,565 133,277
Investments held for resale 3,258,413 6,622,333
Investments in affiliated companies - 6,995,145
Goodwill - 2,128,641
Other assets 472,995 656,530
---------------- ----------------
Total Assets $ 26,242,561 $ 36,620,047
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ - $ 1,782,442
Affiliated companies - 1,017,951
Other - 287,312
Payables
Customers - 9,547,745
Broker dealers and other - 360,164
Accounts payable and accrued expenses 134,320 443,930
Other liabilities and deferred amounts 66,158 895,464
---------------- ----------------
200,478 14,335,008
Long-term borrowings 2,099,658 2,374,228
---------------- ----------------
Total liabilities 2,300,136 16,709,236
---------------- ----------------
Minority interest in consolidated subsidiaries 9,353,228 1,903,306
---------------- ----------------
Stockholders' equity
Common stock; $.05 par value; 10,000,000 shares
authorized; 1,781,000 and 2,871,000 shares issued and
outstanding at December 31, 1995 and 1996, respectively 89,050 143,550
Paid-in capital 13,693,733 19,089,233
Retained earnings (accumulated deficit) 248,324 (1,402,174)
Unrealized gain/loss on available for sale investments - 435,177
Cumulative translation adjustment 558,090 (258,281)
---------------- ----------------
Total stockholders' equity 14,589,197 18,007,505
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 26,242,561 $ 36,620,047
================ ================
</TABLE>
See notes to consolidated financial statements
- 2 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------------
1995 1996 1995 1996
---------------- ---------------- ---------------- ----------------
(AS RESTATED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Commissions $ - $ 226,950 $ - $ 226,950
Fees - 258,523 - 258,523
Interest and dividends - 220,045 - 340,082
Principal transactions, net - 1,131,539 637,417 1,131,539
Trading - 343,034 - 343,034
Investment - 788,505 637,417 788,505
Hotel room revenues 842,009 - 1,433,113 -
Hotel food and beverage revenues 526,873 - 660,616 -
Other 208,319 (68,400) 505,424 161,174
Equity in earnings of unconsolidated affiliates - (301,115) 87,072 (301,115)
---------------- ---------------- ---------------- ----------------
Total revenues 1,577,201 1,467,542 3,323,642 1,817,153
---------------- ---------------- ---------------- ----------------
Costs and expenses
Cost of sales 244,010 - 275,048 -
Compensation and benefits 318,895 245,407 801,092 477,107
Interest 315,565 87,157 302,773 220,582
Brokerage, clearing, exchange fees and other - 378,716 - 378,716
Occupancy - 110,535 - 203,535
Office supplies and expenses - 97,722 - 135,770
Communications - 63,988 - 63,988
Advertising - 58,149 - 58,149
Legal fees - 55,419 - 55,419
Consulting fees - 58,099 - 58,099
Travel - 55,940 - 115,377
Education - 16,556 - 16,556
Automotive - 26,753 - 26,753
General and administrative 174,135 83,949 865,545 104,363
Depreciation and amortization 166,276 292,051 317,847 296,538
Loss on foreign currency transactions - (49,850) 161,571 (11,406)
---------------- ---------------- ---------------- ----------------
Total costs and expenses 1,218,881 1,580,591 2,723,876 2,199,546
---------------- ---------------- ---------------- ----------------
Income (loss) from continuing operations
before provision for income taxes and
minority interest in earnings of subsidiaries 358,320 (113,049) 599,766 (382,393)
Provision for income taxes (82,000) (50,501) (99,438) (50,501)
Minority interest in earnings of subsidiaries (132,900) (36,878) (199,782) (36,878)
---------------- ---------------- ---------------- ----------------
Income (loss) from continuing operations 143,420 (200,428) 300,546 (469,772)
Loss from discontinued operations - - - 41,899
Loss on sale of discontinued operations - - - (1,323,083)
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 143,420 $ (200,428) $ 300,546 $ (1,750,956)
================ ================ ================ ================
Weighted average number of shares outstanding 1,781,000 (1) 2,871,000 1,781,000 (1) 2,871,000
================ ================ ================ ================
Income (loss) from continuing operations
per share $ 0.08 $ (0.07) $ 0.17 $ (0.16)
================ ================ ================ ================
Net income (loss) per share $ 0.08 $ (0.07) $ 0.17 $ (0.61)
================ ================ ================ ================
</TABLE>
Note: The results of operations and cash flows of Eastbrokers AG are for the
period from the date of acquisition (August 1, 1996) through September 30,
1996. (See note 1.)
(1) Adjusted for 1 for 5 reverse stock split in September 1996
See notes to consolidated financial statements.
- 3 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
------------------------------------
1995 1996
----------------- -----------------
(AS RESTATED) (AS RESTATED)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 300,546 $ (1,750,956)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 180,315 403,577
Gain on the sale of investments (706,869) -
Loss on sale of discontinued operations - 1,323,083
Depreciation and amortization 337,795 494,144
Deferred taxes 69,117 82,565
Equity in (earnings) loss of unconsolidated affiliates (87,072) 301,115
----------------- -----------------
93,832 853,528
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies - (34,801)
Securities purchased under agreements to resell - 4,331,950
Receivables
Customers 5,550 (2,199,261)
Brokers, dealers and others - 348,256
Affiliated companies - (3,388,705)
Other - 1,721,108
Securities owned, at value - (2,238,065)
Other assets (99,811) 352,868
Payables
Customers - 382,105
Brokers, dealers and others - (479,519)
Accounts payable and accrued expenses (159,504) (85,296)
----------------- -----------------
Net cash provided by (used in) operating activities (159,933) (435,832)
----------------- -----------------
Cash flows from investing activities
Net proceeds from (payments for)
Acquisition of net assets of Eastbrokers
Beteiligungs AG, net of cash acquired - (1,105,667)
Investments in affiliates (6,467,388) (2,577,530)
Proceeds from the disposition of affiliate 2,662,609 -
Investments held for resale 2,368,380 (134,829)
Purchases of furniture and equipment (302,908) (236,081)
----------------- -----------------
Net cash provided by (used in) investing activities (1,739,307) (4,054,107)
----------------- -----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from public offering 11,155,336 -
Capital contributions by minority interests 1,056,295 304,166
Common stock and warrants reacquired (450,000) -
Short-term financings - 1,013,156
Short-term borrowings from affiliated companies - 2,256,356
Other long-term debt (6,356,934) (224,844)
----------------- -----------------
Net cash provided by (used in) financing activities 5,404,697 3,348,834
----------------- -----------------
Foreign currency translation adjustment (1,538,732) 962,436
----------------- -----------------
Increase (decrease) in cash and cash equivalents 1,966,725 (178,669)
Cash and cash equivalents at beginning of period 350,266 5,190,586
----------------- -----------------
Cash and cash equivalents at end of period $ 2,316,991 $ 5,011,917
================= =================
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31,
------------------------------------
1995 1996
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
================= =================
Cash paid for interest $ 302,773 $ 235,076
================= =================
Non-cash transactions
Common shares of CEZ and Vodni Stavby, Praha
received in the disposition of the Hotel Fortuna $ - $ 7,957,012
================= =================
Common shares of CEZ and Vodni stavby, Praha transferred
in lieu of cash payment for debt and accrued interest $ - $ 1,550,508
================= =================
Eastbrokers International shares issued for Eastbrokers Beteiligungs AG acquisition $ - $ 5,400,000
================= =================
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated (the
"Company") for the quarter and nine months ended December 31, 1996 have
been prepared by the Company, are unaudited, and are subject to year-end
adjustments. These unaudited financial statements reflect all known
adjustments (which included only normal, recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods
presented in accordance with generally accepted accounting principles. The
results presented herein for the interim periods are not necessarily
indicative of the actual results to be expected for the fiscal year.
The notes accompanying the consolidated financial statements in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1995
and in the Company's Transitional Report on Form 10-KSB for the period
ended March 31, 1996, include accounting policies and additional
information pertinent to an understanding of these interim financial
statements.
For the quarter and nine months ended December 31, 1995, the accompanying
consolidated financial statements include the financial position, results
of operations and cash flows of the Company and its subsidiary, Hotel
Fortuna a.s., for the quarter and nine months ended December 31, 1995.
For the quarter and nine months ended December 31, 1996, the accompanying
consolidated financial statements include the financial position, results
of operations and cash flows of the Company for the quarter and nine months
ended December 31, 1996. The financial position of its subsidiary,
Eastbrokers Beteiligungs Aktiengesellschaft ("Eastbrokers AG") is as of
September 30, 1996. The results of operations and cash flows of Eastbrokers
AG are for the period from the date of acquisition (August 1, 1996) through
September 30, 1996. The results of operations and cash flows of its former
subsidiary, Hotel Fortuna a.s., are through the period prior to the
disposition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated (formerly Czech Industries, Inc.) and its U.S. and
international subsidiaries (collectively, "Eastbrokers" or the "Company").
The shareholders of the Company approved the name change on December 10,
1996 at its Annual Meeting of Shareholders.
These consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position and the results of the operations of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Management believes that the estimates
utilized in the preparation of the consolidated financial statements are
prudent and reasonable. Actual results could differ from these estimates.
The Company, through its subsidiaries, provides a wide range of financial
services primarily in the United States, Central Europe, and Eastern
Europe. Its businesses include securities underwriting, distribution and
trading; merger, acquisition, restructuring, and other corporate finance
advisory activities; asset management; merchant banking and other principal
investment activities; brokerage and research services; and securities
- 6 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
clearance services. These services are provided to a diversified group of
clients and customers, including corporations, governments, financial
institutions, and individuals. Substantially all of the Company's revenues
and expenses are generated through its European subsidiaries and
affiliates. Accordingly, no segment information has been provided.
CHANGE IN FISCAL YEAR-END
On February 10, 1996, the Board of Directors unanimously approved a change
in the Company's fiscal year-end from December 31 to March 31. This change
became effective for the fiscal period ended March 31, 1996. Accordingly,
this report includes the results for the fiscal year ended December 31,
1995, the transition period ended March 31, 1996 and the fiscal year ended
March 31, 1997.
The fiscal year-end of the Company's domestic subsidiary was also changed
to March 31.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European Subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede
the Company's closing date by three months.
FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities and the
Company's trading positions, as well as financial instruments with
off-balance sheet risk, are carried at market or fair values or are carried
at amounts which approximate fair value because of their short-term nature.
Estimates of fair value are made at a specific point in time, based on
relevant market information and information about the financial instrument,
specifically, the value of the underlying financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. The Company has no investments in derivatives.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried as their original
costs. The carrying value of such equity securities is adjusted when
changes in the underlying fair values are readily ascertainable, generally
as evidenced by listed market prices or transactions which directly affect
the value of such equity securities. Downward adjustments relating to such
equity securities are made in the event that the Company determines that
the eventual realizable value is less than the carrying value.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses on these securities are
determined on a specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities sold under agreements to resell are treated as financing
arrangements and are carried at contract amounts reflecting the amounts at
which the securities will be subsequently resold as specified in the
- 7 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COLLATERALIZED SECURITIES TRANSACTIONS (CONTINUED)
respective agreements. The Company takes possession of the underlying
securities purchased under agreements to resell and obtains additional
collateral when the market value falls below the contract value. The
maximum term of these agreements is generally less than ninety-one days.
OTHER RECEIVABLES
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities.
UNDERWRITINGS
Underwritings include gains, losses, and fees, net of syndicate expenses
arising from securities offerings in which the Company acts as an
underwriter or agent. Underwriting fees are recorded at the time the
underwriting is completed and the income is reasonably determinable.
FEES
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered
into by the Company.
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade-date
basis as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations having non-U.S. dollar functional
currencies are translated at year-end rates of exchange, and the income
statements are translated at weighted average rates of exchange for the
year. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation," gains or losses resulting
from translating foreign currency financial statements, net of hedge gains
or losses and their related tax effects, are reflected in cumulative
translation adjustments, a separate component of stockholders' equity.
Gains or losses resulting from foreign currency transactions are included
in net income.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. Common stock data for the fiscal year
ended December 31, 1995 and the transition period ended March 31, 1996 have
been retroactively adjusted throughout these consolidated financial
statements
- 8 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMMON STOCK DATA (CONTINUED)
to reflect a one-for-five reverse common stock split in September 1996. The
outstanding warrants and stock options are currently excluded from the
earnings per share calculation as their effect would be antidilutive.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all demand deposits held in banks and certain highly liquid
investments with maturities of 90 days or less other than those held for
sale in the ordinary course of business to be cash equivalents.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis
over periods from five to 25 years and are periodically evaluated for
impairment.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
3. ACQUISITION OF EASTBROKERS BETEILIGUNGS AKTIENGESELLSCHAFT
Eastbrokers Vienna is an Austrian based holding company that has
established a presence in 12 Central and Eastern European countries through
its network of subsidiaries and affiliate offices. On August, 1, 1996, the
Company acquired 80 percent of the outstanding stock of Eastbrokers
Beteiligungs Aktiengesellschaft ("Eastbrokers Vienna") through the issuance
of 1,080,000 shares of the Company's common stock valued at $5,400,000. At
the time of the acquisition, the Company's stock was trading at
approximately $7.50 per share. A discount to the per share price was
recognized in consideration of the size of the block of shares with respect
to the number of outstanding shares and because the stock issued was
restricted stock. As a participant in Eastbrokers Vienna's capital
increase, the Company later acquired an additional 245,320 of an available
270,000 shares for cash increasing its ownership percentage to 83.62
percent. In two separate transactions in November and December 1996, the
Company purchased 67,756 additional shares, increasing its ownership
percentage to approximately 92 percent.
The fair value of the net assets acquired under these transactions
approximated $8,300,000. The acquisition has been accounted for under the
purchase method of accounting. The excess of the purchase price over the
fair value of the net assets acquired resulted in the Company recording
approximately $1,900,000 in goodwill, which is being amortized over 25
years on a straight-line basis. The significant equity investment of the
Company, WMP, was written up to book value, which approximated estimated
market value at the date of acquisition. The amount of this net write-up
was approximately $607,000 USD. The purchase agreement contains certain
provisions whereby the selling shareholders may be eligible to receive an
additional 120,000 shares of the Company's common stock in the event
certain earnings targets are achieved.
4. INVESTMENTS IN AFFILIATED COMPANIES
INVESTMENT IN WMP BORSENMAKLER AKTIENGESELLSCHAFT
Through its subsidiary, Eastbrokers Vienna, the Company owns a 49 percent
interest in the outstanding
- 9 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
4. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
INVESTMENT IN WMP BORSENMAKLER AKTIENGESELLSCHAFT (CONTINUED)
capital stock of WMP Borsenmakler Aktiengesellschaft ("WMP"). WMP is a
stock broker-dealer and market maker in Vienna, Austria and is licensed as
a Class B bank under Austrian law. A Class B bank may, at its discretion,
conduct any of the normal activities associated with a bank with one major
exception: it cannot accept customer deposits.
The Company accounts for this investment using the equity method of
accounting. The carrying value of this investment was approximately
$6,408,000 on September 30, 1996. The summarized statement of financial
condition and statement of operations information for WMP for the nine
months ended September 30, 1996 was as follows:
1996
Summarized Statement of Financial Condition
Total assets $21,593,685
Total liabilities 6,851,440
------------
Stockholders' equity $14,742,245
-----------
Summarized Statement of Operations
Revenues $ 3,195,707
Expenses 2,924,760
-------------
Net income $ 270,947
-------------
This summarized financial information has been translated from the Austrian
Schilling into U.S dollars at the foreign currency exchange rates as of
September 30, 1996. Fluctuations in the foreign currency exchange rates may
affect the comparability of this information on a period to period basis.
Although the summarized financial information for WMP reflects earnings
year to date, WMP experienced losses from operations in the period from
August 1, 1996 through September 30, 1996. These losses from operations
totaled approximately $250,000 USD.
INVESTMENTS IN OTHER UNCONSOLIDATED AFFILIATES
The Company also has other investments in unconsolidated affiliates through
Eastbrokers Vienna. These affiliates are accounted for using the equity
method of accounting. These investments are predominantly start-up
operations. At September 30, 1996, these unconsolidated affiliate
investments included the following offices: Zagreb, Croatia; Ljubljana,
Slovenia; Almaty, Kazakstan; Moscow, Russia; Sofia, Bulgaria; Slovakia
Industries; and NIF TRUD Investment Fund. The combined carrying amount of
these investments was approximately $590,000. Losses from these operations
totaled approximately $50,000 USD in the period from August 1, 1996 through
September 30, 1996.
RECEIVABLES FROM AFFILIATED COMPANIES
Periodically, the Company provides operating advances to its unconsolidated
affiliates. These advances are generally due on demand and are not subject
to interest charges.
- 10 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
5. FINANCIAL INSTRUMENTS
Financial instruments owned consist of the Company's proprietary trading
and investment accounts, securities purchased under agreements to resell,
and investments held for resale. The Company's financial instruments, at
fair value, are as follows:
December 31,
1996
-------------
Securities purchased under agreements to resell
Sovereign government debt - Hungary $ 614,891
Corporate equities - Hungary 409,927
Corporate equities - Czech Republic 1,101,785
------------
$ 2,126,603
Securities owned at value
Corporate equities - Austria $ 590,561
Sovereign government debt - Hungary 15,753
Corporate equities - Slovak Republic 2,118,051
Corporate equities - Poland 448,184
------------
$ 3,172,549
------------
Available for sale securities
Corporate equities - Austria $ 604,594
Corporate equities - Czech Republic 138,105
------------
$ 742,699
------------
6. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of credit
with financial institutions, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
LINES OF CREDIT
These lines of credit carry interest rates between 7.00 percent and 12.00
percent as computed on an annual basis. There were no lines of credit
outstanding at December 31, 1995 or March 31, 1996.
ADVANCES FROM AFFILIATED COMPANIES
Periodically, the Company's subsidiaries and affiliates will provide
operating advances to other members in the affiliated group. These advances
are generally due on demand and are not subject to interest charges.
7. DISCONTINUED OPERATIONS
On October 1, 1996, the Company entered into an agreement with Y.S.E. a.s.
to dispose of the Company's controlling equity interest in the Hotel
Fortuna a.s. The Company had owned 251,000 shares of Common Stock of the
Hotel Fortuna a.s., which owns and operates a 242 room hotel, restaurant
and lounge located in Prague, Czech Republic. The disposition of the
Company's interest in the Hotel Fortuna a.s. is deemed to be a disposition
of a significant amount of the Company's assets.
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EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
7. DISCONTINUED OPERATIONS (CONTINUED)
In return for its equity interest in the Hotel Fortuna a.s., the Company
received 100,000 shares of Common Stock of Ceske energeticke zavody a.s.,
nominal value 1,100 CZK ("CEZ"), a Czech utility company, and 86,570 shares
of Common Stock of Vodni stavby Praha a.s., nominal value 1,000 CZK ("VS"),
a Czech construction company. Both CEZ and VS are actively traded on the
Prague Stock Exchange's ("PSE") Main Market. The VS shares were transferred
to the Company on or about October 15, 1996, and the CEZ shares were
transferred to the Company about November 5, 1996. Although the Company
received the shares at various dates, the title to these shares did not
transfer until the delivery of the Hotel Fortuna, a.s. shares. The Company
transferred its shares of the Hotel Fortuna a.s. to Y.S.E. a.s. on or about
November 6, 1996 which also represents the final closing of the sale.
The Company determined the cost basis of the Hotel Fortuna a.s. shares by
adding the Company's historical cost basis in the hotel with the Company's
proportionate share of the hotel's earnings it received through June 30,
1996. Based on this computation, the Company determined that the cost basis
of its interest in the hotel was approximately $9,400,000 USD. In
negotiating the sale of the Company's interest in Hotel Fortuna, a.s., the
Purchaser offered shares of CEZ and VS as considerations for the shares of
Hotel Fortuna, a.s. The Company negotiated the number of the CEZ and VS
shares it was to receive as consideration by utilizing the then current
market values of the shares as quoted on the PSE on October 1, 1996, the
date of the signing of the contract. On October 1, 1996, the PSE quoted
prices of CEZ and VS were 1,040 CZK (approximately $37.50 USD) and 1,900
CZK (approximately $69.50 USD) per share, respectively. Based on these
October 1, 1996 quoted prices, the value of the consideration to be
received was approximately $9,800,000 USD.
The Company valued the consideration received on the sale of its interest
in Hotel Fortuna, a.s. as of November 6, 1996, which is the date title to
these shares was transferred to the Company. This is consistent with the
provisions of current accounting literature which describes the conditions
required to be met for a sale to be considered consummated. As of November
6, 1996, the per share prices of the CEZ and VS were 950 CZK (approximately
$35.00 USD) and 1,300 CZK (approximately $51.00 USD), respectively, which
represented approximately $7,957,012 USD at the then current exchange
rates. The Company classified these shares as available for sale
securities.
On a date subsequent to obtaining the shares, the Company used 2,500 shares
of CEZ and 30,302 shares of VS to repay the balance of the principal and
interest due under a Note payable owed to Finn s.r.o. in the approximate
amount of $2.1 million USD. Also, the Company sold 13,900 shares of VS at
1,800 CZK (approximately $65.50 USD) per share for approximately $910,000
USD.
In accordance with current accounting standards, the Company has restated
the financial statements to reflect the sale of its ownership interest in
the Hotel Fortuna a.s. as discontinued operations. The minority interest in
consolidated subsidiaries has been has been significantly reduced due to
the elimination of the minority interest attributable to the Company's
investment in the Hotel Fortuna a.s.
8. SUBSEQUENT EVENTS
By mid January 1997, the per share value of Ceske energeticke zavody a.s.
("CEZ") had returned to its October 1996 levels. As a result, the Company
began selling off its interest in CEZ to reduce its overall market exposure
in this stock.
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PART I -- FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Form 10-QSB for the quarterly period ended December 31, 1996, makes
reference to the Company's Current Report on Form 8-K dated August 1, 1996
("Report"). The Report, which is incorporated by reference herein, includes
information necessary or useful to an understanding of the Company's businesses
and financial statement presentations. The Report more fully describes the terms
and conditions of the Agreement between the Company and Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers AG") a Vienna, Austria based investment banking
and stock brokerage firm. Such information relating to the Agreement between the
Company and Eastbrokers AG is not contained in this Form 10-QSB. The Report is
included as an exhibit in this Form 10-QSB and the Company will furnish a copy
of this Report upon request made directly to the Company's headquarters at 15245
Shady Grove Road, Suite 340, Rockville, Maryland 20850, telephone number (301)
527-1110 and facsimile number (301) 527-1112.
On August 1, 1996, the Company consummated its acquisition of Eastbrokers AG
reflecting its previously stated objective of seeking to invest into, merge with
or acquire one or more companies in growth oriented industries. Although the
Company's focus had been primarily in the Czech Republic, its original mission
was to pursue such investment opportunities throughout Eastern and Central
Europe. Eastbrokers AG is a holding company providing financial services in
Eastern and Central Europe through its network of subsidiaries. The acquisition
of Eastbrokers AG is intended to not only provide an earnings stream from its
core brokerage business, but also positions the Company to provide investment
banking and corporate finance services in an emerging market infrastructure and
growth industries.
During the quarter ended December 31, 1996, management continued its program of
augmenting mid-level personnel, leasing additional office space, and enhancing
the management information systems in several of our Eastern European offices.
Management also began preparations to offer certain services and products to
firms and individuals associated with the U.S. capital markets.
On November 6, 1996, the Company consummated the sale of its ownership interest
in the Hotel Fortuna a.s.. See Item 5 of this Form 10-QSB for information
regarding the disposition of the Hotel Fortuna a.s. stock. Upon review of the
market conditions facing the hotel industry in Prague, management determined
that it would be in the best interest of the Company to liquidate its investment
in the hotel. The Company intends to use the net proceeds generated from the
sale to expand operations.
In return for its equity interest in the Hotel Fortuna a.s., the Company
received 100,000 shares of Common Stock of Ceske energeticke zavody a.s.,
nominal value 1,100 CZK ("CEZ"), a Czech utility company, and 86,570 shares of
Common Stock of Vodni stavby Praha a.s., nominal value 1,000 CZK ("VS"), a Czech
construction company. Both CEZ and VS are actively traded on the Prague Stock
Exchange's ("PSE") Main Market. The VS shares were transferred to the Company on
or about October 15, 1996, and the CEZ shares were transferred to the Company
about November 5, 1996. Although the Company received the shares at various
dates, the title to these shares did not transfer until the delivery of the
Hotel Fortuna, a.s. shares. The Company transferred its shares of the Hotel
Fortuna a.s. to Y.S.E. a.s. on or about November 6, 1996 which also represents
the final closing of the sale.
At the time of this filing, the Company was in the process of selling its
interest in CEZ at the prevailing market prices to reduce its overall market
exposure in this stock and was continuing to hold its shares of VS. At December
31, 1996, VS had a market value of 1,400 CZK per share or approximately
$2,180,000 USD at the then current exchange rates. Management expects to hold
this particular investment until such time as the per share market value
approximates the negotiated price. However, there can be no assurance such a per
share market value will occur.
On a date subsequent to obtaining the shares, the Company used 2,500 shares of
CEZ and 30,302 shares of VS to repay the balance of the principal and interest
due under a Note payable owed to Finn s.r.o. in the approximate amount of $2.1
million USD. Also, the Company sold 13,900 shares of VS at 1,800 CZK
(approximately $65.50 USD) per share for approximately $910,000 USD.
Also on November 6, 1996, the European Association of Securities Dealers (EASD)
approved for membership
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into its organization WMP Borsenmakler AG ("WMP"), a partially owned subsidiary
of the Company. The EASD operates EASDAQ, which is a screen-based stock market
that uses a multiple market-making system similar to that used by NASDAQ in the
United States. WMP provides market making services in over 400 Austrian
securities trading on the Vienna Stock Exchange, underwriting services to
issuers seeking to raise capital on the Vienna Stock Exchange, and brokerage
services to institutional clients investing in the Eastern European stock
markets. WMP intends to expand its market making, underwriting and brokerage
services to countries and companies serviced by the EASD and through EASDAQ.
On December 10, 1996, the Company held the 1996 Annual Meeting of Stockholders.
At this meeting, the Board of Directors of the Company submitted to the
shareholders three proposed amendments to the Company's Certificate of
Incorporation. Only one of these proposals passed, and the Certificate of
Incorporation was amended accordingly. The other two proposals did not pass
because the number of shares voted did not meet the required minimums. See Item
4 of this Form 10-QSB for a brief description of each matter voted upon, and the
number of votes cast for, against, and withheld, the number of abstentions, and
broker non-votes. The Board of Directors also submitted such proposals to the
stockholders to elect two new directors, approve the 1996 stock option plan and
ratify the appointment of the Company's independent auditors for the current
fiscal year.
In January 1997, a date subsequent to this report, the Company entered into
negotiations to purchase a broker dealer license and acquire office space in New
York City as the location for a North American office. During the next few
months, the Company will be incurring additional costs associated with the set
up and opening of this new office. At present, management expects the new office
to reach the break-even point approximately 10 months after opening.
The information contained in this Item contains forward looking statements.
Readers are cautioned not to place undue reliance on this information which
speaks only as of the date hereof. The matters referred to in such statements
could be effected by the risks and uncertainties involved in the Company's
business, including (without limitation) the effect of political, economic and
market conditions both domestically and in Eastern and Central Europe. Further,
the Company undertakes no obligation to release publicly any revisions to these
forward looking statements to reflect events occurring after the date hereof or
to reflect unanticipated events or developments.
Results of Operations. See Note 1 of the Notes to Consolidated Financial
Statements For the Nine Months Ended December 31, 1996, for an explanation of
the basis of presentation of the financial statements. For the three month
period ended December 31, 1996, the Company generated consolidated revenues in
the amount of $1,467,542, compared to $1,577,201 for the three month period
ended December 31, 1995. This decrease is a combination of the effects of the
disposition of the Hotel Fortuna a.s. and the acquisition of Eastbrokers AG on
August 1, 1996. These consolidated financial statements contain the revenues and
expenses of Eastbrokers AG for the period August 1, 1996 (date of acquisition)
through September 30, 1996. The operating loss of Eastbrokers AG for the nine
months ended September 30, 1996 was approximately ($459,000). The operating loss
recognized in these financial statements is only for the period from the date of
acquisition (August 1, 1996) through September 30, 1996 and was approximately
($9,000). Quarterly information is not available for Eastbrokers AG for periods
prior to the acquisition as there is no statutory reporting requirements other
than year end. Assuming 1995 revenues and expenses accumulated pro rata through
out the year, 1995 revenues for the nine months ended September 30, 1995 were
approximately $4,700,000 versus approximately $4,500,000 for the nine months
ended September 30, 1996. No significant deviations are noted between the
corresponding periods. Expenses for the nine months ended September 30, 1995
were approximately $3,800,000 versus $4,600,000 for the nine months ended
September 30, 1996. During 1996, 2 major factors contributed to an increase in
expenses year to date. First, Eastbrokers AG incurred costs associated with the
acquisition by the Company. The total of these costs are approximately $220,000.
Second, several of our affiliate offices became operational towards the end of
1995 and 1996 is the first year reflecting the costs of these startup operations
with minimal revenues for the nine months ended September 30, 1996.
The change in revenues is also affected by the change in the Company's fiscal
year end. For the period ended December 31, 1995, the Company's consolidated
financial statements contained the hotel's revenues and expenses for the quarter
and six months ended December 31, 1995. For the period ended December 31, 1996,
the Company's consolidated financial statements contain the hotel's revenues and
expenses for the quarter through the date of sale of the Company's interest. The
revenues and expenses of the hotel for the quarter ended September 30, 1996 are
not reflected in the consolidated financial statements due to the sale of the
Company's
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interest in the Hotel Fortuna a.s. This factor alone would have contributed to a
significant decline in the revenues reported this period as compared to the same
period one year ago. The bulk of the overall revenue decline was compensated by
the acquisition of Eastbrokers AG.
The Company incurred total consolidated costs and expenses of $1,580,591 for the
three month period ended December 31, 1996, compared to $1,218,881 for the three
month period ended September 30, 1995. Most of the increase is attributable to
the first consolidation of Eastbrokers AG's revenues and expense. Also,
unexpected costs associated with the Eastbrokers AG acquisition are having a
negative effect on earnings. To date these costs consist of approximately
$64,000 in combined legal and accounting fees and approximately $156,000 in set
up and implementation costs for operating systems in each of the Company's 13
offices in Europe for an aggregate cost to date of approximately $220,000.
The Company incurred a consolidated net loss of $1,597,731 for the three month
period ended December 31, 1996, compared to a consolidated net income of
$143,420 for the three month period ended December 31, 1995. This dramatic shift
in earnings is attributable to lower than expected earnings from the hotel
through the sale date coupled with a loss on the sale of the hotel.
During the quarter, the Company, acquired an additional 74,900 shares of
Eastbrokers AG capital stock from outside shareholders in a transaction valued
at approximately $1.1 million USD. As a result of this share purchase, the
Company now owns approximately 92 percent of Eastbrokers AG.
Eastbrokers AG provided additional funds to increase its equity in the
Eastbrokers Warsaw unit and the Eastbrokers Budapest unit. The Eastbrokers
Warsaw and Budapest units are using the funds for working capital.
On December 31, 1996, the Company had total current assets of $25,149,237 and
total current liabilities of $14,335,008, compared to $7,126,846 and $200,478,
respectively, on December 31, 1995. As of the date of this filing, the Company
believes that it has adequate liquidity to meet its current obligations.
However, no assurances can be made as to the Company's ability to meet its cash
requirements subsequent to any further business combinations.
The statements of cash flows for 1996 primarily reflect the changes in the
operating, investing, and financing activities of Eastbrokers AG from the date
of acquisition (August 1, 1996) through September 30, 1996 due to the
classification of the Hotel Fortuna a.s. as discontinued operations. For 1995,
the statements of cash flows primarily reflect the changes in the operating,
investing, and financing activities of the Hotel Fortuna a.s. Due to the change
in the Company's principal operating activities from the hospitality industry to
the financial services industry, comparison between the two periods provides
minimal information. Further, comparative cash flow information is unavailable
for Eastbrokers AG for interim periods prior to the acquisition as there is no
statutory reporting requirement other than year end. The cash flows for 1996 do
reflect the volatile nature of the securities industry and the reallocation of
the Company's assets indicative of a growing organization. The change in the
foreign currency translation adjustment is primarily related to the sale of the
Hotel Fortuna a.s. and the fluctuations in the Company's functional currencies
to the U.S. dollar.
Volatile Nature of Securities Business. The securities business is, by its
nature, subject to various risks, particularly in volatile or illiquid markets,
including the risk of losses resulting from the underwriting or ownership of
securities, trading, arbitrage and merchant banking activities, counterparty
failure to meet commitments, customer fraud, employee fraud, misconduct and
errors, failures in connection with the processing of securities transactions
and litigation.
The Company's principal business activities, investment banking, securities
sales and trading and correspondent brokerage services are, by their nature,
highly competitive and subject to various risks, volatile trading markets and
fluctuations in the volume of market activity. Consequently, the Company's net
income and revenues have been, and may continue to be, subject to wide
fluctuations, reflecting the impact of many factors beyond the Company's
control, including securities market conditions, the level and volatility of
interest rates, competitive conditions and the size and timing of transactions.
The securities business and its profitability are affected by many factors of a
national and international nature, including economic and political conditions,
broad trends in business and finance, legislation and regulation affecting the
national and international business and financial communities, currency values,
inflation, market conditions, the availability of short-term or long-term
funding and capital, the credit capacity or perceived creditworthiness of the
security industry in the marketplace and the level and volatility of interest
rates.
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A securities firm's business and its profitability are also affected by the
firms credit capacity or perceived creditworthiness and competitive factors,
including its ability to attract and retain highly skilled employees. These and
other factors may contribute to reduced levels of new issue or merger,
acquisition, restructuring, and leveraged capital activities, including
leveraged buyouts and high-yield financing, or the level of participation in
financing and investment related to such activities, generally resulting in
lower revenues from investment and merchant banking fees and underwriting and
corporate development investments. Reduced volume of securities transactions and
reduced market liquidity generally result in lower revenues from dealer and
trading activities and commissions.
Lower price levels of securities may result in a reduced volume of transactions
and in losses from declines in the market value of securities held in trading,
investment and underwriting positions. Sudden sharp declines in market values of
securities and the failure of issuers and counterparties to perform their
obligations can result in illiquid markets. In such markets, the Company may not
be able to sell securities and may have difficulty in covering its securities
positions. Such markets, if prolonged, may also lower the Company's revenues
from investment banking, merchant banking and other investments, and could have
a material adverse effect on the Company's results of operations and financial
condition.
Significant Competition Within the Securities Industry. The Company encounters
significant competition in all aspects of the securities business and competes
worldwide directly with other domestic and foreign securities firms, a number of
which have greater capital, financial and other resources than the Company. In
addition to competition from firms currently in the securities business, there
has been increasing competition from other sources, such as commercial banks and
investment boutiques.
As a result of anticipated legislative and regulatory initiatives in the U.S. to
remove or relieve certain restrictions on commercial banks, it is possible that
competition in some markets currently dominated by investment banks may increase
in the near future.
Such competition could also affect the Company's ability to attract and retain
highly skilled individuals to conduct its various businesses. The principal
competitive factors influencing the Company's business are its professional
staff, the Company's reputation in the marketplace, its existing client
relationships, the ability to commit capital to client transactions and its mix
of market capabilities. The Company's ability to compete effectively in
securities brokerage and investment banking activities will also be influenced
by the adequacy of its capital levels. In addition, the Company's ability to
expand its business may depend on its ability to raise additional capital.
Business Subject to Extensive Federal, State and Foreign Regulations. The
Company's business is, and the securities industry generally is, subject to
extensive regulation in Austria and all other Central and Eastern European
states where its subsidiaries operate at the state level, as well as by industry
self-regulatory organizations ("SROs"). The company is also subject to
regulation by various foreign financial regulatory authorities in the
jurisdictions outside of Austria or Central and Eastern Europe where it does
business, including by The Securities and Futures Authority of the United
Kingdom and the Securities and Exchange Commission of the United States of
America.
Compliance with many of the regulations applicable to the Company involves a
number of risks, particularly in areas where applicable regulations may be
unclear. The Austrian Ministry of Finance (the "Ministry"), other governmental
regulatory authorities, including state securities regulators, and SROs,
including the Vienna Stock Exchange Chamber, may institute administrative or
judicial proceedings or arbitrations which may result in censure, fine, civil
penalties (including treble damages in the case of insider trading violations),
the issuance of cease-and-desist orders, the de-registration or suspension of a
broker-dealer, investment adviser or futures commission merchant, the statutory
disqualification of its officers or employees or other adverse consequences,
and, even if none of such actions is taken, could have a material adverse effect
on the Company's perceived creditworthiness, reputation and competitiveness.
Customers of the Company or others who allege that they have been damaged by the
Company's violation of applicable regulations also may seek to obtain
compensation from the Company, including the unwinding of any transactions with
the Company.
Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by the
Ministry or other Austrian or foreign governmental regulatory authorities and
SROs or changes in the interpretation or enforcement of existing laws and rules
may adversely affect the
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manner of operation and profitability of the Company.
The Company's businesses may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume of the Company's underwriting,
merger and acquisition and merchant banking business in any year could be
affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Austrian Central Bank) and changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities. From time to time, various forms of
anti-takeover legislation and legislation that could affect the benefits
associated with financing leveraged transactions with high-yield securities have
been proposed that, if enacted, could adversely affect the volume of merger and
acquisition and investment banking business, which in turn could adversely
affect the Company's underwriting, advisory and trading revenues related
thereto.
Market, Credit and Liquidity Risks Associated with Underwriting and Trading
Activities. The Company's underwriting, securities trading, market-making and
arbitrage activities are conducted by the Company as principal and subject the
Company's capital to significant risks, including market, credit (including
counterparty) and liquidity risks.
The Company's underwriting, securities trading, market-making and arbitrage
activities often involve the purchase, sale or short-sale of securities as
principal in markets that may be characterised by relative illiquidity or that
may be particularly susceptible to rapid fluctuations in liquidity. The Company
from time to time has large position concentrations in certain types of
securities or commitments and in the securities of or commitments to a single
issuer, including sovereign governments and other entities, issuers located in a
particular country or geographic area, or issuers engaged in a particular
industry. Through its subsidiaries and affiliate offices, the Company engages in
proprietary trading of Eastern European securities with an emphasis on
government and corporate bonds, local debt instruments and Central and Eastern
European equity securities, which involve risks associated with the political
instability and relative currency values of the nations in which the issuer
principally engages in business as well as the risk of nationalisation. In
addition, the Company has, from time to time, substantial position
concentrations in or commitments to high-yield issuers.
These securities generally involve greater risk than investment-grade debt
securities due to credit considerations, liquidity of secondary trading markets
and vulnerability to general economic conditions. The level of the Company's
high-yield securities inventories and the impact of such activities upon the
Company's results of operations can fluctuate from period to period as a result
of customer demands and economic and market considerations.
In addition, the trend in all major capital markets, for competitive and other
reasons, toward larger commitments on the part of lead underwriters means that,
from time to time, an underwriter may retain significant position concentrations
in individual securities. Such concentrations increase the Company's exposure to
specific credit, market and political risks. In addition, material fluctuations
in foreign currencies vis-a-vis the U.S. dollar, in the absence of
countervailing covering or other procedures, may result in losses or gains in
the carrying value of certain of the Company's assets located or denominated in
non-U.S. jurisdictions or currencies.
Capital Intensive Nature of and Potential Losses Resulting from Merchant Banking
Activities. Securities firms, including the Company, increasingly facilitate
major client transactions and transactions sponsored by their proprietary pools
of capital by using their own capital in a variety of investment activities that
have been broadly described as merchant banking.
Such activities include, among other things, purchasing equity or debt
securities or making commitments to purchase such securities in merger,
acquisition, restructuring and leveraged capital transactions, including
leveraged buyouts and high-yield financing. Such positions and commitments may
involve substantial amounts of capital and significant exposure to any one
issuer or business, as well as market, credit and liquidity risks. Equity
securities purchased in these transactions generally are held for appreciation,
are not readily marketable and typically do not provide dividend income. Debt
securities purchased in such transactions typically rank subordinate to bank
debt of the issuer and may rank subordinate to other debt of the issuer. In
addition, the Company also provides and arranges bridge financing, which assures
funding for major transactions, with the expectation that refinancing will be
obtained through the placement of high-yield debt or other securities. Such
activities may also involve substantial amounts of capital and significant
exposure to any one issuer as well as
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various risks associated with credit conditions and vulnerability to general
economic conditions.
There can be no assurance that the Company will not experience significant
losses as a result of such activities.
Derivative Financial Instruments. At the present time, the Company does not
engage in the use of derivatives financial instruments. In many of the countries
where the Company has operations, the local currencies are referred to as "soft"
or "exotic". As such, there are very few, if any, cost effective hedging
strategies available to the Company or potential investors. The Company's
inability to engage in currency hedging activities may result in its earnings
being subject to greater volatility due to exchange rate fluctuations.
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Part II -- OTHER INFORMATION
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 1996, the Company held the 1996 Annual Meeting of
Stockholders of Czech Industries, Inc. ("Annual Meeting"). At this meeting,
the Company's Board of Directors submitted three proposed amendments to the
Company's Certificate of Incorporation to the stockholders. The Board of
Directors also submitted proposals to the stockholders to elect two new
directors, approve the 1996 stock option plan and ratify the appointment of
the Company's independent auditors for the current fiscal year. The holders
of 2,269,748 shares of stock entitled to vote, which constituted a quorum,
were present at the annual meeting in person or by proxy. As of the record
date, there were 2,871,000 shares issued and outstanding.
Proposal No. 1 - Election of Directors. Two nominees, Wolfgang Kossner and
August A. de Roode, were submitted to the stockholders. The nominations of
Messrs. Kossner and de Roode to serve as directors for a three year term
were approved by the stockholders., 2,250,520 voted for the proposal and
19,228 voted against the proposal with no votes abstained or unvoted.
Proposal No. 2 - Amendment to the Certificate of Incorporation to Change
the Name of the Corporation to Eastbrokers International Incorporated.
Amendment was approved by the stockholders. 2,256,681 voted in favor of the
proposal, 10,097 voted against the proposal, 2,970 abstained from voting
and 601,252 did not vote.
Proposal No. 3 - Amendment to the Certificate of Incorporation and By-laws
Regarding Stockholder Meetings. Amendment was not approved by the
stockholders. The required affirmative vote of sixty-six and two thirds
percent of the outstanding shares was not met. 1,509,488 voted in favor of
the proposal, 37,131 voted against the proposal, 3,575 abstained from
voting and 1,320,806 did not vote.
Proposal No. 4 - Amendment to the Certificate of Incorporation Regarding
Removal of a Member of the Board of Directors. Amendment was not approved
by the stockholders. The required affirmative vote of sixty-six and two
thirds percent of the outstanding shares was not met. 1,535,991 voted in
favor of the proposal, 12,003 voted against the proposal, 2,200 abstained
from voting and 1,320,806 did not vote.
Proposal No. 5 - Approval of the 1996 Stock Option Plan. The 1996 Stock
Option Plan was approved by the stockholders. 1,224,711 voted in favor of
the proposal, 146,698 voted against the proposal, 178,785 abstained from
voting and 1,320,806 did not vote.
Proposal No. 6 - Ratification of the Appointment of Auditors. The
appointment of the accounting firm of Pannell Kerr Forster PC was approved
by the stockholders. 2,177,162 voted in favor of the proposal, 83,724 voted
against the proposal, 8,862 abstained from voting and 601,252 did not vote.
An error was noted in the proxy statement sent with the Notice of Annual
Meeting. The proxy statement incorrectly listed Ing. Petr Bednarik as an
officer, director and owner of Stella Group a.s., a Prague based investment
company. The correct information should have listed Ing. Petr Bednarik as
an officer, director, and owner of Stratego Invest a.s., a Prague based
investment company. The Board of Directors would like to apologize for this
oversight and any misunderstanding or confusion it may have caused.
ITEM 5 -- OTHER INFORMATION
On October 1, 1996, the Company entered into an agreement with Y.S.E. a.s.
to dispose of the Company's controlling equity interest in the Hotel
Fortuna a.s. The Company had owned 251,000 shares of Common Stock of the
Hotel Fortuna a.s., which owns and operates a 242 room hotel, restaurant
and lounge located in Prague, Czech Republic. The disposition of the
Company's interest in the Hotel Fortuna a.s. is deemed to be a disposition
of a significant amount of the Company's assets.
In return for its equity interest in the Hotel Fortuna a.s., the Company
received 100,000 shares of Common Stock of Ceske energeticke zavody a.s.,
nominal value 1,100 CZK ("CEZ"), a Czech utility company, and 86,570 shares
of Common Stock of Vodni stavby Praha a.s., nominal value 1,000 CZK ("VS"),
a Czech construction company. Both CEZ and VS are actively traded on the
Prague Stock Exchange's ("PSE") Main Market. The VS shares were transferred
to the Company on or about October 15, 1996, and the CEZ
- 19 -
<PAGE>
shares were transferred to the Company about November 5, 1996. Although the
Company received the shares at various dates, the title to these shares did
not transfer until the delivery of the Hotel Fortuna, a.s. shares. The
Company transferred its shares of the Hotel Fortuna a.s. to Y.S.E. a.s. on
or about November 6, 1996 which also represents the final closing of the
sale.
The Company determined the cost basis of the Hotel Fortuna a.s. shares by
adding the Company's historical cost basis in the hotel with the Company's
proportionate share of the hotel's earnings it received through June 30,
1996. Based on this computation, the Company determined that the cost basis
of its interest in the hotel was approximately $9,400,000 USD. In
negotiating the sale of the Company's interest in Hotel Fortuna, a.s., the
Purchaser offered shares of CEZ and VS as considerations for the shares of
Hotel Fortuna, a.s. The Company negotiated the number of the CEZ and VS
shares it was to receive as consideration by utilizing the then current
market values of the shares as quoted on the PSE on October 1, 1996, the
date of the signing of the contract. On October 1, 1996, the PSE quoted
prices of CEZ and VS were 1,040 CZK (approximately $37.50 USD) and 1,900
CZK (approximately $69.50 USD) per share, respectively. Based on these
October 1, 1996 quoted prices, the value of the consideration to be
received was approximately $9,800,000 USD.
The Company valued the consideration received on the sale of its interest
in Hotel Fortuna, a.s. as of November 6, 1996, which is the date title to
these shares was transferred to the Company. This is consistent with the
provisions of current accounting literature which describes the conditions
required to be met for a sale to be considered consummated. As of November
6, 1996, the per share prices of the CEZ and VS were 950 CZK (approximately
$35.00 USD) and 1,300 CZK (approximately $51.00 USD), respectively, which
represented approximately $7,957,012 USD at the then current exchange
rates. The Company classified these shares as available for sale
securities.
On a date subsequent to obtaining the shares, the Company used 2,500 shares
of CEZ and 30,302 shares of VS to repay the balance of the principal and
interest due under a Note payable owed to Finn s.r.o. in the approximate
amount of $2.1 million USD. Also, the Company sold 13,900 shares of VS at
1,800 CZK (approximately $65.50 USD) per share for approximately $910,000
USD.
At the time of this filing, the Company was in the process of selling its
interest in CEZ at the prevailing market prices to reduce its overall
market exposure in this stock and was continuing to hold its shares of VS.
At December 31, 1996, VS has a market value of 1,400 CZK per share and the
Company's holdings is this stock were valued at approximately $2,180,000
USD at the then current exchange rates.
As noted in Note 3 of the Notes to Consolidated Financial Statements, the
Company has recognized a loss on the sale of discontinued operations of
($1,323,083) and a loss on discontinued operations of $74,220 for
operating expenses incurred through the date of sale of its interest in
the Hotel Fortuna a.s.
The Stock Purchase Agreement for the purchase of Eastbrokers AG contains
certain covenants relating to the sale of the Hotel Fortuna a.s. that may
require an adjustment of the purchase price. These potential adjustments,
if enforced, would require the Company to issue additional shares of
common stock to the principals of Eastbrokers AG based on a formula
contained in the Stock Purchase Agreement. The principals of Eastbrokers
AG have agreed to waive any purchase price adjustment that might have been
required under the terms of this agreement.
The transaction between the Company and Y.S.E. a.s. was arranged by
Stratego Invest a.s., a broker-dealer and financial consulting company
organized under the laws of the Czech Republic. Ing. Petr Bednarik, a
director and shareholder of the Company, is the Chairperson of the
Supervisory Board and a beneficial owner of Stratego Invest a.s. For
providing services related to the transaction, Stratego Invest a.s. was to
have received a commission fee of 1,000,000 CZK (approximately $37,000
USD). Stratego Invest a.s. has agreed to waive its commission related to
this transaction.
- 20 -
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits required by Item 601 of Regulation S-B
Exhibit No. Description
(3)(i) Certificate of Incorporation of Czech Industries, Inc., as
amended (a)
(10.1) Stock Sale/Purchase Agreement (a)
(10.2) 1996 Stock Option Plan (a)
(27.1) Financial Data Schedule (Electronic Filing Only).
(27.2) Item 2 of Current Report on Form 8-K dated August 1, 1996.*
- --------------------------
(a) As previously filed.
* Incorporated by reference from Current Report on Form 8-K dated
August 1, 1996 (File No. 0-26202).
- 21 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned thereunto duly authorized.
EASTBROKERS INTERNATIONAL INCORPORATED
(Registrant)
By /s/ Martin A. Sumichrast
----------------------------------------------
Martin A. Sumichrast
Vice Chairman
Dated: August 11, 1997
- 22 -
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
Exhibit No. Description
----------- ---------------
<S> <C> <C>
(3)(i) Certificate of Incorporation of Czech Industries, Inc., as amended. (a)
(10.1) Stock Sale/Purchase Agreement (a)
(10.2) 1996 Stock Option Plan (a)
(27.1) Financial Data Schedule (Electronic Filing Only).
(27.2) Item 2 of Current Report on Form 8-K dated August 1, 1996.*
</TABLE>
- --------------------------
(a) As previously filed.
* Incorporated by reference from Current Report on Form 8-K dated
August 1, 1996 (File No. 0-26202).
- 23 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,011,917
<SECURITIES> 9,794,886
<RECEIVABLES> 7,492,071
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,149,237
<PP&E> 2,895,971
<DEPRECIATION> 682,224
<TOTAL-ASSETS> 36,620,047
<CURRENT-LIABILITIES> 14,335,008
<BONDS> 2,374,228
0
0
<COMMON> 143,550
<OTHER-SE> 17,863,955
<TOTAL-LIABILITY-AND-EQUITY> 36,620,047
<SALES> 0
<TOTAL-REVENUES> 1,817,153
<CGS> 0
<TOTAL-COSTS> 2,199,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220,582
<INCOME-PRETAX> (382,393)
<INCOME-TAX> 50,501
<INCOME-CONTINUING> (469,772)
<DISCONTINUED> (1,281,184)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,750,956)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
