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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A NO. 2
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
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Delaware 52-1807562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850
(Address of principal executive offices) (Zip Code)
(301) 527-1110
(Issuer's telephone number, including area code)
CZECH INDUSTRIES, INC.
(Former name, if changed since last report)
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.05 par value
Class A Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-QSB or any
amendment to this Form 10-QSB. [ ]
State issuer's revenues for its most recent fiscal year: $5,552,069.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average of the bid and ask price of such stock on June 27,
1997 was $10,162,084.
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on June 27, 1997, was 3,003,000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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EASTBROKERS INTERNATIONAL INCORPORATED
Index to Form 10-KSB
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Page
PART I
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Item 1. Description of Business................................................................................ 3
Item 2. Description of Property................................................................................ 12
Item 3. Legal Proceedings...................................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............................................... 13
Item 6. Management's Discussion and Analysis or Plan of Operation.............................................. 15
Item 7. Financial Statements
Historical Financial Statements
Independent Auditor's Report..................................................................... 25
Consolidated Statements of Financial Condition................................................... 26
Consolidated Statements of Operations
Year Ended December 31, 1995, Transition Period Ended March 31, 1996,
and Year Ended March 31, 1997............................................................... 27
Consolidated Statements of Changes in Stockholders' Equity....................................... 28
Consolidated Statements of Cash Flows............................................................ 29
Notes to Consolidated Financial Statements....................................................... 31
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure................... 45
PART III
Item 9. Directors and Executive Officers of the Registrant..................................................... 46
Item 10. Executive Compensation................................................................................. 48
Item 11. Security Ownership of Certain Beneficial Owners and Management......................................... 51
Item 12. Certain Relationships and Related Transactions......................................................... 52
Item 13. Exhibits and Reports on Form 8-K....................................................................... 54
Signatures........................................................................................................ 55
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PART I
Item 1. DESCRIPTION OF BUSINESS
GENERAL
Certain information set forth in this report under the captions "Item 1.
Description of Business," and "Item 6. Management's Discussion and Analysis or
Plan of Operation" includes "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and is subject to certain
risks and uncertainties, including but not limited to the effect of political,
economic and market conditions both domestically and in Eastern and Central
Europe. Readers are cautioned not to place undue reliance on these forward
looking statements, which are made as of the date hereof and are referred to in
the discussion of risks and uncertainties set forth under the caption "Risk
Factors" which appears later in this Item 1. The Company undertakes no
obligation to release any revisions to the forward looking statements to reflect
events or circumstances after the date hereof or to reflect unanticipated events
or developments.
REVERSE STOCK SPLIT
At a Special Meeting of the Company's shareholders held on September 10,
1996, the shareholders approved a one-for-five reverse split of the Company's
Common Stock. Unless otherwise indicated, the information contained herein gives
effect to the one-for-five reverse stock split of the issued and outstanding
Common Stock and the reduction in the authorized number of shares of Common
Stock from 50,000,000 to 10,000,000.
CHANGE OF NAME
At the 1996 Annual Meeting of Shareholders held on December 10, 1996, the
shareholders of Czech Industries, Inc. approved the change of the Corporation's
name to Eastbrokers International Incorporated (the "Company" or "Eastbrokers").
The Board of Directors of the Company believes that the change of name more
accurately reflects the nature and scope of the Company's business and will
serve to enhance the Company's recognition by reflecting the expansion of its
business activities in Central and Eastern Europe.
BACKGROUND
Eastbrokers International Incorporated (the "Company") was incorporated in
the State of Delaware on January 20, 1993, as the Czech Fund in order to take
advantage of the rapid growth in business opportunities arising from the
privatization of the newly-democratized Czech Republic by merging with or
acquiring Czech businesses.
In July 1993, the Company had a small initial public offering, following
which it purchased a controlling interest in Hotel Fortuna, a.s., a Czech
corporation owning a hotel located in Prague, and was renamed Czech Industries,
Inc. The Company also entered into an agreement to acquire a controlling
interest in Moravacentrum, a collection of eight department stores in Brno. This
acquisition was consummated using a portion of the $15 million gross proceeds
from a secondary public offering in June 1995.
Later in 1995, however, the Company shifted its focus in response to
changes in the marketplace. As major institutional investors began to appreciate
the investment opportunities available in the Czech Republic, most of such
opportunities were seized by a limited number of major institutions which now
control much of the Czech economy. This development made it very difficult for
smaller players such as the Company to effectively take advantage of available
opportunities.
In 1996, the Company received what it considered an attractive offer for
its interest in Moravacentrum. The Company accepted this offer to sell
Moravacentrum, determining that the sale proceeds could be better applied
towards other acquisitions which would provide better prospects for return on
investment.
Having considered a variety of investments, the Company decided on the
acquisition of Eastbrokers Beteiligungs AG ("Eastbrokers Vienna"), an Austrian
brokerage company with offices throughout Central and Eastern Europe. This
transaction enhanced the Company's prospects by both providing the Company with
a vehicle for its existing acquisition strategy while extending its
opportunities beyond the Czech Republic to the entirety of Central and Eastern
Europe. The acquisition was completed on August 1, 1996. Following the
acquisition, the Company's name was changed to Eastbrokers International
Incorporated.
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The Company, through its Vienna-based subsidiary, Eastbrokers Vienna,
provides financial services in Eastern and Central Europe. The principal
strategic objective of the Company is to establish controlling ownership of
independent broker-dealers and to create a network that provides access to
emerging market investment opportunities in Eastern and Central Europe. Through
its U.S. subsidiary, Eastbrokers North America, Inc., the Company intends to
market these investment opportunities to Western European and United States
institutional and commercial investors.
Eastbrokers Vienna's primary business is to provide its customers with
stock brokering and investment banking services. Eastbrokers Vienna conducts
business through its head office in Vienna, Austria and in its subsidiary and
affiliate offices located in (a) Prague, Czech Republic (b) Budapest, Hungary,
(c) Bratislava, Slovakia, (d) Almaty, Kazakhstan, (e) Istanbul, Turkey, (f)
Moscow, Russia, (g) Bucharest, Romania, (h) Sofia, Bulgaria, (i) Ljubljana,
Slovenia, (j) Zagreb, Croatia, and (k) Warsaw, Poland. Through its subsidiaries
and affiliate offices, the Company is a member of the Vienna Stock Exchange, the
Budapest Stock Exchange, the Bratislava Stock Exchange, the Zagreb Stock
Exchange, the Ljubljana Stock Exchange, the Bucharest Stock Exchange, the
Central Asian Stock Exchange, the Warsaw Stock Exchange and a shareholder and
member of the Prague Stock Exchange. Eastbrokers Vienna also owns 49% of WMP
Borsenmakler AG ("WMP"), a publicly-held Austrian investment banking and
brokerage firm.
Through its Vienna affiliate, Eastbrokers Vienna's brokerage, trading and
market making business generates approximately 10% of all revenues. Eastbrokers
Vienna conducts its sales activities as principal and agent on behalf of its
clients. Eastbrokers Vienna primarily distributes and trades Eastern and Central
European equity securities and to a lesser degree, debt securities. Eastbrokers
Vienna, through WMP, actively makes a market for the securities of more than 400
companies on the Vienna Stock Exchange.
Eastbrokers Vienna is also a leading Eastern and Central European
investment banking firm which provides advice to, and raises capital for Eastern
and Central European companies. Eastbrokers Vienna provides advisory services on
key strategic matters such as mergers, acquisitions, privatizations, joint
ventures as well as long range financial planning. Eastbrokers Vienna seeks to
raise much of its capital in Western Europe through institutional and commercial
investors.
Additionally, through its recently acquired subsidiary in the United
States, Eastbrokers North America, Inc. ("Eastbrokers NA", member NASD, the
Company intends to provide added value, performance-driven research, trading,
asset management and corporate finance services in the emerging markets of
Central and Eastern Europe to North American institutional investors (buyside
and sellside) and high net worth individuals. The U.S. based broker dealer is
expected to complement the existing European based units. Eastbrokers NA intends
to focus on seeking out North American companies whose primary focus is Central
and Eastern Europe. Differentiation of the services provided will be emphasized
in an effort to enable Eastbrokers NA to fulfill its objective of assisting
existing foreign units by accessing and transacting with North American capital
markets, which represent a source of emerging market capital, through quality
research and by establishing relationships that would evolve naturally into
other financial related products and services. The Company has not previously
operated a broker dealer in the United States and there can be no assurance that
Eastbrokers NA can be successfully established or operated.
ACQUISITIONS AND DISPOSITIONS DURING THE FISCAL YEAR
Through a series of stock purchase transactions beginning July 1995, the
Company purchased a 42.75% equity interest in Moravacentrum a.s., a joint stock
company which owns a major quality department store chain based in Brno, Czech
Republic. In December 1995, the Company entered into an agreement to sell its
shares in Moravacentrum a.s. for approximately $8.73 million. The parties agreed
upon an installment sale, and, the final installment was paid in April 1996. The
Company recorded a gain from the sale aggregating approximately $1.2 million.
The Company determined that the sale of Moravacentrum a.s. presented a unique
opportunity to accelerate further mergers and acquisitions through increased
working capital.
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. As a participant in Eastbrokers Vienna's capital increase, the
Company subsequently acquired an additional 245,320 of an available 270,000
shares for cash increasing its ownership percentage to 83.62 percent. In three
separate transactions in November and December 1996 and March 1997, the Company
purchased 81,550 additional shares, increasing its ownership percentage to
approximately 94 percent.
The fair value of the net assets acquired under these transactions
approximated $8,400,000. The acquisition has been accounted for under the
purchase method of accounting. The excess of the purchase price over the fair
value of the
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net assets acquired resulted in the Company recording approximately $1,950,000
in goodwill, which is being amortized over 25 years on a straight-line basis.
These consolidated financial statements include the results of operations of
Eastbrokers Vienna from the date of acquisition through December 31, 1996. See
Item 7 - Financial Statements. The purchase agreements contain 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.
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 shares were transferred to the Company on
or 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 January and February 1997, the Company sold its entire interest in CEZ
in a series of transactions with a total value of approximately $3,700,000 USD.
The average sales price per share was 1,067 CZK (approximately $38.00 USD).
On March 6, 1997, the Company purchased a 90% interest of Financial
Planning Services International, Inc. ("FPS"), a Delaware Corporation and member
of the National Association of Securities Dealers, Inc. ("NASD"), from Mr.
Robert Sass, a non-affiliate. In consideration of the 90% interest, the Company
issued to Mr. Sass, 22,500 shares of the Company's common stock. The Company
subsequently renamed FPS to Eastbrokers North America, Inc. ("Eastbrokers NA").
Mr. John Paul DeVito, Vice President of Brokerage and Sales and President and
CEO of Eastbrokers NA purchased the balance of the 10% of FPS for 2,500 shares
of the Company's Common Stock. Mr. DeVito purchased the 2,500 shares from the
Company at $4.00 per share for an aggregate amount of $10,000, $9,875 of which
was loaned to Mr. DeVito by the Company in exchange for a promissory note. Mr.
Sass is a board member of the Eastbrokers NA and serves as an advisor to the
Chairman of the Board of the Company.
GOVERNMENT REGULATION
The Company has operations based in 12 foreign countries. The Company is
exposed to the risk of changes in
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social, political and economic conditions inherent in foreign operations,
including changes in the laws and policies that govern foreign investment in
countries where it has operations as well as, to a lesser extent, changes in
United States laws and regulations relating to foreign trade and investment.
There can be no assurance as to the future effect of changes in social,
political and economic conditions on the Company's business or financial
condition.
COMPETITION
The Company encounters substantial competition from both foreign and
domestic businesses in Central and Eastern Europe. A large number of established
and well-financed entities including multinational businesses and investment
banking firms such as Creditanstaldt, Credit Suisse-First Boston, ING Bearings
and ABN Amro, have recently and substantially increased their business
activities in Central and Eastern Europe. Nearly all of such entities have
substantially greater financial resources, technical expertise and managerial
capabilities than the Company, and consequently, the Company may be at a
substantial competitive disadvantage in the conduct of its business in Central
and Eastern Europe.
EMPLOYEES
The Company currently has 207 full-time employees and 28 part-time
employees.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company must comply with various federal, state and local regulations
relating to the protection of the environment. Federal, state, and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environnment or otherwise relating to the protection of the
environment will not, in the opinion of the Company, have a material effect on
the capital expenditures, earnings, or the competitive position of the Company.
RISK FACTORS
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.
A securities firm's business and its profitability are also affected by the
firm's 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
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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. See
"Description of Business - Competition".
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. See "Description of Business - Governmental Regulation".
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 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
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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. See "Management's
Discussion and Analysis or Plan of Operation".
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 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. See "Management's Discussion and Analysis
or Plan of Operation".
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
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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, in a cost effective manner, may result in its earnings being subject
to greater volatility due to exchange rate fluctuations.
Dependence upon Availability of Capital and Funding
A substantial portion of the Company's total assets consists of highly
liquid marketable securities and short-term receivables arising from securities
transactions. The highly liquid nature of these assets provides the Company with
flexibility in financing and managing its business. However, certain of the
Company's activities such as merchant banking frequently involve substantial
capital commitments in securities which are often illiquid. The funding needs of
the Company are satisfied from internally generated funds and capital, including
equity, long-term debt and short-term borrowings which consist of securities
sold under agreements to repurchase ("repurchase agreements"), master notes and
committed and uncommitted lines of credit.
All repurchase transactions and a portion of the Company's bank borrowings
are made on a collateralized basis. Liquidity management includes the monitoring
of assets available to hypothecate or pledge against short-term borrowing. The
Company maintains borrowing relationships with a broad range of banks, financial
institutions, counterparties and others. The volume of the Company's borrowings
generally fluctuates in response to changes in the amount of resale transactions
outstanding, the level of the Company's securities inventories and overall
market conditions. Availability of financing to the Company can vary depending
upon market conditions, the volume of certain trading activities, credit
ratings, credit capacity and the overall availability of credit to the
securities industry and there can be no assurance that adequate financing to
support the Company's businesses will continue to be available in the future.
See "Management's Discussion and Analysis or Plan of Operation".
Potential Restrictions on Business of, and Withdrawal of Capital from, Regulated
Subsidiaries Resulting from Net Capital Requirements
As a registered broker-dealers and member of numerous stock exchanges
throughout Central and Eastern Europe, the Company is required to comply with
each of the countries' regulatory authorities and net capital rules of the stock
exchanges. These rules, which specify minimum net capital requirements for
registered broker-dealers and stock exchange members, are designed to assure
that broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business and have the effect of
requiring that at least a substantial portion of their assets be kept in cash or
highly liquid investments. Compliance with such net capital requirements could
limit operations that require the intensive use of capital, such as underwriting
and trading activities. These rules also could restrict the Company's ability to
withdraw capital from the regulatory authorities, even in circumstances where
these authorities hold more than the minimum amount of the Company's required
capital, which in turn, could limit the Company's ability to pay dividends,
repay debt and redeem or repurchase shares of its outstanding capital stock.
Potential Securities Laws Liability
Many aspects of the Company's business involve substantial risks of
liability. In recent years, there has been increasing incidence of litigation
involving the securities industry, including class actions that generally seek
substantial damages. Companies engaged in the underwriting and distribution of
securities are exposed to substantial liability under applicable securities
laws.
Dependence on Personnel and Certain Key Management
Most aspects of the Company's business are dependent on highly-skilled
individuals. The Company devotes considerable resources to recruiting, training
and compensating such individuals and has taken further steps to encourage such
individuals to remain in the Company's employ. Individuals employed by the
Company may, however, choose to leave the Company at any time to pursue other
opportunities. In addition, the operation of the Company's business is
principally dependent on certain key management personnel. In particular, Martin
A. Sumichrast and Peter Schmid have played significant roles in the promotion,
development and management of the Company. If the employment by the Company of
either of these two people terminates, or they are unable to perform their
duties, there may be a significant adverse effect on the performance of the
Company as a whole. At the present time, the Company does not have a key-man
life insurance policy in effect with respect to Mr. Schmid. See "Item 9".
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<PAGE>
Operating Losses and Financial Condition
Since its formation, the Company has suffered substantial cash flow
deficits and operating losses. The net loss for the year ended March 31, 1997
was $866,411. As of such date, the Company had cash and cash equivalents of
$4,755,723 and net working capital of approximately $6,500,000. There can be no
assurance that the Company's future operations will be profitable or that it
will have available funds adequate to fund its operations. Should the operations
of the Company be profitable, it is likely that the Company would retain much or
all of its earnings to finance future growth and expansion.
"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
Securities
The Securities and Exchange Commission ("Commission") has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
less than $5.00 per share, subject to certain exceptions. The Company's Common
Stock is currently listed in the Nasdaq SmallCap Market and, as a result, such
securities are currently exempt from the definition "penny stock." If the Common
Stock is removed from listing on Nasdaq at any time, the Company's securities
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally, those persons with assets in
excess of $1,000,000 or annual income exceeding $200,000, $300,000 together with
their spouse). For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchase of such securities and
have received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities in the
secondary market.
Proposed Changes to Nasdaq Listing Requirements
On November 6, 1996, the Board of Directors of Nasdaq approved proposed
changes to the entry standards necessary to qualify for listing on both the
Nasdaq National Market (the "National Market") and the Nasdaq SmallCap Market.
Following a 30-day comment period, the Nasdaq Board of Directors has considered
comments, made modifications of the proposed changes and filed the rule changes
with the Securities and Exchange Commission for final approval. Among the
proposed changes to the Nasdaq SmallCap Market listing and maintenance criteria
are the following: eliminating the alternative test to the $1 minimum bid price;
extending the corporate governance standards currently required by the National
Market to the SmallCap issuers; increasing the quantitative standards; and
implementing a requirement that auditors of Nasdaq-listed companies be subject
to proper review. If the proposed or other changes to the listing and
maintenance criteria are approved by the Securities and Exchange Commission,
there can be no assurance that the Company will be able to fulfill such
criteria.
Delisting of Securities to Adversely Affect Market
In the event that the Common Stock were to no longer meet applicable Nasdaq
requirements and were delisted from Nasdaq, the Company would attempt to have
its securities traded in the over-the-counter market via the Electronic Bulletin
Board or the "pink sheets." In such event, holders of the Company's securities
would likely encounter greater difficulty in disposing of these securities
and/or obtaining accurate quotations as to the prices of the Company's
securities.
Specific Risks of the Geographic Area Covered by the Company
The Company's investments will be primarily in securities of issuers
resident in an area which is currently in a state of flux - Central and Eastern
Europe and Central Asia. Its political institutions and economic policies now
face the challenges of rapid change. Its population is ethnically diverse and
cultural and religious tensions abound. Memories of conflicts, past injustices
and the legacy of the denial of justice and the expropriation of property will
continue to create tension for years to come. These problems will compound the
difficulties of the change from a centrally planned
- 10 -
<PAGE>
economy to a market economy. For these reasons the Company's investments will be
subject to risks of a nature and degree not normally encountered in relation to
more developed economies and additional to those inherent in any equity
investment. Specific examples of some of these risks are described below:
Liquidity of the Company's Investments: The nature of the Company's
investments limits their potential secondary market. Accordingly, the
Company may not be able to achieve the full value of its investments on
disposal. Once local stock markets are operational, it is anticipated that
liquidity will improve, but there exists no guarantee that the markets
should be as liquid as those of developed countries. Due to the risks of
illiquidity of its investments, the Company could be faced with a risk of
non-reimbursement of its loans.
Political and Economic Factors: The countries in which the Company's
operations are concentrated had centrally-planned, socialist economies for
many years. Attempts at political and economic reform have been made with
limited success and it is impossible to foresee if such reforms will
achieve their intended aims. Restrictions may be imposed on investing in
specific companies or industries which may be considered to be important or
sensitive to national interests and which may also represent the best
investment opportunities. In addition, investments may be expropriated on a
change of government policy.
Valuation Risk: Accounting and financial reporting standards in the
selected countries are not equivalent to International Accounting Standards
and consequently, less information is available to investors in the
selected countries than in more developed capital markets. Nevertheless,
the Company will use for the valuation, financial reports issued by
international auditing firms and all other means will be applied in order
to monitor the unlisted investments.
Problems of Transition and Business Failure: Until very recently, virtually
all industrial output within the Comecon and Warsaw Pact countries was from
state-owned industry. As a result, few individuals understand basic
capitalistic management skills and techniques. Privatization of much of the
region's industry and the transition to a more market-orientated economy
will be difficult. Industry in the region is considerably less developed
and less efficient than industry in Western Europe and, in addition to
doubts as to the continuing viability of much of the region's industry,
those businesses which survive are likely to require considerable capital
investment and restructuring. The failure of one or more businesses in
which the Company has invested may have a significant adverse effect on the
performance of the Company as a whole.
Legal Infrastructure: The Company and its advisors will be reliant on legal
advisors in the jurisdictions in which it invests. Due to the inadequacy or
immaturity of legal systems in some jurisdictions and the difficulty of
obtaining adequate or satisfactory legal advice, it may be impossible to be
certain that the Company has valid legal title to the investments located
in such jurisdictions or to be able to protect its interests in such
investments.
Changes in Law and Enforcement of Rights: Legislation relating to
securities, stock markets and property rights is either non existent or has
been introduced very recently in several of the countries where the
Company's operations are located. Existing legislation is likely to be
subject to extensive amendment and significant new legislation may be
introduced at any time. It may be difficult to enforce the Company's rights
in cases where competing claims arise or in case of re-nationalization.
Investment and Repatriation Restrictions: Repatriation of investment
income, capital and the proceeds of sales by foreign investors may require
governmental registration and/or approval. A number of countries in which
the Company may invest do not have freely convertible currencies or their
currencies may only be convertible at rates determined by their
governments. Repatriation restrictions may also be imposed at any time.
Changes in the value of currencies in which the Company's investments are
denominated will result in a corresponding change in the value of the
Company's assets which are generally denominated in the local functional
currencies. Investors should note that the local currencies involved may be
subject to rapid devaluation against the major "hard" currencies, with the
result that delays in currency conversion may cause significant losses.
Taxation: Taxation of dividends and capital gains received by non-residents
varies among the selected countries. In addition, the selected countries
generally have less well-defined tax laws and procedures, and such laws may
permit retroactive taxation. As a result, the Company could in the future
become subject to local tax liabilities that had not been anticipated in
conducting its investment activities or valuing its assets. The Company
may, if, in the opinion of the Directors and the Company's Tax Advisor, it
is likely to be fiscally beneficial for the Company, invest via one or more
wholly owned subsidiaries located in any jurisdiction in the world.
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<PAGE>
Enforceability of Civil Liabilities
A substantial portion of the Company's assets are located outside the
United States. It may be difficult for investors to enforce outside of the
United States judgments against the Company obtained in the United States in any
actions, including actions predicated upon the civil liability provisions of the
securities laws of the United States. In addition, certain of the officers and
directors of the Company are not citizens or residents of the United States and
all or a substantial portion of the assets of such persons are or may be located
outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States against such persons or to
enforce judgments obtained in the United States, including judgments predicated
upon the civil liability provisions of the securities laws of the United States.
Item 2. DESCRIPTION OF PROPERTY
The Company does not own any properties and is not a party to any material
leases.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the Company's fiscal
year to a vote of security holders through the solicitation of proxies or
otherwise.
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<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market under
the symbol "EAST" (previously, the symbol was "CZCH").
The following table sets forth the reported high and low bid quotations (as
adjusted for the one-for-five reverse split of the Company's Common Stock) of
the Common Stock for the periods indicated, commencing with the date the Common
Stock became listed on the NASDAQ SmallCap Market (June 8, 1995). Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------
High Low
-------------------- --------------------
<S> <C> <C>
1995
Second Quarter $ 32.5000 $ 20.0000
(June 8-June 30)
Third Quarter $ 26.2500 $ 8.1250
Fourth Quarter $ 11.8750 $ 5.0000
1996
First Quarter $ 9.0625 $ 5.0000
Second Quarter $ 13.7500 $ 5.6250
Third Quarter $ 11.2500 $ 4.5625
Fourth Quarter $ 6.0000 $ 3.5000
1997
First Quarter $ 5.2500 $ 3.3750
Second Quarter $ 7.3750 $ 4.3125
Third Quarter $ 7.1250 $ 6.3750
(through August 8, 1997)
</TABLE>
On August 8, 1997, the Company's Common Stock as reported on the NASDAQ
SmallCap Market system was $6.750 (closing bid price). On that date there were
approximately 70 holders of record of Common Stock (including entities which
hold stock in street name on behalf of other beneficial owners).
The Company has not paid any cash dividends on its Common Stock to date,
and does not anticipate declaration or payment of any dividends in the
foreseeable future. The Company anticipates that for the foreseeable future it
will follow a policy of retaining earnings, if any, in order to finance the
expansion and development of its business. Payment of dividends is within the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements and operating and financial condition of the
Company, among other factors.
On December 10, 1996, the Board of Directors approved a plan whereby the
Company was authorized to begin a buy-back program of its common stock. Under
the terms of this plan, the Company was authorized to redeem up to $1,000,000 of
common stock at a price not to exceed $5.00 per share beginning in January 1997.
On January 23, 1997, the Company redeemed 45,000 of its outstanding shares at
$4.75 per share. Currently, the Company's common stock is trading at a price in
excess of the approved plan and no additional buy-backs are anticipated.
The following information sets forth all securities of the Company sold by
it within the past three (3) years, which securities were not registered under
the Securities Act of 1933, as amended:
On August 1, 1996, the Company issued 1,080,000 shares of its common stock
to the selling security holders of Eastbrokers Beteiligungs AG in a transaction
valued at $5,400,000. During the period surrounding the acquisition, the
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<PAGE>
Company's common stock was trading approximately between $6.25 and $8.00 per
share for its fully registered and unrestricted shares. Due to the nature of
restricted shares and the various covenants restricting the transfer of these
shares, the Board of Directors assigned a value of $5,400,000 to this
transaction.
On March 6, 1997, the Company issued 22,500 shares of common stock value
relating to the acquisition of Eastbrokers North America, Inc. In a separate but
related transaction to the Eastbrokers North America, Inc. acquisition, the
Company sold 2,500 shares of the Company's stock to an officer of the Company in
exchange for a promissory note. These shares were transferred to the selling
shareholder of Eastbrokers North America, Inc. as part of the acquisition. The
shares were valued in accordance with the terms of the Stock Purchase Agreement
of Eastbrokers North America, Inc. As of the date of the closing, the total
amount of the common stock transferred was $100,000.
On March 20, 1997 the Company entered into a consulting agreement with JB
Sutton Group, Inc. ("Sutton"). under which the Company granted to Sutton 150,000
warrants (the "Warrants'). Pursuant to a Termination Agreement between the
Company and Sutton dated August 8, 1997, the consulting agreement was terminated
and the 150,000 warrants were accordingly canceled.
During the year ended March 31, 1997, the Company issued a total of 37,000
shares of common stock at a per share price approximating the then current
market price for services rendered to the Company.
In April 1997, the Company issued 125,002 shares of common stock, par value
$.05, of the Company ("Common Stock"). The securities were sold to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,012 or $6.00 per share. The net proceeds to the Company
were $725,012. There were no underwriting discounts or commissions. The Offering
was made pursuant to an exemption from registration under Rule 506 of the
Securities Act of 1933, as amended (the "Securities Act"). The Offering was made
only to selected "accredited investors" as that term is defined in Rule 501(a)
of the Securities Act.
The Company has relied upon Section 4(2) of the Securities Act of 1933, as
amended, for its private placement exemption, such that the sales of the
securities were transactions by an issuer not involving any public offering. In
each transaction, the purchasers were sophisticated and had access to
information about the Company.
- 14 -
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this Form 10-KSB.
The Company's principal activities have changed dramatically during the
past fiscal year. During the fiscal year ending March 31, 1997, the Company
completely disposed of its interest in the Hotel Fortuna, a.s. and acquired
Eastbrokers Beteiligungs AG, an Austrian based securities broker-dealer
providing financial services in Central and Eastern Europe through its network
of subsidiaries and affiliate offices.
The earnings of the Company are subject to wide fluctuations since many
factors over which the Company has little or no control, particularly the
overall volume of trading and the volatility and general level of market prices,
may significantly affect its operations.
The Company's assets have increased from $26,242,561 at December 31, 1995
to $32,014,929 at March 31, 1997, the Company's liabilities increased from
$2,300,136 at December 31, 1995 to $12,613,492 at March 31, 1997, and the
Company's minority interest in consolidated subsidiaries decreased from
$9,353,228 at December 31, 1995 to $1,549,386 at March 31, 1997. The increase in
assets and liabilities is primarily attributable to the Company's acquisition of
Eastbrokers Beteiligungs AG in 1996. The decrease in minority interest is
primarily due to the Company's disposition of its interest in the Hotel Fortuna,
a.s. during 1996.
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 affected by the risks and uncertainties inherent in the Company's
business, including (without limitation) the effects of political, economic and
market conditions both domestically and in Eastern and Central Europe. See the
discussion of risks and uncertainties set forth under the caption "Risk Factors"
which appears in Item 1. 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.
Plan of Operation
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.
The Company's business strategy is to (1) utilize its marketing and Central
and Eastern Europe emerging market expertise to take advantage of opportunities
for growth in this sector of the global securities market; (2) develop the base
of its asset management business through concentrating on Central and Eastern
European debt and equity securities; (3) enhance and develop the Company's
merchant banking activities; (4) identify potential corporate finance candidates
for investment banking opportunities; and (5) utilize its expertise in the
privatization activities still available in Central and Eastern Europe.
Management also believes there are significant opportunities available in this
region for specialized account and institutional sales.
The Company believes that investment in the emerging markets of Central and
Eastern Europe will continue to grow rapidly in the coming years. Currently,
Hungary, Romania, and Poland are enjoying enhanced interest on the part of
foreign investors. The Company has successfully marketed its NIF Trud
Privatization Fund of Bulgaria. NIF Trud has approximately 120,000 shareholders
and owns interests in 78 Bulgarian companies. The Company currently is the
exclusive management company for NIF Trud. The Company intends to provide
ongoing management services to NIF Trud and investment banking services to the
companies in its portfolio.
While investing in the emerging markets of Central and Eastern Europe
involves risk considerations not typically associated with investing in
securities of U.S. issuers, the Company believes that such considerations are
outweighed by the benefits of diversification and potentially superior returns.
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<PAGE>
Among the considerations involved in investing in emerging markets such as
Central and Eastern Europe is that less information may be available about
foreign companies than about domestic companies. Foreign companies are also not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. In addition, unlike investing in U.S.
companies, securities of non-U.S. companies are generally denominated in foreign
currencies, thereby subjecting each security to changes in value when the
underlying foreign currency strengthens or weakens against the U.S. dollar.
Currency exchange rates can also be affected unpredictably by intervention of
U.S. or foreign governments or central banks or by currency controls or
political developments in the U.S. and abroad.
The value of international fixed income products also responds to interest
rate changes in the U.S. and abroad. In general, the value of such products will
rise when interest rates fall, and fall when interest rates rise. However,
interest rates in each foreign country and the U.S. may change independently of
each other.
Debt and equity securities in emerging markets such as Central and Eastern
Europe may also not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater risk than securities of
U.S companies. Investing in Central and Eastern European securities may further
result in higher expenses than investing in domestic securities because of costs
associated with converting foreign currencies to U.S. dollars and expenses
related to foreign custody procedures. Investment in Central and Eastern
European securities may also be subject to local economic or political risks,
including instability of some foreign governments, inadequate market controls,
the possibility of currency blockage or the imposition of withholding taxes on
dividend or interest payments and the potential for expropriation,
re-nationalization or confiscatory taxation and limitations on the use or
repatriation of funds or other assets.
The Company is also in the process of building its research department to
include reviewing the general market conditions, specific industries, and
individual companies and providing timely, cost effective information with
respect thereto in monthly newsletters, which will discuss Central and Eastern
European economic and currency trends and give readers specific investment
recommendations and ideas. The potential fee for this service, if any, has not
yet been determined.
During the year ended March 31, 1997, 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.
The Company intends to have its North American offices fully operational
prior to the end of the fiscal year ending March 31, 1998. This subsidiary will
act as an introducing broker in that it does not clear its own securities
transactions, but instead, it contracts to have such transactions cleared
through clearing broker on a fully disclosed basis. In a fully disclosed
clearing transaction, the identity of the Company's client is known to the
clearing broker. Generally, a clearing broker physically maintains the client's
account and performs a variety of services as agent for the Company, including
clearing all securities transactions (delivery of securities sold, receipt of
securities purchased and transfer of related funds). The Company intends to
utilize the services of the Bear Stearns Companies, Inc. ("Bear Stearns") as its
fully disclosed clearing broker. Bear Sterns is recognized as one of the leading
firms in clearing transactions in emerging markets such as Central and Eastern
Europe.
Results of Operations
Fiscal Year 1997 Compared with the Fiscal Year 1995
The Company is comparing the calendar year ending December 31, 1995 with
the fiscal year ending March 31, 1997. Since the transition period ended March
31, 1996 represents only a short period, it will be left out of this analysis
except where a material transaction has occurred.
As noted in the "General" sections, the Company's principal activities have
changed dramatically during the past fiscal year. During the fiscal year ended
March 31, 1997, the Company completely disposed of its interest in the Hotel
Fortuna, a.s. and acquired Eastbrokers Beteiligungs AG, an Austrian based
securities broker-dealer providing financial services in Central and Eastern
Europe through its network of subsidiaries and affiliate offices. As such, a
comparison between Fiscal Year Ended March 31, 1997 and the Fiscal Year Ended
December 31, 1995 provides minimal meaningful information.
- 16 -
<PAGE>
A non-recurring item reflected in the operations of the Company for the
year ended December 31, 1995, the transition period ended March 31, 1996, and
the year ended March 31, 1997 is the gain on the disposition of available for
sale securities of Moravacentrum a.s. of $637,417, $327,104, and $229,574,
respectively.
Other non-recurring items reflected in the operations for the year ended
March 31, 1997 are the loss on discontinued operations of approximately
($1,300,000) on the disposition of the Company's entire interest in the Hotel
Fortuna a.s. and the gain on the disposition of available for sale securities
which resulted in a fourth quarter gain of approximately $655,000.
As an overview of the year ended March 31, 1997, Eastbrokers Beteiligungs
AG was first consolidated on August 1, 1996 and has a calendar year end. It is
important to note that the Consolidated Statements of Operations includes the
revenues and expenses of Eastbrokers Beteiligungs AG for the period from the
date of acquisition (August 1, 1996) through December 31, 1996 (a five month
period) in accordance with Note 1 to the financial statements. See Item 7.
Financial Statements. The overall increase in the volume of revenue and expenses
is indicative of a change from a one location, single operating unit to a
multi-location, diverse entity.
Pro forma results of operations as presented in Note 5 - "Business
Acquisitions" reflect total revenues for the year ended December 31, 1995 as
$7,193,061 versus $8,639,986 for the year ended March 31, 1997. The Company's
total revenues increased in each of its subsidiaries with the single largest
increase coming from merchant banking activities in Eastbrokers AG. The addition
of the Warsaw office in late September/early October 1996 further enhanced the
revenues for the year ended March 31, 1997. The expenses also reflect the
corresponding operational costs of the Warsaw office from the date of
acquisition. The primary component of minority interest in earnings of
subsidiaries reflects the minorities share of the net loss of the Warsaw office
through the date of acquisition by the Company.
The net tax benefit represents the cumulative effect of individual
subsidiaries' unique tax calculations. In some instances, certain revenue items
are non-taxable in accordance with statutory requirements in the country in
which the office is located. In others, net operating losses available for
carryforward created a generous tax benefit. As discussed in Note 13 - "Income
Taxes", the Company has approximately $1,060,000 USD in net operating loss
carryforwards available in Austria and approximately $1,800,000 USD in net
operating loss carryforwards available for future use in the U.S. The Company
has not established a valuation allowance for the Austrian net operating losses
due to a history of profitable operations in 1993, 1994, and 1995. The Company
also expects its Austrian operations to return to profitability in the fiscal
year ended March 31, 1999 as its efforts in various privatization activities are
realized and such activities should generate an increase in the value of certain
Company holdings. Further, the Austrian net operating losses are available for
carryforward indefinitely. Accordingly, the Company believes it is more likely
than not that these benefits will be realized in the future. The non-taxable
income under foreign regulations in the Slovak Republic is capital gain
distribution income to the owners of record and is related to Slovak
privatization activities in which Eastbrokers Vienna was actively involved. This
income was received in the fourth quarter. Distributions of this nature are
non-taxable under Slovak Republic regulations. It is unlikely that Eastbrokers
Vienna will have similar transactions in the future. As noted in the following
paragraph, other activities occurred in the fourth quarter that contributed to
the current year's tax benefit. The U.S. net operating loss carryforwards will
expire, if unused, in varying amounts through the year 2012. The Company does
not anticipate any significant changes in the effective tax rates.
The expenses of the Company increased in the fourth quarter as compared to
the third quarter due to a "seasonal" effect and that the third quarter only
included 2 months of expenses versus 3 months in the fourth quarter. July and
August are typically "holiday" (vacation) months in Europe. Revenues and
expenses generally respond accordingly to this seasonal effect. The October to
December quarter is typically a strong quarter as people return from holiday and
work to finish the year strong. The Company is also pursuing several corporate
finance opportunities and has found that outsourcing portions of the work to
industry experts is sound corporate policy to manage personnel and overhead
costs. Many of the projects began in late September/early October 1996 and
continued through year end. General and administrative expenses, as well as
other operational expenses, increased due to the Company's increased focus on
privatization activities in countries that are currently in the process of
opening their markets to western investors. Involvement in privatization
activities generally involves much time and patience as the investments begin to
come to fruition. Prior experience in the privatization process is one of the
Company's more important assets.
The costs associated with the Company's involvement in privatization
activities, its pursuit of corporate finance opportunities, the unexpected
downturn of the economy of the Czech Republic and the effect this downturn has
- 17 -
<PAGE>
had on the Company's operations and the costs associated with the acquisition of
Eastbrokers Vienna are the primary factors contributing to the negative
operating cash flows experienced in 1997. The Company anticipates that
preliminary work performed related to corporate finance activities will begin
generating operating cash flows in the fourth quarter of fiscal 1998 and its
efforts in the various privatization activities will begin generating operating
cash flows near the beginning of the Company's next fiscal year. However, there
is no guarantee that such operating cash flows will materialize by the
anticipated dates or whether they will be sufficient to offset other operating
expenses.
Significant items on the statements of cash flows are primarily related to
customers' receivables, payables, and the related underlying securities. The
Company's policy is to close as many open positions as possible at year end and
re-evaluate its strategic focus as it moves into the 1st quarter. Also, the
regulatory bodies in several of the countries in which the Company operates
prefer to see a strong, liquid balance sheet at year end. The Company strives to
accommodate the needs of these regulatory agencies. Also affecting the cash
flows statement is the sale of the Hotel Fortuna a.s. Cumulative translation
adjustments at March 31, 1996 were eliminated with the sale of the hotel.
As a broker/dealer in securities, the Company will periodically acquire
positions in securities on behalf of its clients. As disclosed in "Note 3
Financial Instruments", the Company has title to various financial instruments
in the countries in which it operates. Certain of these investments may be
characterized as relatively illiquid and potentially subject to rapid
fluctuations in liquidity. Those securities are classified as "available for
sale securities". As of March 31, 1997, the Company's material concentration in
the securities portfolio is limited to its investment in Vodni Stavby Praha
a.s., a security traded on the Prague Stock Exchange Main Market (Czech
Republic). As of March 31, 1997, the market value of the Company's ownership
interest in this security was approximately $1,750,000. At the present time, the
securities market in the Czech Republic is under extreme pressure to initiate
reforms to protect the interests of the minority shareholders. These pressures
are depressing the market and it is possible that the Company will see a further
devaluation in this investment. All other securities are relatively liquid and
the carrying value approximates the market value as of the balance sheet date.
The Company does not have any material concentrations or commitments to
high-yield issuers as of the balance sheet date.
The Company recognizes it has concentrated a significant amount of its
assets as advances to its affiliates and investments in affiliates. At the
present time, the bulk of these loans have been related to privatization
activities which were discussed earlier. Since the Company's affiliates are
generally accounted for as equity investments, these advances do not eliminate
on consolidation. Receivables from affiliated companies and other receivables
are due on demand. The Company expects to collect these receivables within the
next 12 months. There are no material receivables from affiliated companies or
other receivables that have been outstanding for more than one year. For the
year ended March 31, 1997, the Company has investments in affiliated companies
of $7,064,064 and receivables from affiliated companies of $1,511,917. The
concentration of investments in affiliates by country are as follows: Austria --
$6,547,821, Bulgaria -- $332,584, Slovenia -- $114,529, Others -- $69,130. The
concentration of receivables from affiliates by country are as follows: Austria
- -- $675,456, Bulgaria -- $536,587, Slovenia -- $150,994, Czech Republic --
$72,994, Others -- $75,886. For the year ended March 31, 1997, the Company has
listed cash investments in it affiliates of $3,619,137 in the statement of cash
flows. The cash investments noted in the statements of cash flows consist of
direct investments in affiliates and the advances to affiliates. These cash
investments in each affiliate for the year ended March 31, 1997 were as follows:
WMP Borsenmakler AG (Austria) -- $2,455,880, Bulgaria -- $894,513, Slovenia --
$150,994, Czech Republic -- $72,994, and Others -- $44,756. As noted elsewhere
in this Form 10-KSB, Eastbrokers Vienna owns 49 percent of WMP Borsenmakler AG.
During the year ended March 31, 1997, Eastbrokers Vienna participated in a
capital increase in WMP in which it acquired additional shares sufficient to
maintain its proportionate ownership percentage.
The operating activities of the Eastbrokers Vienna are impacted by many
different factors. Some of the more important factors are security market
conditions, level and volatility of interest rates, competitive conditions,
economic and political conditions, inflation, availability of short-term or
long-term funding and capital, and the volume of securities transactions done by
the firm. These factors will be addressed on a country by country basis where
significant Eastbrokers Vienna's operations are located.
Austria. On July 1, 1996, the Vienna Stock Exchange ("VSE") introduced an
electronic trading system to its continuous trading section which has
significantly reduced the overall volume of institutional trades through
independent brokers. Until that point in time, independent brokers such as WMP
handled many of these types of trades. This change accounted for an
approximately 25 percent decline in WMP's 1996 revenues. In response to this
change by the VSE, WMP has applied for an expanded banking license which would
allow it to hold customer accounts and
- 18 -
<PAGE>
perform other banking functions and develop new revenue streams. In addition,
WMP has become a member of the European Association of Securities Dealers
("EASD") and is expected to begin market making activities on the EASDAQ within
the next 12 months. Interest rates remained relatively stable from 1995 to 1996
with an overall drop of approximately 0.5 percent with rates between 4.75 and
5.25 percent. There were no significant changes in the overall competitive
conditions between brokerage companies except for the introductions of the
electronic trading system to the continuous trading section of the VSE. The
overall economic and political situation in Austria is relatively stable and the
government has worked diligently to reduce budgetary pressures through cost
cutting measures. These cost cutting measures appear to have been positively
received by the market. Inflation is stable at approximately 2 percent per annum
for 1995 and 1996. There has been no significant change in the availability or
cost of capital in Austria. The total volume of transactions handled by the
Austrian offices increased in 1996 but the average profit per transaction
decreased in 1996 as compared with 1995. There are no significant restrictions
on transfers of funds to the parent company.
Czech Republic. Between 1995 and 1996, the second wave of the mass
privatization was ending and the "third wave" was beginning. During this time,
foreign competitors began entering the brokerage and investment banking
industry. In the fourth quarter of 1996, the Czech stock markets began showing
signs of instability and the overall market began a steep decline. The market
dropped because of the outflows of foreign capital due to profit taking and
institutional investors adjusting their portfolios to focus on other, more
regulated Eastern European markets. In addition, the Czech Republic has been
criticized for not establishing proper securities regulations. In response to
these criticisms, the Czech government recently adopted new securities
legislation and is in the process of establishing a Securities Commission based
upon the model provided by the U.S. Securities and Exchange Commission. Two of
the major goals of this legislation are to increase the transparency of the
market and to afford minority shareholders greater protection. Interest rates
have been relatively stable between 1995 and 1996 at approximately 13 percent on
an annualized basis. The overall economic and political situation in the Czech
Republic has undergone serious turmoil which has reduced the confidence of
foreign investors in the market. Additionally, foreign investors appear to be
moving into the Hungary and Poland where the markets appear to be more
transparent and have greater protection for the minority investors. Inflation
rates were relatively stable between 1995 and 1996 holding at approximately 8
percent per annum. There has been no significant change in the availability or
cost of capital in the Czech Republic, although there does appear to be some
pressure for interest rates to increase. The result of the decline in the
overall market conditions has negatively affected the Czech brokerage industry,
including the Company's Czech operations. The total volume of securities
transactions in the Czech Republic has decreased substantially along with an
overall reduction in average profit per transaction due to increased
competition. This has caused a decrease in revenue in the Company's Prague
operations and a net operating loss from this unit. In response to the
unexpected downturn in the Czech Republic, the Company has downsized its
operations in the Czech Republic and is concentrating on marketing to the
contrarian investor and developing corporate finance product. There are no
significant restrictions on transfers of funds to the parent company.
Hungary. The Budapest Stock Exchange ("BSE") became the emerging stock
exchange for the year in 1996 thanks to overall market gains of over 170 percent
for the year. Technology and regulations also continued to improve which
contributed to the overall market gains. In 1995, interest rates in Hungary
reached a high of 35-40 percent as inflation reached a high of 33 percent. In
response to the high inflation and interest rates, Hungary initiated a new
fiscal policy which included economic austerity measures and creating a crawling
peg basket for the currency which tied the Hungarian Forint to leading
currencies. The effect of these measures stabilized the currency, interest rates
and overall inflation which served to generate increased investor interest in
Hungary. By the end of 1996, interest rates and inflation stabilized at levels
of 20-22 percent and 19 percent, respectively. The market continued its strong
performance of 1996 into the first quarter of 1997. Accompanying the stock
market rally, a number of leading international investment banks including ABN
Amro, ING Barings, Merrill Lynch, Morgan Stanley, and Salomon Brothers opened
operations in Budapest and became member of BSE. Despite this influx of major
competition, the Hungarian office maintained its client base and doubled its
overall turnover. In response to this increased competition, the Hungarian
office has expanded the services offered to clients. The overall economic and
political situation appears to be relatively stable and continues to improve.
This is evident from the level of investor confidence and the interest by major
international investment banks. There has been no significant change in the
availability or cost of capital to the other than the interest rate
fluctuations. The total volume of transactions increased dramatically in 1996
with an overall reduction in the average profit per transaction. There are no
significant restrictions on transfers of funds to the parent company.
- 19 -
<PAGE>
Poland. The Warsaw Stock Exchange ("WSE") is a highly regulated market
following the French model. The transparency of this market and the protection
afforded minority shareholders has generated both customer confidence and
foreign investor interest. In 1996, the main market index rose nearly 90 percent
while the index of the twenty most capitalized firms increased 82 percent.
Interest rates are relatively stable and moving downward at a slow and
manageable pace. The brokerage industry in Poland is highly competitive due to
restrictions on commissions and allowable spreads on securities transactions. As
a result, many brokerage companies have merged or have been acquired by
well-financed competitors. The overall political and economic situation in
Poland is currently very stable although there is some concern over the
elections in 1997 and that they may delay some market reforms. Currently the
country in a period of economic stability with interest rates and inflation
heading lower and the currency appears to be stabilizing against the major
currencies. For 1996, inflation was approximately 18 percent, a drop of
approximately 3 percent from 1995 levels but still higher than in many
transition economies. The total volume of transactions has continued to increase
with an overall reduction in the average profit per transaction due to increased
competition. There are restrictions on transfers of funds to the parent company.
In certain instances, such transfers may need the permission of the national
bank.
Slovak Republic. Due to the unstable political and economic situation in
the Slovak Republic, investor interest remains very low when compared to other
countries in the region. The overall trading volume in the market is very low
and the shares that are listed are perceived to be fairly illiquid in part due
to the dominance of direct trades. Inflation appeared to be heading lower in
1996 and interest rates followed. In the first quarter of 1997, inflation
appeared to be on the rise again which moved the national bank to raise interest
rates and restrict the money supply. Due to the restrictive monetary policy
being followed by the government, credit is generally not available or comes
with a very high interest rate. There are no significant restrictions on
transfers of funds to the parent company.
Foreign Currency Translation Adjustments
The unexpected strength of the U.S. dollar as compared to the Austrian
Schilling created an unpleasant surprise for the Company. The Company had
collateralized a short term borrowing arrangement with approximately $1,500,000
in cash held in an Austrian Schilling account just as the U.S. dollar began to
increase in strength relative to the Austrian Schilling. During the term of this
arrangement, the Austrian Schilling lost approximately 10 percent of its value
relative to the U.S. dollar. This single transaction makes up the majority of
the loss on foreign currency transactions for the year ended March 31, 1997. The
Company is no longer collateralizing its short term borrowing on a "soft
currency" basis.
The U.S. dollar and its unexpected strength coupled with the unexpected
weakness of the European currencies (including the German Deutchmarke) have
negatively impacted the Company's overall earnings as well as the cumulative
translation adjustment. The primary functional currencies affecting the Company
are as follows: U.S. Dollar, Austrian Schilling, Czech Koruna, Hungarian Forint,
Slovak Koruna and the Polish Zloty. For the year ended March 31, 1997, the
Company reported a foreign currency translation adjustment in its statement of
cash flows of approximately $1.3 million. The effect of the exchange rate
changes on a country by country basis are approximately as follows: Czech
Republic -- $600,000, Austria -- $400,000, Hungary -- $210,000, Poland --
$120,000.
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. Foreign currency
transactions are generally completed transactions denominated in a currency
other than the functional currency or changes in exchange rates that impact
monetary assets and liabilities denominated in currencies other than the primary
functional currency.
Calculation of Earnings Per Share
The calculation of earnings per share on the financial statements included
in this report is based on the weighted average number of shares outstanding, as
calculated.
- 20 -
<PAGE>
Viability of Operating Results
The Company, like many other securities firms, is directly affected by
general economic conditions and market conditions, changes in levels of interest
rates, and demand for the Company's investment and merchant banking services in
the countries where its primary operations are located. The Company is further
affected by changes in valuations of the local currencies to the U.S. dollar
(the functional currency of the Company) in the regions in which it operates,
the interest of foreign investors in the local economies, and governmental
regulations restricting the repatriation of profits. In many of the countries
where the Company's primary operations are located, the local currency is
considered to be "soft" or "exotic". As such, there are very few, if any, cost
effective hedging strategies available to the Company or potential investors.
All of these factors have an impact on the Company's net gain from
securities transactions, underwriting, and commissions revenues. In periods of
reduced market activity, profitability is adversely affected because certain
expenses, consisting primarily of non-officer compensation and benefits,
communications, occupancy, and general and administrative expenses remain
relatively constant.
Currently, the Czech Republic and Slovak Republic markets are experiencing
extremely difficult economic conditions and market reforms may be necessary to
restore these economies to health. In light of these developments, the Company
has reduced the level of its operations in these countries. The Company
recognizes that it may be necessary to support negative cash flow from these
operations in the next 12 to 24 months.
Liquidity and Capital Resources
The Company's statements of financial position reflect a liquid financial
position as cash and assets readily convertible to cash represent 9 percent, 20
percent, and 28 percent of total assets at December 31, 1995, March 31, 1996,
and March 31, 1997, respectively.
The Company is subject to net capital and liquidity requirements in the
local jurisdictions in which it operates. As of March 31, 1997, the Company was
in excess of its minimum net capital and liquidity requirements in all
jurisdictions in which it operates.
The Company finances its operations primarily with existing capital and
funds generated from its diversified operations.
In the opinion of management, the Company's existing capital and cash flow
from operations will be adequate to meet its capital needs for at least the next
12 months in light of currently known and reasonably estimable trends. The
Company is currently exploring its options with regards to additional debt or
equity financing and there can be no assurance such financing will be available.
However, the Company recognizes that with increased liquidity it may be better
positioned to take advantage of potential opportunities in the markets where it
maintains its operations. No assurances can be made as to the Company's ability
to meet its cash requirements subsequent to any further business combinations.
In April 1997, the Company issued 125,002 shares of common stock, par value
$.05, of the Company ("Common Stock"). The securities were sold to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,012 or $6.00 per share. The net proceeds to the Company
were $725,012. There were no underwriting discounts or commissions. The Offering
was made pursuant to an exemption from registration under Rule 506 of the
Securities Act of 1933, as amended (the "Securities Act"). The Offering was made
only to selected "accredited investors" as that term is defined in Rule 501(a)
of the Securities Act.
At March 31, 1997, the Company had $1,200,793 outstanding under repurchase
agreements. The weighted average interest rate on these repurchase agreements
was 12.91 percent. Securities listed on the Prague Stock Exchange Main Market
with a market value of approximately $1,700,000 were used to collateralize this
arrangement.
Effects of Inflation
The Company maintains operations in several economies that are considered
inflationary. To the extent that inflation results in rising interest rates and
devaluation of the local currencies in relation to the U.S. dollar have other
adverse affects on the securities markets and on the value of securities held in
inventory, it may affect the Company's
- 21 -
<PAGE>
financial position and results of operations. The inflation rates in the
countries where Eastbrokers Vienna has significant operations for 1996 are as
follows: Austria - 2 percent, Czech Republic - 8 percent, Hungary - 19 percent,
Poland - 18 percent, and Slovak Republic - 5 percent.
- 22 -
<PAGE>
Selected Financial Data
The historical selected financial data set forth below for the respective
periods are derived from the Company's financial statements included elsewhere
in this Form 10-KSB and should be read in conjunction with those financial
statements and notes thereto. Those financial statements have been audited by
Pannell Kerr Forster PC, independent certified public accountants, whose report
with respect thereto appears elsewhere in this Form 10-KSB.
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balance Sheet Data
Assets $ 26,242,561 $ 26,251,364 $ 32,014,929
Liabilities 2,300,136 2,208,481 12,613,492
Minority interest in consolidated subsidiaries 9,353,228 9,353,228 1,549,386
Stockholders' equity 14,589,197 14,689,655 17,852,051
Statement of Operations Data
December 31, March 31, March 31,
1995 1996 1997
-------------- -------------- --------------
Revenues
Principal transactions, net $ 637,417 $ 327,104 $ 1,872,767
Commissions, underwritings & fees -- -- 1,588,726
Interest, dividends & other revenues 227,119 72,114 2,486,785
Equity in earnings of unconsolidated affiliates 87,072 -- (396,209)
-------------- -------------- --------------
951,608 399,218 5,552,069
-------------- -------------- --------------
Expenses
Compensation and benefits 342,904 106,583 1,712,308
Commissions -- -- 469,111
Professional and consulting fees -- -- 867,302
General and administrative 229,906 133,929 642,897
Other operating costs 310,248 58,248 1,801,005
-------------- -------------- --------------
883,058 298,760 5,492,623
-------------- -------------- --------------
Net income from continuing operations
before income taxes and minority interest 68,550 100,458 59,446
Provision for income taxes 5,484 -- 249,911
Minority interest in earnings of subsidiaries -- -- 105,416
-------------- -------------- --------------
Income (loss) from continuing operations 74,034 100,458 414,773
Discontinued operations 181,764 -- (1,281,184)
-------------- -------------- --------------
Net income (loss) $ 255,798 $ 100,458 $ (866,411)
============== ============== ==============
</TABLE>
- 23 -
<PAGE>
Item 7. Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Historical Financial Statements
Independent Auditor's Report........................................................... 25
Consolidated Statements of Financial Condition......................................... 26
Consolidated Statements of Operations
Year Ended December 31, 1995, Transition Period Ended March 31, 1996,
and Year Ended March 31, 1997..................................................... 27
Consolidated Statements of Changes in Stockholders' Equity............................. 28
Consolidated Statements of Cash Flows.................................................. 29
Notes to Consolidated Financial Statements............................................. 31
</TABLE>
- 24 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Eastbrokers International Incorporated
We have audited the accompanying consolidated statements of financial condition
of Eastbrokers International Incorporated and subsidiaries (formerly Czech
Industries, Inc.) as of December 31, 1995, March 31, 1996, and March 31, 1997,
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the years ended December 31, 1995 and March 31, 1997
and the three month transition period ended March 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eastbrokers
International Incorporated and subsidiaries as of December 31, 1995, March 31,
1996 and March 31, 1997, and the results of operations and its cash flows for
the years ended December 31, 1995 and March 31, 1997 and the three month
transition period ended March 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Pannell Kerr Forster PC
June 23, 1997
- 25 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1995 1996 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 2,316,991 $ 5,190,586 $ 6,867,624
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations - - 119,274
Securities purchased under agreements to resell - - 408,865
Receivables
Customers 325,942 325,942 1,904,112
Broker dealers and other - - 572,399
Affiliated companies - - 1,511,917
Other 1,225,500 - 2,043,306
Securities owned, at value
Equities and other - - 4,253,164
Buildings, furniture and equipment, at cost (net of
accumulated depreciation and amortization of
$604,374, $604,374 and $840,217, respectively) 18,560,155 18,565,670 926,565
Deferred taxes 82,565 82,565 289,938
Available for sale securities 3,258,413 1,677,623 2,378,054
Investments in affiliated companies - - 7,064,064
Goodwill - - 2,453,454
Other assets and deferred amounts 472,995 408,978 1,222,193
---------------- ---------------- -----------------
Total Assets $ 26,242,561 $ 26,251,364 $ 32,014,929
================ ================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ - $ - $ 1,602,182
Affiliated companies - - 1,480,700
Securities sold under agreements to repurchase - - 1,200,793
Bonds payable - - 2,307,500
Payables
Customers - - 1,051,810
Broker dealers and other - - 960,226
Accounts payable and accrued expenses 200,478 182,049 1,573,104
Other liabilities and deferred amounts - - 1,502,803
---------------- ---------------- -----------------
200,478 182,049 11,679,118
Long-term borrowings 2,099,658 2,026,432 934,374
---------------- ---------------- -----------------
Total liabilities 2,300,136 2,208,481 12,613,492
---------------- ---------------- -----------------
Minority interest in consolidated subsidiaries 9,353,228 9,353,228 1,549,386
---------------- ---------------- -----------------
Stockholders' equity
Common stock; $.05 par value; 10,000,000 shares authorized; 1,781,000,
1,781,000, and 2,923,000 shares issued and and outstanding at
December 31, 1995, March 31, 1996 and
March 31, 1997, respectively 89,050 89,050 146,150
Paid-in capital 13,693,733 13,693,733 19,314,883
Retained earnings (accumulated deficit) 248,324 348,782 (517,629)
Treasury stock, at cost - - (213,750)
Unrealized loss on available for sale investments - - (246,794)
Cumulative translation adjustments 558,090 558,090 (630,809)
---------------- ---------------- -----------------
Total stockholders' equity 14,589,197 14,689,655 17,852,051
---------------- ---------------- -----------------
Total Liabilities and Stockholders' Equity $ 26,242,561 $ 26,251,364 $ 32,014,929
================ ================ =================
</TABLE>
See notes to consolidated financial statements.
- 26 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the
For the Transition For the
Year Ended Period Ended Year Ended
December 31, March 31, March 31,
1995 1996 1997
------------------ ------------------ -------------------
<S> <C> <C> <C>
Revenues
Commissions $ - $ - $ 439,531
Underwritings - - 343,998
Fees - - 805,197
Interest and dividends - - 557,188
Principal transactions, net
Trading - - 1,886,478
Investment 637,417 327,104 1,872,767
Other 227,119 72,114 312,725
Equity in earnings (losses) of unconsolidated affiliates 87,072 - (396,209)
------------------ ------------------ -------------------
Total revenues 951,608 399,218 5,821,675
------------------ ------------------ -------------------
Costs and expenses
Compensation and benefits 342,904 106,583 1,712,308
Commissions - - 469,111
Interest 148,677 45,595 236,235
Occupancy - - 333,096
Office supplies and expenses - - 240,448
Communications - - 177,473
Advertising - - 163,159
Professional fees - - 123,905
Consulting fees - - 743,397
Travel - - 209,977
General and administrative 229,906 133,929 642,897
Depreciation and amortization - - 274,573
Loss on foreign currency transactions 161,571 12,653 166,044
------------------ ------------------ -------------------
Total costs and expenses 883,058 298,760 5,492,623
------------------ ------------------ -------------------
Income from continuing operations
before provision for income taxes and
minority interest in earnings of subsidiaries 68,550 100,458 329,052
Income tax benefit (expense) 5,484 - (19,695)
Minority interest in earnings of subsidiaries - - 105,416
------------------ ------------------ -------------------
Income from continuing operations 74,034 100,458 414,773
Discontinued operations
Income from discontinued operations (net of income taxes of $75,867 for the
year ended December 31, 1995 and
$0 for the year ended March 31, 1997) 181,764 - 41,899
Loss on sale of discontinued operations - - (1,323,083)
------------------ ------------------ -------------------
Net income (loss) $ 255,798 $ 100,458 $ (866,411)
================== ================== ===================
Weighted average number of shares outstanding 1,781,000 1,781,000 2,497,137
================== ================== ===================
Income from continuing operations per share $ 0.04 $ 0.06 $ 0.17
================== ================== ===================
Net income (loss) per share $ 0.14 $ 0.06 $ (0.35)
================== ================== ===================
</TABLE>
See notes to consolidated financial statements.
- 27 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 1995, the Transition Period Ended March 31, 1996
and the Year Ended March 31, 1997
<TABLE>
<CAPTION>
Unrealized
Retained Loss
Common Stock Earnings Available Cumulative
----------------------- Paid-in (Accumulated Treasury For Sale Translation
Shares Par value Capital Deficit) Stock Investments Adjustment Total
----------- ----------- ----------- ------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 865,083 $ 43,254 $ 2,034,193 $ (7,474) $ - $(111,083) $ 310,905 $2,269,795
Redemption of stock, January 1995 (200,083) (10,004) (239,996) - - - - (250,000)
Redemption of initial warrants - - (200,000) - - - - (200,000)
Stock issued to bridge lenders 250,000 12,500 (12,500) - - - - -
Recovery of unrealized losses - - - - - 111,083 - 111,083
Proceeds of secondary offering, net 866,000 43,300 12,112,036 - - - - 12,155,336
Net income - - - 255,798 - - - 255,798
Cumulative translation adjustment - - - - - - 247,185 247,185
----------- --------- ------------ ---------- ---------- ---------- ---------- -----------
Balances, December 31, 1995 1,781,000 89,050 13,693,733 248,324 - - 558,090 14,589,197
Net income, transition period - - - 100,458 - - - 100,458
----------- --------- ------------ ---------- ---------- ---------- ---------- -----------
Balances, March 31, 1996 1,781,000 89,050 13,693,733 348,782 - - 558,090 14,689,197
Issuance of common stock in
Eastbrokers AG acquisition 1,080,000 54,000 5,346,000 - - - - 5,400,000
Issuance of common stock in
Eastbrokers NA acquisition 25,000 1,250 98,750 - - - - 100,000
Issuance of common stock
in compensation for services 37,000 1,850 176,400 - - - - 178,250
Acquisition of treasury stock - - - - (213,750) - - (213,750)
Net unrealized loss on investments - - - - - - - (246,794)
Net income - - - (866,411) - - - (866,411)
Cumulative translation adjustment - - - - - - (1,188,899) (1,188,899)
----------- --------- ------------- ---------- ---------- ---------- ---------- -----------
Balances at March 31, 1996 2,923,000 $146,150 $19,314,883 $(517,629) $(213,750) $(246,794) $(630,809) $17,852,051
=========== ========= ============= ========== ========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
- 28 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the
For the Transition For the
Year Ended Period Ended Year Ended
December 31, March 31, March 31,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 255,798 $ 100,458 $ (866,411)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 180,315 - (105,416)
Gain on the sale of investments (706,869) (327,104) (884,530)
Loss on sale of discontinued operations - - 1,323,083
Depreciation and amortization 420,795 - 274,573
Deferred taxes 69,117 - (69,377)
Equity in (earnings) loss of unconsolidated affiliates (87,072) - 396,209
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies - - (85,696)
Securities purchased under agreements to resell - - 6,278,371
Receivables
Customers 129,713 - 1,093,680
Brokers, dealers and others - - 202,244
Other - - 745,297
Securities owned, at value - - (3,285,493)
Other assets (191,624) 64,017 (214,931)
Payables
Customers - - (8,529,846)
Brokers, dealers and others - - 77,726
Accounts payable and accrued expenses (19,109) (18,429) 1,374,879
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities 51,064 (181,058) (2,275,638)
----------------- ----------------- -----------------
Cash flows from investing activities
Net proceeds from (payments for)
Acquisition of net assets of Eastbrokers
Beteiligungs AG, net of cash acquired - - (1,389,577)
Investments in affiliates (6,467,388) - (3,619,137)
Proceeds from the disposition of affiliate 2,662,609 3,099,403 -
Available for sale securities 1,045,279 - 6,277,191
Furniture and equipment (302,908) (5,515) (503,336)
----------------- ----------------- -----------------
Net cash provided by (used in) investing activities (3,062,408) 3,093,888 765,141
----------------- ----------------- -----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from public offering 12,155,336 - -
Capital contributions by minority interests 1,056,295 - 304,166
Common stock and warrants reacquired (450,000) - -
Short-term borrowings - - 568,303
Securities sold under agreements to repurchase - - 1,200,793
Other long-term debt (6,755,685) - -
Repurchase of common stock - - (213,750)
----------------- ----------------- -----------------
Net cash provided by (used in) financing activities 6,005,946 - 1,859,512
----------------- ----------------- -----------------
Foreign currency translation adjustment (889,875) (39,235) 1,328,023
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 2,104,727 2,873,595 1,677,038
Cash and cash equivalents, beginning of period 212,264 2,316,991 5,190,586
----------------- ----------------- -----------------
Cash and cash equivalents, end of period $ 2,316,991 $ 5,190,586 $ 6,867,624
================= ================= =================
</TABLE>
See notes to consolidated financial statements.
- 29 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For the
For the Transition For the
Year Ended Period Ended Year Ended
December 31, March 31, March 31,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ 12,847 $ 371,534
----------------- ----------------- -----------------
Cash paid for interest $ 395,493 $ - $ 87,795
----------------- ----------------- -----------------
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 acquisition
of net assets of Eastbrokers Beteiligungs AG $ - $ - $ 5,400,000
----------------- ----------------- -----------------
Eastbrokers International shares issued in
compensation for services $ - $ - $ 178,250
----------------- ----------------- -----------------
Eastbrokers International shares issued for acquisition
of net assets of Eastbrokers North America, Inc. $ - $ - $ 90,000
----------------- ----------------- -----------------
Valuation adjustment of available for sale securities $ - $ - $ 246,794
----------------- ----------------- -----------------
Stock subscription payable assumed on
purchase of Moravacentrum, a.s. $ (864,024) $ - $ -
----------------- ----------------- -----------------
Stock subscription payable transferred to
purchaser on sale of Moravacentrum, a.s. $ 864,024 $ - $ -
----------------- ----------------- -----------------
</TABLE>
See notes to consolidated financial statements.
- 30 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements
For the Year Ended March 31, 1997
1. 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
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
- 31 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
1. Summary of Significant Accounting Policies (continued)
Financial Instruments (continued)
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
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.
- 32 -
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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.
Buildings, Furniture, and Equipment
Furniture and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets
ranging from four to ten years. Buildings are carried at cost and
depreciated on a straight-line basis over a period of 50 years.
Common Stock Data
Earnings (loss) 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 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 (loss) per share calculation as their effect
would be antidilutive.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has elected to account for its stock-based
compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). Under the provisions of APB No. 25, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's common stock at the date of grant over the
amount an employee must pay to acquire the stock.
Deferred Income Taxes
Deferred income taxes in the accompanying financial statements reflect
temporary differences in reporting results of operations for income tax and
financial accounting purposes.
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.
- 33 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
2. Cash and Securities Segregated Under Federal and Other Regulations
Cash and securities segregated for regulatory purposes or as deposits with
clearing organizations was $119,274 as of March 31, 1997. There were no
such amounts segregated as of December 31, 1995 and March 31, 1996.
3. 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:
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Securities purchased under agreements to resell
Sovereign government debt - Hungary $ -- $ -- $ 228,965
Corporate equities - Hungary -- -- 179,900
-------------- -------------- --------------
$ -- $ -- $ 408,865
============== ============== ==============
Securities owned at value
Corporate equities - Austria $ -- $ -- $ 2,208,623
Corporate equities - Czech Republic -- -- 871,638
Corporate equities - Slovak Republic -- -- 485,141
Corporate equities - Poland -- -- 687,762
-------------- -------------- --------------
$ -- $ -- $ 4,253,164
============== ============== ==============
Available for sale securities
Corporate equities - Austria $ -- $ -- $ 40,321
Corporate equities - Czech Republic 3,258,413 1,677,623 1,893,115
Corporate equities - Hungary -- -- 189,610
Corporate equities - Slovak Republic -- -- 255,008
-------------- -------------- --------------
$ 3,258,413 $ 1,677,623 $ 2,378,054
============== ============== ==============
</TABLE>
4. Buildings, Furniture and Equipment
Buildings, furniture and equipment are summarized below:
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Buildings $ 18,624,248 $ 18,624,248 $ --
Furniture and equipment 540,281 545,796 1,766,782
-------------- -------------- --------------
19,164,529 19,170,044 1,766,782
Less accumulated depreciation (604,374) (604,374) (840,217)
-------------- -------------- --------------
$ 18,560,155 $ 18,565,670 $ 926,565
============== ============== ==============
</TABLE>
Depreciation expense for the year ended December 31, 1995, the transition
period ended March 31, 1996, and the year ended March 31, 1997 was
$227,586, $0, and $108,915, respectively.
- 34 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
5. Business Acquisitions
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. 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 three separate
transactions in November and December 1996 and March 1997, the Company
purchased 81,550 additional shares, increasing its ownership percentage to
approximately 94 percent.
The fair value of the net assets acquired under these transactions
approximated $8,400,000. 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 $1,950,000 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. These consolidated financial statements
include the consolidated results of operations of Eastbrokers Vienna from
the date of acquisition through December 31, 1996 in accordance with Note
1. 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.
Eastbrokers Vienna completed the acquisition of its subsidiary, Eastbrokers
Warsaw, in September 1996. This acquisition has been accounted for under
the purchase method of accounting. The fair value of the net assets
acquired under this transaction approximated $1,169,000 as of the date of
acquisition. The excess of the purchase price over the fair value of the
net assets acquired by Eastbrokers Vienna approximated $231,000 which has
been recorded as goodwill and is being amortized over 25 years on a
straight-line basis.
In September 1996, Eastbrokers Vienna acquired additional shares of
Eastbrokers Wertpapiervermittlungs-gesellschaft mbH ("Eastbrokers GmbH")
and Eastbrokers Slovakia a.s. from two related parties (see Note 12). These
acquisitions have been accounted for under the purchase method of
accounting. The fair value of the net assets acquired under this
transaction approximated $46,000 as of the date of acquisition. The excess
of the purchase price over the fair value of the net assets acquired by
Eastbrokers Vienna approximated $438,000 which has been recorded as
goodwill and is being amortized over 25 years on a straight-line basis.
Eastbrokers North America, Inc.
On March 6, 1997, the Company acquired a 90 percent interest in Financial
Planning Services, Inc. ("FPSI"), a Delaware corporation and member firm of
the National Association of Securities Dealers, Inc. ("NASD") from Mr.
Robert Sass. As consideration for this 90 percent interest in FPSI, the
Company issued 22,500 shares of the Company's common stock. The value
assigned to this stock as of the date of transfer was $4.00 per share. FPSI
has been renamed Eastbrokers North America, Inc. ("Eastbrokers NA") to
reflect its affiliation.
The net assets acquired under this transaction approximated $90,000 and the
acquisition has been accounted for under the purchase method of accounting.
There was no excess of the purchase price over the fair value of the net
assets received at the date of acquisition. These consolidated financial
statements include the results of operations of Eastbrokers NA from the
date of acquisition through March 31, 1997 in accordance with Note 1.
- 35 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
5. Business Acquisitions (continued)
Pro forma Results of Operations
The following summarized, unaudited, pro forma results of operations for
the years ended December 31, 1995 and March 31, 1997 assumes the above
listed acquisitions occurred at the beginning of the respective periods.
The effects of discontinued operations have been excluded from these
computations. There was no effect for the transition period ended March 31,
1996.
Year Ended Year Ended
December 31, 1995 March 31, 1997
----------------- ----------------
Revenues from continuing operations $ 7,193,061 $8,639,986
Net income from continuing operations 891,859 77,167
Net income per share from continuing operations 0.31 0.03
6. Investments in Affiliated Companies
Investment in WMP Borsenmakler Aktiengesellschaft
Through its subsidiary, Eastbrokers Vienna, the Company owns a 49 percent
interest in the outstanding 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 $6,547,821 on March
31, 1997. The summarized statement of financial condition and statement of
operations information for WMP for the year ended December 31, 1996 was as
follows:
1996
-----------
Summarized Statement of Financial Condition
Total assets $18,938,275
Total liabilities 4,513,957
-----------
Stockholders' equity $14,424,318
===========
Summarized Statement of Operations
Revenues $ 4,559,675
Expenses 4,240,310
-----------
Net income $ 319,365
===========
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.
The summarized financial information for WMP reflects earnings for the
twelve month period ended December 31, 1996. During the period from August
1, 1996 through December 31, 1996, WMP experienced losses from operations
of approximately $510,000. The Company's proportionate share of these
losses was approximately $250,000 USD.
- 36 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
6. Investments in Affiliated Companies (continued)
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 December 31, 1996, these unconsolidated affiliate
investments included the following offices: Zagreb, Croatia; Ljubljana,
Slovenia; Almaty, Kazakhstan; Moscow, Russia; Sofia, Bulgaria; Slovakia
Industries; and NIF TRUD Investment Fund. The combined carrying amount of
these investments was $516,243. Losses from these operations totaled
approximately $145,000 USD in the period from August 1, 1996 through
December 31, 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.
7. 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
The Company had outstanding advances on its lines of credit totaling
$1,602,182 at year end. 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.
Securities Sold Under Agreements to Repurchase
At March 31, 1997, the Company had $1,200,793 outstanding under repurchase
agreements. The weighted average interest rate on these repurchase
agreements was 12.91 percent. Securities listed on the Prague Stock
Exchange Main Market with a market value of approximately $1,700,000 were
used to collateralize this arrangement.
Unsecured Bonds Payable
The Company has unsecured bonds with a face value of 25 million Austrian
Schillings requiring annual interest payments at 10 percent per annum which
mature on July 31, 1997. At March 31, 1997, the amount due under these
obligations was $2,307,500.
8. Long-Term Borrowings
Long-term borrowings consist of the following:
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1995 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
Note payable to a finance company, requiring
semi-annual interest payments of 9.00
</TABLE>
- 37 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
8. Long-Term Borrowings (continued)
<TABLE>
<CAPTION>
December 31, March 31, March 31,
1995 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
percent, principal due at maturity on September
30, 1997, secured by 73,200 shares of Fortuna
Hotel, a.s. common stock $ 2,099,658 $ 2,026,432 $ --
Note payable to a financial institution
requiring quarterly interest payments
computed at 6.50 percent on a 360 day
year, collateralized by 157,061 shares of
WMP Borsenmakler Aktiengesellschaft,
principal of 10,000,000 Austrian
Schillings and accrued interest payable in
full at November 30, 2001 -- -- 934,374
------------ ------------ ------------
$ 2,099,658 $ 2,026,432 $ 934,374
============ ============ ============
</TABLE>
9. Commitments and Contingencies
Leases and Related Commitments
The Company occupies office space under leases which expire at various
dates through 2001. The various leases contain provisions for periodic
escalations to the extent of increases in certain operating and other
costs. The Company incurred rent expense under non-cancelable operating
leases in the approximate amounts of $19,000, $12,000, and $35,000 for the
periods ended December 31, 1995, March 31, 1996, and March 31, 1997,
respectively.
Minimum future rentals under these non-cancelable leases for the fiscal
years ending 1998 through 2002 are approximately as follows: 1998 --
$130,000; 1999 -- $144,000; 2000 -- $144,000; 2001 -- $104,000; and 2002 --
$84,000 and in the aggregate $606,000.
The Company's subsidiaries occupy office space under various operating
leases which contain cancellation clauses whereby the Company may cancel
the lease with thirty to ninety days written notice.
Hotel Fortuna Leases
During the years ended December 31, 1995 and March 31, 1997, the Fortuna
Hotel, a.s. (Fortuna) was subject to land and equipment leases. Under the
terms of these leases, Fortuna incurred rent expense in the approximate
amounts of $350,000 and $310,000, respectively.
10. Stockholders' Equity
On December 10, 1996, the Board of Directors approved a plan whereby the
Company was authorized to begin a buy-back program of its common stock.
Under the terms of this plan, the Company was authorized to redeem up to
$1,000,000 of common stock at a price not to exceed $5.00 per share
beginning in January 1997. On January 23, 1997, the Company redeemed 45,000
of its outstanding shares at $4.75 per share. Currently, the Company's
common stock is trading at a price in excess of the approved plan and no
additional buy-backs are anticipated.
In connection with its secondary offering in June 1995, the Company issued
5,505000 Class A Warrants and 1,250,000 Class B Warrants. Both Classes of
Warrants expire in June 2000.
Certain U.S. and non-U.S. subsidiaries are subject to various securities,
commodities and banking regulations,
- 38 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
10. Stockholders' Equity (continued)
and capital adequacy requirements promulgated by the regulatory and
exchange authorities of the countries in which they operate. These
subsidiaries have consistently operated in excess of their local capital
adequacy requirements.
On August 1, 1996, the Company issued 1,080,000 shares of its common stock
to the selling security holders of Eastbrokers Beteiligungs AG in a
transaction valued at $5,400,000. During the period surrounding the
acquisition, the Company's common stock was trading approximately between
$6.25 and $8.00 per share for its fully registered and unrestricted shares.
Due to the nature of restricted shares and the various covenants
restricting the transfer of these shares, the Board of Directors assigned a
value of $5,400,000 to this transaction.
On March 6, 1997, the Company issued 22,500 shares of common stock value
relating to the acquisition of Eastbrokers North America, Inc. In a
separate but related transaction to the Eastbrokers North America, Inc.
acquisition, the Company sold 2,500 shares of the Company's stock to an
officer of the Company in exchange for a promissory note. These shares were
transferred to the selling shareholder of Eastbrokers North America, Inc.
as part of the acquisition. The shares were valued in accordance with the
terms of the Stock Purchase Agreement of Eastbrokers North America, Inc. As
of the date of the closing, the total amount of the common stock
transferred was $100,000.
During the year ended March 31, 1997, the Company issued a total of 37,000
shares of common stock at a per share price approximating the then current
market price for services rendered to the Company.
In April 1997, the Company issued 125,002 shares of common stock, par value
$.05, of the Company ("Common Stock"). The securities were sold to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,012 or $6.00 per share. The net proceeds to the
Company were $725,012. There were no underwriting discounts or commissions.
The Offering was made pursuant to an exemption from registration under Rule
506 of the Securities Act of 1933, as amended (the "Securities Act"). The
Offering was made only to selected "accredited investors" as that term is
defined in Rule 501(a) of the Securities Act.
Cumulative translation adjustments include gains or losses resulting from
translating foreign currency financial statements from their respective
functional currencies to U.S. dollars, net of hedge gains or losses and
related tax effects. Increases or decreases in the value of the Company's
net foreign investments generally are tax-deferred for U.S. purposes, but
the related hedge gains and losses are taxable currently. The primary
markets in which the Company operates are generally economies reliant on
the "soft" or "exotic" currencies prevalent in these markets. The Company
generally elects not to hedge its net monetary investments in these markets
due to the lack of availability of various currency contracts at acceptable
costs.
11. Stock Option Plan
During 1996, the Company adopted a non-qualified stock option plan (the
"plan") as part of an overall compensation strategy designed to facilitate
a pay-for-performance policy and promote internal ownership in order to
align the interests of employees with the long-term interests of the
Company's stock holders.
Under the terms of the plan, stock options granted will have an exercise
price not less than the fair value of the Company's common stock (as
defined in the plan) on the date of grant. Such options generally become
exercisable over a three-year period and expire 5 years from the date of
grant.
A total of 35,000 options a weighted average exercise price of $6.64 per
share were granted under this plan during the fiscal year ended March 31,
1997. The fair value of the options at the date of grant was estimated
using the Black-Scholes option pricing model utilizing the following
weighted average assumptions: risk-free interest rate - 5 percent; expected
option life in years - 5 years; expected stock price volatility - 97.7
percent; and expected dividend yield - 0.0 percent.
- 39 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
11. Stock Option Plan (continued)
An additional 200,000 options were granted outside of the plan at a
weighted average exercise price of $10.00 per share.
Had the Company elected to recognize compensation expense based on the fair
value of the options at the date of grant as prescribed by SFAS No. 123,
the net loss for the year would have been $1,553,935, the net loss per
share from continuing operations would have been ($0.11), and the net loss
per share for the year would have been ($0.62).
12. Related Party Transactions
Prior to the sale by the Company of the Hotel Fortuna a.s. (the "Hotel") on
October 1, 1996, the Company previously owned 50.2 % of the Hotel. See Item
3. Stratego Invest a.s. owned 20.6 % of the Hotel. Stratego Invest a.s. is
more than 50% owned by Stratego a.s., which is controlled by Ing. Petr
Bednarik, former President and CEO of the Company.
The sales 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.
In September 1996, Mr. Schmid received from Eastbrokers Beteiligungs AG
3,511,422 Austrian Schillings (approximately $340,000 USD) for his 49.95
percent ownership interest in Eastbrokers
Wertpapiervermittlungs-gesellschaft mbH ("Eastbrokers GmbH"), an Austrian
Securities Brokerage Company with limited liability. The nominal value of
these shares was 500,000 Austrian Schillings. Mr. Schmid, Chairman,
President, Chief Executive Officer, and Director of the Company, is also a
Director of Eastbrokers GmbH. Eastbrokers GmbH holds the ownership interest
for Eastbrokers Prague.
In September 1996, Mr. Schmid received 376,275 Austrian Schillings
(approximately $36,500 USD) for his 5.60 percent ownership interest in
Easbrokers Slovakia a.s., Bratislava ("Eastbrokers Slovakia"). Eastbrokers
Slovakia is the Company's subsidiary operating in the Slovak Republic. The
nominal value of these shares was 280,000 Slovak Koruna.
In September 1996, Mr. de Roode received 1,110,250 Austrian Schillings
(approximately $107,500 USD) for his 24.40 percent ownership interest in
Easbrokers Slovakia a.s., Bratislava ("Eastbrokers Slovakia"). Eastbrokers
Slovakia is the Company's subsidiary operating in the Slovak Republic. The
nominal value of these shares was 1,220,000 Slovak Koruna. Mr. de Roode was
Chief Executive Officer, Chief Operating Officer and Director of the
Company and was also a Director of Eastbrokers Slovakia at the date of this
transaction.
The Company has entered into a number of agreements with Randall F. Greene,
a former director of the Company. Mr. Greene provided consulting services
pursuant to an agreement dated July 26, 1996 in connection with the
Company's acquisition of Eastbrokers Vienna. Pursuant to this agreement,
Mr. Green received $20,000 as a non-accountable expense allowance and
10,000 shares of the Company's common stock. In addition, Mr. Greene was
paid $37,000 for consulting services provided to the Company in connection
with potential mergers and/or acquisitions. In December 1996, Mr. Greene
entered into an agreement with the Company and certain stockholders of the
Company pursuant to which he was to analyze and evaluate the Company's
operations and to assist the Company in evaluating certain possible
business
- 40 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
12. Related Party Transactions (continued)
combination transactions. Mr. Greene was to be compensated under this
agreement only in the event that such a business combination transaction
was succesfully completed. No such transactions have occurred, no
compensation was paid to Mr. Greene thereunder and the agreement has been
terminated. In addition, in connection with Mr. Greene's resignation from
the Board of Directors of the Company, the Company entered into a
consulting agreement dated March 27, 1997 pursuant to which Mr. Greene is
to provide business and financial advisory services to the Company and into
a related letter agreement also dated March 27, 1997, as amended by a
letter dated April 29, 1997. Under the consulting agreement, Mr. Greene is
to be compensated at the rate of $4,000 per month for the six month term of
the agreement which commenced on April 1, 1997. As additional compensation
under this agreement, Mr. Greene was granted options to purchase 7,750
shares of the Company's common stock at $6.50 per share. Under the related
letter agreement, Mr. Greene was paid $13,750 and granted 12,500 shares in
full satisfaction for consulting services rendered during the period August
1, 1996 through March 31, 1997. Also pursuant to this agreement, the
Company agreed to indemnify Mr. Greene against certain liabilities, the
parties exchanged mutual releases and Mr. Greene agreed to sell his shares
of the Company's common stock subject to certain conditions.
The Company entered into a Consulting Agreement dated March 31, 1997 with
Dr. Sumichrast, a Director of the Company, pursuant to which Dr. Sumichrast
will provide services to the Company through March 31, 1998, and the
Company has granted him 20,000 shares of the Company's Common Stock to vest
ratably over the term of the Agreement.
In March 1997, Eastbrokers Vienna purchased 30,000 shares of Schneiders
1895 AG for 3,618,000 Austrian Schillings (approximately $302,000 USD). Mr.
Schmid is also a Director of Schneiders 1895 AG. Mr. Schmid's father is an
Officer and Director of Schneiders 1895 AG.
During 1996, the Company entered into a verbal agreement with RealWorld, an
internet software developer, to design and build an online stock exchange
game and online trading system. The initial deposit to begin development of
the game and system was 530,000 Austrian Schillings (approximately $50,000
USD). Currently the Company has a liability to RealWorld of 208,000
Austrian Schillings (approximately $20,000 USD) representing amounts due on
progress billings. The agreement recognizes costs will be charged on an
hourly basis and monthly progress billings will be made once the original
deposit has been depleted. Dr. Muller-Tyl is a member of the Supervisory
Board for RealWorld. VCH and Messrs. Schmid, Kossner, and Muller-Tyl are
all shareholders of Realworld and represent a combined ownership interest
of 26 percent.
In December 1996, Eastbrokers Vienna loaned Dr. Muller-Tyl approximately
$72,000 USD. Interest on the outstanding balance of this obligation is
computed at 8 percent per annum until paid in full. Dr. Muller-Tyl is
currently the Chief Operating Officer of the Company.
The Company leases office space from Residenz Realbesitz AG ("Residenz")
for its Vienna operations. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $114,000 USD). The terms of this lease were negotiated such
that the Company is subject to occupancy expenses no greater than the
current market rates. Residenz is a subsidiary of General Partners
Beteiligungs AG ("General Partners") (formerly KHS Beteiligungs AG). Mr.
Kossner owns 30 percent of the outstanding shares of GP. He is a member of
GP's Supervisory Board, WMP's Supervisory Board, the Eastbrokers AG
Supervisory Board, and is a Director of the Company.
General Partners, of which Mr. Kossner is a principal stockholder and
member of the Supervisory Board, owns 535,539 shares of the Company's
outstanding shares.
- 41 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
12. Related Party Transactions (continued)
At December 31, 1996, the Company has a receivable related to share
transactions from Mr. Kossner in the amount of 2,269,198 Austrian
Schillings (approximately $209,000 USD).
At December 31, 1996, the Company has a receivable related to share
transactions from Z.E. Beteiligungs AG. in the amount of 5,537,202 Austrian
Schillings (approximately $511,000 USD). Z.E. Beteiligungs AG is a
subsidiary of General Partners.
WMP is an Austrian broker-dealer, market maker, and member of the Vienna
Stock Exchange. WMP's common stock is publicly traded on the Main Market of
the Vienna Stock Exchange. From time to time, WMP will make a market in a
company's stock that has a direct relationship to the Company through its
directors.
13. Income Taxes
The Company's subsidiaries are subject to income taxes in the various
countries in which they operate.
The provision for (benefit from) income taxes is summarized as follows:
<TABLE>
<CAPTION>
Three Month
Transition
Year Ended Period Ended Year Ended
December 31, March 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Current
Federal $ -- $ -- $ --
State -- -- --
Foreign -- -- 89,072
-------------- -------------- --------------
Total from continuing operations -- -- 89,072
Deferred
Federal 19,304 -- --
State 4,274 -- --
Foreign 46,805 -- (69,377)
-------------- -------------- --------------
Total from continuing operations 70,383 -- (69,377)
-------------- -------------- --------------
$ 70,383 $ -- $ 19,695
============== ============== ==============
The following is a reconciliation of income tax expense (benefit) at the
Federal statutory rates with income taxes recorded by the Company.
Three Month
Transition
Year Ended Period Ended Year Ended
December 31, March 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Income taxes at Federal statutory rate $ 172,209 $ -- $ 111,878
State income taxes net of Federal tax benefit 23,400 -- 15,202
Change in valuation allowance (93,217) -- 697,301
Discontinued operations -- -- (510,975)
</TABLE>
- 42 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
13. Income Taxes (continued)
<TABLE>
<CAPTION>
Three Month
Transition
Year Ended Period Ended Year Ended
December 31, March 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Actual statutory income tax rates less than
effective domestic income tax rate -- -- (71,471)
Non-taxable income under foreign regulations
Slovak Republic -- -- (191,515)
Other (32,009) -- 1,926
-------------- -------------- --------------
$ 70,383 $ -- $ 19,695
============== ============== ==============
</TABLE>
Temporary differences which give rise to deferred tax assets are as
follows:
<TABLE>
<CAPTION>
Three Month
Transition
Year Ended Period Ended Year Ended
December 31, March 31, March 31,
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Depreciation and amortization $ (141,747) $ -- $ 6,020
Basis difference on building 123,110 -- --
Basis difference on marketable securities -- -- (133,385)
Other -- -- (11,425)
Net operating losses available for carryforward 101,202 -- 938,033
------------- -------------- --------------
82,565 -- 799,243
Valuation allowance -- -- (697,301)
------------- -------------- --------------
82,565 -- 101,942
Eastbrokers AG deferred taxes acquired -- -- 187,996
------------- -------------- --------------
$ 82,565 $ -- $ 289,938
============= ============== ==============
</TABLE>
The foreign effective tax rates utilized for purposes of computing income
taxes are not substantially different from the combined effective domestic
rates utilized for computing domestic taxes except for Hungary where the
effective statutory rate is approximately 25 percent. The temporary
differences giving rise to the deferred tax asset are primarily net
operating loss carryforwards.
The foreign net operating loss carryforwards are primarily in Austria and
are approximately 11,500,000 Austrian Schillings (approximately $1,060,000
USD). These net operating losses are available for carryforward
indefinitely. The Company has not established a valuation allowance for the
Austrian net operating losses due to a history of profitable operations in
1993, 1994, and 1995. The Company also expects its Austrian operations to
return to profitability in the fiscal year ending March 31, 1999. Further,
the Austrian net operating losses are available for carryforward
indefinitely. Accordingly, the Company believes it is more likely than not
that these benefits will be realized in the future. The non-taxable income
under foreign regulations in the Slovak Republic is capital gain
distribution income to the owners of record and is related to Slovak
privatization activities in which Eastbrokers Vienna was actively involved.
This income was received in the fourth quarter. Distributions of this
nature are non-taxable under Slovak
- 43 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware corporation)
Notes to Consolidated Financial Statements (continued)
For the Year Ended March 31, 1997
13. Income Taxes (continued)
Republic regulations. The domestic net operating loss carryforwards are
approximately $1,800,000 and will expire, if unused, in varying amounts
through the year 2012. The deferred tax asset related to discontinued
operations was computed at the effective domestic statutory rates and has
been fully reserved.
14. Segment Information
Segment information is as follows for the year ended March 31, 1997:
<TABLE>
<CAPTION>
Share of
(Loss) of
Unconsolidated Identifiable Net Income
Revenues Entities Assets (Loss)
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Austria $ 1,514,097 $ (396,209) $13,075,950 $ 217,388
Czech Republic 656,079 -- 2,202,134 (130,214)
Hungary 387,519 -- 2,117,066 56,166
Poland 921,856 -- 2,341,507 (20,705)
Slovak Republic 854,733 -- 3,071,805 596,560
United States 1,161,940 -- 9,136,486 (1,606,814)
Other 55,845 -- 69,981 21,208
--------------- ---------------- --------------- ----------------
Total $ 5,552,069 $ (396,209) $32,014,929 $ (866,411)
--------------- ---------------- --------------- ----------------
</TABLE>
For the year ended December 31, 1995 and the transition period ended March
31, 1996, substantially all of the Company's revenues and expenses were
generated through the Company's sole operating entity. Accordingly, no
segment information has been provided for these periods.
15. Discontinued Operations
In October 1996, the Company agreed to sell its interest in the Hotel
Fortuna, a.s. ("Fortuna") for 100,000 shares of Ceske energeticke zavody
a.s. ("CEZ") and 86,570 shares of Vodni stavby Praha a.s. based on the then
current market prices for each stock. In November 1996, the sales
transaction was completed. As of the sale date, the Company revised its
estimate of the net realizable value of the shares received based on the
then current market prices for each stock. As a result, the Company
recognized a loss on the sale of discontinued operations of ($1,323,083).
An income from discontinued operations was $41,899 through the sale date.
16. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per share".
The effective date is for financial statements with periods ending after
December 15, 1997 and changes the method by which earnings per share will
be computed. Adoption of this statement will not have a material effect on
earnings per share.
- 44 -
<PAGE>
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company has not had any changes in or disagreements with its principal
independent accountant within its two most recent fiscal years.
- 45 -
<PAGE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors and Executive Officers
Biographical information, including the age, position held with the
Company, term of office as officer or director, employment during the past five
years, and certain other directorships of each officer or director is set forth
below. Messr. Kossner has been elected to serve as director until the annual
meeting of stockholders to be held during the year 1999. Messrs. Michael
Sumichrast, Ph.D. and Martin A. Sumichrast have been elected as directors, each
to serve until the annual meeting of stockholders to be held during the year
1998. Messr. Schmid has been elected as director to serve until the annual
meeting of stockholders to be held during the year 1997. There are no family
relationships among any officers and directors of the Company, except that
Michael Sumichrast, Ph.D. and Martin A. Sumichrast are father and son,
respectively.
PETER SCHMID, 31, Chairman of the Board and Chief Executive Officer of the
Company since March 1997; President of the Company since August 1996; a Director
of the Company since January 1994. Since 1991, Mr. Schmid has been a founder,
Chairman of the Board, Chief Executive Officer, and Member of the Supervisory
Board of Eastbrokers Beteiligungs AG, a Vienna based securities brokerage firm
which was acquired by the Company in August 1996. Mr. Schmid is also Member of
the Supervisory Board of WMP Borsenmakler AG, a Vienna based investment firm;
Eastbrokers a.s. Prague, a subsidiary and Prague, Czech Republic based
securities brokerage firm; Eastbrokers Slovakia a.s., Bratislava, a subsidiary
and Bratislava, Slovak Republic based securities brokerage firm; Eastbrokers
Zagreb an affiliate office and Stock Company for Mediation, a Zagreb, Croatia
based securities brokerage firm; Eastbrokers WDM s.a., Warsaw, a subsidiary and
Warsaw, Poland based securities brokerage firm; NIF Trud (National Cooperative
Investment Fund plc, Sofia), an affiliate office and Sofia, Bulgaria based
investment fund; Eastbrokers Budapest Rt., a subsidiary and Budapest, Hungary
based securities brokerage firm; Eastbrokers s.a., Bucharest, a subsidiary and
Bucharest, Romania based securities brokerage firm; and Eastbrokers d.d.,
Ljubljana, an affiliate office and Ljubljana, Slovenia based securities
brokerage firm; and Schneiders 1895 AG, a retailing firm. Mr. Schmid is also a
Director of Eastbrokers North America, Inc., a subsidiary and New York, New York
based securities brokerage firm.
MARTIN A. SUMICHRAST, 30, Vice Chairman of the Company since March 1997;
Secretary, and a Director of the Company since its inception in 1993. Mr.
Sumichrast is a founder of the Company and was formerly Executive Vice President
and Chief Financial Officer of the Company. Mr. Sumichrast is also Chairman of
Eastbrokers North America, a subsidiary of the Company and New York, New York
based brokerage firm. From 1987 until 1992, Mr. Sumichrast served as the
President of Sumichrast Publications, Inc., a real estate publication located in
Rockville, Maryland. Mr. Sumichrast also serves as President of Sumichrast
Enterprises, Inc., a holding company located in Rockville, Maryland.
KEVIN D. MCNEIL, 37, Vice President, Treasurer and Chief Financial Officer since
March 1997. Since August 1996, Mr. McNeil had been the comptroller of the
Company. Mr. McNeil implemented an accounting system that consolidates the
financial statements of eleven different standards of accounting and currencies
into U.S. general accepted accounting principles for filing with the United
States Securities and Exchange Commission and the National Association of
Securities Dealers. Mr. McNeil is also Secretary/Treasurer of Eastbrokers North
America, Inc., a subsidiary of the Company and New York, New York based
securities brokerage firm. From 1994 to 1996, Mr. McNeil served as a supervising
auditor for Pannell Kerr Forster PC, an international accounting firm. From 1990
until 1994, Mr. McNeil served as a supervising auditor for Schoenadel, Marginot
& Company, CPAs, a large local accounting firm. Incident to a divorce, Mr.
McNeil filed for personal bankruptcy and was granted relief under Chapter 7 in
1994. Mr. McNeil is a member of the American Institute of Certified Public
Accountants, the Virginia Society of Certified Public Accountants and the
International Auditors Division of the Securities Industry Association. Mr.
McNeil holds a B.S. degree from Kansas State University.
FALKO MUELLER-TYL, 27, Vice President and Chief Operating Officer since March
1997. Dr. Mueller-Tyl joined Eastbrokers Beteiligungs AG in 1994, after
finishing his Ph.D. at the University of Economics and Business Administration
in Vienna, where he was also a teaching assistant. Formerly, he was involved in
various consulting projects with the Eastbrokers group and other companies. Dr.
Mueller-Tyl now is a member of the supervisory
- 46 -
<PAGE>
board of Eastbrokers Beteiligungs AG and Vice President and the Chief Operating
Officer of the Company, responsible for the supervision of the Eastern European
operations. Dr. Mueller-Tyl serves as General Manager of Eastbrokers
Wertpapiervermittlungs-gesellschaft mbH ("Eastbrokers GmbH"), an Austrian
Securities Brokerage Company with limited liability; WMP Vermogensverwaltungs
GmbH, an Austrian property management company; and VCH Vermogensverwaltund und
Holding GmbH ("VCH"), a property management and holding company. Dr. Mueller-Tyl
also serves on the supervisory boards of Eastbrokers Beteiligungs AG, a Vienna
based securities brokerage firm; Eastbrokers Slovakia a.s., Bratislava, a
subsidiary and Bratislava, Slovak Republic based securities brokerage firm;
Eastbrokers WDM s.a., Warsaw, a subsidiary and Warsaw, Poland based securities
brokerage firm; Eastbrokers s.a., Bucharest, a subsidiary and Bucharest, Romania
based securities brokerage firm; and RealWorld, an internet software developer.
JOHN PAUL DEVITO, 41, Vice President, Brokerage and Sales, since January 1997.
Mr. DeVito has been in the financial service industry since 1976, and holds
eight securities licenses. Mr. De Vito is also President and Chief Executive
Officer of Eastbrokers North America, Inc., a subsidiary and New York, New York
based brokerage business. From 1995 until 1997, Mr. DeVito served as the New
York Branch Manager for J.B. Oxford & Company, a discount brokerage. From 1990
until 1995, Mr. DeVito was Senior Vice President of Sales and Chief Financial
Officer at Adler Coleman Clearing Corporation ("Adler"), a New York Stock
Exchange clearing company. Mr. De Vito was officially removed from the BD
application as Chief Financial Officer prior to the SIPC Liquidation of Adler in
1995. From 1989 until 1990, Mr. DeVito was an account executive at Douglas
Bremen & Co. From 1988 until 1989, Mr DeVito was an account executive at Blaine
Andrew & Co. From 1986 until 1988, Mr. DeVito was Vice President - Brokerage and
Marketing at Glickenhaus & Co., a New Jersey securities firm. From 1981 until
1986, Mr DeVito was Vice President at the Securities Settlement Corporation, a
subsidiary of the Travelers Corporation. From 1978 until 1981, Mr. DeVito was an
auditor at Paine Webber, Inc. and from 1976 until 1978, Mr. DeVito was an
auditor at Smith Barney Harris Upham. Mr. DeVito hold B.A degrees in industrial
psychology and financial planning from New York University.
MICHAEL SUMICHRAST, Ph.D., 76, Director of the Company since 1993, was Chairman
of the Board of the Company since its inception in 1993 until March 1997. From
1990 to 1994, Dr. Sumichrast served as Chairman of the Board of Sumichrast
Publications, Inc., a real estate publication located in Rockville, Maryland.
During this time, he also served as an economic adviser and representative of
various international American companies. From 1963 to 1990, Dr. Sumichrast was
the senior vice president and chief economist of the National Association of
Home Builders (NAHB), a home builders' professional association.
WOLFGANG KOSSNER, 27, Director of the Company since August 1996. Mr. Kossner was
Executive Vice President of the Company from August 1996 until November 1, 1996.
Mr. Kossner is one of the founders of Eastbrokers Beteiligungs AG. From 1993
through 1995, Mr. Kossner has served as the managing director of WMP
Borsenmakler AG. Prior to that, Mr. Kossner was the manager of securities
trading at WMP Borsenmakler from 1991 to 1993. Mr. Kossner presently serves on
the Supervisory Boards of Eastbrokers' subsidiaries in Vienna, Budapest,
Ljubljana and Zagreb.
B. Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership of equity
securities of the Company with the Securities and Exchange Commission. Officers,
directors and greater-than-ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms that
they file.
Based solely on a review of the copies of Forms 3, 4 and 5 and amendments
thereto furnished to the Company, or written representations from certain
reporting persons that such persons have filed on a timely basis all reports
required by Section 16 (a), and without researching or making any inquiry
regarding delinquent Section 16 (a) filings, the Company believes that, during
the fiscal year ended March 31, 1997, other than initial statements of
beneficial ownership by Messrs. DeVito, McNeil and Mueller-Tyl, all such reports
were filed on a timely basis.
- 47 -
<PAGE>
Item 10. Executive Compensation
The following Summary Compensation Table sets forth the compensation
for the named executives for the year ended March 31, 1997, the three month
transition period ended March 31, 1996, and the twelve month periods ended
December 31, 1995 and December 31, 1994. No other executive officer had total
annual salary and bonus during any such period equal to or greater than
$100,000.
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------- --------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Awards ($Options/SARs(#)Payouts Compensation
- --------------------------- ---- ------ ----- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Schmid(1) 1997* $129,988 -- -- -- -- -- --
Chairman, President 1996** -- -- -- -- -- -- --
and Chief Executive 1995 -- -- -- -- -- -- --
Officer 1994 -- -- -- -- -- -- --
Martin A. Sumichrast(2) 1997* $120,000 $11,000 -- -- -- -- --
Vice-Chairman of the 1996**$ 30,000 -- -- -- -- -- --
Board and Secretary 1995 $107,500 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Petr Bednarik, Ing.(1) 1997* $ 49,000 -- $24,000*** -- -- -- --
Former President and 1996**$ 10,000 -- -- -- -- -- --
Chief Executive Officer 1995 $107,500 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
August A. de Roode(1)(4) 1997* $ 72,094 -- -- -- -- -- --
Former Chief Executive 1996** -- -- -- -- -- -- --
Officer and Chief 1995 -- -- -- -- -- -- --
Operating Officer 1994 -- -- -- -- -- -- --
Michael Sumichrast, Ph.D.(3) 1997* $100,000 -- $75,000*** -- -- -- --
Former Chairman of the 1996**$ 24,999 -- -- -- -- -- --
Board 1995 $100,000 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
</TABLE>
*for the fiscal year ended March 31, 1997.
**for the three month transition period ended March 31, 1996.
***these amounts constitute severance pay.
(1) Mr. Schmid has been Chairman of the Board and Chief Executive Officer since
March 1997 and President of the Company since August 1996. Mr. Bednarik was
President and Chief Executive Officer from the time of the Company's
inception in 1993 until August 1996. Mr. de Roode was Chief Executive
Officer and Chief Operating Officer from August 1996 to March 1997.
(2) Martin A. Sumichrast became Vice Chairman of the Board in March 1997. Prior
to that, he was Executive Vice President and Chief Financial Officer.
(3) Dr. Sumichrast was Chairman of the Board from the time of the Company's
inception in 1993 until March 1997.
(4) Dr. de Roode's compensation was paid through VCH Vermogensverwaltung Und
Holding GmbH.
- 48 -
<PAGE>
Employment Agreements
Effective January 1995, the Company entered into employment agreements
("Employment Agreements") with Messrs. Michael Sumichrast, Ph.D., Petr Bednarik,
Ing., and Martin A. Sumichrast. Mr. Bednarik's employment was terminated
effective August 1, 1996 in connection with the acquisition of Eastbrokers
Vienna. Under the terms of Mr. Bednarik's Employment Agreement, Mr. Bednarik
received $24,000 in severance compensation in August 1996 as a result of such
termination of employment. Dr. Sumichrast's Employment Agreement was terminated
upon his resignation as Chairman effective March 20, 1997 and he was awarded a
sum of $75,000. Mr. Martin Sumichrast's employment agreement will expire in
December 1999, and will renew for a period of five years following the
expiration date, unless contrary notice is given by either party. The Company
also entered into employment agreements with Messrs. August de Roode and Peter
Schmid, effective as of August 1, 1996. Messr. Kossner continues to be a
Director of the Company. Messr. de Roode's agreement expired upon his
resignation on March 15, 1997. Messr. Schmid's agreement will expire on August
1, 1999, and he will have a three-year renewal option, unless contrary notice is
given by either party. The salaries for Martin A. Sumichrast and Peter Schmid
are $120,000 each. The salaries under the agreements may be increased to reflect
annual cost of living increases and may be supplemented by discretionary merit
and performance increases as determined by a compensation committee to consist
of three outside directors of the Company, except that during the three years
following June 8, 1995, Mr. Martin Sumichrast's salary may not exceed $150,000.
In the first three years following August 1, 1996, Messr. Schmid's salary may
not exceed $150,000. Messrs. Martin A. Sumichrast and Schmid are each eligible
to receive an annual bonus of up to 25% of their salary under their respective
agreements, such bonuses to be determined by the Board and not subject to any
specified performance criteria. The agreements provide, among other things, for
participation in an equitable manner in any profit-sharing or retirement plan
for employees or executives and for participation in employee benefits
applicable to employees and executives of the Company. The agreements provide
that the Company will establish a performance incentive bonus plan providing
each executive the opportunity to earn an annual bonus of up to five percent of
the increase in the Company's pretax income, based upon the attainment of
performance goals to be established by the Compensation Committee of the
Company. The agreements further provide for the use of an automobile and other
fringe benefits commensurate with their duties and responsibilities. The
agreements also provide for benefits in the event of disability.
Pursuant to the agreements, employment may be terminated by the Company
with cause or by the executive with or without good reason. Termination by the
Company without cause, or by the executive for good reason, would subject the
Company to liability for liquidated damages in an amount equal to the terminated
executive's current salary and a pro rata portion of their prior year's bonus
for the remaining term of the agreement, payable in equal monthly installments,
without any set-off for compensation received from any new employment. In
addition, the terminated executive would be entitled to continue to participate
in and accrue benefits under all employee benefit plans and to receive
supplemental retirement benefits to replace benefits under any qualified plan
for the remaining term of the agreement to the extent permitted by law.
Under the agreements, the Company is obligated to purchase insurance
policies on the lives of Messrs. Martin A. Sumichrast and Schmid. The Company
will pay the premiums on these policies and upon the death of the employee, the
Company will receive an amount equal to the premiums it paid under the policy
and the remaining proceeds will go to the employee's designated beneficiary. The
Company has a one million dollar key man life insurance policy on Martin A.
Sumichrast with the Company as its beneficiary.
- 49 -
<PAGE>
Option/SAR Grants
<TABLE>
<CAPTION>
Individual Grants
Number of Percent of total
securities options/SARs
underlying granted to
options/SARs employees in Exercise or base
Name Granted (#) fiscal year price ($/Sh) Expiration date
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Peter Schmid 33,000 16.5% $10.00 August 1, 2001
Martin A. Sumichrast 100,000 50.0% $10.00 August 1, 2001
</TABLE>
Option/SAR Exercises
There were no exercises of options during the fiscal year ended March 31,
1997.
Compensation of Directors
Each Director of the Company is entitled to receive $1,500.00 plus
reasonable expenses, for attending scheduled board meetings at which members
meet in person. Directors are not entitled to receive compensation for board
meetings held by telephonic conference. During the fiscal year ended March 31,
1997, three former Directors received fees totaling $4,500.00. All current
directors have waived such fees for the fiscal year ending March 31, 1997.
1996 Stock Option Plan
At the Annual Meeting held on December 10, 1996, the stockholders approved
the 1996 Stock Option Plan (the "Plan") pursuant to which officers, employees,
directors and consultants of the Company and its Affiliates are eligible to be
granted Awards. The Plan is administered by the Stock Award Committee, or, in
the absence of such a committee by the entire Board, which has the plenary
authority to grant Awards including Stock Options, Stock Appreciation Rights,
Restricted Stock, or any combination of the foregoing, and to determine the
terms and conditions of the Awards.
The total number of shares of Common Stock reserved and available for
distribution as Awards under the Plan is 400,000.
In the fiscal year ended March 31, 1997, an aggregate of 25,000 shares of
Common Stock and options to purchase 35,000 shares were awarded pursuant to the
Plan.
During the fiscal year ended March 31, 1997, an additional 12,000 shares of
common stock were issued outside of the plan as compensation for services to the
Company.
- 50 -
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock owned as of June 27, 1997 by (i) each person who is known by the
Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each of the Company's officers and directors; and (iii) all officers
and directors as a group. The following calculations were based upon there being
3,003,000 shares of the Company's Common Stock issued and outstanding as of June
27, 1997. Except as otherwise noted, the persons named in the table below do not
own any other capital stock of the Company and have sole voting and investment
power with respect to all shares as beneficially owned by them.
<TABLE>
<CAPTION>
Percentage of
Name and Address (1) Position with Company Number of Shares Shares
------------------------------ ------------------------------------- ---------------------- ----------------
<S> <C> <C> <C>
Peter Schmid (2) Chairman of the Board, 554,659 18.47
President and Chief Executive
Officer, Director
Martin A. Sumichrast (3) Vice-Chairman of the 57,000 1.90
Board and Secretary, Director
Falko Mueller-Tyl (6) Vice President and Chief 57,431 1.91
Operating Officer
Kevin D. McNeil Vice President, Treasurer 2,495 *
and Chief Financial Officer
John Paul DeVito (4) Vice President Brokerage 8,268 *
and Sales
Michael Sumichrast, Ph.D. (3) Director 6,600 *
Wolfgang Kossner (5) Director 768,039 25.58
---------------------- ----------------
All Officers and Directors as 1,454,492 48.43
a Group (7 persons)
</TABLE>
* Less than 1%
(1) Except as otherwise noted, c/o Eastbrokers International Incorporated,
15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850.
(2) 359,925 shares are owned by Karntner Landes und Hypothekenbank AG as
nominee for the Tsuyoshi Trust Vaduz and 194,734 are owned by said
bank as nominee for Mr. Schmid. Mr. Schmid has sole voting and
investment power with respect to the trust shares and is a beneficiary
of this trust. Excludes 33,000 shares issuable upon exercise of
options to acquire Common Stock at $10.00 per share.
(3) 53,600 shares are owned by Sumichrast Enterprises, Inc., a corporation
of which Martin A. Sumichrast, Dr. Sumichrast's son, is an officer and
director and the owner. Dr. Sumichrast may be deemed to have voting
and investment power with respect to 1,600 of these 53,600 shares. Dr.
Sumichrast and Martin Sumichrast each own 5,000 shares directly.
Excludes options held by Martin Sumichrast to acquire 100,000 shares
at $10.00 per share and Class A Warrants representing the right to
acquire 1,000 shares at $20.00 per share.
(4) Excludes 10,000 shares issuable upon exercise of options at $7.00 per
share.
(5) 535,539 shares are owned indirectly through General Partners
Beteiligungs AG, formerly KHS Beteiligungs AG ("GP") of which Mr.
Kossner is a principal stockholder. 200,000 shares were owned by
- 51 -
<PAGE>
Karntner Landes und Hypothekenbank AG (the "Bank") as nominee for GP.
Mr. Kossner may be deemed to have shared voting and investment power
with respect to these shares. Also includes 32,500 shares held by the
Bank as nominee for Central and Eastern European Fund ("Fund"), of
which Mr. Kossner is a director. This inclusion of such Fund shares
shall not be construed as an admission that Mr. Kossner is the
beneficial owner of such shares. Excludes 67,000 shares issuable upon
exercise of options to acquire Common Stock at $10.00 per share.
(6) 17,331 shares are owned directly by Dr. Mueller-Tyl. 20,000 shares are
owned indirectly through his step-father and an additional 21,600
shares are owned indirectly through his father. Dr. Mueller-Tyl may be
deemed to have shared voting and investment power with respect to
these shares.
Item 12. Certain Relationships and Related Transactions
Prior to the sale by the Company of the Hotel Fortuna a.s. (the "Hotel") on
October 1, 1996, the Company previously owned 50.2 % of the Hotel. See Item 3.
Stratego Invest a.s. owned 20.6 % of the Hotel. Stratego Invest a.s. is more
than 50% owned by Stratego a.s., which is controlled by Ing. Petr Bednarik,
former President and CEO of the Company.
The sales 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.
In September 1996, Mr. Schmid received from Eastbrokers Beteiligungs AG
3,511,422 Austrian Schillings (approximately $340,000 USD) for his 49.95 percent
ownership interest in Eastbrokers Wertpapiervermittlungs-gesellschaft mbH
("Eastbrokers GmbH"), an Austrian Securities Brokerage Company with limited
liability. The nominal value of these shares was 500,000 Austrian Schillings.
Mr. Schmid, Chairman, President, Chief Executive Officer, and Director of the
Company. GmbH. Eastbrokers GmbH holds the ownership interest for Eastbrokers
Prague.
In September 1996, Mr. Schmid received 376,275 Austrian Schillings
(approximately $36,500 USD) for his 5.60 percent ownership interest in
Easbrokers Slovakia a.s., Bratislava ("Eastbrokers Slovakia"). Eastbrokers
Slovakia is the Company's subsidiary operating in the Slovak Republic. The
nominal value of these shares was 280,000 Slovak Koruna.
In September 1996, Mr. de Roode received 1,110,250 Austrian Schillings
(approximately $107,500 USD) for his 24.40 percent ownership interest in
Easbrokers Slovakia a.s., Bratislava ("Eastbrokers Slovakia"). Eastbrokers
Slovakia is the Company's subsidiary operating in the Slovak Republic. The
nominal value of these shares was 1,220,000 Slovak Koruna. Mr. de Roode was
Chief Executive Officer, Chief Operating Officer and Director of the Company.
The Company has entered into a number of agreements with Randall F. Greene,
a former director of the Company. Mr. Greene provided consulting services
pursuant to an agreement dated July 26, 1996 in connection with the Company's
acquisition of Eastbrokers Vienna. Pursuant to this agreement, Mr. Green
received $20,000 as a non-accountable expense allowance and 10,000 shares of the
Company's common stock. In addition, Mr. Greene was paid $37,000 for consulting
services provided to the Company in connection with potential mergers and/or
acquisitions. In December 1996, Mr. Greene entered into an agreement with the
Company and certain stockholders of the Company pursuant to which he was to
analyze and evaluate the Company's operations and to assist the Company in
evaluating certain possible business combination transactions. Mr. Greene was to
be compensated under this agreement only in the event that such a business
combination transaction was succesfully completed. No such transactions have
occurred, no compensation was paid to Mr. Greene thereunder and the agreement
has been terminated. In addition, in connection with Mr. Greene's resignation
from the Board of Directors of the Company, the Company entered into a
consulting agreement dated March 27,
- 52 -
<PAGE>
1997 pursuant to which Mr. Greene is to provide business and financial advisory
services to the Company and into a related letter agreement also dated March 27,
1997, as amended by a letter dated April 29, 1997. Under the consulting
agreement, Mr. Greene is to be compensated at the rate of $4,000 per month for
the six month term of the agreement which commenced on April 1, 1997. As
additional compensation under this agreement, Mr. Greene was granted options to
purchase 7,750 shares of the Company's common stock at $6.50 per share. Under
the related letter agreement, Mr. Greene was paid $13,750 and granted 12,500
shares in full satisfaction for consulting services rendered during the period
August 1, 1996 through March 31, 1997. Also pursuant to this agreement, the
Company agreed to indemnify Mr. Greene against certain liabilities, the parties
exchanged mutual releases and Mr. Greene agreed to sell his shares of the
Company's common stock subject to certain conditions.
The Company entered into a Consulting Agreement dated March 31, 1997 with
Dr. Sumichrast, a Director of the Company, pursuant to which Dr. Sumichrast will
provide services to the Company through March 31, 1998, and the Company has
granted him 20,000 shares of the Company's Common Stock to vest ratably over the
term of the Agreement.
In March 1997, Eastbrokers Vienna purchased 30,000 shares of Schneiders
1895 AG for 3,618,000 Austrian Schillings (approximately $302,000 USD). Mr.
Schmid is also a Director of Schneiders 1895 AG. Mr. Schmid's father is an
Officer and Director of Schneiders 1895 AG.
During 1996, the Company entered into a verbal agreement with RealWorld, an
internet software developer, to design and build an online stock exchange game
and online trading system. The initial deposit to begin development of the game
and system was 530,000 Austrian Schillings (approximately $50,000 USD).
Currently the Company has a liability to RealWorld of 208,000 Austrian
Schillings (approximately $20,000 USD) representing amounts due on progress
billings. The agreement recognizes costs will be charged on an hourly basis and
monthly progress billings will be made once the original deposit has been
depleted. Dr. Mueller-Tyl is a member of the Supervisory Board for RealWorld.
VCH and Messrs. Schmid, Kossner, and Mueller-Tyl are all shareholders of
Realworld and represent a combined ownership interest of 26 percent.
In December 1996, Eastbrokers Vienna loaned Dr. Mueller-Tyl approximately
$72,000 USD. Interest on the outstanding balance of this obligation is computed
at 8 percent per annum until paid in full. Dr. Mueller-Tyl is currently the
Chief Operating Officer of the Company.
The Company leases office space from Residenz Realbesitz AG ("Residenz")
for its Vienna operations. Under the terms of the leases, the Company incurred
occupancy costs of approximately 1,200,000 Austrian Schillings (approximately
$114,000 USD). The terms of this lease were negotiated such that the Company is
subject to occupancy expenses no greater than the current market rates. Residenz
is a subsidiary of General Partners Beteiligungs AG ("General Partners")
(formerly KHS Beteiligungs AG). Mr. Kossner owns 30 percent of the outstanding
shares of GP. He is a member of GP's Supervisory Board, WMP's Supervisory Board,
the Eastbrokers AG Supervisory Board, and is a Director of the Company.
General Partners, of which Mr. Kossner is a principal stockholder and
member of the Supervisory Board, owns 535,539 shares of the Company's
outstanding shares.
At December 31, 1996, the Company has a receivable related to share
transactions from Mr. Kossner in the amount of 2,269,198 Austrian Schillings
(approximately $209,000 USD).
At December 31, 1996, the Company has a receivable related to share
transactions from Z.E. Beteiligungs AG. in the amount of 5,537,202 Austrian
Schillings (approximately $511,000 USD). Z.E. Beteiligungs AG is a subsidiary of
General Partners.
WMP is an Austrian broker-dealer, market maker, and member of the Vienna
Stock Exchange. WMP's common stock is publicly traded on the Main Market of the
Vienna Stock Exchange. From time to time, WMP will make a market in a company's
stock that has a direct relationship to the Company through its directors.
- 53 -
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits required by Item 601 of Regulation S-B
1. See Index to Exhibits on pages 56-57. (a)
b. Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended March 31, 1997 through the date hereof.
- ------------------------
(a) As previously filed.
- 54 -
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, 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/ Peter Schmid * October 16, 1997
- ---------------------------------------------- ---------------------
Peter Schmid Date
Chairman, President, Chief Executive Officer, and Director
In accordance with the Exchange Act, this amendment to this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Peter Schmid * October 16, 1997
- ---------------------------------------------- ---------------------
Peter Schmid Date
Chairman, President, Chief Executive Officer, and Director
/s/ Martin A. Sumichrast October 16, 1997
- ---------------------------------------------- ---------------------
Martin A. Sumichrast Date
Vice Chairman of the Board, Secretary, and Director
/s/ Kevin D. McNeil October 16, 1997
- ---------------------------------------------- ---------------------
Kevin D. McNeil Date
Vice President, Treasurer, and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Michael Sumichrast * October 16, 1997
- ---------------------------------------------- ---------------------
Michael Sumichrast, PhD Date
Director
/s/ Wolfgang Kossner * October 16, 1997
- ---------------------------------------------- ---------------------
Wolfgang Kossner Date
Director
* By Martin A. Sumichrast and Kevin D. McNeil as attorneys-in fact.
- 55 -
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
Exhibit No. Description
----------- -----------
<S> <C> <C>
(2.1) Stock Purchase Agreement dated June 14, 1996 between the Company and
Eastbrokers Beteiligungs AG incorporated by reference to the Company's Form
8-K dated August 1, 1996.
(3.1) Certificate of Incorporation, as amended, incorporated by reference to the
Company's Form 10-QSB for the nine months ended December 31, 1996.
(3.2) Bylaws of the Company, as amended, incorporated by reference to the
Company's Form 10-QSB for the three months ended March 31, 1995.
(3.3) Amendments to the Bylaws, incorporated by reference to the Company's Form
10-QSB for the three months ended June 30, 1996.
(4.1) Specimen copy of Common Stock Certificate, Form of
Class A Warrant Agreement, Form of Class B Warrant
Agreement, and Form of Warrant Agreement are each
incorporated by reference to the Company's Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (No.
33-89544).
(4.2) Underwriter's Unit Purchase Option, incorporated by reference to the
Company's Form 10-KSB for the year ended December 31, 1995.
(4.3) Warrant Certificate between the Company and J.B. Sutton Group, LLC, dated
March 27, 1997, incorporated by reference to the Company's Form S-3 filed
with the Securities and Exchange Commission on May 9, 1997 (No. 333-26825).
(10.1) Employment Agreement between the Company and Martin A. Sumichrast dated
February 1995, incorporated by reference to the Company's Form S-1.
(10.2) Employment Agreement between the Company and Peter Schmid dated August 1,
1996, the form of such employment agreement is incorporated by reference to
the Company's Form 8-K dated August 1, 1996.
(10.3) Form of Restrictive Covenants of Wolfgang M. Kossner, August A. de Roode
and Peter Schmid, such covenants executed on August 1, 1996, incorporated
by reference to the Company's Form 10-QSB for the three months ended June
30, 1996.
(10.4) Stock Option Agreement between the Company and Wolfgang
M. Kossner dated August 1, 1996, the form of such stock
option agreement is incorporated by reference to the
Company's Form 8-K dated August 1, 1996.
(10.5) Stock Option Agreement between the Company and August
A. de Roode dated August 1, 1996, the form of such
stock option agreement is incorporated by reference to
the Company's Form 8-K dated August 1, 1996.
(10.6) Stock Option Agreement between the Company and Peter Schmid dated August 1,
1996, the form of such stock option agreement is incorporated by reference
to the Company's Form 8-K dated August 1, 1996.
(10.7) Stock Option Agreement between the Company and Sumichrast Enterprises dated
August 1, 1996, the form of such stock option agreement is incorporated by
reference from Form 8-K dated August 1, 1996.
</TABLE>
- 56 -
<PAGE>
INDEX TO EXHIBITS (Continued)
<TABLE>
<CAPTION>
Page
Exhibit No. Description
----------- -----------
<S> <C> <C>
(10.9) Letter Agreement between the Company and Randall F. Greene, Director of the
Company, for advisory services dated July 26, 1996, incorporated by reference
to the Company's Form 10-QSB for the three months ended June 30, 1996.
(10.10) Stock Sale/Purchase Agreement by and between Y.S.E. a.s. and Czech
Industries, Inc., dated as of October 1, 1996, incorporated by reference to
the Company's Report on Form 10-QSB for the nine months ended December 31,
1996.
(10.11) The 1996 Stock Option Plan of the Company, incorporated
by reference to the Company's Report on Form 10-QSB for
the nine months ended December 31, 1996.
(10.12) Consulting Agreement between the Company and Randall F. Greene ("Greene"),
Director of the Company, dated March 27, 1997, and Letter from Greene to
the Company amending the Agreement, dated April 29, 1997. (a)
(10.13) Stock Purchase and Sale Agreement by and among the Company, John Paul De
Vito, and Robert Sass, dated March 6, 1997 (a)
(10.14) Consulting Agreement between Michael Sumichrast, Ph.D. and the Company dated
April 1, 1997. (a)
(10.15) Letter Agreement between the Company and August de Roode dated March 10, 1997. (a)
(21.1) Subsidiaries of the Company. (a)
(23.1) Consent of Pannell Kerr Forster PC, dated June 27, 1997. (a)
(24.1) Powers of Attorney, granted by Peter Schmid, Chairman, President and CEO of
the Company, on behalf of the Company, and by Peter Schmid, Michael Sumichrast
Ph.D. and Wolfgang Kossner, individually, appointing Martin A. Sumichrast and
Kevin D. McNeil as attorneys-in-fact. (a)
(27) Financial Data Schedule (Electronic Filing Only).
</TABLE>
- -------------------------
(a) As previously filed.
- 57 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,867,624
<SECURITIES> 7,040,083
<RECEIVABLES> 6,031,734
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,058,715
<PP&E> 1,766,782
<DEPRECIATION> 840,214
<TOTAL-ASSETS> 32,014,929
<CURRENT-LIABILITIES> 11,679,118
<BONDS> 934,374
0
0
<COMMON> 146,150
<OTHER-SE> 19,314,883
<TOTAL-LIABILITY-AND-EQUITY> 32,014,929
<SALES> 0
<TOTAL-REVENUES> 5,552,069
<CGS> 0
<TOTAL-COSTS> 5,492,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 236,235
<INCOME-PRETAX> 59,446
<INCOME-TAX> (249,911)
<INCOME-CONTINUING> 414,773
<DISCONTINUED> (1,281,184)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (866,411)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
