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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1999
REGISTRATION NO. 333-________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EASTBROKERS INTERNATIONAL INCORPORATED
(Name of Small Business Issuer in its Charter)
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<S> <C> <C>
Delaware 6799 52-1807562
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
15245 SHADY GROVE ROAD, SUITE 340
ROCKVILLE, MARYLAND 20850
(301) 527-1110
(Address and Telephone Number of Principal Executive Offices)
MARTIN A. SUMICHRAST
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
15245 SHADY GROVE ROAD, SUITE 340
ROCKVILLE, MARYLAND 20850
(301) 527-1110
(Name, Address and Telephone Number of Agent for Service)
WITH A COPY TO:
JAY R. SCHIFFERLI, ESQ.
KELLEY DRYE & WARREN LLP
TWO STAMFORD PLAZA
281 TRESSER BOULEVARD
STAMFORD, CONNECTICUT 06901
(203) 324-1400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If the only
securities being registered on this Form are being offered pursuant to dividend
or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
====================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.05 per share 925,000 5.18750 4,798,437.50 1,333.97
Class C Common Stock Purchase Warrants - - - -
Common Stock, underlying Class C Common
Stock Purchase Warrants 925,000 5.18750 4,798,437.50 1,333.97
Common Stock, underlying 7% Convertible Debentures 385,000 5.18750 1,997,187.50 555.22
Common Stock, underlying Placement Agents' Warrants 1,225,000 5.18750 6,354,687.50 1,766.60
Total 3,460,000 17,948,750.00 4,989.75
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the average of the high and the low prices of the Common
Stock on the Nasdaq SmallCap Market on February 10, 1999.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
<TABLE>
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EASTBROKERS INTERNATIONAL INCORPORATED
CROSS-REFERENCE SHEET
FORM SB-2 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
<S> <C> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus..........................................Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus..........................................Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors.........................Summary; Risk Factors
4. Use of Proceeds..............................................Use of Proceeds
5. Determination of Offering Price..............................Not Applicable
6. Dilution.....................................................Not Applicable
7. Selling Security Holders.....................................Selling Stockholders
8. Plan of Distribution.........................................Outside Front Cover of Prospectus; Plan of
Distribution
9. Legal Proceedings............................................Business
10. Directors, Executive Officers, Promoters and
Control Persons..............................................Risk Factors; Management
11. Security Ownership of Certain Beneficial Owners
and Management...............................................Selling Stockholders; Certain Relationships and
Related Transactions
12. Description of Securities....................................Description of Securities
13. Interests of Named Experts and Counsel.......................Experts; Counsel
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...............Disclosure of Commission Position on
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years..........................Business; Certain Relationships and Related
Transactions
16. Description of Business......................................Business
17. Management's Discussion and Analysis or Plan of
Operation....................................................Management's Discussion and Analysis or Plan of
Operation
18. Description of Property......................................Business
19. Certain Relationships and Related Transactions...............Certain Relationships and Related Transactions
20. Market for Common Equity and Related
Stockholder Matters..........................................Market for Common Equity and Related Stockholder
Matters; Risk Factors; Outside Front Cover of
Prospectus
21. Executive Compensation.......................................Executive Compensation
22. Financial Statements.........................................Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
</TABLE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1999
PROSPECTUS
EASTBROKERS INTERNATIONAL INCORPORATED
This Prospectus relates to the offer and sale of [_________shares] (the
"Shares") of common stock, par value $.05 per share (the "Common Stock"),
[________] Class C Common Stock Purchase Warrants (the "Warrants") and
[_________] shares of Common Stock underlying the Warrants (the "Warrant
Shares"), [________] shares of Common Stock underlying the 7% Convertible
Debentures due (the "Debenture Shares") and [_________] shares of Common Stock
underlying Placement Agents' Warrants ("Placement Agent Warrant Shares") of
Eastbrokers International Incorporated (the "Company") by or on behalf of
certain stockholders of the Company ("Selling Stockholders").
The Shares, the Warrants, the Warrant Shares, the Debenture Shares, and
the Placement Agent Warrant Shares may be offered and sold from time to time by
one or more of the Selling Stockholders or by pledgees, donees, transferees or
other successors in interest to the Selling Stockholders. No Selling Stockholder
is required to offer or sell any of his or its Shares, Warrants, Warrant Shares,
Placement Agent Warrant Shares or Debenture Shares. The Selling Stockholders
anticipate that, if and when offered and sold, the Shares, the Warrant Shares,
the Placement Agent Warrant Shares and the Debenture Shares will be offered and
sold in transactions (which may include block transactions) effected on the
Nasdaq SmallCap Market (the "Nasdaq SmallCap") at the then prevailing market
prices. The Selling Stockholders reserve the right, however, to offer and sell
the Shares, the Warrant Shares, the Placement Agent Warrant Shares and the
Debenture Shares on any other national securities exchange on which the Common
Stock is or may become listed or in the over-the-counter market, in each case at
then prevailing market prices, or in privately negotiated transactions each at a
price then to be negotiated. The Warrants will not be listed on any exchange or
in the over-the-counter market and therefore, the Selling Stockholders may offer
and sell the Warrants in privately negotiated transactions at a price then to be
negotiated. All offers and sales made on the Nasdaq SmallCap or any other
national securities exchange or in the over-the-counter market will be made
through or to licensed brokers and dealers. All proceeds from the sale of the
Shares, the Warrant Shares, the Placement Agent Warrant Shares and the Debenture
Shares will be paid directly to the Selling Stockholders and will not be
deposited in an escrow, trust or other similar arrangement. The Company will not
receive any of the proceeds from the sales by the Selling Stockholders. However,
the Company will receive proceeds from the exercise of the Warrants by the
Selling Stockholders. No discounts, commissions or other compensation will be
allowed or paid by the Selling Stockholders or the Company in connection with
the offer and sale of the Shares, the Warrants, the Warrant Shares, the
Debenture Shares and the Placement Agent Warrant Shares except that usual and
customary brokers' commissions may be paid by the Selling Stockholders. Upon any
sale of the Shares, the Warrants, the Warrant Shares, the Placement Agent
Warrant Shares and the Debenture Shares offered hereby, the Selling Stockholders
and participating agents, brokers or dealers may be deemed to be underwriters as
that term is defined in the Securities Act of 1933, as amended (the "Securities
Act"), and commissions or discounts or any profit realized on the resale of such
securities purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
The Company's Common Stock is currently traded on the Nasdaq SmallCap
under the trading symbol "EAST." The Warrants do not trade on any exchange.
------------
INVESTING IN THE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 7.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS.
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY OFFER OR SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN
SUCH JURISDICTION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission" or the "SEC"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and at Seven World
Trade Center, 13th Floor, New York, New York 10048. In addition, the Company is
required to file electronic versions of these documents through the Commission's
Electronic Data Gathering, Analysis and Retrieval System (EDGAR). The Commission
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. Copies of such material may also
be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C.
20549. The Common Stock is quoted on the Nasdaq SmallCap. Information regarding
the trading of EAST on the Nasdaq SmallCap can be obtained from the Nasdaq
SmallCap Market, 9801 Washingtonian Boulevard, Gaithersburg, Maryland 20878
((202) 496-2500).
The Company has filed with the Commission a Registration Statement on
Form SB-2, as amended (the "Registration Statement"), under the Securities Act
with respect to the securities being offered by this Prospectus. As permitted by
the rules and regulations of the Commission, this Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the offer and
sale of the securities, reference is made to the Registration Statement and the
exhibits thereto. Statements contained in this Prospectus concerning the
provisions of documents filed with the Registration Statement as exhibits are
necessarily summaries of such documents, and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission. The Registration Statement may be inspected without charge at the
Public Reference Section of the Commission at 450 Fifth Street, Room 1024, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from the Commission at prescribed rates.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain information set forth in this statement includes "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. In addition, from time to time, the Company may publish
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act or make oral statements that constitute
2
<PAGE>
forward-looking statements. These forward-looking statements may relate to such
matters as anticipated financial performance, future revenues or earnings,
business prospectus, projected ventures, new products, anticipated market
performance and similar matters. The words "budgeted," "anticipate," "project,"
"estimate," "expect," "may," "believe," "potential" and similar statements are
intended to be among the statements that are forward looking statements. Because
such statements reflect the reality of risk and uncertainty that is inherent in
the business of the Company, actual results may differ materially from those
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward looking statements, which are made
as of the date hereof.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company cautions readers that a variety of factors could cause
the Company's actual results to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
These risks and uncertainties, many of which are beyond the Company's control,
include, but are not limited to: (i) transaction volume in the securities
markets, (ii) the volatility of the securities markets, (iii) fluctuations in
interest rates, (iv) changes in regulatory requirements which could affect the
cost of doing business,(v) fluctuations in currency rates, (vi) general economic
conditions, both domestic and international, (vii) changes in the rate of
inflation and related impact on securities markets, (viii) competition from
existing financial institutions and other new participants in the securities
markets, (ix) legal developments affecting the litigation experience of the
securities industry, (x) changes in federal and state tax laws which could
affect the popularity of products sold by the Company, and (xi) those risks and
uncertainties set forth under the caption "Risk Factors" on page 7 and in the
Company's filings with the SEC.
The Company undertakes no obligation to release publicly any revisions
to the forward looking statements to reflect events or circumstances after the
date hereof or to reflect unanticipated events or developments.
3
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
PLEASE READ ALL OF THIS PROSPECTUS CAREFULLY. IT DESCRIBES OUR COMPANY,
FINANCES AND PRODUCTS. FEDERAL AND STATE SECURITIES LAWS REQUIRE THAT WE INCLUDE
IN THIS PROSPECTUS ALL IMPORTANT INFORMATION THAT INVESTORS WILL NEED TO MAKE AN
INVESTMENT DECISION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS TO MAKE YOUR INVESTMENT DECISION. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROSPECTUS. THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION (INCLUDING
FINANCIAL STATEMENTS AND NOTES THERETO) CONTAINED IN THIS PROSPECTUS AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
HEREIN.
THE COMPANY
We were incorporated in the State of Delaware on January 20, 1992, as
the Czech Fund. Our initial goal was 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. From 1993 through
1994, we held an interest in a Czech hotel and an interest in a Czech department
store.
In 1996, we re-evaluated our business strategy and after considering a
variety of investment opportunities, acquired Eastbrokers Beteiligungs AG, an
Austrian brokerage company with offices throughout Central and Eastern Europe
("Eastbrokers Vienna"). This transaction enhanced our prospects by both
providing us with a vehicle to implement our acquisition strategy and extend our
opportunities beyond the Czech Republic to the entirety of Central and Eastern
Europe. Thereafter, our name was changed to Eastbrokers International
Incorporated, our present name.
We are primarily a holding company for sixteen subsidiaries and
affiliates which are directly and indirectly owned. Twelve of the subsidiaries
and affiliates are incorporated and located in Central and Eastern Europe. We
also own 100 percent of EBI Securities Corporation ("EBI Securities"), 100
percent of Eastbrokers Leasing Ltd., 90 percent of Eastbrokers North America,
Inc. ("Eastbrokers NA") and 100 percent of an inactive U.S. subsidiary. All of
our subsidiaries and affiliates are engaged in the investment banking,
broker-dealer, advisory and security business. Our principal strategic objective
has been to establish controlling ownership of independent broker-dealers
located primarily in Central and Eastern Europe and to create a network that
provides access to emerging market investment opportunities in Central and
Eastern Europe. In fiscal year 1998, we expanded our objective to include
establishing controlling ownership of independent broker-dealers in the United
States.
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<CAPTION>
THE OFFERING
<S> <C>
Securities offered.............................. The resale of: [______________] shares of Common Stock;
[____________] Warrants; [____________] Warrant Shares;
[____________] Debenture Shares; and [____________]
Placement Agent Warrant Shares. See "Description of
Securities."
Common Stock Outstanding prior
to the Offering (as of February 11, 1999)......... 5,142,750
Common Stock Outstanding after
the Offering(1)................................. [___________] shares
- ------------------------------------------------------- ------------------------------------------------------------
4
<PAGE>
- ------------------------------------------------------- ------------------------------------------------------------
Risk Factors.................................... The offering involves a high degree of risk. See "Risk
Factors" at page 7.
Use of Proceeds................................. We will not receive any proceeds from resales of the
Shares, the Warrant Shares, the Placement Agent
Warrant Shares or the Debenture Shares. All funds
received by us upon the exercise of the Warrants will
be used for general corporate and working capital
purposes.
</TABLE>
- ------------------
(1) Assumes exercise of all the Warrants and Placement Agents' Warrants and
conversion of all of the Debentures.
- --------------------------------------------------------------------------------
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
Financial Statements of the Company contained herein for the years ended March
31, 1997 and 1998 and for the six months ended September 30, 1997 and 1998, and
should be read in conjunction with, and are qualified in their entirety by
reference to, such Financial Statements and the notes thereto, and in
conjunction with "Management's Discussion and Analysis of Financial Condition or
Plan of Operation" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the Year For the Year For the Six Months
Ended March Ended March Ended September 30,
31, 1997 31, 1998
-------- -------- 1997 1998
---- ----
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues
Commissions.............................. $ 439,531 $ 2,521,031 $ 673,175 $ 4,611,417
Investment Banking....................... 1,149,195 807,803 335,266 703,340
Trading Profit, net...................... 3,679,045 4,175,023 1,718,464 2,532,962
Other.................................... 473,704 2,635,024 297,066 2,497,278
----------- ------------ ------------ ------------
Total Revenue......................... 5,741,475 10,138,881 3,023,971 10,344,997
----------- ------------ ------------ ------------
Expenses
Compensation and benefits................ 2,181,419 3,748,948 1,026,428 6,363,848
Consulting and professional fees......... 867,302 2,412,787 794,239 1,231,552
Occupancy................................ 333,096 982,095 336,084 803,572
Communications........................... 177,473 678,718 151,904 776,710
Brokerage, clearing, exchange fees and
other ................................ - 1,145,567 483,216 1,240,339
General and administrative............... 806,056 3,698,052 880,501 844,785
Other.................................... 1,127,277 2,343,302 694,412 1,310,690
--------- ----------- ------------ ----------
Total expenses........................ 5,492,623 15,009,469 4,366,784 12,571,496
--------- ----------- ------------ ----------
Income (loss) from continuing operations..... 362,573 (4,947,557) (1,097,247) (3,064,912)
Discontinued operations...................... (1,281,184) - - -
----------- ------------ ------------ ------------
Net loss..................................... $ (918,611) $(4,947,557) $(1,097,247) $(3,064,912)
=========== ============ ============ ============
Weighted average number of shares
outstanding.............................. 2,497,137 3,149,009 3,007,121 4,476,737
------------ ------------- ----------- ------------
Basic and diluted loss per share............. $ (0.37) $ (1.57) $ (0.36) $ (0.68)
------------ ------------- ----------- ------------
Consolidated Statements of Financial Position
Data:
Total assets................................. $31,962,729 $44,838,853 $34,223,102 $54,404,378
Total liabilities............................ 12,613,492 18,178,312 17,046,409 27,851,828
Minority interest in consolidated subsidiaries 1,549,386 8,776,678 1,594,029 9,459,208
Stockholders' Equity......................... 17,799,851 17,883,863 15,582,664 17,093,342
</TABLE>
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6
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RISK FACTORS
WE FACE A VARIETY OF RISKS IN THE CONDUCT OF OUR BUSINESS, ANY OF WHICH
COULD MATERIALLY AND ADVERSELY AFFECT US, OUR BUSINESS AND OUR FINANCIAL
PERFORMANCE. SOME OF THESE RISKS ARE SUMMARIZED BELOW. THIS SUMMARY IS NOT
INTENDED TO BE A COMPLETE LIST OF ALL MATTERS THAT COULD ADVERSELY AFFECT US,
AND THERE ARE MANY FACTORS BEYOND OUR CONTROL THAT AFFECT US, OUR BUSINESS AND
OUR FINANCIAL PERFORMANCE.
THE VOLATILE NATURE OF THE SECURITIES BUSINESS
The securities business is naturally subject to various risks,
particularly in volatile or illiquid markets. Among the risks are potential
losses resulting from the following activities: (i) underwriting or owning
securities, (ii) trading, arbitrage and merchant banking activities, (iii)
failure by the other party to meet commitments, (iv) customer fraud and employee
fraud, (v) misconduct and errors, (vi) failures in connection with processing
securities transactions and (vii) litigation.
Various factors affect a securities firm's business and profitability.
These factors include the firm's credit capacity or perceived creditworthiness
and competitive factors, including the ability to attract and retain highly
skilled employees. These and other factors may contribute to reduced levels of
new issuances of securities or merger, acquisition, restructuring, and leveraged
capital activities, including leveraged buyouts and high-yield financing. Such
factors may also help reduce the level of participation in financing and
investment related to these activities. This generally results in lower revenues
from investment and merchant banking fees and from 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 companies issuing securities and
parties on the other side of a transaction to perform their obligations can
result in illiquid markets. In such markets, we may not be able to sell
securities and may have difficulty covering our securities positions. Such
markets, if prolonged, may also lower our revenues from investment banking,
merchant banking and other investments, and could have a material adverse effect
on our results of operations, financial condition and cash flows.
Our principal business activities (investment banking, securities sales
and trading and correspondent brokerage services) are naturally highly
competitive and subject to various risks, volatile trading markets and
fluctuations in the volume of market activity. Consequently, our net income and
revenues, as well as our stock price, have been, and may continue to be, subject
to wide fluctuations. This, of course, reflects the impact of many factors that
are beyond our control. These factors include: (i) securities market conditions,
(ii) the level and volatility of interest rates, (iii) competitive conditions
and (iv) the size and timing of transactions.
Numerous other national and international factors affect the securities
business and the profitability of securities firms. These include: (i) economic
and political conditions, (ii) broad trends in business and finance, (iii)
legislation and regulation affecting the national and international business and
financial communities, (iv) currency values, (v) inflation, (vi) market
conditions, (vii) the availability of short-term or long-term funding and
capital, (viii) the credit capacity or perceived creditworthiness of the
securities industry in the marketplace and (ix) the level and volatility of
interest rates.
THERE IS SIGNIFICANT COMPETITION WITHIN THE SECURITIES INDUSTRY
We encounter significant competition in all aspects of the securities
business and compete worldwide directly with other domestic and foreign
securities firms. Many of these competitors have greater capital, financial and
other resources than we have. In addition to competition from firms currently in
7
<PAGE>
the securities business, there has been increasing competition from other
sources, such as commercial banks and investment boutiques.
We anticipate legislative and regulatory initiatives in the U.S. to
remove or relieve certain restrictions on commercial banks. Thus, it is possible
that competition in some markets currently dominated by investment banks may
increase in the near future.
Such competition could also affect our ability to attract and retain
highly skilled individuals to conduct our various businesses, which may have an
adverse effect on our business. The principal competitive factors influencing
our business are: (i) our professional staff, (ii) our reputation in the
marketplace, (iii) our existing client relationships, (iv) the ability to commit
capital to client transactions and (v) our mix of market capabilities. The
adequacy of our capital levels will also influence our ability to compete
effectively in securities brokerage and investment banking activities. In
addition, our ability to expand our business may depend on our ability to raise
additional capital. See "Description of Business - Competition."
THE SECURITIES BUSINESS IS SUBJECT TO EXTENSIVE FEDERAL, STATE AND
FOREIGN REGULATION
Our business (and the securities industry generally) is subject to
extensive regulation. First, we are subject to regulation in the United States,
Austria and all other Central and Eastern European states where our subsidiaries
operate at the state level. Second, we are subject to regulation by various
foreign financial regulatory authorities in the jurisdictions outside of the
United States, Austria and Central and Eastern Europe where we do business,
including regulation by the Securities and Futures Authority of the United
Kingdom. Finally, we are subject to regulation by industry self regulatory
organizations (known as "SROs"). See "Description of Business - Governmental
Regulation."
SROs such as the NASD require strict compliance with their rules and
regulations. Our failure to comply with any of these laws, rules or regulations
could result in fines, suspension or expulsion, which could have possible
material adverse effects upon us and may affect our stock price accordingly.
The scope of EBI Securities' broker-dealer operations is subject to the
terms of its Restriction Agreements with the NASD. In the event that EBI
Securities violates the terms of its Restriction Agreements, the NASD can
suspend or revoke its membership and may impose fines upon or censure EBI
Securities.
Compliance with many of the regulations that apply to us involves a
number of risks, particularly in areas where applicable regulations may be
unclear. The SEC, 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. These proceedings or arbitrations may
result in censure, fine, civil penalties (including treble damages in the case
of insider trading violations), issuance of cease-and-desist orders,
de-registration of or suspension of a broker-dealer, investment adviser or
futures commission merchant, statutory disqualification of our officers or
employees or other adverse consequences. Moreover, even if no such actions are
taken, there could be a material adverse effect on our perceived
creditworthiness, reputation and competitiveness. Customers of ours or others
who allege that our violation of applicable regulations have damaged them also
may seek to obtain compensation from us, including unwinding any transactions
with us. Such unwinding could have an adverse impact on our business.
Other changes may adversely affect our manner of operation and
profitability. These include: (i) additional legislation and regulations,
including those relating to the activities of affiliates of broker-dealers, (ii)
changes in rules promulgated by the SEC, the Ministry or other Austrian or
foreign governmental regulatory authorities and SROs and (iii) changes in the
interpretation or enforcement of existing laws and rules.
Regulations may materially affect our business in two ways. First,
regulations may directly apply to us in the conduct of our business. Second,
laws, rules and regulations that apply generally to the industry or the market
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as a whole may materially affect the market for our products and services. Some
examples of factors that could affect the volume of our underwriting, merger and
acquisition and merchant banking business in any year are: (i) existing and
proposed tax legislation, (ii) antitrust policy and other governmental
regulations and policies (including the interest rate policies) and (iii)
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 our related underwriting, advisory and trading revenues.
THERE ARE MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH
OUR UNDERWRITING AND TRADING ACTIVITIES
We conduct our underwriting, securities trading, market-making and
arbitrage activities as principal and in doing so subject our capital to
significant risks, including market, credit (including counterparty) and
liquidity risks.
Our 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 characterized by relative illiquidity or that
may be particularly susceptible to rapid fluctuations in liquidity. From time to
time we have large position concentrations in certain types of securities or
commitments and in the securities of or commitments to a single issuer. The
issuers could include sovereign governments and other entities, issuers located
in a particular country or geographic area, or issuers engaged in a particular
industry. Through our subsidiaries and affiliate offices, we engage in
proprietary trading of United States and Central and Eastern European securities
with an emphasis on government and corporate bonds, local debt instruments and
equity securities. These transactions involve risks associated with the
political instability and relative currency values of the nations in which the
issuer principally engages in business, including the risk of nationalization.
Additionally, from time to time we have substantial position concentrations in
high-yield issuers 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 our
high-yield securities inventories and the impact of such activities upon our
results of operations can fluctuate from period to period as a result of
customer demands and economic and market considerations.
For competitive and other reasons, the trend in all major capital
markets 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 our exposure to specific
credit, market and political risks. Also, material fluctuations in foreign
currencies against 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
assets located or denominated in non-U.S. jurisdictions or currencies.
We derive much of our revenue from commissions generated by our
broker-dealers from retail brokerage transactions in equity and debt securities,
underwriting activities and private placements. We believe that as the business
of the broker-dealers develops, the broker-dealers will engage in securities
trading for their own accounts. These activities may involve the purchase, sale
or short sale of securities as principal and may involve certain risks which may
limit our ability to resell securities we purchased or to repurchase securities
sold in such transactions. These risks include change in the market price of
such securities and a decrease in the liquidity of markets. Principal and
underwriting transactions also involve economic, political, credit, currency,
interest rate and other related risks, any of which could result in an adverse
change in the market price of the relevant securities. See "Management's
Discussion and Analysis or Plan of Operation."
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MERCHANT BANKING ACTIVITIES ARE VERY CAPITAL INTENSIVE AND HAVE A
POTENTIAL FOR LOSS
Securities firms, such as ourselves, increasingly promote major client
transactions and transactions sponsored by the clients' own pools of capital by
using their 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 various
transactions. These include mergers, acquisitions, and 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. Purchasers of equity securities in these
transactions generally hold them for appreciation, and the securities 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. We also provide and
arrange bridge financing. Bridge financing 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 we will not experience significant
losses as a result of such activities. Such losses may have an adverse effect on
our business. See "Management's Discussion and Analysis or Plan of Operation."
DERIVATIVE FINANCIAL INSTRUMENTS
At the present time, we do not engage in the use of derivative
financial instruments. In some of the countries where we have operations
(Slovakia, Kazakhstan, Turkey, Slovenia, Croatia and Poland), the local
currencies are referred to as "soft" or "exotic". Soft currency is the currency
of a nation where a person can exchange the currency only with difficulty. Soft
currency countries typically have minimal amounts of currency reserved for
exchange purposes. As such, there are very few, if any, cost effective hedging
strategies available to us or potential investors. Our inability to engage in
currency hedging activities may result in our earnings being subject to greater
volatility due to exchange rate fluctuations.
REQUIREMENTS FOR ADDITIONAL CAPITAL
We may need to raise additional funds to provide working capital or to
respond to unforeseen needs or to take advantage of unanticipated opportunities.
Over the longer term, it is likely that we will require substantial additional
monies to continue to fund our working capital needs. There can be no assurance
that any such funds will be available at the time or times needed, or available
on terms acceptable to us. If adequate funds are not available on acceptable
terms, we may not be able to take advantage of market opportunities, to develop
new services or products or otherwise respond to competitive pressures and could
be illiquid. Such inability could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
DEPENDENCE UPON AVAILABILITY OF CAPITAL AND FUNDING
A substantial portion of our total assets consists of highly liquid
marketable securities and short-term receivables arising from securities
transactions. The highly liquid nature of these assets provides us with
flexibility in financing and managing our business. However, certain of our
activities, such as merchant banking, frequently involve substantial capital
commitments in securities which are often illiquid. [Internally generated funds
and capital satisfy our funding needs.] Such funds and capital include 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 our bank borrowings are
made on a collateralized basis. This means that we have to pledge assets of ours
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in order to secure the funds involved in the repurchase transactions or
borrowings. Liquidity management includes monitoring assets available to pledge
against short-term borrowing. We maintain borrowing relationships with a broad
range of banks, financial institutions, counterparties and others. The volume of
our borrowings generally fluctuates in response to changes in the amount of
resale transactions outstanding, the level of our securities inventories and
overall market conditions. Availability of financing 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. There can be no assurance that adequate financing to support our
businesses will continue to be available in the future. See "Management's
Discussion and Analysis or Plan of Operation."
POTENTIAL RESTRICTIONS RESULTING FROM NET CAPITAL REQUIREMENTS ON THE
BUSINESS OF REGULATED SUBSIDIARIES AND ON THE WITHDRAWAL OF CAPITAL
As a registered broker-dealer and member of numerous stock exchanges
throughout the United States and Central and Eastern Europe, we are required to
comply with each of the countries' regulatory authorities and net capital rules
of the stock exchanges. These rules specify minimum net capital requirements for
registered broker-dealers and stock exchange members. They attempt to ensure
that broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business. Accordingly, the rules
require that at least a substantial portion of 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 our ability to withdraw
capital from restricted accounts governed by regulatory restrictions, even in
circumstances where these accounts hold more than the minimum amount of required
capital. This, in turn, could prevent or limit our ability to pay dividends,
repay debt and redeem or repurchase shares of our outstanding capital stock.
POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of our business involve substantial risks of liability. In
recent years litigation involving the securities industry has increased,
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 our business depend on highly-skilled individuals. We
devote considerable resources to recruiting, training and compensating such
individuals and have taken further steps to encourage such individuals to remain
in our employ. Individuals employed by us may, however, choose to leave at any
time to pursue other opportunities. Moreover, operating our business depends
principally on certain key management personnel. In particular, Martin A.
Sumichrast and Wolfgang Kossner have played significant roles in promoting,
developing and managing the Company. Wolfgang Kossner serves as a consultant to
the Company. If Mr. Kossner's affiliation with us were to cease, or if he were
unable to continue to serve in this role, there may be a significant adverse
effect on our performance as a whole. Martin A. Sumichrast is an officer,
director and employee of ours. If we terminate his employment, or if he is
unable to perform his duties, there may be a significant adverse effect on our
performance as a whole. We expect that our potential growth and any expansion
into new areas and activities requiring additional expertise (such as new
markets or the development of new products) will place additional demands on our
human resources. We anticipate such demands will require us to add new
management personnel and to develop additional expertise in our existing
management personnel. The failure to acquire such services or to develop such
expertise could have a material adverse effect on our prospects for success.
Competition for such personnel is intense and we can give no assurance that we
will be able to hire and/or retain adequate personnel. At the present time, we
have a key-man life insurance policy in effect on Mr. Sumichrast. However, we
cannot be certain that the proceeds from such policy will be adequate to offset
the loss of his services. We do not have key-man life insurance policies in
effect with respect to Mr. Kossner.
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OPERATING LOSSES AND FINANCIAL CONDITION
Since the Company's formation, we have suffered substantial cash flow
deficits and operating losses. The net loss for the year ended March 31, 1998
was $4,947,557 and for the six months ended September 30, 1998 was $3,064,912.
Cash and cash equivalents were $7,156,702 as of March 31, 1998 and $5,019,082 as
of September 30, 1998. There can be no assurance that our future operations will
be profitable or that we will have available funds adequate to fund our
operations. Should our operations be profitable, it is likely that we would
retain much or all of our earnings to finance future growth and expansion.
DELISTING OF SECURITIES: ADVERSE EFFECT ON THE MARKET
In the event that the Common Stock were no longer to meet applicable
Nasdaq SmallCap requirements including timely reporting and were delisted from
Nasdaq SmallCap, we would attempt to have our securities traded in the
over-the-counter market via the Electronic Bulletin Board or the "pink sheets."
In such event, holders of our securities would likely encounter greater
difficulty in disposing of these securities and/or obtaining accurate quotations
as to the prices of our securities.
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON
MARKETABILITY OF SECURITIES
The SEC has adopted regulations which generally define "penny stock" to
be any equity security that has a market price (as defined) of less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Since our Common Stock is currently listed on the Nasdaq SmallCap we
are exempt from the definition of penny stock at this time. If at any time
regulators delist the Common Stock from the Nasdaq SmallCap, transactions
involving the securities may become subject to penny stock rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors.
(Generally, accredited investors are those persons with assets in excess of
$1,000,000 or annual income exceeding $200,000, $300,000 together with their
spouse.) For transactions subject to penny stock 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, the Commission mandates a risk disclosure document
relating to the penny stock market which the broker-dealer must deliver prior to
any transaction involving a penny stock, unless exempt. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and disclose current quotations for the securities. If
the broker-dealer is the sole market-maker, the broker-dealer must also disclose
this fact as well as its presumed control over the market. Finally,
broker-dealers must send monthly statements 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 our securities in the secondary market.
DILUTIVE AND OTHER ADVERSE EFFECTS OF OUTSTANDING OPTIONS AND WARRANTS
Under the terms of the outstanding Class A, B and C warrants, options
issued under our 1996 Stock Option Plan, and other outstanding options and
warrants, the holders of such warrants and options are given an opportunity to
profit from a rise in the market price of the Common Stock with a resulting
dilution in the interests of the other shareholders. The existence of such
options and warrants may adversely affect terms on which we may obtain
additional financing. For example, the holders of the warrants might exercise
them at a time when we are attempting to obtain additional capital through a new
offering of securities on terms more favorable than those which the warrants and
options provide.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION AND ISSUANCE OF PREFERRED
STOCK
As of December 1997, our Board of Directors authorized the issuance of
up to 10,000,000 shares of preferred stock. As of February 11, 1999 no shares of
preferred stock were issued. The Board of Directors has the power to establish
the dividend rates, liquidation preferences, voting rights, redemption and
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conversion terms, and all other rights, preferences and privileges with respect
to any series of preferred stock. The issuance of any series of preferred stock
having rights superior to those of the Common Stock may result in a decrease in
the value or market price of the Common Stock. The Board of Directors could use
this as a means to prevent a change in control of the Company. Future issuances
of preferred stock may provide for dividends, certain preferences in liquidation
and conversion rights. Such preferred stock issuance could make the possible
takeover of the Company, or the removal of management of the Company, more
difficult. The issuance of such preferred stock could discourage hostile bids
for control of the Company in which shareholders could receive premiums for
their Common Stock or warrants, could adversely affect the voting and other
rights of the holders of the Common Stock, or could depress the market price of
the Common Stock or warrants.
SPECIFIC RISKS OF THE GEOGRAPHIC AREAS COVERED BY THE COMPANY OTHER
THAN THE UNITED STATES
Our investments will include securities of issuers resident in areas
currently in a state of flux - Central and Eastern Europe and Central Asia.
These regions' political institutions and economic policies now face the
challenges of rapid change. Their populations are 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 economy to a market economy.
For these reasons our investments will be subject to risks of a nature and
degree not normally encountered in more developed economies and additional to
those inherent in any equity investment. Specific examples of some of these
risks are described below:
- - LIQUIDITY OF OUR INVESTMENTS: The nature of our investments in these
geographic areas limits their potential secondary market. Accordingly, we
may not be able to achieve the full value of our investments on disposal.
Although we anticipate that liquidity will improve once local stock markets
are operational, there is no guarantee that the markets will be as liquid
as those of developed countries.
- - POLITICAL AND ECONOMIC FACTORS: The countries in which some of our
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 whether such reforms will
achieve their intended aims. Countries may impose restrictions on investing
in specific companies or industries which they consider to be important or
sensitive to national interests, but which also may be the best investment
opportunities available there. Additionally, changes in government policy
may result in countries expropriating investments.
- - VALUATION RISK: Accounting and financial reporting standards in selected
countries are not equivalent to International Accounting Standards or U.S.
Generally Accepted Accounting Standards. Consequently, less information is
available to investors in the selected countries than in more developed
capital markets. Nevertheless, we will use valuations and financial reports
of international auditing firms and will apply all other means to monitor
unlisted investments.
- - PROBLEMS OF TRANSITION AND BUSINESS FAILURE: Until very recently, virtually
all industrial output within the Comecon and Warsaw Pact countries was
generated 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 the United States. 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 we have invested may have a
significant adverse effect on our performance as a whole.
- - CHANGES IN LAW AND ENFORCEMENT OF RIGHTS: In cases where competing claims
arise or in cases of re-nationalization, it may be difficult to enforce our
rights in several of the countries where we operate. There are several
reasons for this. First, legislation relating to securities, stock markets
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and property rights may not exist. Second, these countries may only very
recently have introduced such legislation, and may introduce significant new
legislation at any time. Finally, existing legislation is likely to be
subject to extensive amendment.
- - INVESTMENT AND REPATRIATION RESTRICTIONS: We may require governmental
registration and/or approval in order to repatriate investment income,
capital and the proceeds of sales by foreign investors. A number of
countries in which we may invest do not have freely convertible currencies
or their currencies may only be convertible at rates determined by their
governments. Countries may also impose repatriation restrictions at any
time. Changes in the value of currencies in which our investments are
denominated will result in a corresponding change in the value of our
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
corresponding 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, we could in the future become
subject to local tax liabilities that had not been anticipated in conducting
our investment activities or valuing our assets.
ENFORCEABILITY OF CIVIL LIABILITIES
A substantial portion of our 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 based on the civil liability provisions of the
securities laws of the United States. In addition, certain of our officers and
directors are not citizens or residents of the United States and all or a
substantial portion of their assets are or may be located outside the United
States. As a result, it may be difficult for investors to affect service of
process within the United States against them or to enforce judgments obtained
in the United States, including judgments based on the civil liability
provisions of the securities laws of the United States.
IMPACT OF THE YEAR 2000
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally. The potential costs and uncertainties associated with the
Year 2000 issue will depend on a number of factors, including software, hardware
and the nature of the industry in which a company operates. Additionally,
companies must coordinate with other entities with which they electronically
interact.
We are currently in the process of a systems upgrade unrelated to the Year
2000 issue. In conjunction with this upgrade, we are in the process of
establishing a program to address issues associated with the Year 2000. To
ensure that our computer systems are Year 2000 compliant, we have been reviewing
our systems and programs to identify those that contain two-digit year codes,
and we intend to replace them in conjunction with the systems upgrade provided
by the Baan Corporate Office Solutions. In addition, we are in the process of
contacting our major external counterparties and suppliers to assess their
compliance and remediation efforts and our exposure to them.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of our computer and non-information technology systems.
Such failures could have a material adverse effect on us and may cause systems
malfunctions, incorrect or incomplete transaction processing resulting in failed
trade settlements, the inability to reconcile accounting books and records, the
inability to reconcile trading positions and balances with counterparties,
inaccurate information to manage our exposure to trading risks and disruptions
of funding requirements. In addition, even if we successfully remediate our Year
2000 issues, we can be materially and adversely affected by failures of third
parties to remediate their own Year 2000 issues. The failure of third parties
with which we have financial or operational relationships such as securities
exchanges, clearing organizations, depositories, regulatory agencies, banks,
clients, counterparties, vendors and utilities, to remediate their computer and
non-information technology systems issues in a timely manner could result in a
material financial risk to us.
If the above mentioned risks are not remedied, we may experience business
interruption or shutdown, financial loss, regulatory actions, damage our global
franchise and legal liability. We are currently unable to quantify the adverse
effect such risks impose, but our management believes that if the Year 2000
issue is not remedied, there could be a material adverse effect on our financial
position and results of operation. See "Management's Discussion and Analysis or
Plan of Operation-Impact of the Year 2000."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares,
the Warrant Shares, the Debenture Shares or the Placement Agent Shares since
such shares will be sold by the Selling Stockholders. Holders of the Warrants,
the Placement Agents' Warrants and the 7% Convertible Debentures (the
"Debentures") are not obligated to exercise any of their Warrants or convert any
of their Debentures. However, assuming exercise of all of the Warrants, the net
proceeds to be received by the Company is estimated to be $____________. The
closing bid price of the Common Stock on the Nasdaq SmallCap on February 11,
1999 was $7.3125. The Warrants are exercisable at $7.00. Accordingly, there is
no assurance that any of the Warrants will be exercised. The Company will not
receive any proceeds from resales of the Warrants, the Shares, the Warrant
Shares, the Placement Agents' Warrants or the Debenture Shares.
The Company currently anticipates that it will use the net proceeds to
it of this Offering, if any, to fund general corporate and working capital
requirements.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap under the
symbol "EAST" (previously, the symbol was "CZCH"). The following table sets
forth the reported high and low bid quotations on a calendar year basis (as
adjusted for the one-for-five reverse split of the Company's Common Stock, which
occurred in September 1996) of the Common Stock for the periods indicated. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
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COMMON STOCK
----------------------
HIGH LOW
----------- ----------
1996
First Quarter $ 9.0625 $5.0000
Second Quarter $13.7500 $5.9375
Third Quarter $11.2500 $4.5625
Fourth Quarter $ 6.0000 $3.7500
1997
First Quarter $ 5.2500 $3.3750
Second Quarter $ 7.5000 $4.3125
Third Quarter $ 7.2500 $6.5000
Fourth Quarter $11.1250 $6.3750
1998
First Quarter $11.0000 $8.3750
Second Quarter $10.5000 $4.0000
Third Quarter $14.0000 $4.0000
Fourth Quarter $ 5.7500 $2.3100
(through December 31, 1998)
1999
First Quarter $13.0000 $4.1250
(through February 11, 1999)
On February 11, 1999, the closing bid price for the Company's Common
Stock as reported on the Nasdaq SmallCap was $7.3125 per share. 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 repurchase 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 repurchased 45,000 of its
outstanding shares at $4.75 per share. Currently, no additional buy-backs are
anticipated.
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BUSINESS
BACKGROUND
Eastbrokers International Incorporated ("EII," and together with its
subsidiaries the "Company") was incorporated in the State of Delaware on January
20, 1993, as the Czech Fund. The Company's initial goal was 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.
From 1993 through 1996, the Company held an interest in a Czech hotel and an
interest in a Czech department store.
In 1996, the Company re-evaluated its business strategy and, after
considering a variety of investment opportunities, acquired Eastbrokers Vienna.
This transaction enhanced the Company's prospects by both providing the Company
with a vehicle to implement its acquisition strategy and extend its
opportunities beyond the Czech Republic to the entirety of Central and Eastern
Europe. Following the acquisition, the Company's name was changed to Eastbrokers
International Incorporated, its present name.
EII is primarily a holding company for sixteen subsidiaries and
affiliates which are directly and indirectly owned. Twelve of the Company's
subsidiaries and affiliates are incorporated and located in Central and Eastern
Europe. The Company also owns 100 percent of EBI Securities, 100 percent of
Eastbrokers Leasing Ltd., 90 percent of Eastbrokers NA and 100 percent of an
inactive U.S. subsidiary. All of the Company's subsidiaries and affiliates are
engaged in the investment banking, broker-dealer, advisory and security
business. The principal strategic objective of the Company has been to establish
controlling ownership of independent broker-dealers located primarily in Central
and Eastern Europe and to create a network that provides access to emerging
market investment opportunities in Central and Eastern Europe. In fiscal year
1998, this objective was expanded to include establishing controlling ownership
of independent broker-dealers in the United States.
CURRENT OPERATIONS
Through Eastbrokers Vienna, the Company provides financial services in
Central and Eastern Europe. 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) Klagenfurt, Austria, (b)
Bratislava, Slovakia, (c) Almaty, Kazakhstan, (d) Istanbul, Turkey, (e)
Ljubljana, Slovenia, (f) Zagreb, Croatia, and (g) Warsaw, Poland. Although the
Company sold its operations in Budapest, Hungary, the Company continues to have
a working relationship with the buyer. 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, and the Warsaw Stock Exchange. Eastbrokers Vienna also owns 52 percent
of WMP Bank AG (formerly WMP Borsenmakler AG) ("WMP"), a publicly-held Austrian
investment banking and brokerage firm. Due to the continued decline in the Czech
Republic markets and recurring operating losses generated through its subsidiary
office located in Prague, Czech Republic, the Company determined that it was in
the best interest of the Company and shareholders to dispose of this operation.
73.55 percent of the Company's interest in this subsidiary was sold in June
1998.
Eastbrokers Vienna's brokerage, trading and market making business
generated approximately 25 percent and 41 percent of all of the Company's
revenues for the fiscal years ended March 31, 1997 and 1998, respectively.
Eastbrokers Vienna conducts its sales activities as principal and agent on
behalf of its clients. Eastbrokers Vienna primarily distributes and trades
Central and Eastern European equity securities and to a lesser degree, debt
securities. Eastbrokers Vienna, through WMP, actively makes a market in more
than 800 debt and equity securities on the Vienna Stock Exchange. For the six
months ended September 30, 1998, EBI Securities generated approximately 42
percent of all of the Company's consolidated revenue.
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Eastbrokers Vienna is also a Central and Eastern European investment
banking firm which provides advice to, and raises capital for, Central and
Eastern 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
capital for its investment banking clients from institutional and commercial
investors in Western Europe. Since 1993, Eastbrokers Vienna has assisted with
over twenty-five investment banking transactions.
The Company acquired 90 percent of Eastbrokers NA in March 1997. On
January 4, 1999, Eastbrokers NA's request to withdraw its registration as a
broker-dealer with the SEC and a member of the National Association of
Securities Dealers ("NASD") was approved. The office space previously occupied
by Eastbrokers NA has been converted into a branch office of EBI Securities.
In October 1997, the Company announced its intention to establish a
full service brokerage operation in Kiev, Ukraine subject to obtaining the
required regulatory approvals. Due to the overall instability in the region
caused by the economic crisis in Asia and potential currency problems in Russia,
the Company has decided to continue its evaluation of this market and will delay
this expansion until such time as it feels the expansion is economically viable.
On February 20, 1998, the Company consummated a private placement.
Under the terms of this private placement, the Company sold 1,227,000 units at
$5.00 per unit, with each unit consisting of one share of the Company's common
stock, par value $.05 per share (the "Common Stock"), and one Class C Common
Stock purchase warrant with an exercise price of $7.00 per share. After expenses
related to this private placement, the Company received approximately
$5,400,000. As provided by the terms of the Class A and Class B warrants
outstanding at the time of this private placement, the Company also announced
certain adjustments relating to the pricing of its Class A and Class B warrants.
In conjunction with this private placement, the Company announced a 1-for-5
reverse split of its Class A and Class B warrants with corresponding changes in
the number of warrants required for exercise. This reverse split was in
proportion to the 1-for-5 reverse split of the Common Stock in September 1996
and caused each warrant again to be exercisable for one share of Common Stock.
The effect of these changes resulted in a total of 1,101,000 Class A warrants
outstanding with an exercise price of $18.00 per share and 250,000 Class B
warrants outstanding with an exercise price of $19.00 per share as of March 31,
1998.
During April 1998, the Company announced that a consortium in which the
Company was participating was awarded the management contract for Polish
National Investment Fund #9. This consortium consisted of the Company, Tonlor
Finance, a Polish finance and investment company based in Warsaw, and General
Partners AG, an Austrian investment and holding company. Subsequent to the
signing of the preliminary management agreement but prior to the signing and
ratification of the final management agreement, the consortium was informed that
the Polish national government had reached a strategic decision to change the
focus, structure, and process related to the privatization of its national
investment funds. The consortium was encouraged to resubmit its application and
compete for a management contract under the new criteria. After considerable
deliberation and an evaluation of the time, energy, effort, and financial
commitment originally expended in the bidding process and an evaluation of the
cost required to continue in the bidding process, the consortium determined that
its resources, financial and human, were better allocated to other worthwhile
projects.
In May 1998, the Company acquired all of the outstanding common stock
of Cohig & Associates, Inc., a Denver, Colorado based investment banking and
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brokerage firm, in exchange for 445,000 unregistered shares of the Common Stock
and an agreement to advance $1,500,000 in additional working capital to Cohig &
Associates. Following the acquisition, the Company changed the name of Cohig &
Associates, Inc. to EBI Securities Corporation ("EBI Securities"). The Company
intends to develop EBI Securities as the foundation to expand its U.S. based
investment banking and brokerage presence and anticipates that EBI Securities
will be the first in a series of acquisitions targeting other successful medium
size investment banking and brokerage firms both domestically and
internationally. EII believes that its current organizational structure as an
entrepreneurial and international publicly-traded company will be particularly
appealing to potential acquisition candidates.
EBI Securities is a full service brokerage firm specializing in
providing investment advice and counsel to individuals and small to middle
Market institutions. At the present time, EBI Securities has approximately [180]
licensed representatives. EBI Securities provides its brokerage clients with a
broad range of traditional investment products and services. EBI Securities also
strives to establish itself with investors and corporate finance clients through
its commitment to a professional and personalized service. Its trading
department makes a market in approximately 150 securities which include its
investment banking clients and those securities that its research department has
identified as promising, small to middle-market and potentially high growth
companies. EBI Securities' investment banking department operates with a single
goal in mind: to enhance and develop the capital structures of small to middle
market emerging growth companies through private placements, bridge financing,
and public offerings in order to enable the firm's corporate finance clients to
capitalize on promising business opportunities, favorable market conditions,
and/or late stage product development.
EBI Securities is registered as a broker-dealer with the SEC and is
licensed in 50 states and the District of Columbia. It is also a member of the
NASD and the Securities Investor Protection Corporation ("SIPC"). Customer
accounts are insured to $25 million under the SIPC excess insurance program. EBI
Securities operates pursuant to the exemptive provisions of SEC Rule 15c3-3
(k)(2)(ii) and clears all transactions with and for customers on a fully
disclosed basis.
EBI Securities maintains its clearing arrangement with Fiserv
Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ:
FISV). Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement enables
EBI Securities to offer its clients a broad range of products and services that
is typically only offered by firms that are larger and/or have a larger capital
base. Fiserv has advised the Company that it is aware of the year 2000 computer
issue and is working to mitigate the effect of the year 2000 issue on its
operations. See "Management's Discussion and Analysis or Plan of Operation
Impact of the Year 2000".
In June 1998, the Company's largest European subsidiary, WMP, successfully
raised 60 million Austrian Schillings (approximately $4,800,000 USD) in a bond
offering. The Company originally intended to utilize these proceeds to enhance
and further develop its European trading activities. The bonds were issued in
denominations of 10,000 Austrian Schillings (approximately $800 USD at the then
current exchange rates), bear an annual interest rate of 7.5 percent, payable at
maturity, and mature in June 2002. In December 1998, the Company redeemed
approximately 42 million Austrian Schillings of these bonds. The Company intends
to redeem the remaining bonds in the future.
In June 1998, the Company sold 73.55 percent of its interest in
Eastbrokers Prague a.s. See "Acquisitions and Dispositions Subsequent to the
Fiscal Year End" below.
On November 25, 1998, the Company sold 10 newly issued units in a
private placement consisting in the aggregate of $1,100,000 in 7 percent
Convertible Debentures and Series C Warrants to purchase 125,000 shares of
Common Stock.
In December 1998, the Company sold its subsidiary, Eastbrokers Budapest
Rt. for HUF 217,000,000 (approximately $1,000,000 USD at the then current
exchange rates). The Company continues to have a working relationship with the
buyer and maintains a presence in Budapest through its relationship with the
buyer.
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In December 1998, the Company entered into a non-binding letter
agreement pursuant to which it intends to acquire Lloyd Wade Securities, Inc.
("Lloyd Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd Wade
is a full service securities firm. The acquisition is contingent upon, among
other things, receipt of any necessary corporate and stockholder approvals, all
necessary governmental approvals, completion of business, legal and financial
due diligence and other customary conditions. There can be no assurance that
such transaction will be successfully completed.
A key component of the Company's business plan is to grow through the
purchase and roll-up of complementary businesses both in the United States and
in Europe, with the acquisitions financed by the issuance of Common Stock.
Management believes that consolidation within the industry is inevitable.
Concerns attributable to the volatility currently prevailing in the financial
markets help explain the increasing number of acquisition opportunities being
introduced to the Company. The Company is currently focused on maximizing the
profitability of the acquisitions that have been consummated to date, and it is
continuing to selectively seek additional complementary acquisition and/or
merger candidates.
ACQUISITIONS AND DISPOSITIONS DURING THE FISCAL YEAR
In February 1998, the Company participated in a capital increase for
its subsidiary, Eastbrokers Vienna. In this capital increase, the Company
acquired 389,925 shares of the available 390,000 shares for approximately
$4,000,000 USD. The shares were offered at a price of 130 Austrian Schillings
per share (approximately $10.40 USD per share) and raised the Company's
ownership interest in Eastbrokers Vienna from approximately 94 percent to
approximately 96 percent.
Through its subsidiary, Eastbrokers Vienna, the Company acquired a 48.1
percent interest in the outstanding capital stock of WMP on August 1, 1996. 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. From time to time Eastbrokers
Vienna has carried shares of WMP. Accordingly, since August 1996, the Company's
ownership of WMP has exceeded 50 percent when including WMP shares in its
trading portfolio. At December 31, 1996, the Company's aggregate ownership
percentage in WMP, including its trading position, was approximately 55 percent.
This investment was accounted for using the equity method in the March 31, 1997
financial statements as the Company believed that its control of WMP may likely
have been lost as the result of the probable occurrence of certain events that
lay outside of its control. In September, 1997 circumstances surrounding these
events were resolved such that these events were no longer considered probable
of occurrence and the Company deemed its control of WMP was no longer temporary.
For the fiscal year ended March 31, 1998, WMP has been consolidated for the
entire year. At December 31, 1997, the Company's aggregate ownership interest in
WMP was 52 percent.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH") for 2.5 million Austrian Schillings (approximately $200,000 USD at
the then current exchange rates). The sales price approximated the cost basis of
WMP GmbH at the date of disposition. At the date of disposition, WMP GmbH was
primarily an inactive subsidiary.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Peter Schmid, the former
Chairman of the Board, President, Chief Executive Officer and a Director of EII,
for 13 million Austrian Schillings (approximately $1,025,000 USD at the then
current exchange rates). The Company acquired its ownership interest in SWIB in
mid-1997 for 510,000 Austrian Schillings (approximately $40,000 USD at the then
current exchange rates). At the time of acquisition, the principal asset of SWIB
was an investment in a Company which was entering bankruptcy proceedings and
there was considerable uncertainty regarding the future realizable value of this
asset. By December 1997, bankruptcy proceedings had progressed to a point where
an estimate could be made on the net realizable value of this primary asset.
Based on the information available at that time SWIB's value at the date of
disposition was determined by the Board of Directors of EII to be in the range
of 12 million to 14 million Austrian Schillings (approximately $950,000 to
$1,100,000 USD at the then current exchange rates).
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In December 1997, Eastbrokers Budapest Rt. sold its wholly owned
subsidiary, 1001 Pengo Kft., to three directors of Eastbrokers Budapest Rt. for
100 million Hungarian Forints (approximately $500,000 USD at the then current
exchange rates). As of the date of disposition, the sales price approximated the
cost basis of 1001 Pengo Kft.
ACQUISITIONS AND DISPOSITIONS SUBSEQUENT TO THE FISCAL YEAR END
In May 1998, the Company acquired all of the outstanding common stock
of EBI Securities in exchange for 445,000 unregistered shares of the Company's
Common Stock and an agreement to advance $1,500,000 in additional working
capital into EBI Securities. The Company intends to develop EBI Securities as
the foundation to expand its U.S. based investment banking and brokerage
presence and anticipates that EBI Securities will be the first in a series of
acquisitions targeting other successful medium size investment banking and
brokerage firms both domestically and internationally. EII believes that its
current organizational structure as an entrepreneurial and international
publicly traded company will be particularly appealing to potential acquisition
candidates. The office space presently occupied by Eastbrokers NA is in the
process of being converted to a branch office of EBI Securities.
In June 1998, the Company sold 73.55 percent of its interest in
Eastbrokers Prague a.s. to a third party for 15 million Austrian Schillings
(approximately $1,200,000 USD at the then current exchange rates).
PROPOSED ACQUISITIONS
In December 1998, the Company entered into a non-binding letter
agreement pursuant to which it will acquire Lloyd Wade, a full service
securities firm. This acquisition continues the Company's intended strategy,
begun with the acquisition of EBI Securities, of expanding its U.S. based
investment banking and brokerage presence.
GOVERNMENT REGULATION
The Company has operations based in the United States and 9 foreign
countries. The Company's business is, and the securities industry generally is,
subject to extensive regulation in each of these jurisdictions at both the
federal and 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 the United States,
Austria and Central and Eastern Europe where it does business, including, for
example, by the Securities and Futures Authority of the United Kingdom.
In the United States, the Company's business, and the securities
industry generally, are subject to extensive regulation at both the federal and
state levels. The SEC is the agency primarily responsible for administration of
federal securities laws. Much of the regulation of broker-dealers, however, has
been delegated by the SEC to SROs, primarily the NASD. The NASD has the
authority to adopt rules (which are subject to approval by the SEC) for
governing the industry and the NASD conducts periodic examinations to ensure
compliance. The scope of EBI Securities' broker-dealer operations are subject to
the terms of their respective Restriction Agreements with the NASD. In the event
that EBI Securities violates the terms of its Restriction Agreement or NASD
rules, its NASD membership can be suspended or revoked and the NASD may impose
fines upon it or censure it. Broker-dealers are also subject to regulation by
state securities commissions in the states in which they are registered. EBI
Securities is registered in all 50 states. EBI Securities is subject to the
SEC's net capital rules, which require them to maintain prescribed levels of
capital in order to conduct business. EBI Securities has capital in excess of
the required minimums.
The Company's non-U.S. business is also subject to extensive regulation
by various non-U.S. governments, securities exchanges, central banks and
regulatory bodies, especially in Austria where the Company owns WMP, an Austrian
bank that engages in the securities business, including on the Austrian Stock
Exchange. Each of these authorities impose regulation on the Company's
activities within the scope of their respective jurisdictions. These regulations
are generally intended to protect the integrity of the stock exchange, bank or
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financial market subject to regulation and to protect customers of the regulated
agency, and not primarily to protect investors in the regulated entity. The
Company is currently in compliance with the net capital requirements in each of
the Central and Eastern European jurisdictions in which the Company operates.
The SEC, the Austrian Ministry of Finance, other governmental
authorities and SROs have the authority to institute administrative or judicial
proceedings against any entity subject to their jurisdiction, and the officers
and employees of any such entity. These proceedings 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.
In addition to the existing laws and regulations affecting the Company,
additional legislation and regulations, amendments to existing laws and
regulations may be adopted in the future, or changes in interpretations or
enforcement of existing laws and regulations may be adopted in the future. Any
such event could directly affect the manner and operation and profitability of
the Company.
COMPETITION
The Company is engaged in a highly competitive business. With respect
to one or more aspects of its business, the Company encounters substantial
competition from both foreign and domestic businesses in the United States and
Central and Eastern Europe. Its competitors include an elite list comprised of
member organizations of the New York Stock Exchange and other registered
securities exchanges in North America and Central and Eastern Europe. A large
number of established and well-financed entities including multinational
businesses and investment banking firms such as Bank Austria, 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. Discount
brokerage firms affiliated with commercial banks and companies which provide
electronic on-line trading provide additional competition. In many instances,
the Company is also competing directly for customer funds with investment
opportunities offered by real estate, insurance, banking, and savings and loan
industries. The Company competes principally on the basis of service, product
selection, location and reputation in its local markets.
EMPLOYEES
At November 13, 1998, the Company had approximately 450 full-time
employees and 40 part-time employees. No employees are covered by collective
bargaining agreements and the Company believes its relations are good with both
its employees and its independent contractors and consultants.
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 environment or otherwise relating to the protection of the
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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.
LEGAL PROCEEDINGS
Through its recently acquired subsidiary, EBI Securities, the Company
is subject to several legal proceedings in various jurisdictions throughout the
United States.
USCAN FREE TRADE ZONES V. COHIG & ASSOCIATES, INC. (EBI SECURITIES), ET
AL., United States District Court for the Western District of Washington. In
March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint against EBI
Securities and Steve Signer, an employee of EBI Securities, alleging that EBI
Securities misled USCAN about the creditworthiness of a third party in
connection with an introduction made by Mr. Signer. EBI Securities categorically
denies this allegation. USCAN informed EBI Securities that it would be working
with a certain third party to secure certain loans on behalf of USCAN which
USCAN would then use to open a trading account with EBI Securities. Once EBI
Securities learned of the relationship to this third party, it refused to enter
into any business arrangements with USCAN as long as the third party was
involved due to regulatory problems encountered in prior business dealings with
this certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that might
have resulted. Mr. Signer was dismissed as a defendant in this case due to lack
of personal jurisdiction and has received an award of fees. Plaintiff originally
sought a judgment of approximately $86,000,000 in compensatory and punitive
damages. However, USCAN recently stated in pleadings and during a court
deposition taken in October 1998 that its damage claim had been reduced to
$332,000 and that it would dismiss its RICO claims. EBI Securities has filed
counterclaims for defamation based upon certain false and defamatory
representations regarding EBI Securities. A trial date has been scheduled for
January 1999. EBI Securities believes it has meritorious defenses and intends to
vigorously defend against USCAN's claims as well as aggressively pursue claims
against USCAN and two of its officers for defamation, abuse of process, and
civil conspiracy.
FLORIDA DEPARTMENT OF INSURANCE AS RECEIVER FOR UNITED STATES EMPLOYER
INSURANCE CONSUMER SELF-INSURANCE FUND OF FLORIDA ("USEC") V. DEBENTURE GUARANTY
CORPORATION, ET. AL., United States District Court for the Middle District of
Florida. In November, 1995, the plaintiff, USEC, commenced the above entitled
action against Debenture Guaranty Corporation ("Debenture") and certain other
defendants, including EBI Securities and Steve Signer, an employee of EBI
Securities. In 1994, USEC entered into an arrangement whereby USEC lent money to
Debenture, and Debenture opened an account in Debenture's name to trade U.S.
Treasuries. The note to USEC was in the amount by which the treasuries could be
margined. This transaction was allegedly part of a scheme whereby USEC was
attempting to inflate its assets for regulatory purposes. Debenture allegedly
misappropriated the funds for its own benefit and USEC subsequently failed.
Plaintiffs alleged that EBI Securities and Signer aided, abetted and conspired
with Debenture to defraud USEC and claimed damages of $11,000,000. After a six
week trial held from September 8, 1998, to October 14, 1998, a jury returned a
verdict in favor of EBI Securities. The plaintiffs have filed a motion for a new
trial. EBI Securities has objected to this motion. EBI Securities has filed a
motion for recovery of its attorney's fees incurred in connection with defending
this action.
EURO-AMERICAN INSURANCE COMPANY LTD., ET. AL. V. NATIONAL FAMILY CARE
LIFE INSURANCE COMPANY, ET. AL., 191st Judicial District of Dallas County, Texas
(the "NFC Litigation"). In April, 1996, National Family Care Life Insurance
Company ("NFC") commenced the above action against, among others, EBI Securities
and Steve Signer, an employee of EBI Securities. In late 1994 or early 1995, NFC
entered into an arrangement with Debenture Guaranty Corporation ("Debenture"),
another defendant in the NFC Litigation, whereby NFC lent money to Debenture,
and Debenture opened an account in Debenture's name to trade U.S. Treasuries.
The note to NFC was in the amount by which the treasuries could be margined.
This transaction was allegedly part of a scheme whereby NFC was attempting to
inflate its assets for regulatory purposes. Debenture allegedly misappropriated
the funds for its own benefit. NFC alleged that EBI Securities and Signer aided,
abetted and conspired with Debenture in allegedly defrauding Plaintiff. NFC has
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reduced its damages demand from approximately $11,500,000 to $1,100,000. This
case is related to the USEC litigation, described above, which also involves a
claim of fraud against Debenture. EBI Securities believes it has meritorious
defenses and intends to vigorously defend against NFC's claims.
EBI Securities also is involved in an arbitration proceeding related to
the NFC Litigation entitled NATIONAL FAMILY CARE LIFE INSURANCE CO. V. PAULI
COMPANY, INC., ET AL., NASDR Case No. 96-02673 (the "Arbitration"). The
Arbitration panel entered an award against EBI Securities in July 1998 in favor
of third-party plaintiff Pauli & Company, Inc. ("Pauli") of approximately
$370,000, which was significantly below the initial award sought by Pauli of
approximately $1,100,000. EBI Securities has filed a motion in the NFC
Litigation to vacate this award and plans to vigorously contest this award on
appeal.
In view of the inherent difficulty of predicting the outcome of such
matters, the Company cannot state what the eventual outcome of pending matters
against EBI Securities will be. Management believes, based upon discussions with
the Company's counsel, that the outcome of such matters will not have a material
adverse affect on the consolidated financial condition of the Company but may be
material to the Company's operating results for any particular period depending
on the outcome of the matter and the level of the Company's income for such
period.
In addition to the litigation described above, the Company, through its
subsidiaries, is involved in various legal actions and claims arising in the
ordinary course of business. Management believes that each of such matters will
be resolved without material adverse effect on the Company's financial condition
or operating results.
DESCRIPTION OF PROPERTY
The Company does not own any real property. Leases on the properties
leased by the Company expire at various times over the next five years. At
current production levels, the Company believes its leased space is suitable and
adequate. However, if volume and activity increases, it may necessitate leasing
additional office space.
The Company's corporate offices are located in Rockville, Maryland. The
Company leases its office space in Rockville, Maryland and through its
subsidiaries. At December 31, 1998 it leased office space in the following
locations: (i) New York, New York; (ii) Vienna, Austria; (iii) Klagenfurt,
Austria; (iv) Zagreb, Croatia; (v) Almaty, Kazakhstan; (vi) Warsaw, Poland;
(vii) Bratislava, Slovak Republic; and (viii) Ljubljana, Slovenia. The Company
maintains a presence in Budapest, Hungary due to its relationship with the buyer
of its operations previously located there.
Commencing with the acquisition of Cohig & Associates, Inc. in May
1998, the Company also leased office space in (i) Denver, Colorado; (ii) Aspen,
Colorado; (iii) Colorado Springs, Colorado; (iv) Meza, Arizona; (v) La Jolla,
California; (vi) Los Angeles, California; (vii) Newark, Delaware; (viii) Boca
Raton, Florida; (ix) Baltimore, Maryland; (x) Farmington, Michigan; (xi)
Aberdeen, New Jersey; (xii) Sea Girt, New Jersey; (xiii) Albuquerque, New
Mexico; (xiv) Charlotte, North Carolina; (xv) Seattle, Washington; and (xvi)
Spokane, Washington.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 in Form 10-KSB for the fiscal year ended
March 31, 1998, as amended.
PLAN OF OPERATION
GENERAL OVERVIEW
Prior to August 1996, the Company engaged in the purchase and sale of
newly privatized businesses in the Czech Republic. In August 1996, the Company
entered the Central and Eastern European investment banking and securities
business through its acquisition of Eastbrokers Vienna, an Austrian holding
company providing financial services in Central and Eastern Europe through its
network of subsidiaries. The acquisition of Eastbrokers Vienna was intended to
not only provide an earnings stream from brokerage activities, but also position
the Company to provide investment banking and corporate finance services.
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In March 1997, the Company expanded its operations into the brokerage
business in the United States through its acquisition of an existing New
York-based broker-dealer. In May 1998, the Company continued the expansion of
its U.S. operations through the acquisition of EBI Securities. In December 1998,
the Company signed a non-binding letter agreement pursuant to which it intends
to acquire Lloyd Wade, a full services securities firm. See "Business--Current
Operations."
The Company currently operates a highly diversified investment banking
and securities network, with 20 US offices and 9 international branches located
in the following countries: Austria; Poland; Slovakia; Turkey; Kazakhstan;
Romania; Bulgaria; Croatia; Slovenia. The Company's mission is to build, through
acquisitions and strategic alliances, a highly successful, global, middle
market, investment banking and securities firm.
EUROPEAN OPERATIONS
When Eastbrokers Vienna was acquired in August, 1996, the Company's
business strategy for its European operations was to: (1) market its emerging
market expertise; (2) develop an asset management business focused 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 throughout the region. During the past 12
months, the Company has had to modify this business strategy in response to the
global financial crisis, which peaked in the Summer of 1998, when the Russian
Ruble was devalued. This devaluation led to sharp decreases in stock markets
worldwide, particularly in Central and Eastern Europe. In addition, due to
falling prices, liquidity in much of the region was significantly reduced. In
order to minimize the negative effects on the Company's financial operations,
the Company reduced its work force in Austria, Romania, Turkey, Russia and
Bulgaria. In Poland, Slovenia, Croatia, Kazakhstan and Slovakia, the Company has
reevaluated its operations for additional cost savings. In the Czech Republic,
the Company sold approximately 73 percent of its operations (see dispositions).
Depending upon further changes in market conditions, the Company may determine
to close, sell or merge with third parties its other European operations as it
deems necessary.
Despite the current negative sentiment in emerging markets, the Company
believes that Central and Eastern Europe's ultimate unification into the
European Economic and Monetary Union will lead to a significant increase in
investor interest in the region. This potential increase in these emerging
markets will benefit those firms that have existing operations in the region.
The Company intends to maintain its solid long term involvement in the region
and to continue to provide its clients with quality brokerage and investment
banking services.
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.
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
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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.
UNITED STATES OPERATIONS
Subsequent to the acquisition of Eastbrokers Vienna, the Company
commenced expansion of its brokerage operations in the United States. The
Company's goal was to build a strong US brokerage presence that would enable it
to distribute middle market, international corporate finance product. In the
Spring of 1997, the Company purchased a U.S. based broker-dealer, Eastbrokers
North America, Inc. During the process of establishing the Eastbrokers North
America, the Company was approached by numerous U.S. based broker-dealers
interested in being acquired by the Company. Management believes that
consolidation within the securities industry, particularly in the United States,
is inevitable. This consolidation can be attributed to the current volatility
prevailing in the financial markets, the higher degree of capital needed to
maintain solid brokerage functions and the increased regulatory environment. The
Company decided that as a well-capitalized, entrepreneurially managed,
international, publicly-traded, investment banking firm, it would be
particularly appealing to the sellers of medium size brokerage firms. In
addition, the Company believes that the purchase and roll-up of complementary
securities businesses both in the United States and in Europe, can be financed
by the issuance of its Common Stock.
In May 1998, the Company made a significant step in its roll-up
strategy in the United States. The Company acquired all of the outstanding
common stock of Cohig & Associates, Inc., a Denver, Colorado based investment
banking and brokerage firm, in exchange for 445,000 unregistered shares of the
Common Stock and an agreement to advance $1,500,000 in additional working
capital to Cohig & Associates. See "Business--Current Operations."
In December 1998, the Company signed a non-binding letter agreement
pursuant to which it intends to acquire Lloyd Wade, a full service securities
firm. See "Business--Current Operations."
RESULTS OF OPERATIONS
QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER
AND SIX MONTHS ENDED SEPTEMBER 30, 1997
For the quarterly period ended September 30, 1998, the Company
generated consolidated revenues in the amount of $6,207,205, compared to
$1,413,995, for the quarterly period ended September 30, 1997. For the six month
period ended September 30, 1998 the Company generated consolidated revenues in
the amount of $10,344,997, compared to $3,023,971 for the six month period ended
September 30, 1997. Total revenues for the three and six month periods ended
September 30, 1998, are significantly higher than the previous periods due
primarily to the acquisition of EBI Securities, which contributed approximately
$2,712,000 and $4,341,000 for the quarterly and six month periods, respectively.
Total revenue was also affected by the sale of Eastbrokers Prague a.s. The
Company recognized a gain on sale of interest in Eastbrokers Prague a.s. of
approximately $1,312,000 before taxes. This amount is reflected in the revenue
section under the caption "Gain on sale of interest in subsidiary."
The Company incurred total consolidated costs and expenses of
$8,324,941, for the quarterly period ended September 30, 1998, and $12,539,496,
for the six month period ended September 30, 1998, compared to $2,593,078, for
the quarterly period ended September 30, 1997 and $4,366,784, for the six month
period ended September 30, 1997. Total costs and expenses for the three month
and six month periods ended September 30, 1998 are significantly higher than the
previous periods due primarily to the acquisition of EBI Securities, which
contributed
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approximately $4,939,000, for the three month period and $6,630,000, for the six
month period, respectively. The Company also incurred higher than expected legal
and consulting fees for the quarter, mainly due to costs associated with the
completion of its audit for the fiscal year ended March 31, 1998.
The Company's loss before provision for income taxes and minority
interest in earnings of subsidiaries was $2,149,736, for the quarterly period
ended September 30, 1998, and $2,226,499, for the six month period ended
September 30, 1998, compared to $1,179,083, for the quarterly period ended
September 30, 1997, and $1,342,813 for the six month period ended September 30,
1997. The Company's provision for income taxes and minority interest in earnings
of subsidiaries for the quarterly and six month periods, are attributed solely
to the Company's European operations, and are primarily related to WMP Bank AG
and Eastbrokers Budapest Rt (which was sold in December 1998).
The Company incurred a consolidated net loss of $2,854,655, for the
quarterly period ended September 30, 1998, and $3,064,912, for the six month
period ended September 30, 1998, compared to a consolidated net loss of
$668,735, for the quarterly period ended September 30, 1997, and $1,097,247, for
the six month period ended September 30, 1997.
The Company's net loss for the quarter was primarily attributable to
the effect of the significant downturn in global stock markets during the period
of August and September. For the quarter ended September 30, 1998, the Company
incurred approximately $1,950,000 in trading losses due to inventory adjustments
that were marked down as of September 30, 1998. These adjustments were
approximately $1,250,000 for securities held by EBI Securities, and $700,000 for
foreign securities held by Eastbrokers Vienna and its affiliates. An increase in
the net loss for the quarter was also attributed to a slowdown in gross
commission revenue at EBI Securities during the months of August and September.
On September 30, 1998, the Company had total assets of $54,404,378, and
total liabilities of $27,851,828, compared to $34,223,102, and $17,046,409,
respectively, on September 30, 1997. As of the date of this filing, the Company
believes that it has adequate liquidity to meet its current obligations.
However, no assurances can be made as to the Company's ability to meet its cash
requirements in connection with any expansion of the Company's operations or any
possible business combinations.
The cash flows for the six month period ended September 30, 1998
reflect the volatile nature of the securities industry and the reallocation of
the Company's assets indicative of a growing organization. The change in the
foreign currency translation adjustment is primarily related to the fluctuations
in the Company's functional currencies to the U.S. dollar. 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 the U.S. Dollar and the
Austrian Schilling.
As a broker/dealer in securities, the Company will periodically acquire
positions in securities on behalf of its clients. As disclosed in "Note 2
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".
FISCAL YEAR 1997 COMPARED WITH THE FISCAL YEAR 1998
As noted in the "General" section, the Company's principal activities
have changed dramatically during the past two fiscal years. During the fiscal
year ended March 31, 1997, the Company completely disposed of its interest in
the Hotel and acquired Eastbrokers Vienna, an Austrian based securities
broker-dealer providing financial services in Central and Eastern Europe through
its network of subsidiaries and affiliate offices. Potential purchasers of the
securities offered hereby are cautioned that a comparison between Fiscal Year
Ended March 31, 1997 and the Fiscal Year Ended March 31, 1998 may provide only
minimal meaningful information.
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A non-recurring item reflected in the operations of the Company for the
year ended March 31, 1997 is the gain on the disposition of available for sale
securities of Moravacentrum a.s. of $229,574. 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 and the gain on the disposition of
available for sale securities which resulted in a fourth quarter gain of
approximately $655,000. A non-recurring item reflected in the operations of the
Company for the year ended March 31, 1998 includes the sale of the 51 percent
interest in SWIB to Peter Schmid, the Company's former Chairman, President and
Chief Executive Officer, for approximately $1,000,000.
As an overview of the year ended March 31, 1997, Eastbrokers Vienna 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 Vienna 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 "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 March 31, 1997 as
$8,559,786. Comparing total revenues for the year ended March 31, 1998 (the
first full year of consolidated operations) of $10,138,881 to pro forma results
of operations for the year ended March 31, 1997, shows an increase of $1,579,095
USD.
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 tax benefit. As discussed in Note 13 - "Income Taxes",
the Company has approximately $12,850,000 USD in net operating loss
carryforwards available in Austria and approximately $2,985,000 USD in net
operating loss carryforwards available for future use in the U.S. The Company
has established a valuation allowance for the U.S. net operating losses. The
Company also expects its Austrian operations to return to profitability in the
fiscal year ended December 31, 1998 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.
Regulations in the Slovak Republic provide capital gain distribution income
related to Slovak privatization activities is non-taxable. Eastbrokers Vienna
was actively involved in such activities and received such income in the fiscal
year ended March 31, 1997. 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 2013. The Company does not anticipate any
significant changes in the effective tax rates.
In Europe, the expenses of the Company generally increase in the
quarter ending December 31 as compared to the quarter ending September 30 due
primarily to a "seasonal" effect. July and August are typically "holiday"
(vacation) months in Europe. Revenues and expenses generally respond accordingly
to this seasonal effect. The quarter ending December 31 is typically a strong
quarter in Europe as people return from holiday and seek to complete pending
transactions by calendar year end. 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 1997 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 abilities.
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The costs associated with the Company's involvement in privatization
activities, its pursuit of corporate finance opportunities, the continued
downturn of the economy of the Czech Republic and the effect this downturn has
had on the Company's operations, the costs associated with the acquisition of
Eastbrokers Vienna and the establishment of Eastbrokers NA and an overall
increase in general and administrative expenses are the primary factors
contributing to the negative operating cash flows experienced in the fiscal year
ended March 31, 1998. The Company anticipated to offset many of these operating
expenses with revenue generated from brokerage commissions of Eastbrokers NA and
ongoing privatization projects in Central and Eastern Europe. With this
unexpected decrease in revenue and increased cost, the Company's $4,947,557
operating loss was significantly larger than anticipated. The Company
anticipates that preliminary work performed related to corporate finance
activities will begin generating operating cash flows in the second quarter of
the Company's fiscal year ending March 31, 2000 and its efforts in the various
privatization activities will begin generating operating cash flows near the
beginning of 1999. 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 fiscal year
end and re-evaluate its strategic focus as it moves into the first 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.
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 was 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. As of March 31, 1998,
the Company had three significant concentrations in the securities portfolio. A
description of these securities and their respective carrying amounts are as
follows: a security of a Russian chemical producer traded on the OTC market of
the Vienna Stock Exchange -- $1,030,270, a security of a Bulgarian
pharmaceutical company traded on the Bulgarian Stock Exchange --$3,185,630, and
a security of a Bulgarian oil refinery traded on the Bulgarian Stock Exchange --
$1,354,830. 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 to high yield issuers 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. 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. For the years
ended March 31, 1997 and 1998, the Company has investments in affiliated
companies of $8,272,240 and $156,800, respectively, and receivables from
affiliated companies of $1,511,917 and $2,286,277, respectively. The
concentration of investments in affiliates by country are as follows: for 1997 -
Austria -- $7,755,997, Bulgaria -- $332,584, Slovenia -- $114,529, Others --
$69,130; and for 1998 - Slovenia and Croatia -- $156,800. The significant
decline in the investments in affiliated companies is primarily attributable to
WMP and the conversion from the equity method to full consolidation for this
subsidiary. The concentration of receivables from affiliates by country are as
follows: for 1997 - Austria -- $675,456, Bulgaria -- $536,587, Slovenia --
$150,994, Czech Republic -- $72,994, Others -- $75,886; and for 1998 - Austria
- -- $2,286,277. 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 (Austria) -- $2,455,880, Bulgaria -- $894,513, Slovenia --
$150,994, Czech Republic -- $72,994, and Others -- $44,756. These cash
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investments in each affiliate for the year ended March 31, 1998 were as follows:
Eastbrokers NA -- $512,036. As noted elsewhere in this Form SB-2, Eastbrokers
Vienna owns 52 percent of WMP. 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 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. There were no
significant changes in the overall competitive conditions between brokerage
companies except for the introduction of the electronic trading system to the
continuous trading section of the VSE. 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. At 2.5 percent, Austria's real economic
growth in 1997 was higher than projected, mainly thanks to the solid expansion
of real goods exports of 14.9 percent. This favorable development is to the most
part attributable to stepped-up foreign trade activity and hefty gains recorded
by Austria's export markets. Austria's accession to the European Union and the
opening up of Eastern Europe have helped Austrian exports advance from 37
percent in 1994 to 44 percent in 1996. In addition, the stabilization of
European exchange rates largely reversed the downtrend of the real effective
exchange rate in the past few years. Starting in 1993, the devaluations of the
weak currencies had gradually undermined Austria's competitiveness. This changed
for the better in 1996 and 1997, not least owing to the prospect of the
establishment of EMU, and resulted in a cumulative improvement of the real
effective exchange rate of 5.4 percent in 1996 and 1997. The confluence of this
development and wage moderation significantly shored up the competitiveness of
the Austrian economy in the past two years, pushing it back to the level it held
in the early 1990s. At 5.1 percent, the federal budget deficit posted its
highest level in 1995. By 1997 it had been trimmed to 2.5 percent through
subdued public consumption and tax hikes, so that Austria would meet the fiscal
convergence criteria of the Maastricht Treaty. In the opinion of management, the
outlook for the Austrian economy in 1999 is very positive. In its most recent
projections the Austrian Institute for Economic Research ("WIFO") projects
growth rates of 3.2 percent for 1999. Interest rates as measured by an average
commercial credit declined from 7.82 percent in 1995 to 6.96 percent in 1996 to
6.50 percent in 1997 and further to 6.39 percent in August 1998. The overall
economic and political situation in Austria has been very stable and the
government has worked diligently to reduce budgetary pressure. The annual
deficit, which peaked in 1995 at 112.7 billion ATS, decreased to 100.4 billion
ATS in 1996 and to 64.5 billion ATS 1997. Inflation peaked in 1992 with 4.1
percent annual increase and then continued to drop to 3.6 percent in 1993, 3.0
percent in 1994, 2.2 percent in 1995, 1.9 percent in 1996, 1.3 percent in 1997
and to 1.2 percent in the first half of 1998. 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
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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 1997 at approximately 13 percent on
an annualized basis. During 1997, the main index of the Prague Stock Exchange
saw a gradual decline from 550 to 460. The overall volume, although relatively
stable, was unusually low with an average turnover of approximately 100 million
Czech Korunas. During the first half of 1998, the market index hovered between
the 450 and 500 range before dropping approximately 30 percent in the first week
of October 1998. This decline represented a 41 percent drop from the levels of
the prior year and a historical low. Average daily turnover has shown some
improvement but it remains uncertain whether these levels will be sufficient to
maintain the market or if the market will be subject to additional corrections.
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 Hungary and
Poland where the markets appear to be more transparent and have greater
protection for the minority investors. After remaining relatively stable for
most of 1995 and 1996 at approximately 8 percent per annum, inflation in the
Czech Republic declined slightly during 1997 followed by a dramatic increase in
the first quarter of 1998 before settling in at approximately 10.5 percent by
the end of the third quarter 1998. Much of the inflationary and overall market
turmoil was believed to have been brought about by the economic crises in Russia
and Asia. There has been no significant change in the availability or cost of
capital in the Czech Republic, although interest rates increased by
approximately 2.50 percent in 1997 to 13.00 percent. Interest rates have
remained relatively constant at this level through 1998. 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 sold its operations in
the Czech Republic on June 1998.
HUNGARY. The Budapest Stock Exchange ("BSE") became one of the
pre-eminent emerging market stock exchanges in 1996 thanks to overall market
gains of over 170 percent for the year ended December 31, 1996 which led the
Budapest Stock Market Exchange Index ("BUX") to close the year at 4,134. During
1997, the BUX reached a high of 8,107 before retreating to the 6,000 level in
November 1997. Positive developments helped the BUX recover to approximately
8,000 by the end of 1997. During 1998, the BUX reached a record high of
approximately 9,100 and then dropped (due to global market turmoil) to
approximately 3,600 before recovering to approximately 5,100 as of October 1998.
As the index grew, so did overall market liquidity. 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. Interest rates
closed the 1997 year at approximately 24 percent and declined during the first
half of 1998 to approximately 20 percent. Inflation was also curtailed and
dropped to approximately 16.5 percent during 1997. There has been no significant
change in the availability or cost of capital other than the interest rate
fluctuations. The total volume of transactions increased dramatically in 1996
(the last year for which the Company has data) with an overall reduction in the
average profit per transaction. In December 1998, the Company sold its
operations in Hungary.
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. The
stock market continued to perform well in 1997 and continued to reach even
higher through May 1998. At that time, the Warsaw Stock Exchange Index ("WIG")
reached a record high of over 18,000. Unfortunately, this market was unable to
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withstand the effects of the Asian and Russian economic crises. By mid-October
1998, the WIG had dropped over 40 percent to below 11,000. Interest rates
remained high at approximately 22 percent through 1997 and increasing to 24.5
percent during the first half of 1998. Economic growth seems to have continued
into 1998 with steady economic growth of approximately 7 percent. 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. This
political situation appears to have been stabilized in September 1997, when the
Solidarity Electoral Action ("AWS") won the elections and assumed control of the
government. Currently the country is 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. Inflation remained at approximately 18
percent for much of 1997 before dropping to approximately 14 percent by mid
1998. 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. However, the September 1998 election ousted the
current political party, which may result in a more favorable investment
environment. The overall trading volume in the market has been 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 1997, the monetary policy was aimed at maintaining
internal and external stability. Inflation reached a rate of approximately 6.5
percent and GDP grew at a similar pace. For 1998, GDP appears to be growing at
approximately 6.5 percent with inflation increasing to approximately 7.25
percent. 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. The Company intends to liquidate its position in Eastbrokers Slovakia
within the next six months.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
The unexpected strength of the U.S. Dollar as compared to the Austrian
Schilling during the fiscal year ended March 31, 1997 had an adverse effect on
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 foreign 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.
31
<PAGE>
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.
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 some of the countries
where we have operations (e.g., Slovakia, Kazakhstan, Turkey, Slovenia, Croatia
and Poland), the local currencies are referred to as "soft" or "exotic". Soft
currency is the currency of a nation where a person can exchange the currency
only with difficulty. Soft currency countries typically have minimal amounts of
currency reserved for exchange purposes. As such, there are very few, if any,
cost effective hedging strategies available to us 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 Slovak Republic and Romanian markets are experiencing
extremely difficult economic conditions and market reforms may be necessary to
restore this economy to health. In light of these developments, it is the
Company's intention to liquidate its position in Eastbrokers Slovakia and
Eastbrokers Romania within the next six months. The Company recognizes that in
the interim period between now and any such liquidation it may be necessary to
support negative cash flow from these operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of financial position reflect a liquid
financial position as cash and cash equivalents convertible to cash represent 21
percent and 16 percent of total assets at March 31, 1997, and March 31, 1998,
respectively and 13.3 percent and 9.2 percent of total assets at September 30,
1997 and September 30, 1998, respectively.
The Company is subject to net capital and liquidity requirements in the
local jurisdictions in which it operates. As of March 31, 1997 and 1998 and as
of September 30, 1997 and 1998, 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 and financing activities.
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 sold 125,000 shares of Common Stock to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,000 or $6.00 per share. The net proceeds to the Company
were $723,195. There were no underwriting discounts or commissions. The Offering
was made pursuant to an exemption from registration pursuant to Rule 506 under
the Securities Act.
32
<PAGE>
On February 20, 1998, the Company sold 1,227,000 newly issued units for
$6,135,000 in cash, or $5.00 per unit, with each consisting of one share of
Common Stock and one Class C Warrant. This price was approximately 40 percent
below the then current market price. These units were offered and sold to
various accredited investors. With regard to this sale, the Company relied upon
the exemption from registration pursuant to Rule 506 under the Securities Act.
In June 1998, the Company sold 73.55 percent of its interest in
Eastbrokers Prague a.s. for 15 million Austrian Schillings. The Company
recognized a profit from the sale of Prague of approximately $1,312,000, at the
then current exchange rates. This amount is reflected in the revenue section
under gain on sale of interest in subisidary.
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. During the fiscal year ending March 31, 1998,
the underlying securities were sold to a third party for an amount approximating
the Company's carrying basis. The repurchase agreements were transferred to the
new owner at the date of sale.
On November 25, 1998, the Company sold 10 newly issued units consisting
in the aggregate of $1,100,000 in 7% Convertible Debentures and Series C
Warrants to purchase 125,000 shares of common stock.
In December 1998, the Company sold 125,000 shares of Common Stock for
$500,000. With regard to this sale, the Company relied upon the exemption from
registration pursuant to Rule 506 under the Securities Act.
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, or
has other adverse affects on securities markets and on the value of securities
held by the Company in inventory, it may affect the Company's financial position
and results of operations. The 1996 inflation rates in the countries where
Eastbrokers Vienna has significant operations are as follows: Austria - 2
percent, Czech Republic - 8 percent, Hungary - 19 percent, Poland - 18 percent,
and Slovak Republic - 5 percent. The 1997 inflation rates in the countries where
Eastbrokers Vienna has significant operations are as follows: Austria - 3
percent, Czech Republic - 10 percent, Hungary - 18 percent, Poland - 13 percent,
and Slovak Republic - 6 percent.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
SFAS No. 128. The new standard replaces primary and fully diluted earnings per
share with basic and diluted earnings per share. SFAS No. 128 was adopted by the
Company beginning with the interim reporting period ended December 31, 1997. The
adoption did not impact previously reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by the Company beginning with the fiscal year ended March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement established standards
for the way that public business enterprises report information about operating
33
<PAGE>
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement will be effective for the Company's
annual report for the fiscal year ended March 31, 1999. In the initial year of
application, comparative information for earlier years is to be restated. At
this time, the Company does not believe that this statement will have a
significant impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. At this time,
the Company does not believe that this statement will have a significant impact
on the Company.
IMPACT OF THE YEAR 2000
Many of the world's computer systems (including those in
non-information technology equipment and systems) currently record years in a
two-digit format. If not addressed, such computer systems will be unable to
properly interpret dates beyond the year 1999, which could lead to business
disruptions in the U.S. and internationally (the "Year 2000" issue). The
potential costs and uncertainties associated with the Year 2000 issue will
depend on a number of factors, including software, hardware and the nature of
the industry in which a company operates. Additionally, companies must
coordinate with other entities with which they electronically interact.
The Company is currently in the process of a systems upgrade unrelated
to the Year 2000 issue. In conjunction with this upgrade, the Company is in the
process of establishing a program to address issues associated with the Year
2000. To ensure that the Company's computer systems are Year 2000 compliant, the
Company has been reviewing its systems and programs to identify those that
contain two-digit year codes, and the Company intends to replace them in
conjunction with the systems upgrade provided by the Baan Corporate Office
Solutions. In addition, the Company is in the process of contacting its major
external counterparties and suppliers to assess their compliance and remediation
efforts and the Company's exposure to them.
In addressing the Year 2000 issue, the Company has divided its program
into six phases:
(1) the Inventory phase, involving the identification of items that
may be affected by Year 2000 compliance issues, including facilities
and related non-information technology systems (embedded technology),
computer systems, hardware, and services and products provided by
third parties;
(2) the Assessment phase, involving the evaluation of items identified
in the Inventory phase to determine which will function properly with
the change to the new century, and the prioritizing of items which
will need remediation based on their potential impact to the Company;
(3) the Remediation phase, involving the analysis of the items that
are affected by Year 2000, the identification of problem areas and the
replacement of non-compliant items;
(4) the Testing phase involving the testing of all proposed repairs,
including forward date testing which simulates dates in the Year 2000;
(5) the Implementation phase consists of placing all items that have
been remediated and successfully tested into operation; and
(6) the Integration phase, involving the testing of the Company's
business critical systems in a future time environment with external
entities.
34
<PAGE>
As of February 11, 1999, the Company had substantially completed the
Inventory phase and was also conducting the procedures associated with the
Assessment, Remediation, Testing and Implementation phases. The Company expects
to complete the Inventory and Assessment phase in the first calendar quarter of
1999. The Remediation and Testing phases with respect to business critical
applications are expected to be completed by the end of the first calendar
quarter of 1999. The Implementation phase is expected to be completed by the end
of the second calendar quarter of 1999. The Integration phase will commence at
the time the Company receives its new operating system which is scheduled to be
implemented in January 1999 and will continue through 1999. In addition, the
Company will identify the major business relationships of the Company by the end
of the first calendar quarter of 1999, and many of them will be tested as soon
thereafter as practicable. The Company will continue to survey and communicate
with counterparties, intermediaries and vendors with whom it has important
financial and operational relationships to determine the extent to which they
are vulnerable to Year 2000 issues. As of February 11, 1999, the Company has not
yet received sufficient information from all parties about their remediation
plans to predict the outcomes of their efforts. In particular, Management
believes the level of awareness and remediation efforts relating to the Year
2000 is issue less advanced in the Central and Eastern European markets in which
the Company conducts business than in the United States.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. Such failures could have a material adverse effect on the
Company and may cause systems malfunctions, incorrect or incomplete transaction
processing resulting in failed trade settlements, the inability to reconcile
accounting books and records, the inability to reconcile trading positions and
balances with counterparties, inaccurate information to manage the Company's
exposure to trading risks and disruptions of funding requirements. In addition,
even if the Company successfully remediates its Year 2000 issues, it can be
materially and adversely affected by failures of third parties to remediate
their own Year 2000 issues. The failure of third parties with which the Company
has financial or operational relationships such as securities exchanges,
clearing organizations, depositories, regulatory agencies, banks, clients,
counterparties, vendors and utilities, to remediate their computer and
non-information technology systems issues in a timely manner could result in a
material financial risk to the Company.
If the above mentioned risks are not remedied, the Company may
experience business interruption or shutdown, financial loss, regulatory
actions, damage to the Company's global franchise and legal liability. The
Company is currently unable to quantify the adverse effect such risks impose,
but management believes that if the Year 2000 issue is not remedied there could
be a material adverse effect on the Company's financial position and results of
operation.
The Company does not have business continuity plans in place that cover
the Year 2000 issue. The Company intends to evaluate Year 2000 specific
contingency plans during 1999 as part of its Year 2000 risk mitigation efforts.
Based upon current information, the Company estimates that the total
cost of implementing its Year 2000 initiative will be between $750,000 and
$1,500,000, including the cost of its general systems upgrade. The Year 2000
costs include all activities undertaken on Year 2000 related matters across the
Company, including, but not limited to, remediation, testing (internal and
external), third party review, risk mitigation and contingency planning. Through
December 31, 1998, the Company estimates that it has expended approximately
$400,000 on the Year 2000 project. These costs have been and will continue to be
funded through operating cash flow and are expensed in the period in which they
are incurred.
The Company's expectations about future costs and the timely completion
of its Year 2000 modifications are subject to uncertainties that could cause
actual results to differ materially from what has been discussed above. Factors
that could influence the amount of future costs and the effective timing of
remediation efforts include the success of the Company in identifying computer
programs and non-information technology systems that contain two-digit year
codes, the nature and amount of programming and testing required to upgrade or
replace each of the affected programs and systems, the nature and amount of
testing, verification and reporting required by the Company's regulators around
35
<PAGE>
the world, including securities exchanges, central banks and various
governmental regulatory bodies, the rate and magnitude of related labor and
consulting costs, and the success of the Company's external counterparties and
suppliers, as well as worldwide exchanges, clearing organizations and
depositories, in addressing the Year 2000 issue.
IMPACT OF THE EURO
The Euro issue is the result of the Economic and Monetary Union (the
"EMU") which came into effect on January 1, 1999 and the conversion of member
states to a single currency known as the Euro. The introduction of the Euro will
have a profound impact on the way enterprises operate. Further, it will be one
of the most important changes in the economic landscape of Europe in the next
few years.
The single currency is expected to contribute significantly to further
market integration throughout the member countries. Prices will be easier to
compare which should increase market transparency. As businesses recognize that
they will no longer be exposed to foreign currency exchange rate risks and the
related costs of currency conversion, cross-border transactions within the EMU
are expected to become more attractive.
The introduction of the Euro has been described as a unique event in
history. This uniqueness is also the root of potential problems. During the
transition period, companies will be required to use two different currency
units. This could create a basic input functionality problem whereby enterprises
will receive financial information in both the Euro and the national currency
units. A potential output functionality problem may be that companies will be
required to produce financial information in either the Euro or the national
currency unit or in some cases both currencies. Further adding to potential
problems is a requirement that historical financial information stored in the
system must be converted to the Euro unit.
The Company is currently in the process of a systems upgrade unrelated
to the year 2000 or Euro issues. In the course of this upgrade and addressing
the Year 2000 issue, the Company will be installing new software that is Euro
capable and will evaluate any potential problems identified that could be
related to the Euro issue. The Company is also monitoring the compliance of its
software suppliers in addressing this issue. Based on a recent evaluation, the
Company has determined that material costs and resources will not be required to
permit its computer systems to properly handle Euro reporting and transactions.
36
<PAGE>
MANAGEMENT
A. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, their ages and
positions are set forth below:
NAME AGE* POSITION
Martin A. Sumichrast 32 Chairman of the Board, President and Chief
Executive Officer
Kevin D. McNeil 38 Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
Wolfgang Kossner 29 Vice Chairman of the Board
Siegfried Samm 51 Director
Michael Sumichrast, Ph.D. 77 Director
Jay R. Schifferli 38 Director
- -----------------
* As of January 4, 1999.
Messrs. Kossner, 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 1999. 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.
MARTIN A. SUMICHRAST, 32, Chairman of the Board, Chief Executive Officer and
President of the Company since December 1998, and Vice Chairman of the Company
since March 1997; and 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. Mr. Sumichrast is also
Chairman of Eastbrokers North America, Inc., a subsidiary of the Company. 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, 38, Executive Vice President and Secretary since December 1998;
and Treasurer and Chief Financial Officer since March 1997. Since August 1996,
Mr. McNeil had been the comptroller of the Company. Mr. McNeil is also
Secretary/Treasurer of Eastbrokers North America, Inc., a subsidiary of the
Company. 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 Washington D.C. regional accounting firm. 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.
WOLFGANG KOSSNER, 29, Vice Chairman of the Board since December 1998
and a 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
the co-founder of Eastbrokers Beteiligungs AG. From 1993 through 1995, Mr.
Kossner served as the managing director of WMP Borsenmakler AG. Prior to that,
37
<PAGE>
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.
SIEGFRIED SAMM, Ph.D., 51, Director of the Company since January 1998.
Since 1980, Dr. Samm has been the Professor of Economy at Handels Academy in
Villach, Austria. Dr. Samm also serves as the Managing Director of Samm GmbH, an
Austrian based company which provides investment advice on currency matters.
From 1977 until 1979, Dr. Samm taught at the Handels Acadamie in Volkermarkt.
From 1976 to 1977, Dr. Samm worked as an assistant director for Volksbank, an
Austrian commercial bank. From 1976 until 1977, Dr. Samm was an assistant
manager at Geiler & Perh, an Austrian based export company. From 1973 until
1976, Dr. Samm was an auditor at BAWAG, a Vienna, Austria based commercial bank.
MICHAEL SUMICHRAST, Ph.D., 77, 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.
JAY R. SCHIFFERLI, 38, Director of the Company since January 1, 1999,
is a Partner at the law firm of Kelley Drye & Warren LLP, an international law
firm with offices in the United States, Europe and Asia. Mr. Schifferli
concentrates his practice in securities and corporate law, and he has extensive
experience counseling on mergers and acquisitions, joint ventures, corporate
finance and general business law matters. Mr. Schifferli is also a Director of
Rodocnachi Offshore, Ltd., a Cayman Islands investment company. Kelley Drye is
counsel to the Company.
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. All current
directors have waived such fees for the fiscal years ending March 31, 1997 and
1998.
B. COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10 percent 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, 1998, other than initial statement of beneficial
ownership by Dr. Samm, all such reports were filed on a timely basis.
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 January 4, 1999 by (i) each person who is known by the
Company to own beneficially more than five percent of the Company's Common
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<PAGE>
Stock; (ii) each of the Company's officers and directors; and (iii) all officers
and directors as a group. 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>
Martin A. Sumichrast (2) Chairman of the Board, President, 251,000 2.12
Chief Executive Officer and Director
Kevin D. McNeil Executive Vice President, 52,495 *
Secretary, Treasurer and Chief
Financial Officer
Wolfgang Kossner (3) Vice Chairman 1,776,639 33.30
Michael Sumichrast, Ph.D. Director - 0 - *
Siegfried Samm, Ph.D. Director - 0 - *
Jay Schifferli Director - 0 - *
Peter Schmid (former Chairman
of the Board, President and
Chief Executive Officer) (4) 587,659 12.24
General Partners AG 1,477,139 28.04
All Officers and Directors as 2,467,793 45.97
a Group (6 persons)
</TABLE>
- ---------------
* Less than 1 percent.
(1) Except as otherwise noted, c/o Eastbrokers International
Incorporated, 15245 Shady Grove Road, Suite 340, Rockville,
Maryland 20850.
(2) 200,000 shares are owned directly by Martin A. Sumichrast, 50,000
shares are owned by Sumichrast Enterprises, Inc., a corporation
of which Martin A. Sumichrast is an officer and director and the
owner. Includes 1,000 shares issuable upon exercise of Class A
Warrants to acquire Common Stock at $18.00 per share.
(3) 977,139 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
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. Includes 67,000 shares issuable upon exercise of options
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<PAGE>
to acquire Common Stock at $10.00 per share held by Mr. Kossner,
100,000 shares issuable upon the exercise of options to acquire
Common Stock at $10.00 per share held by GP and 400,000 shares
issuable upon the exercise of warrants to acquire Common Stock at
$7.00 per share held by GP.
(4) 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. Includes 33,000 shares issuable upon
exercise of options to acquire Common Stock at $10.00 per share.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
for the named executives for the years ended March 31, 1998 and 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
$100,000. Effective December 15, 1998, Peter Schmid resigned as Chairman of the
Board, President and Chief Executive Officer of the Company.
40
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------------------------------
Annual Compensation Awards Payouts
------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
NAME AND PRINCIPAL POSITION SECURITIES
--------------------------- OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
YEAR SALARY BONUS COMPENSATION STOCK AWARDS($) OPTIONS/SARS(#) PAYOUTS COMPENSATION
---- ------ ----- ------------ --------------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Schmid(1) 1998 $ 138,305 $ 30,000 -- -- -- -- --
Chairman, President 1997* $ 129,988 -- -- -- -- -- --
and Chief Executive 1996** -- -- -- -- -- -- --
Officer 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Martin A. Sumichrast(2) 1998 $ 120,000 $ 20,000 -- -- -- -- --
Vice-Chairman of the 1997* $ 120,000 $ 11,000 -- -- -- -- --
Board and Secretary 1996** $ 30,000 -- -- -- -- -- --
1995 $ 107,500 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Petr Bednarik, Ing.(1) 1998 -- -- -- -- -- -- --
Former President and 1997* $ 49,000 -- $ 24,000*** -- -- -- --
Chief Executive Officer 1996** $ 10,000 -- -- -- -- -- --
1995 $ 107,500 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
August A. de Roode(1)(4) 1998 -- -- -- -- -- -- --
Former Chief Executive 1997* $ 72,094 -- -- -- -- -- --
Officer and Chief 1996** -- -- -- -- -- -- --
Operating Officer 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Michael Sumichrast, 1998 -- -- $ 65,980 -- -- -- --
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 was the Chairman of the Board and Chief Executive
Officer from March 1997 through December 15, 1998 and President of the Company
from August 1996 through December 1998. 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.
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<PAGE>
(2) Martin A. Sumichrast became Chairman of the Board, President and
Chief Executive Officer of the Company in December 1998, and was Vice Chairman
of the Board since 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 at his direction.
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. The Company also entered into Employment Agreements with Messrs.
August de Roode and former Chairman of the Board, President, Chief Executive
Officer and Director of EII, Peter Schmid, effective as of August 1, 1996. Mr.
De Roode's agreement expired upon his resignation on March 15, 1997. Mr.
Schmid's agreement expired upon his resignation on December 15, 1998. Mr. Martin
Sumichrast entered into a new Employment Agreement which will expire in December
2004, 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
an Employment Agreement, effective as of December 31, 1998 with Kevin D. McNeil,
which agreement will expire in December 2002, unless contrary notice is given by
either party. The annual salaries for Martin A. Sumichrast and Mr. McNeil have
been initially fixed at $240,000 and $120,000, respectively, with such
subsequent increases in salary during the term of the agreements as may be
determined by the Board of Directors. Messrs. Martin A. Sumichrast and McNeil
are each eligible to receive a quarterly performance bonus of up to 1 percent
and 1/4 percent, respectively, of 1 percent of total revenue of the Company in
excess of $6,000,000 per quarter. As an inducement for entering into each of
their respective agreements, the Company has agreed to sell 200,000 shares and
50,000 shares of Common Stock to Mr. Martin A. Sumichrast and Mr. McNeil,
respectively, at a price of $3.00 per share in exchange for each of Messrs.
Sumichrast and McNeil issuing to the Company a promissory note in the amount of
$600,000 and $150,000, respectively. 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 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 McNeil. 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 and a $500,000 key man life insurance policy on Mr. McNeil, in each
case with the Company as the beneficiary.
Effective January 1, 1999, Wolfgang Kossner, Vice Chairman of the
Board, entered into a one-year Consulting Agreement with the Company. Mr.
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Kossner will receive compensation for his services as a consultant to the
Company of 200,000 Class C Warrants, payable in equal installments on March 31,
1999, June 30, 1999, September 30, 1999 and December 31, 1999. The value of the
Class C Warrants will be determined for compensation purposes using the Black
Schole method at the time of grant. As additional compensation under the
agreement, Mr. Kossner will receive project success fees to be determined. The
agreement may be terminated by the Company for cause and in the event that the
Company terminates the agreement for any reason other than "for cause," Mr.
Kossner shall be entitled to the remaining payments that would have otherwise
been payable had his services not been terminated. The agreement also provides
for full compensation and reimbursement of expenses in the event of disability.
OPTION/SAR GRANTS
There were no grants to any of the named executive officers or
Directors of options, stock appreciation rights or similar instruments during
the fiscal year ended March 31, 1998. On January __, 1999, the Board of
Directors of the Company granted stock options to Martin A. Sumichrast and
Wolfgang Kossner. Pursuant to these grants, Martin A. Sumichrast and Wolfgang
Kossner are each entitled for 10 years to purchase 75,000 shares of the
Company's Common Stock at $4.00 per share and Kevin D. McNeil is entitled for 7
years to purchase 50,000 shares of the Company's Common Stock at $4.00 per
share.
OPTION/SAR EXERCISES
There were no exercises of options during the fiscal year ended March
31, 1997. Options for 7,750 shares of Common Stock were exercised during the
fiscal year ended March 31, 1998.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Value Options/SARs at FY-End Options/SARs at
Shares Acquired Realized (#) Exercisable/ FY-End($) Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ---------------------------- ------------------ -------------- --------------------------- -----------------------
<S> <C> <C> <C> <C>
Peter Schmid 0 - 33,000/0 -
Wolfgang Kossner 0 - 100,000/0 -
</TABLE>
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 October 1997, the Plan was
amended to provide an additional 200,000 shares available for distribution.
Total number of shares of Common Stock available after the amendment is 600,000.
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.
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<PAGE>
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. During the fiscal year ended March 31, 1998, an
additional 10,000 shares were issued outside of the Plan as compensation for
services to the Company.
SELLING STOCKHOLDERS
This Prospectus relates to the resale of [__________] Shares,
[_________] Warrants, [_________] Warrant Shares, [________________] Placement
Agent Warrant Shares, and [__________] Debenture Shares. The table below sets
forth information with respect to this resale. The following table sets forth,
to the knowledge of the Company, (i) the number of shares of Common Stock
beneficially owned by each Selling Stockholder, (ii) and the percentage of the
outstanding shares of Common Stock beneficially owned by each Selling
Stockholder, (iii) the number of Shares, Warrant Shares and Debenture Shares to
be offered and sold by such Selling Stockholder, and (iv) the number of shares
and percentage of outstanding shares to be beneficially owned by such Selling
Stockholder after such offering and sale, assuming that all the shares offered
by such Selling Stockholder are in fact sold. Unless otherwise indicated, each
person has sole investment and voting power (or shares such powers with his or
her spouse) with respect to the shares set forth in the following table. As of
January 4, 1999 the Company had 5,017,750 shares of Common Stock issued and
outstanding.
--------------------------------- ----------------------------------
Beneficial Ownership Beneficial Ownership
Prior to the Offering After the Offering
--------------------------------- ----------------------------------
SHARES OF SHARES TO SHARES OF
COMMON STOCK PERCENTAGE (1) BE SOLD COMMON STOCK PERCENTAGE
------------ -------------- --------- ------------ ----------
[To Come]
----------------------
* Represents holdings of less than one percent.
DESCRIPTION OF SECURITIES
The authorized capital of the Company consists of 10 million shares of
Common Stock, par value $.05 and 10 million shares of preferred stock, par value
$.01 per share (the "Preferred Stock"). As of February 11, 1999, 5,142,750
shares of Common Stock are currently issued and outstanding by approximately 620
holders of record, and no shares of Preferred Stock have been issued or are
outstanding.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
stockholders, to issue 10 million shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption (including sinking fund provisions), redemption prices and
liquidation preferences and the number of shares constituting and the
designation of any such series.
The rights and terms relating to any new series of Preferred Stock
could adversely affect the voting power or other rights of the holders of Common
Stock or such Preferred Stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company.
44
<PAGE>
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record in the election of directors and with respect to all other
matters to be voted on by stockholders. Holders of shares of Common Stock do not
have cumulative voting rights. Therefore, the holders of more than 50 percent of
such shares voting for the election of directors can elect all of the directors.
The holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of legally available funds. See "Dividend
Policy." In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining available for distribution after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the Common Stock. Holders of shares of Common Stock, as such, have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to the Common Stock. The rights of the holders of Common
Stock are subject to any rights that may be fixed for holders of Preferred
Stock, when and if any Preferred Stock is issued. All of the shares of Common
Stock currently outstanding are duly authorized, validly issued, fully paid and
non-assessable.
WARRANTS
There are currently outstanding 1,101,000 Class A Common Stock Purchase
Warrants, 250,000 Class B Common Stock Purchase Warrants and 1,362,222 Class C
Common Stock Purchase Warrants. With respect to the Class A Warrants, each such
warrant entitles the registered holder to purchase one share of Common Stock,
$.05 par value, of the Company at an exercise price of $18.00 per share,
exercisable until June 6, 2000.
Each Class B Warrant entitles the registered holder to purchase one
share of Common Stock, $.05 par value, of the Company at an exercise price of
$19.00 per share, exercisable until June, 2000.
Each Class C Warrant entitles the registered holder to purchase one
share of Common Stock, $.05 par value, of the Company at an exercise price of
$7.00 per share, exercisable from February 20, 1999 until February 20, 2002. The
shares underlying these warrants are subject to a "demand registration" right
upon receipt of a demand for registration from a majority of the holders of the
common stock and the warrants issued in the private placement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, whose address is 40 Wall Street, New York, New York,
10005, telephone number (212) 936-5100.
45
<PAGE>
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 owned 50.2 percent of the Hotel. Stratego Invest
a.s., a broker-dealer and financial consulting company organized under the laws
of the Czech Republic, owned 20.6 percent of the Hotel. Stratego Invest a.s. was
at that time more than 50 percent owned by Stratego a.s., which was controlled
by Ing. Petr Bednarik. Mr. Bednarik was President and CEO of the Company until
August 1996. The sales transaction of the Hotel by the Company was arranged by
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), however, Stratego Invest a.s. waived its commission
related to this transaction.
In September 1996, Mr. Peter Schmid, former Chairman of the Board,
President, Chief Executive Officer and Director of EII, received from
Eastbrokers Vienna 3,511,422 Austrian Schillings (approximately $340,000 USD)
for his 49.95 percent ownership interest in Eastbrokers
Wertpapiervermittlungs-gesellschaft GmbH ("Eastbrokers GmbH"), an Austrian
Securities Brokerage Company with limited liability. The nominal value of these
shares was 500,000 Austrian Schillings.
In September 1996, Mr. Schmid received 376,275 Austrian Schillings
(approximately $36,500 USD) for his 5.60 percent ownership interest in
Eastbrokers 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. August de Roode received 1,110,250 Austrian
Schillings (approximately $107,500 USD) for his 24.40 percent ownership interest
in Eastbrokers Slovakia. 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 until March 1997 and he was also a Director of
Eastbrokers Slovakia at the date of this transaction.
The Company entered into various 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, during the 1997 fiscal year Mr. Greene was paid $37,000 for
consulting services provided to the Company in connection with potential mergers
and/or acquisitions. In connection with Mr. Greene's resignation from the Board
of Directors of the Company, the Company entered into a six month consulting
agreement dated March 27, 1997 pursuant to which Mr. Greene was paid $24,000 and
granted options to purchase 7,750 shares of the Company's Common Stock at $6.50
per share. A related letter agreement was entered into with Mr. Green on March
27, 1997, as amended by a letter dated April 29, 1997. Under the related letter
agreement, Mr. Greene was paid $13,750 and granted 12,500 shares of the
Company's Common Stock 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 to the Company's primary market maker
subject to certain conditions.
The Company entered into a one year consulting agreement dated March
31, 1997 with Dr. Sumichrast, a Director of the Company, pursuant to which Dr.
Sumichrast was granted 20,000 shares of the Company's Common Stock to vest
ratably over the term of the agreement. Dr. Sumichrast provided services to the
Company during the period April 1, 1997 through September 30, 1997 and received
10,000 shares at an average price of $6.598 per share as compensation for these
services.
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<PAGE>
In March 1997, Eastbrokers Vienna purchased 30,000 shares of Schneiders
1895 AG for 3,618,000 Austrian Schillings (approximately $302,000 USD). Mr.
Peter Schmid is a Director of Schneiders 1895 AG and Mr. Schmid's father is an
officer and Director of Schneiders 1895 AG.
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
was the Chief Operating Officer of the Company until his resignation in January
1998.
The Company leases office space from General Partners Immobilenz
("GPI")(formerly Residenz Realbesitz AG ("Residenz")) for its Vienna operations
pursuant to a month-to-month lease. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $95,000 USD) in the fiscal years ended March 31, 1997 and 1998.
The terms of this lease were negotiated such that the Company is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners Beteiligungs AG ("General Partners"), an Austrian holding
company and the beneficial owner of 1,477,139 shares of Common Stock. Mr.
Kossner, a Director of the Company and an officer of the Company from August,
1996 until November, 1996, owns approximately 30 percent of the outstanding
shares of GP. He is a member of GP's Supervisory Board, WMP's Supervisory Board,
the Eastbrokers Vienna Supervisory Board, and is a Director of the Company.
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 states that 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. Venture Capital Holdings Gmbh, an Austrian company owned and
controlled by Mr. De Roode and Mr. Muller-Tyl ("VCH") and Messrs. Schmid,
Kossner, and Muller-Tyl were at that time shareholders of RealWorld and
represented a combined ownership interest of 26 percent.
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 ("ZE") in the amount of 5,537,202
Austrian Schillings (approximately $511,000 USD). ZE 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 stock
of companies that have a direct relationship to the Company through its
Directors.
In October 1997, WMP sold its interest in WMP GmbH, primarily an
inactive subsidiary to COR Industrieberatung GmbH, for 2.5 million Austrian
Schillings (approximately $200,000 USD). The sales price approximated the cost
basis of WMP GmbH at the date of disposition.
In December 1997, Eastbrokers Vienna sold its 51 percent interest SWIB
to Mr. Schmid for 13 million Austrian Schillings (approximately $1,025,000 USD).
The Company acquired its ownership interest in SWIB in mid-1997 for 510,000
Austrian Schillings (approximately $40,000 USD). At the time of acquisition, the
principal asset of SWIB was an investment in a company which was entering
bankruptcy proceedings and there was considerable uncertainty regarding the
future realizable value of this asset. By December 1997, bankruptcy proceedings
had progressed to a point where an estimate could be made on the net realizable
47
<PAGE>
value of this asset. Based on the information available at that time, SWIB's
value at the date of disposition was determined by the Board of Directors to be
in the range of 12 million to 14 million Austrian Schillings (approximately
$950,000 to $1,100,000 USD).
As of December 31, 1997, ZE, a 26.27 percent owned subsidiary of
General Partners, owned approximately 25 percent of UCP Beteiligungs AG ("UCP
AG"), an Austrian holding company. UCP AG, in turn, owns 27.7 percent of a
Russian chemical company, UCP AOOT. Shares of UCP AOOT are listed
over-the-counter on the Vienna Stock Exchange. WMP is a market maker in the
shares of UCP AOOT on the Vienna Stock Exchange. During 1997, WMP facilitated
the purchase and sale of several blocks of UCP AOOT shares. As of year end, the
Company held approximately 38,000 shares of UCP AOOT as an investment. As of
March 31, 1998, at this time, the estimated value of these shares was
approximately $1,030,270. Subsequent to year end, the Company sold approximately
8,000 shares in 6 separate transactions for approximately $400,000. As of
October 26, 1998, the current market price of UCP AOOT shares was approximately
$54 per share on the Vienna Stock Exchange. For the fiscal year ended March 31,
1998, the Company recorded, as a charge to earnings, a market value adjustment
of approximately ($610,000). Although the UCP AOOT shares are trading at a
premium to the original cost basis, the Company wrote down the carrying value of
this item based on an independent valuation of UCP AOOT and the uncertainty
surrounding the Russian economy.
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996, the
Company assumed a receivable in the amount of 7,387,697 ATS (approximately
$704,000) from Peter Schmid. As of December 31, 1997, the receivable increased
due to cash advances to 8,046,177 ATS (approximately $635,000) at the then
current exchange rates. These cash advances included the U.S. Dollar denominated
amount fluctuates based on the foreign currency exchange rate. On May 31, 1998,
Mr. Schmid entered into a Non-Negotiable Term Note in the amount of 8,046,177
Austrian Schillings. This Note bears interest at 8 percent per annum and matures
May 31, 2000. It was collateralized by 150,000 shares of the Common Stock. On
October 8, 1998, Mr. Schmid repaid 6,748,111 Austrian Schillings of the total
amount due. Mr. Schmid has informed the Company that he intends to repay the
remaining outstanding balance by December 31, 1998.
Periodically, the Company engages in securities transactions with URBI
S.A., ("URBI"), a Spanish investment company. Mr. Kossner was a member of URBI's
Supervisory Board from November 1996 through June 1998 and Mr. Schmid was a
member until May 1997. All transactions between URBI and the Company were
consummated at the then current market prices. At December 31, 1997, the amount
due from URBI was 7,023,576 Austrian Schillings or approximately $555,000,
arising exclusively from various securities transactions. Prior to June 30,
1998, URBI had repaid all amounts due with respect to the transactions open at
December 31, 1997. As of June 30, 1998, the Company had a receivable from URBI
in the amount of 4,698,215 Austrian Schillings or approximately $370,000 related
to transactions occurring subsequent to December 31, 1997. In addition, the
Company entered into a repurchase agreement with URBI in June 1997. This
repurchase agreement and the related shares of Vodni Stavby a.s., a Czech
construction company, were sold to a non-affiliated Czech Republic company in
October 1997.
During October 1997, WMP entered into a stock loan transaction with VCH
in the amount of 4,065,000 Austrian Schillings (approximately $325,000). In
August, 1998, VCH repaid the Company in full for this stock loan transaction.
WMP periodically engages in stock loan transactions as a portion of its normal
business operations.
In December 1997, WMP purchased 7,200,000 ATS (approximately $576,000)
of 8 percent bonds due April 1, 2000 of ZE. The ZE bonds earn a comparatively
higher interest rates (350 basis point above comparable Austrian governmental
rates).
As of December 31, 1997, the Company had a receivable from C.R.F. a.s.,
a Slovak privatization company, related to a stock sale transaction and
consulting fees. The total amount due from these transactions was 7,078,500
Austrian Schillings (approximately $559,000). Mr. Schmid was the Chairman of the
Board of C.R.F. a.s. from November 1995 through October 1997.
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<PAGE>
In September 1997, Martin A. Sumichrast acquired 50,000 shares of
Common Stock at a price of $6.00 per share in exchange for a note payable in the
amount of $300,000 to the Company. This note bears interest at 8 percent per
annum and is due September 15, 1999. In December 1998, this note was cancelled
and the shares were returned to the Company.
On February __, 1999, the Board of Directors of the Company granted
stock options to Martin A. Sumichrast and Wolfgang Kossner. Pursuant to these
grants, Martin A. Sumichrast and Wolfgang Kossner are each entitled for 10 years
to purchase 75,000 shares of the Company's Common Stock at $4.00 per share and
Kevin D. McNeil is entitled for 7 years to purchase 50,000 shares of the
Company's Common Stock at $4.00 per share. The Board also granted to EBI
Securities an option for 5 years to purchase 150,000 shares of the Company's
Common Stock at $8.00 per share allocated based on earn-out provision. Except
for the grant to EBI Securities, all options vest at December 31, 1999.
On January 1, 1999, Martin A. Sumichrast and Kevin D. McNeil
purchased 70,000 Class C Warrants and 32,583 Class C Warrants from Eastbrokers
N.A., respectively, in each case for an amount equal to $0.25 per warrant. Each
warrant will entitle Mr. Sumichrast and Mr. McNeil, each, to purchase one (1)
share of the Company's common stock at a price of $7.00 per share. Payment for
the warrants will be in the form of unsecured promissory notes, with one-year
terms and interest accruing at 8 percent.
Effective January 1, 1999, Jay R. Schifferli, a Partner at Kelley Drye
& Warren LLP, became a director of the Company. Kelley Drye & Warren LLP
received legal fees in the amount of $____________ during the calendar year
ended December 31, 1998.
PLAN OF DISTRIBUTION
The Shares, the Warrants, the Warrant Shares, the Placement Agent
Warrant Shares and the Debenture Shares may be offered and sold from time to
time by one or more of the Selling Stockholders, or by pledgees, donees,
transferees or other successors in interest. No Selling Stockholder is required
to offer or sell any of his or its Shares, Warrants, Warrant Shares or Debenture
Shares. The Selling Stockholders anticipate that, if and when offered and sold,
the Shares, the Warrant Shares, the Placement Agent Warrant Shares and the
Debenture Shares will be offered and sold in transactions (which may include
block transactions) effected on the Nasdaq SmallCap at then prevailing market
prices. The Selling Stockholders reserve the right, however, to offer and sell
the Shares, the Warrant Shares, the Placement Agent Warrant Shares and the
Debenture Shares on any other national securities exchange on which the Common
Stock is or may become listed or in the over-the-counter market, in each case at
then prevailing market prices, or in privately negotiated transactions each at a
price then to be negotiated. The Warrants will not be listed on any exchange or
in the over-the-counter market and therefore, the Selling Stockholder may offer
and sell the Warrants in privately negotiated transactions at a price then to be
negotiated. All offers and sales made on the Nasdaq SmallCap or any other
national securities exchange or in the over-the-counter market will be made
through or to licensed brokers and dealers. No agreements, arrangements or
understandings have been entered into with any broker or dealer, and no brokers
or dealers have been selected, in connection with the offer and sale of the
Shares, the Warrants, the Warrant Shares, the Placement Agent Warrant Shares or
the Debenture Shares. All proceeds from the sale of the Shares, the Warrant
Shares, the Placement Agent Warrant Shares and the Debenture Shares will be paid
directly to the Selling Stockholders and will not be deposited in an escrow,
trust or other similar arrangement. The Company will not receive any of the
proceeds from the sales of the Shares, Warrant Shares, the Placement Agent
Warrant Shares or the Debenture Shares by the Selling Stockholders. However, the
Company will receive proceeds from the exercise of the Warrants by the Selling
Stockholders. No discounts, commissions or other compensation will be allowed or
paid by the Selling Stockholders or the Company in connection with the offer and
sale of the Shares, the Warrants, the Warrant Shares, the Placement Agent
Warrant Shares and the Debenture Shares, except that usual and customary
brokers' commissions may be paid by the Selling Stockholders. All proceeds from
the sale of the Shares, the Warrants, the Placement Agent Warrant Shares, the
Warrant Shares or the Debentures Shares will be paid directly to the Selling
Stockholders and will not be deposited in an escrow, trust or other similar
arrangement.
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<PAGE>
The selling broker may act as agent or may acquire the Shares or
interests therein as principal or pledgee and may, from time to time, effect
distributions of the Shares or interests. If a dealer is utilized in the sale of
the Shares in respect of which the Prospectus is delivered, the Selling
Stockholders will sell the Shares to the dealer, as principal. The dealer may
then resell the Shares to the public at varying prices to be determined by such
dealer at the time of resale.
The Company has agreed to indemnify the Selling Stockholders and the
Selling Stockholders have agreed to indemnify the Company, its officers,
directors, employees, agents and controlling persons from certain damages or
liabilities arising out of or based upon any untrue statement or alleged untrue
statement of any material fact contained in or material omission or alleged
omission from the Registration Statement, any preliminary, final or summary
prospectus contained therein, or any amendment or supplement thereto, to the
extent such untrue statement or omission was made in the Registration Statement
or other document in reliance upon information furnished by the indemnifying
party.
The legal, accounting and other fees and expenses related to the offer
and sale of the Shares contemplated hereby are estimated to be $[ ] and will be
paid by the Company. The Company will pay all expenses incurred in connection
with this offering, excluding commissions charged by any broker or dealer acting
on behalf of a Selling Stockholder.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has changed its accountants from Pannell Kerr Forster PC to
Deloitte & Touche LLP. This change was reported in the Company's Current Reports
on Form 8-K, dated November 4, 1997 and January 22, 1998. The decision to change
was approved by the Board of Directors. The reports of Pannell Kerr Forster PC
on the Company's financial statements for the fiscal year ended March 31, 1997,
the transition period ended March 31, 1996 and the fiscal year ended December
31, 1995 contained no adverse opinion or disclaimer of opinion and were not
modified as to uncertainty, audit scope or accounting principles. The Company
has had no disagreements with Pannell Kerr Forster PC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of Pannell Kerr
Forster PC, would have caused it to make reference thereto in their report on
the financial statements of the Company.
EXPERTS
The consolidated statement of financial condition as of March 31, 1998
and the related consolidated statements of operations, comprehensive income,
changes in shareholders' equity and cash flows for the year then ended included
in this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expressed an
unqualified opinion and includes an explanatory paragraph referring to a gain
of $1,025,429 from a related party transaction), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated statement of financial condition as of March 31, 1997
and the related consolidated statements of operations, comprehensive income,
changes in shareholders' equity and cash flows for the year then ended included
in this prospectus have been audited by Pannell Kerr Forster PC, independent
auditors, as stated in their report, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
50
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the legality of the securities
offered hereby have been passed upon for the Company by Kelley Drye & Warren
LLP, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut 06901. Jay
R. Schifferli, a Director of the Company, is a Partner of Kelley Drye & Warren
LLP.
* * * * *
51
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
Historical Financial Statements for
Eastbrokers International Incorporated
PAGE
<S> <C>
Independent Auditors' Report............................................................................ 54
Independent Auditors' Report............................................................................ 55
Consolidated Statements of Financial Condition at March 31, 1998 and 1997............................... 56
Consolidated Statements of Operations for the years ended March 31, 1998 and 1997....................... 58
Consolidated Statements of Comprehensive Income for the years ended March 31, 1998
and 1997........................................................................................... 59
Consolidated Statements of Changes in Shareholders' Equity for the years
ended March 31, 1998 and 1997....................................................................... 60
Consolidated Statements of Cash Flows for the years ended March 31, 1998 and 1997....................... 61
Notes to Consolidated Financial Statements.............................................................. 63
</TABLE>
Historical Financial Statements for
Eastbrokers International Incorporated
For the Six Months Ending
September 30, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Financial Condition at September 30, 1998 and 1997........................... 102
Consolidated Statements of Operations for the Quarterly and Six-month Periods ended
September 30, 1998 and 1997.......................................................................... 103
Consolidated Statements of Comprehensive Income for the Quarterly
and Six-month Periods ended September 30, 1998 and 1997.............................................. 104
Consolidated Statements of Cash Flows for the Quarterly and Six-month Periods ended
September 30, 1998 and 1997.......................................................................... 105
Notes to Consolidated Financial Statements for the Quarterly and
Six-Month Periods ended September 30, 1998........................................................... 107
</TABLE>
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Eastbrokers International Incorporated
We have audited the accompanying consolidated statement of financial condition
of Eastbrokers International Incorporated and subsidiaries as of March 31, 1998,
and the related consolidated statements of operations, comprehensive income,
changes in shareholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 March 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 12, the accompanying 1998 financial statements include a
gain of $1,025,429 from a related party transaction.
DELOITTE & TOUCHE LLP
Baltimore, Maryland
October 30, 1998 (and
February 12, 1999 as
to Note 17)
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Eastbrokers International Incorporated
We have audited the accompanying consolidated statement of financial condition
of Eastbrokers International, Inc. and subsidiaries as of March 31, 1997,
and the related consolidated statements of operations, comprehensive income,
changes in stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, Inc. and subsidiaries as of March 31, 1997, and the results of
operations and their cash flows for the year ended March 31, 1997 in conformity
with generally accepted accounting principles.
These financial statements have been restated.
PANNELL KERR FORSTER PC
June 23, 1997, except
for footnote 1 as to
which the date is
October 29, 1998
and footnote 17 as
to which the date is
February 12, 1999.
54
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, MARCH 31,
1998 1997
---- ----
(As Restated)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,156,702 $ 6,867,624
Cash and securities deposited with clearing organizations
Or segregated under federal and other regulations 986,233 119,274
Securities purchased under agreements to resell 887,170 408,865
Receivables
Customers 4,819,958 1,904,112
Brokers, dealers and clearing organizations 4,404,608 572,399
Affiliated companies 2,286,277 1,511,917
Related to disposition of entity 1,493,913 -
Financial institution 1,018,642 -
Receivable from executive officer 517,221 -
Other 3,384,125 2,043,306
Securities owned, at fair value
Corporate equities 7,985,484 3,349,684
Other sovereign government obligations 692,428 -
Net assets held for sale 868,960 -
Office facilities, furniture and equipment, at cost (less accumulated
depreciation and amortization of $766,898 and $628,014, respectively) 1,153,439 926,565
Deferred taxes 4,558,801 492,098
Available for sale securities - 2,378,054
Investments in affiliated companies 156,800 8,272,240
Goodwill, net 2,073,774 1,894,398
Other assets and deferred amounts 394,318 1,222,193
----------- -----------
Total Assets $44,838,853 $31,962,729
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ 2,570,499 $ 1,602,182
Affiliated companies 31,937 1,480,700
Securities sold under agreements to repurchase - 1,200,793
Bonds payable - 2,307,500
- -
Payables
Customers 5,405,464 1,051,810
Brokers, dealers and clearing organizations 6,169,159 960,226
Accounts payable and accrued expenses 727,512 1,573,104
Other liabilities 1,169,272 1,502,803
----------- -----------
16,073,843 11,679,118
Deferred taxes 84,382 -
Long-term borrowings 2,020,087 934,374
----------- -----------
Total liabilities 18,178,312 12,613,492
----------- -----------
Minority interest in consolidated subsidiaries 8,776,678 1,549,386
----------- -----------
Commitments and contingencies
Shareholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized; no
shares issued and outstanding at March 31, 1998 or March 31,
1997, respectively - -
Common stock; $.05 par value; 10,000,000 shares authorized;
4,297,750 and 2,923,000, shares issued and outstanding at March
31, 1998 and March 31, 1997, respectively 214,888 146,150
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C>
Paid-in capital 25,640,114 19,314,883
Accumulated deficit (5,517,386) (569,829)
Note receivable - common stock (313,133) -
Treasury stock, at cost - (213,750)
Accumulated other comprehensive income (2,140,620) (877,603)
----------- -----------
Total shareholders' equity 17,883,863 17,799,851
----------- -----------
Total Liabilities and Shareholders' Equity $44,838,853 $31,962,729
=========== ===========
See notes to consolidated financial statements.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
MARCH 31, MARCH 31,
1998 1997
-------------- -----------
(AS RESTATED)
<S> <C> <C>
Revenues
Commissions $ 2,521,031 $ 439,531
Investment banking 807,803 1,149,195
Principal transactions
Trading 4,735,825 1,806,278
Investment (560,802) 1,872,767
Interest and dividends 391,121 557,188
Equity in losses of unconsolidated subsidiaries (38,388) (396,209)
Gain on sale of investment - related party 1,025,429 -
Other 1,256,862 312,725
----------- -----------
Total revenues 10,138,881 5,741,475
----------- -----------
Costs and expenses
Compensation and benefits 3,748,948 2,181,419
Consulting fees 2,177,145 743,397
Brokerage, clearing, exchange fees and other 1,145,567 -
Occupancy 982,095 333,096
Interest 761,156 236,235
Information processing and communications 678,718 177,473
Office supplies and expenses 426,889 240,448
Professional fees 235,642 123,905
Travel 593,898 209,977
General and administrative 3,698,052 806,056
Depreciation and amortization 590,743 274,573
(Gain)/loss on foreign currency transactions (29,384) 166,044
----------- -----------
Total costs and expenses 15,009,469 5,492,623
----------- -----------
Income (loss) from continuing operations before
provision for income taxes and
minority interest in earnings of subsidiaries (4,870,588) 248,852
Income tax benefit (expense) (285,830) 8,305
Minority interest in earnings of subsidiaries 208,861 105,416
----------- -----------
Income (loss) from continuing operations (4,947,557) 362,573
Discontinued operations
Income from discontinued operations (net of income taxes of $0
for the year ended March 31, 1997) - 41,899
Loss on sale of discontinued operations - (1,323,083)
----------- -----------
Net loss $(4,947,557) $ (918,611)
----------- -----------
Earnings (loss) per common share from continuing operations
Basic $ (1.57) $ 0.15
----------- -----------
Diluted $ (1.57) $ 0.15
----------- -----------
Earnings (loss) per common share
Basic $ (1.57) $ (0.37)
----------- -----------
Diluted $ (1.57) $ (0.37)
----------- -----------
Average common shares outstanding
Basic 3,149,009 2,497,137
----------- -----------
Diluted 3,149,009 2,497,137
----------- -----------
See notes to consolidated financial statements.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended
March 31, March 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Net loss $(4,947,557) $ (918,611)
Other comprehensive income
Foreign currency translation adjustments (1,509,811) (1,188,899)
Unrealized holding gains (losses) 246,794 (246,794)
Less: reclassification adjustment for gains included in net loss (246,794) -
------------ ------------
Comprehensive loss $(6,457,368) $ (2,354,304)
============ =============
</TABLE>
See notes to consolidated financial statements.
58
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
Retained Treasury
Paid-in Earnings Stock & Note
Shares Par Value Capital (Accumulated Deficit) Receivable
------------- ------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1996 1,781,000 $ 89,050 $13,693,733 $ 348,782 -
Issuance of common stock in 1,080,000 54,000 5,346,000 - -
Eastbrokers AG acquisition
Issuance of common stock in 25,000 1,250 98,750 - -
Eastbrokers NA acquisition
Issuance of common stock in 37,000 1,850 176,400 - -
compensation for services
Acquisition of treasury stock - - - - $(213,750)
Net unrealized loss on investments - - - - -
Net loss - - - (918,611) -
Cumulative translation adjustment - - - - -
---------- --------- ----------- ------------ ---------
Balances at March 31, 1997 (as 2,923,000 $146,150 $19,314,883 $ (569,829) $(213,750)
restated)
Issuance of common stock in 125,000 6,250 716,945 - -
private placement
Retirement of treasury stock (45,000) (2,250) (211,500) - 213,750
Issuance of common stock in 10,000 500 65,480 - -
compensation for services
Issuance of common stock to 50,000 2,500 297,500 - (300,000)
officer for note receivable
Net unrealized gain on investments - - - - -
Issuance of common stock in 1,227,000 61,350 5,354,619 - -
private placement
Exercise of stock options 7,750 388 49,987 - -
Sale of Subsidiary Stock 52,200
Net loss - - - (4,947,557) -
Accrued interest on note - - - - (13,133)
receivable
Cumulative translation adjustment - - - - -
---------- --------- ----------- ------------ ---------
Balances at March 31, 1998 4,297,750 $214,888 $25,640,114 $ (5,517,386) $(313,133)
---------- --------- ----------- ------------ ---------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Loss on
Available for Cumulative
Sale Translation
Investments Adjustment Total
--------------- --------------- -----------------
<S> <C> <C> <C>
Balances, April 1, 1996 - $ 558,090 $14,689,655
Issuance of common stock in - - 5,400,000
Eastbrokers AG acquisition
Issuance of common stock in - - 100,000
Eastbrokers NA acquisition
Issuance of common stock in - - 178,250
compensation for services
Acquisition of treasury stock - - (213,750)
Net unrealized loss on investments $(246,794) - (246,794)
Net loss - - (918,611)
Cumulative translation adjustment - (1,188,899) (1,188,899)
--------- ----------- -----------
Balances at March 31, 1997 (as $(246,794) $ (630,809) $17,799,851
restated)
Issuance of common stock in - - 723,195
private placement
Retirement of treasury stock - - -
Issuance of common stock in - - 65,980
compensation for services
Issuance of common stock to - - -
officer for note receivable
Net unrealized gain on investments 246,794 - 246,794
Issuance of common stock in - - 5,415,969
private placement
Exercise of stock options - - 50,375
Sale of Subsidiary Stock 52,200
Net loss - - (4,947,557)
Accrued interest on note - - (13,133)
receivable
Cumulative translation adjustment - (1,509,811) (1,509,811)
--------- ----------- -----------
Balances at March 31, 1998 $- $(2,140,620) $17,883,863
--------- ----------- -----------
See notes to consolidated financial statements.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
March 31, March 31,
1998 1997
---------------- ----------------
(As Restated)
<S> <C> <C>
Cash flows from operating activities
Net loss $(4,947,557) $ (918,611)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest in subsidiaries (208,861) (105,416)
Gain on the sale of investment - (884,530)
Loss on sale of discontinued operations - 1,323,083
Depreciation and amortization 590,743 274,573
Deferred taxes (1,696,396) (69,377)
Other 104,368 396,209
Changes in operating assets and liabilities
Cash and securities segregated for regulatory
purposes or deposited with regulatory agencies 82,415 (85,696)
Securities purchased under agreements to resell (478,305) 6,278,371
Receivables (3,744,971) 2,041,221
Securities owned, at value (6,443,982) (3,233,293)
Other assets and deferred amounts 827,875 (214,931)
Payables
Customers 4,353,654 (8,529,846)
Brokers, dealers and others 5,208,933 77,726
Accounts payable and accrued expenses (879,123) 1,374,879
----------- -------------
Net cash used in operating activities (7,231,207) (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 (264,036) (3,619,137)
Available for sale securities 2,378,054 6,277,191
Capital expenditures (289,070) (503,336)
----------- -------------
Net cash provided by investing activities 1,824,948 765,141
----------- -------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placements 6,139,164 -
Capital contributions by minority interests - 304,166
Short-term borrowings (1,339,183) 568,303
Securities sold under agreements to repurchase (1,200,793) 1,200,793
Proceeds from long-term debt 1,085,713 -
Repurchase of common stock - (213,750)
Other 102,575 -
----------- -------------
Net cash provided by financing activities 4,787,476 1,859,512
----------- -------------
Foreign currency translation adjustment 907,861 1,328,023
----------- -------------
See notes to consolidated financial statements.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
March 31, March 31,
1998 1997
----------- --------------
<S> <C> <C>
Increase in cash and cash equivalents 289,078 1,677,038
Cash and cash equivalents, beginning of period 6,867,624 5,190,586
----------- --------------
Cash and cash equivalents, end of period $ 7,156,702 $ 6,867,624
=========== ==============
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 261,633 $ 371,534
=========== ===============
Cash paid for interest $ 679,265 $ 87,795
=========== ===============
Non-cash transactions
Retirement of treasury stock $ 213,750 $ -
=========== ===============
Common shares of CEZ and Vodni Staby, 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 $ 65,980 $ 178,250
=========== ==============
Eastbrokers International shares issued for acquisition
of net assets of Eastbrokers North America, Inc. $ - $ 90,000
=========== ==============
See notes to consolidated financial statements.
</TABLE>
61
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
NOTE 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. See Note 18 -"Significant
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.
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its
U.S. subsidiaries other than EBI Securities is March 31. At the time of the
Company's acquisition of EBI Securities in May 1998 the fiscal year of EBI
Securities ended September 30. The Company intends to change the fiscal year of
EBI Securities to March 31 effective as of March 31, 1999.
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.
62
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities and
the Company's trading positions 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 at their original
costs. The carrying value of such equity securities is adjusted when changes in
the underlying fair values are readily ascertainable, generally as evidenced by
listed market prices or transactions which directly affect the value of such
equity securities. Downward adjustments relating to such equity securities are
made in the event that the Company determines that the eventual realizable value
is less than the carrying value.
Securities classified as available for sale are carried at fair value
with unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses on these securities are
determined on a specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due
on cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities purchased 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. These receivables are
due on demand.
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. The Company
reflects this income in its investment banking revenue.
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. The Company reflects this income in its investment banking
revenue.
63
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are made to
a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade-date
basis as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations in foreign 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.
OFFICE FACILITIES, FURNITURE, AND EQUIPMENT
Office facilities 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 three to ten years.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common
stock and stock equivalents outstanding. The outstanding warrants and stock
options are currently excluded from the earnings 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 expense 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.
64
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
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
Goodwill is amortized on a straight line basis over periods from five
to 25 years and is periodically evaluated for impairment on an undiscounted cash
flow basis. The accumulated amortization was $132,015 and $46,987 for the
periods ended March 31, 1998 and 1997, respectively.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to
the current presentation.
RESTATEMENT OF 1997 FINANCIAL STATEMENT
During fiscal 1998, management determined that the Austrian net
operating losses available for carryforward had been underreported on the
consolidated statement of financial condition as of March 31, 1997. In addition,
management determined that it had inappropriately recognized an unrealized gain
and had incorrectly classified a portion of its investment in WMP. Accordingly,
the accompanying 1997 financial statements have been restated.
Following is a summary of the effects of the restatement:
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Corporate equities $4,253,164 $3,349,684
Deferred tax asset 289,938 492,098
Investments in affiliated companies 7,064,064 8,272,240
Goodwill 2,453,454 1,894,398
Trading revenues 1,886,478 1,806,278
Net loss (866,411) (918,611)
Basic and Diluted earnings
per share (0.35) (0.37)
65
<PAGE>
Note 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 and $986,233 as of March 31, 1997 and
1998, respectively.
66
<PAGE>
NOTE 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 estimated
fair market value, are as follows:
March 31, March 31,
1998 1997
----------- -------------
(As Restated)
Securities purchased under agreements to resell
Sovereign government debt - Austria $ 887,170 $ --
Sovereign government debt - Hungary -- 228,965
Corporate equities - Hungary -- 179,900
----------- -----------
$ 887,170 $ 408,865
----------- -----------
Securities owned at fair value
Corporate equities - Austria $ 6,587,220* $ 1,305,143
Corporate equities - Hungary 410,244 --
Corporate equities - Czech Republic -- 871,638
Corporate equities - Slovak Republic 84,074 485,141
Corporate equities - Poland 760,552 687,762
Corporate equities - Other 143,394 --
----------- -----------
$ 7,985,484 $ 3,349,684
----------- -----------
Sovereign government debt
Austria $ 621,353 $ --
Hungary 71,075 --
----------- -----------
$ 692,428 $ --
----------- -----------
Available for sale securities
Corporate equities - Austria $ -- $ 40,321
Corporate equities - Czech Republic -- 1,893,115
Corporate equities - Hungary -- 189,610
Corporate equities - Slovak Republic -- 255,008
----------- -----------
$ -- $ 2,378,054
----------- -----------
*As of March 31, 1998, the Company has 3 significant concentrations in the
securities portfolio. A description of these securities and their respective
carrying amounts are as follows: a security of a Russian chemical producer
traded on the OTC market of the Vienna Stock Exchange -- $1,030,270, a security
of a Bulgarian pharmaceutical company traded on the Bulgarian Stock Exchange
- --$3,185,630, and a security of a Bulgarian oil refinery traded on the Bulgarian
Stock Exchange -- $1,354,830. 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 to high yield issuers or
commitments to high-yield issuers as of the balance sheet date.
67
<PAGE>
NOTE 4. OFFICE FACILITIES, FURNITURE AND EQUIPMENT
Office facilities, furniture and equipment are summarized below:
March 31, March 31,
1998 1997
--------------- -------------------
Furniture and equipment $1,920,337 $1,554,579
Less accumulated depreciation (766,898) (628,014)
--------------- -------------------
$1,153,439 $926,565
--------------- -------------------
Depreciation expense for the years ended March 31, 1997 and 1998, was
$108,915 and $418,804, respectively.
NOTE 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 in the fiscal year ended March 31, 1997,
the Company later acquired an additional 245,320 (out of a total issue of
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 $8,200,000. 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 1997 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 by December 31, 1998. No such
shares have been earned to date.
In a capital increase for Eastbrokers Vienna in the fiscal year ended
March 31, 1998, the Company purchased 389,925 (out of a total issue of 390,000)
for cash, increasing its ownership to 96 percent.
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 $1,124,000 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 $173,000 which has been
recorded as goodwill and is being amortized over 25 years on a straight-line
basis.
68
<PAGE>
NOTE 5. BUSINESS ACQUISITIONS (CONTINUED)
In September 1996, Eastbrokers Vienna acquired additional shares of
Eastbrokers Wertpapiervermittlungs-gesellschaft GmbH ("Eastbrokers GmbH") and
Eastbrokers Slovakia a.s. from 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 issued 22,500 shares of Common Stock
valued at $4.00 per share relating to the acquisition of Eastbrokers North
America, Inc. ("Eastbrokers NA"). In a separate but related transaction to the
Eastbrokers NA acquisition, the Company sold 2,500 shares of Common Stock at
$4.00 per share to an officer of the Company in exchange for a promissory note.
These shares were transferred to the selling shareholder of Eastbrokers NA as
part of the acquisition. 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.
PRO FORMA RESULTS OF OPERATIONS
The following summarized, unaudited, pro forma results of operations
for the year ended March 31, 1997 assumes the above listed acquisitions occurred
at the beginning of fiscal 1997.
Year Ended
March 31, 1997
------------------
Revenues from continuing operations $8,559,786
Net income from continuing operations (14,097)
Net income per share from continuing operations (0.01)
NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES
INVESTMENT IN WMP BANK AKTIENGESELLSCHAFT
Through its subsidiary, Eastbrokers Vienna, the Company acquired a 48.1
percent interest in the outstanding capital stock of WMP on August 1, 1996. 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. From time to time Eastbrokers
Vienna has carried shares of WMP. Accordingly, since August 1996, the Company's
ownership of WMP has exceeded 50 percent including WMP shares in its trading
portfolio. At December 31, 1996, the Company's aggregate ownership percentage in
WMP, including its trading position, was 55 percent. This investment was
accounted for using the equity method in the March 31, 1997 financial statements
as the Company believed that its control of WMP may likely have been lost as the
result of the probable occurrence of certain events that lay outside of its
control. In September, 1997 circumstances surrounding these events were resolved
such that these events were no longer considered probable of occurrence and the
Company deemed its control of WMP was no longer temporary. Accordingly, the
Company began consolidating its investment in WMP effective with its third
quarter of fiscal 1998 financial statements. For the fiscal year ended March 31,
1998, WMP has been consolidated for the entire year. At December 31, 1997, the
Company's aggregate ownership interest in WMP was 52 percent.
69
<PAGE>
NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
The following unaudited pro forma information for the Company has been
prepared as though WMP was acquired at the beginning of fiscal year 1997 and
consolidated from that date:
1997
----
Total revenues $10,138,350
Total assets 44,405,383
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; and NIF TRUD Investment Fund. At December 31,
1997, these unconsolidated affiliate investments included the following offices:
Zagreb, Croatia; Ljubljana, Slovenia; Moscow, Russia; Sofia, Bulgaria; and NIF
TRUD Investment Fund. The combined carrying amounts of these investments as of
December 31, 1996 and 1997 was $516,243 and $156,800, respectively. Losses from
these operations totaled approximately $145,000 USD in the period from August 1,
1996 through December 31, 1996. Income from these operations totaled
approximately $122,000 USD for the year ended December 31, 1997.
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.
NOTE 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 and $2,570,499 as of March 31, 1997 and 1998, respectively. As of
March 31, 1998, the Company had unsecured credit lines available of
approximately $3.5 million. These lines of credit carry interest rates between
7.00 percent and 12.00 percent and between 6.500 percent and 9.125 percent for
the years ended March 31, 1997 and 1998, respectively, as computed on an annual
basis.
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.
70
<PAGE>
NOTE 7. SHORT-TERM BORROWINGS (CONTINUED)
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. During the fiscal year ending March 31, 1998,
the underlying securities were sold to a third party for an amount approximating
the Company's cost basis. The repurchase agreements were transferred to the new
owner at the date of sale.
UNSECURED BONDS PAYABLE
The Company had unsecured bonds with a face value of 25 million
Austrian Schillings requiring annual interest payments at 10 percent per annum
which matured on July 31, 1997. At March 31, 1997, the amount due under these
obligations was $2,307,500. These unsecured bonds were redeemed by the Company
on July 31, 1997.
NOTE 8. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Long-term borrowing arrangement with a financial institution
requiring Note payable to a finance company, requiring annual
interest payments which cannot exceed the 10 year government
bond rate plus 2 percent (approximately 10.00 percent),
principal of 12,000,000 Austrian Schillings, principal due at
maturity on December 31, 2001 $ 948,000 $ --
Notes 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 (representing
approximately 24 percent of the Company's WMP shares as of March 31,
1998), principal of 10,000,000 Austrian Schillings and accrued
interest payable in full on November 30, 2001 804,308 934,374
Notes payable to financial institutions requiring quarterly
interest payments computed at varying percentages on a 360 day
year, with varying maturity dates but all due in 1999 267,779 --
---------------- ----------------
$2,020,087 $934,374
---------------- ----------------
</TABLE>
71
<PAGE>
NOTE 8. LONG-TERM BORROWINGS (CONTINUED)
The scheduled maturities of long-term debt outstanding at March 31,
1998 are summarized as follows: $267,779 in 1999, $0 in 2000, $0 in 2001,
$1,752,308 in 2002 and $0 thereafter.
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASES AND RELATED COMMITMENTS
The Company occupies office space under leases which expire at various
dates through 2003. 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 $35,000 and $131,000 for the periods ended March 31,
1997, and March 31, 1998, respectively.
Minimum future rentals under these non-cancelable leases for the fiscal
years ending 1999 through 2003 are approximately as follows: 1999 -- $164,000;
2000 -- $164,000; 2001 -- $104,000; 2002 -- $84,000; and 2003 -- $42,000 and in
the aggregate $558,000.
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 year ended March 31, 1997, the Hotel was subject to land and
equipment leases. Under the terms of these leases, the Hotel incurred rent
expense in the approximate amounts of $310,000 during fiscal year 1997. These
leases terminated with the disposition of the Hotel. See Note 15.
NOTE 10. SHAREHOLDERS' EQUITY
STOCK REPURCHASE
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 is authorized to repurchase 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 repurchased 45,000 of its
outstanding shares at $4.75 per share. Currently, no additional buy-backs are
anticipated. This treasury stock was retired during the fiscal year ended March
31, 1998.
STOCK TRANSACTIONS
On August 1, 1996, the Company issued 1,080,000 shares of its Common
Stock to the selling security holders of Eastbrokers Vienna 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 NA, valued at $4.00 per share.
In a separate but related transaction to the Eastbrokers NA 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 NA as part of the acquisition. The shares were also
valued at $4.00 per share.
72
<PAGE>
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
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 sold 125,000 shares of Common Stock to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,000 or $6.00 per share. The net proceeds to the Company
were $723,195. There were no underwriting discounts or commissions.
In September 1997, the Company issued 10,000 shares of Common Stock to
Dr. Michael Sumichrast in compensation for services performed on behalf of the
Company during the previous six months. The average price per share assigned to
this transaction was $6.598 per share based on the average closing price for the
period April 1, 1997 through September 30, 1997.
In September 1997, Martin A. Sumichrast acquired 50,000 shares of
Common Stock at a price of $6.00 per share in exchange for a note payable
bearing an interest rate of 8 percent in the amount of $300,000 to the Company.
On February 20, 1998, the Company sold 1,227,000 newly issued units
consisting of one share of Common Stock and one Class C Warrant in a private
placement for $6,135,000 in cash, for a price of $5.00 per unit (approximately
40 percent below the then current market price as of February 19, 1998.) After
deducting offering expenses of $899,031, the Company netted $5,415,969. These
units were offered and sold to various accredited investors.
Each of the foregoing issuances was made by the Company without
registration under the Securities Act of 1933, as amended (the "Securities
Act"). In each such case the Company relied upon the exemption from registration
provided by Section 4(2) under the Securities Act and Regulation D promulgated
under the Securities Act.
CLASS A WARRANTS
In connection with its June 1995 public offering, the Company issued
5,505,000 Class A Warrants. The Class A Warrants became exercisable on June 7,
1996. By reason of the Company's September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class A Warrants represented
the right to acquire one (1) share of Common Stock for $20. The Class A Warrants
include redemption provisions at the option of the Company and, upon thirty (30)
days' written notice to all holders of Class A Warrants, the Company has the
right to reduce the exercise price and/or extend the term of the Class A
Warrants, subject to compliance with the requirements of certain SEC rules and
regulations to the extent applicable. The Class A Warrant Holders are also
entitled to certain antidilution privileges. In April 1998, the Company
announced an amendment relating to the number of warrants outstanding and the
exercise price. The adjustment to the number of warrants reflected the September
1996 reverse stock split and reduced the number of outstanding warrants by
four-fifths (4/5's), such that one warrant again represents the right to
purchase one share of Common Stock. An adjustment to the exercise price of the
Class A Warrants to $18.00 per share resulted in connection with the February
1998 private placement. Subsequent to this adjustment, there are 1,101,000 Class
A Warrants outstanding. The Class A Warrants expire in June 2000.
73
<PAGE>
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
CLASS B WARRANTS
In connection with the aforementioned public offering whereby the Class
A warrants were issued, the Company issued 1,250,000 Class B Warrants to certain
bridge lenders. By reason of the September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class B Warrants represented
the right to acquire one (1) share of Common Stock for $21. The other terms of
the Class B Warrants are identical to the Class A Warrants, including the
antidilution provisions. In April 1998, the Company announced an amendment
relating to the number of warrants outstanding and the exercise price. The
adjustment to the number of warrants reflected the September 1996 reverse stock
split and reduced the number of outstanding warrants by four-fifths (4/5's),
such that one warrant again represents the right to purchase one share of Common
Stock. An adjustment to the exercise price of the Class B Warrants to $19.00 per
share resulted in connection with the February 1998 private placement.
Subsequent to this adjustment, there are 250,000 Class B Warrants outstanding.
The Class B Warrants have not been registered. These warrants expire in June
2000.
CLASS C WARRANTS
In connection with the private placement in February 1998, the Company
issued 1,227,000 units, each unit consisting of one share of common stock and
one Class C Warrant. Each Class C Warrant entitles the holder to purchase one
share of Common Stock during the period commencing February 20, 1999 and
ending February 20, 2002 at an exercise price of $7.00 per share, subject to
certain adjustments. Commencing February 20, 1999 these warrants will be
redeemable at a price of $.10 per warrant at any time after the closing price of
the Common Stock is above $10.00 for 20 consecutive trading days. The shares
underlying these warrants are subject to a "demand registration" right upon
receipt of a demand for registration from a majority of the holders of the
common stock and the warrants issued in this private placement. In connection
with the private placement, 1,237,222 Class C Warrants were issued to the
placement agents, including 312,583 Class C Warrants issued to Eastbrokers NA as
one of the placement agents.
OTHER
Certain U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, 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.
Cumulative translation adjustments include gains or losses resulting
from translating foreign currency financial statements from their respective
currencies to USD. Increases or decreases in the value of the Company's net
foreign investments generally are tax-deferred for U.S. purposes. Certain of the
markets in which the Company operates (i.e., Russia, Kazakhstan and Bulgaria)
are generally reliant on the "soft" or "exotic" currencies. 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.
74
<PAGE>
NOTE 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
shareholders.
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 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 at 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.
Had compensation cost been determined based on the fair value at the
grant dates consistent with the method of FASB Statement 123, the Company's
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
(As Restated)
<S> <C> <C>
Net loss
- as reported $(4,947,557) $ (918,611)
- pro forma (4,998,993) (1,606,135)
Primary and fully diluted earnings per share
- as reported $ (1.57) $ (.37)
- pro forma (1.59) (.64)
</TABLE>
During the fiscal year ended March 31, 1997, an additional 200,000
options were granted outside of the plan at a weighted average exercise price of
$10.00 per share and with an expiration date of August 1, 1999. At March 31,
1998 all 235,000 options outstanding were exercisable. The weighted average fair
value of the options at the various grant dates was $5.24.
NOTE 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 owned 50.2 percent of the Hotel.
Stratego Invest a.s., a broker-dealer and financial consulting company organized
under the laws of the Czech Republic, owned 20.6 percent of the Hotel. Stratego
Invest a.s. was at that time more than 50 percent owned by Stratego a.s., which
was controlled by Ing. Petr Bednarik. Mr. Bednarik was President and CEO of the
Company until August 1996. The sales transaction of the Hotel by the Company was
arranged by 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), however, Stratego Invest a.s. waived
its commission related to this transaction.
In September 1996, Mr. Peter Schmid received from Eastbrokers Vienna
3,511,422 Austrian Schillings (approximately $340,000 USD) for his 49.95 percent
ownership interest in Eastbrokers Wertpapiervermittlungs-gesellschaft GmbH
("Eastbrokers GmbH"), an Austrian Securities Brokerage Company with limited
liability. The nominal value of these shares was 500,000 Austrian Schillings.
Mr. Schmid, former Chairman, President, Chief Executive Officer, and Director of
the Company, was also a Director of Eastbrokers GmbH.
75
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
In September 1996, Mr. Schmid received 376,275 Austrian Schillings
(approximately $36,500 USD) for his 5.60 percent ownership interest in
Eastbrokers 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. August de Roode received 1,110,250 Austrian
Schillings (approximately $107,500 USD) for his 24.40 percent ownership interest
in Eastbrokers Slovakia. 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 until March 1997 and he was also a Director of
Eastbrokers Slovakia at the date of this transaction.
The Company entered into various 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, during the 1997 fiscal year Mr. Greene was paid $37,000 for
consulting services provided to the Company in connection with potential mergers
and/or acquisitions. In connection with Mr. Greene's resignation from the Board
of Directors of the Company, the Company entered into a six month consulting
agreement dated March 27, 1997 pursuant to which Mr. Greene was paid $24,000 and
granted options to purchase 7,750 shares of the Company's Common Stock at $6.50
per share. A related letter agreement was entered into with Mr. Green on March
27, 1997, as amended by a letter dated April 29, 1997. Under the related letter
agreement, Mr. Greene was paid $13,750 and granted 12,500 shares of the
Company's Common Stock 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 to the Company's primary market maker
subject to certain conditions.
The Company entered into a one year consulting agreement dated March
31, 1997 with Dr. Sumichrast, a Director of the Company, pursuant to which Dr.
Sumichrast was granted 20,000 shares of the Company's Common Stock to vest
ratably over the term of the agreement. Dr. Sumichrast provided services to the
Company during the period April 1, 1997 through September 30, 1997 and received
10,000 shares at an average price of $6.598 per share as compensation for these
services.
In March 1997, Eastbrokers Vienna purchased 30,000 shares of Schneiders
1895 AG for 3,618,000 Austrian Schillings (approximately $302,000 USD). Mr.
Peter Schmid is a Director of Schneiders 1895 AG and Mr. Schmid's father is an
officer and Director of Schneiders 1895 AG.
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
was the Chief Operating Officer of the Company until his resignation in January
1998.
76
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases office space from General Partners Immobilenz
("GPI")(formerly Residenz Realbesitz AG ("Residenz")) for its Vienna operations
pursuant to a month-to-month lease. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $95,000 USD) in the fiscal years ended March 31, 1997 and 1998.
The terms of this lease were negotiated such that the Company is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners Beteiligungs AG ("General Partners"), an Austrian holding
company and the beneficial owner of 1,477,139 shares of Common Stock. Mr.
Kossner, a Director of the Company and an officer of the Company from August,
1996 until November, 1996, owns approximately 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.
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 states that 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. Venture Capital Holdings Gmbh, an Austrian company owned and
controlled by Mr. De Roode and Mr. Muller-Tyl ("VCH") and Messrs. Schmid,
Kossner, and Muller-Tyl were at that time shareholders of RealWorld and
represented a combined ownership interest of 26 percent.
At December 31, 1996, the Company has a receivable related to
securities 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 ("ZE") in the amount of 5,537,202
Austrian Schillings (approximately $511,000 USD). ZE 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 stock
of companies that have a direct relationship to the Company through its
Directors.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH"), primarily an inactive subsidiary to COR Industrieberatung GmbH,
for 2.5 million Austrian Schillings (approximately $200,000 USD). The sales
price approximated the cost basis of WMP GmbH at the date of disposition.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Mr. Schmid for 13 million
Austrian Schillings (approximately $1,025,000 USD). The Company acquired its
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD). At the time of acquisition, the principal asset of
SWIB was an investment in a company which was entering bankruptcy proceedings
and there was considerable uncertainty regarding the future realizable value of
this asset. By December 1997, bankruptcy proceedings had progressed to a point
where an estimate could be made on the net realizable value of this asset. Based
on the information available at that time, SWIB's value at the date of
disposition was determined by the Board of Directors to be in the range of 12
million to 14 million Austrian Schillings (approximately $950,000 to $1,100,000
USD). The sale of SWIB resulted in a gain of approximately $1.0 million USD and
is included in the accompanying consolidated statement of operations.
77
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1997, ZE, a 26.27 percent owned subsidiary of
General Partners, owned approximately 25 percent of UCP Beteiligungs AG ("UCP
AG"), an Austrian holding company. UCP AG, in turn, owns 27.7 percent of a
Russian chemical company, UCP AOOT. Shares of UCP AOOT are listed
over-the-counter on the Vienna Stock Exchange. WMP is a market maker in the
shares of UCP AOOT on the Vienna Stock Exchange. During 1997, WMP facilitated
the purchase and sale of several blocks of UCP AOOT shares. As of year end, the
Company held approximately 38,000 shares of UCP AOOT as an investment. At this
time, the estimated value of these shares was approximately $1,030,270. This
amount is reported in the Securities owned at value, Corporate equities section
of the financial statements. Subsequent to year end, the Company sold
approximately 8,000 shares in 6 separate transactions for approximately
$400,000. As of October 26, 1998, the current market price of UCP AOOT shares
was approximately $54 per share on the Vienna Stock Exchange. For the fiscal
year ended March 31, 1998, the Company recorded, as a charge to earnings, a
market value adjustment of approximately ($610,000). Although the UCP AOOT
shares are trading at a premium to the original cost basis, the Company wrote
down the carrying value of this item based on an independent valuation of UCP
AOOT and the uncertainty surrounding the Russian economy.
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996, the
Company assumed a receivable in the amount of 7,387,697 ATS (approximately
$704,000 USD, at the then current exchange rates) from Peter Schmid. As of
December 31, 1997, the receivable increased due to cash advances to 8,046,177
ATS (approximately $635,000 USD, at the then current exchange rates). On May 31,
1998, Mr. Schmid entered into a Non-Negotiable Term Note in the amount of
8,046,177 Austrian Schillings. This amount is reported in the Receivable from
executive officer in the consolidated statement of financial condition. This
Note bears interest at 8 percent per annum and matures May 31, 2000. It was
collateralized by 150,000 shares of the Common Stock. On October 8, 1998, Mr.
Schmid repaid 6,748,111 Austrian Schillings of the total amount due. Mr. Schmid
has informed the Company that he intends to repay the remaining outstanding
balance by December 31, 1998.
Periodically, the Company engages in securities transactions with URBI
S.A., ("URBI"), a Spanish investment company. Mr. Kossner was a member of URBI's
Supervisory Board from November 1996 through June 1998 and Mr. Schmid was a
member until May 1997. All transactions between URBI and the Company were
consummated at the then current market prices. At December 31, 1997, the amount
due from URBI was 7,023,576 Austrian Schillings or approximately $555,000,
arising exclusively from various securities transactions. This amount is
reported in the Receivable from affiliated companies in the consolidated
statement of financial condition. Prior to June 30, 1998, URBI had repaid all
amounts due with respect to the transactions open at December 31, 1997. As of
June 30, 1998, the Company had a receivable from URBI in the amount of 4,698,215
Austrian Schillings or approximately $370,000 related to transactions occurring
subsequent to December 31, 1997. In addition, the Company entered into a
repurchase agreement with URBI in June 1997. This repurchase agreement and the
related shares of Vodni Stavby a.s., a Czech construction company, were sold to
a non-affiliated Czech Republic company in October 1997.
During October 1997, WMP entered into a stock loan transaction with VCH
in the amount of 4,065,000 Austrian Schillings (approximately $325,000). In
August, 1998, VCH repaid the Company in full for this stock loan transaction.
WMP periodically engages in stock loan transactions as a portion of its normal
business operations.
In December 1997, WMP purchased 7,200,000 ATS (approximately $576,000)
of 8 percent bonds due April 1, 2000 of ZE. This amount is reported in the
Securities owned at value, Corporate equities in the consolidated statement of
financial condition. The ZE bonds earn a comparatively higher interest rates
(350 basis point above comparable Austrian governmental rates).
As of December 31, 1997, the Company had a receivable from C.R.F. a.s.,
a Slovak privatization company, related to a stock sale transaction and
consulting fees. The total amount due from these transactions was 7,078,500
Austrian Schillings (approximately $559,000). This amount is reported in the
Receivable from affiliated companies in the consolidated statement of financial
condition. Mr. Schmid was the Chairman of the Board of C.R.F. a.s. from November
1995 through October 1997.
78
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
In September 1997, Martin A. Sumichrast acquired 50,000 shares of
Common Stock at a price of $6.00 per share in exchange for a note payable in the
amount of $300,000 to the Company. This amount is recorded in the Note
receivable-common stock in the consolidated statement of financial condition.
This note bears interest at 8 percent per annum and is due September 15, 1999.
NOTE 13. INCOME TAXES
The tax expense recorded of $285,830 for the year ended March 31, 1998
results principally from foreign taxes on earnings at the Company's
subsidiaries.
The differences between the tax provision (benefit) calculated at the
statutory federal income tax rate and the actual tax provision (benefit) for
each period is shown in the table below:
Year Ended Year ended
March 31, March 31,
1998 1997
----------------- -------------
Tax benefit at federal statutory rate $(1,656,000) $ 84,678
State income taxes, net of federal benefit (93,962) 14,402
Foreign taxes 265,078 --
Unrecognized benefit of net
operating losses 1,735,849 697,301
Discontinued operations -- (510,975)
Non-taxable income from Slovak Republic -- (191,515)
Other 34,865 (102,196)
----------------- -------------
$ 285,830 $ (8,305)
----------------- -------------
79
<PAGE>
NOTE 13. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax asset and
liability are as follows:
Year Ended Year ended
March 31, March 31,
1998 1997
----------------- -------------
Depreciation $ 4,259 $ 6,020
Unrecognized gain from marketable securities 83,437 (105,385)
Accrued expenses 9,390
Capital loss carryforward 45,445
Foreign tax credit carryforward 32,652
Other 6,468 (11,425)
Net operating loss carryforward 5,748,282 1,112,193
----------------- -------------
5,929,933 1,001,403
Valuation allowance (1,455,514) (697,301)
----------------- -------------
4,474,419 304,102
Eastbrokers AG deferred taxes acquired -- 187,996
----------------- -------------
$4,474,419 $ 492,098
----------------- -------------
At March 31, 1998, the Company has a U.S. federal net operating loss
carryforward of approximately $2,985,000 that may be used against future U.S.
taxable income until it expires between the years March 31, 2012 and March 31,
2013. The Company also has a U.S. capital loss carryforward of approximately
$118,000 USD that expires March 31, 2002 and a U.S. foreign tax credit
carryforward of approximately $33,000 USD that expires between the years March
31, 2010 and March 31, 2013. At December 31, 1997, the Company has an Austrian
federal net operating loss carryforward of approximately $12,850,000 USD that
has no expiration period.
The non-taxable income from the Slovak Republic is from privatization
activities in which Eastbrokers Vienna was actively involved. This income was
received in the fourth quarter of the fiscal year ended December 31, 1997.
Distributions of this nature are non-taxable under Slovak Republic regulations.
The undistributed earnings of the foreign subsidiaries are intended to
be permanent in duration.
80
<PAGE>
NOTE 14. SEGMENT INFORMATION
Segment information is as follows for the year ended March 31, 1998:
<TABLE>
<CAPTION>
SHARE OF
(LOSS) OF
UNCONSOLIDATED IDENTIFIABLE NET
REVENUES ENTITIES ASSETS (LOSS)
<S> <C> <C> <C> <C>
Austria $ 4,152,076 $ (38,388) $ 22,762,098 $ (1,764,309)
Czech Republic 1,100,457 - 868,961 (279,568)
Hungry 2,108,992 - 7,533,072 214,017
Poland 1,372,325 - 2,529,672 33,585
Slovak Republic 9,842 - 1,945,028 (428,439)
United States 218,199 - 8,062,958 (2,746,065)
Other 1,176,990 - 1,137,064 23,222
------------- -------------------- ------------- -------------
Total $ 10,138,881 $ (38,388) $ 44,838,853 $ (4,947,557)
------------- --------------- ------------- --------------
</TABLE>
Segment information is as follows for the year ended March 31, 1997 (As
Restated):
<TABLE>
<CAPTION>
SHARE OF
(LOSS) OF
UNCONSOLIDATED IDENTIFIABLE NET
REVENUES ENTITIES ASSETS (LOSS)
<S> <C> <C> <C> <C>
Austria $ 1,433,897 $ (396,209) $ 13,023,750 $ 165,188
Czech Republic 656,079 - 2,202,134 (130,214)
Hungry 387,519 - 2,117,066 56,166
Poland 921,856 - 2,341,507 (20,705)
Slovak Republic 1,124,339 - 3,071,805 596,560
United States 1,161,940 - 9,136,486 (1,606,814)
Other 55,845 - 69,981 21,208
-------------- ---------------- ------------- --------------
Total $ 5,741,475 $ (396,209) $ 31,962,729 $ (918,611)
-------------- ---------------- ------------- --------------
</TABLE>
81
<PAGE>
NOTE 15. DISCONTINUED OPERATIONS
In October 1996, the Company agreed to sell its interest in the Hotel
for 100,000 shares of Ceske energeticke zavody a.s. 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 USD).
Income from discontinued operations was $41,899 through the sale date.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
In May 1998, a date subsequent to the fiscal year end date of March 31,
1998, the Company acquired all of the outstanding common stock of EBI
Securities, a Denver, Colorado based investment banking and brokerage firm, in
exchange for 445,000 unregistered shares of the Company's Common Stock and an
agreement to advance $1,500,000 in additional working capital to EBI Securities.
EBI Securities is subject to the following legal proceedings.
USCAN FREE TRADE ZONES V. COHIG & ASSOCIATES, INC. (EBI SECURITIES), ET
AL., United States District Court for the Western District of Washington. In
March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint against EBI
Securities and Steve Signer, an employee of EBI Securities, alleging that EBI
Securities misled USCAN about the credit worthiness of a third party in
connection with an introduction made by Mr. Signer. EBI Securities categorically
denies this allegation. USCAN informed EBI Securities that it would be working
with a certain third party to secure certain loans on behalf of USCAN which
USCAN would then use to open a trading account with EBI Securities. Once EBI
Securities learned of the relationship to this third party, it refused to enter
into any business arrangements with USCAN as long as the third party was
involved due to regulatory problems encountered in prior business dealings with
this certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that might
have resulted. Mr. Signer was dismissed as a defendant is this case due to lack
of personal jurisdiction and has received an award of fees. Plaintiff originally
sought a judgment of approximately $86,000,000 in compensatory and punitive
damages. However, USCAN recently stated in a pleading and during a court
deposition taken in October 1998 that its damage claim had been reduced to
$332,000. EBI Securities has filed counterclaims for defamation based upon
certain false and defamatory representations regarding EBI Securities. A
preliminary trial date has been scheduled for January 1999. EBI Securities
believes it has meritorious defenses and intends to vigorously defend against
USCAN's claims as well as aggressively pursue claims against USCAN and two of
its officers for defamation, abuse of process, and civil conspiracy.
82
<PAGE>
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
FLORIDA DEPARTMENT OF INSURANCE AS RECEIVER FOR UNITED STATES EMPLOYER
INSURANCE CONSUMER SELF-INSURANCE FUND OF FLORIDA ("USEC") V. DEBENTURE GUARANTY
CORPORATION, ET. AL., United States District Court for the Middle District of
Florida. In November, 1995, the plaintiff, USEC, commenced the above entitled
action against Debenture Guaranty Corporation ("Debenture") and certain other
defendants, including EBI Securities and Steve Signer, an employee of EBI
Securities. In 1994, USEC entered into an arrangement whereby USEC lent money to
Debenture, and Debenture opened an account in Debenture's name to trade U.S.
Treasuries. The note to USEC was in the amount by which the treasuries could be
margined. This transaction was allegedly part of a scheme whereby USEC was
attempting to inflate its assets for regulatory purposes. Debenture allegedly
misappropriated the funds for its own benefit and USEC subsequently failed.
Plaintiffs alleged that EBI Securities and Signer aided, abetted and conspired
with Debenture to defraud USEC and claimed damages of $11,000,000. After a six
week trial held from September 8, 1998, to October 14, 1998, a jury returned a
verdict in favor of EBI Securities. The plaintiffs have filed a motion for a new
trial. EBI Securities is in the process of preparing an objection to this
motion. EBI Securities is also planning to file a motion for recovery of its
attorney's fees incurred in connection with defending this action.
EURO-AMERICAN INSURANCE COMPANY LTD., ET. AL. V. NATIONAL FAMILY CARE
LIFE INSURANCE COMPANY, ET. AL., 191st Judicial District of Dallas County, Texas
(the "NFC Litigation"). In April, 1996, National Family Care Life Insurance
Company ("NFC") commenced the above action against, among others, EBI Securities
and Steve Signer, an employee of EBI Securities. In late 1994 or early 1995, NFC
entered into an arrangement with Debenture Guaranty Corporation ("Debenture"),
another defendant in the NFC Litigation, whereby NFC lent money to Debenture,
and Debenture opened an account in Debenture's name to trade U.S. Treasuries.
The note to NFC was in the amount by which the treasuries could be margined.
This transaction was allegedly part of a scheme whereby NFC was attempting to
inflate its assets for regulatory purposes. Debenture allegedly misappropriated
the funds for its own benefit. NFC alleged that EBI Securities and Signer aided,
abetted and conspired with Debenture in allegedly defrauding Plaintiff. NFC has
reduced its damages demand from approximately $11,500,000 to $1,100,000. This
case is related to the USEC litigation, described above, which also involves a
claim of fraud against Debenture. EBI Securities believes it has meritorious
defenses and intends to vigorously defend against NFC's claims.
EBI Securities also is involved in an arbitration proceeding related to
the NFC Litigation entitled NATIONAL FAMILY CARE LIFE INSURANCE CO. V. PAULI
COMPANY, INC., ET AL., NASDR Case No. 96-02673 (the "Arbitration"). The
Arbitration panel entered an award against EBI Securities in July 1998 in favor
of third-party plaintiff Pauli & Company, Inc. ("Pauli") of approximately
370,000, which was significantly below the initial award sought by Pauli of
approximately $1,100,000. EBI Securities has filed a motion to vacate and plans
to vigorously contest this award on appeal.
In addition to the litigation described above, the Company, through its
subsidiaries, is involved in various legal actions and claims arising in the
ordinary course of business. Management believes that each of such matters will
be resolved without material adverse effect on the Company's financial condition
or operating results.
In June 1998, subsequent to the date of this report, but prior to the
filing date, the Company's largest European subsidiary, WMP, successfully raised
60 million Austrian Schillings (approximately $4,800,000 USD) in a bond
offering. The Company intends to utilize these proceeds to enhance and further
develop its European trading activities. The bonds were issued in denominations
of 10,000 Austrian Schillings (approximately $800 USD at the then current
exchange rates), bear an annual interest rate of 7.5 percent, payable at
maturity, and mature in June 2002.
83
<PAGE>
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
In June 1998, the Company sold a 73.55 percent interest in Eastbrokers
Prague a.s. for 15 million Austrian Schillings (approximately $1,200,000 USD at
the then current exchange rate). The net assets related to this transaction are
presented in the accompanying balance sheet as "Net assets held for sale."
In November 1998, the Company sold 10 newly issued units consisting
in the aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock.
In December 1998, the Company sold 125,000 shares of Common Stock for a
total offering price of $500,000 or $4.00 per share. Also in December 1998, the
Company sold its subsidiary, Eastbrokers Budapest Rt. for HUF 217,000,000
(approximately $1,000,000 USD). The Company continues to have a working
relationship with the buyer and maintains a presence in Budapest through its
relationship with the buyer.
In December 1998, the Company entered into a non-binding letter
agreement pursuant to which EBI Securities intends to acquire Lloyd Wade
Securities, Inc. ("Lloyd Wade"), a wholly owned subsidiary of Financial
Services, Inc. Lloyd Wade is a full service securities firm. The acquisition is
contingent upon, among other things, receipt of any necessary corporate and
stockholder approvals, all necessary governmental approvals, completion of
business, legal and financial due diligence and other customary conditions.
There can be no assurance that such transaction will be successfully completed.
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128. The new
standard replaces primary and fully diluted earnings per share with basic and
diluted earnings per share. SFAS No. 128 was adopted by the Company beginning
with the interim reporting period ended December 31, 1997. The adoption did not
affect previously reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by the Company beginning with the fiscal year ended March 31, 1999. The
financial statements for the years ended March 31, 1997 and 1998 have been
restated for comparative purposes to reflect the application of SFAS 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement will be effective for the Company's
annual report for the fiscal year ended March 31, 1999. In the initial year of
application, comparative information for earlier years is to be restated. At
this time, the Company does not believe that this statement will have a
significant impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. At this time,
the Company does not believe that this statement will have a significant impact
on the Company.
84
<PAGE>
NOTE 18. SIGNIFICANT ESTIMATES
As part of the preparation of its fiscal 1998 financial statements, the
Company has made several valuation estimates. Such estimates could be impacted
by changes in facts and circumstances in the near term. Such changes, if they
occur, could have a significant effect on the Company's financial position and
results of operations. The net amounts recorded related to these estimates are
summarized as follows:
o An approximate $1 million receivable from a Serbian financial institution
related to the Company selling its creditor position with a bankrupt
company. This amount is included in financial institution receivable in the
accompanying 1998 balance sheet.
o An approximate $1 million investment in the shares of UCP AOOT (See Note
12), a Russian chemical company. This amount is included in securities
owned - corporate equities in the accompanying 1998 balance sheet.
NOTE 18. SIGNIFICANT ESTIMATES (CONTINUED)
o An approximate $724,000 receivable related to a repurchase agreement and
the related shares of Vodni Stavby, a.s. This amount is included in other
receivables in the accompanying 1998 balance sheet.
85
<PAGE>
86
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
Cash and cash equivalents $5,019,082
Cash and securities segregated for regulatory
Purposes or deposited with clearing organizations 95,163
Securities purchased under agreements to resell 894,656
Receivables
Customers 1,022,278
Brokers, dealers and other 8,847,217
Affiliated companies 5,565,427
Other 10,896,069
Securities owned, at value
Government and agencies 2,202,510
Equities and other 10,813,253
Buildings, furniture and equipment, at cost (net of
Accumulated depreciation and amortization of
$955,936 and $804,014, respectively) 1,520,964
Deferred taxes 4,022,918
Investments held for resale 176,456
Investments in affiliated companies 143,405
Goodwill 2,790,555
Other assets and deferred amounts 394,425
-----------
Total Assets $54,404,378
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ 1,542,905
Affiliated companies 1,597,091
Securities sold under agreements to repurchase -
Bonds payable -
Securities loaned 1,126,461
Payables
Customers 7,864,512
broker-dealers and other 3,073,946
Accounts payable and accrued expenses 2,027,554
Other liabilities and deferred amounts 1,553,502
-----------
18,785,971
Long-term borrowings 9,065,857
-----------
Total liabilities 27,851,828
-----------
Minority interest in consolidated subsidiaries 9,459,208
-----------
Commitments and contingencies
Stockholder' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized; no
shares issued and outstanding at September 30, 1998 or
September 30, 1997, respectively -
Common stock; $.05 par value; 10,000,000 shares authorized;
4,767,750 and 3,063,000, shares issued and outstanding at
September 30, 1998 and September 30, 1997, respectively 238,388
Paid-in capital 27,966,614
Retained earnings (accumulated deficit) (8,582,298)
Note receivable - common stock (325,080)
Unrealized gain/loss on available for sale investments -
Cumulative translation adjustment (2,204,282)
-----------
Total shareholders' equity 17,093,342
-----------
Total Liabilities and Shareholders' Equity $54,404,378
===========
See notes to consolidated financial statements.
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERLY PERIOD FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------- ----------------------------------
1998 1997 1998 1997
----------------- ---------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Commission $2,864,300 $247,038 $4,611,417 $ 673,175
Fees 494,720 302,587 703,340 335,266
Interest and dividends 213,524 112,968 402,206 199,313
Principal transactions, net
Trading 1,011,470 237,865 2,389,599 1,078,192
Investment (345,002) 490,484 143,363 640,272
Gain on sale of interest in subsidiary 1,312,057 - 1,312,057 -
Other 656,136 153,873 783,015 367,282
Equity in earnings of unconsolidated affiliates - (130,820) - (269,529)
------------ -------------- ------------- -------------
Total revenues 6,207,205 1,413,995 10,344,997 3,023,971
------------ -------------- ------------- -------------
Costs and expenses
Compensation and benefits 3,701,651 585,669 6,363,848 1,026,428
Interest 28,658 61,936 104,262 100,384
Brokerage, clearing, exchange fees and other 1,573,313 206,202 1,240,339 483,216
Occupancy 461,678 159,150 803,572 336,084
Office supplies and expense 303,996 85,401 674,974 162,218
Communications 548,123 93,640 776,710 151,904
Legal fees 521,861 47,363 621,391 52,740
Consulting fees 344,645 468,456 610,161 741,499
Travel 214,724 172,236 342,416 255,810
General and administrative 574,292 637,891 844,785 880,501
Depreciation and amortization 84,000 75,134 189,038 176,000
------------ -------------- ------------- -------------
Total costs and expenses 8,356,941 2,593,078 12,571,496 4,366,784
------------ -------------- ------------- -------------
Loss before provision for income taxes and
Minority interest in earnings of subsidiaries (2,149,736) (1,179,083) (2,226,499) (1,342,813)
Provision (benefit) for income taxes (610,356) 264,246 (665,433) 116,843
Minority interest in earnings of subsidiaries (94,563) 246,102 (172,980) 128,723
------------ -------------- ------------- -------------
Net loss $(2,854,655) $(668,735) $(3,064,912) $(1,097,247)
------------ -------------- ------------- -------------
Weighted average number of shares outstanding 4,476,737 3,007,121 4,476,737 3,007,121
------------ -------------- ------------- -------------
Basic and diluted earnings per share $ (0.64) $ (0.22) $ (0.68) $ (0.36)
------------ -------------- ------------- -------------
See notes to consolidated financial statements.
</TABLE>
88
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Quarterly Period For the Six Months
Ended September 30, Ended September 30,
------------------------------------- ----------------------------------------
1998 1997 1998 1997
----------------- ---------------- ------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (2,854,655) $ (668,735) $ (3,064,912) $ (1,097,247)
Other comprehensive income (loss)
Foreign currency translation adjustments 308,488 (1,026,713) (63,662) (1,253,999)
Unrealized holding losses - (15,016) - (707,316)
----------------- ---------------- -------------- ---------------
Comprehensive loss $ (2,546,167) $ (1,710,464) $ (3,128,574) $ (3,058,562)
================= =================== ================= ==================
</TABLE>
See notes to consolidated financial statements
89
<PAGE>
<TABLE>
<CAPTION>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
------------------------------------------------
1998 1997
------------------------ --------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities $ (3,064,912) $ (1,097,247)
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Minority interest in earnings of subsidiaries 172,980 (128,723)
Depreciation and amortization 189,038 176,000
Deferred taxes 535,883 (132,970)
Gain on sale of interest in subsidiary (1,312,057) -
Equity in earnings (loss) of unconsolidated affiliates - 269,529
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes or
deposited with regulatory agencies 891,070 (403,974)
Securities purchased under agreements to resell (7,486) (2,481,563)
Receivables
Customers 3,797,680 (416,525)
Brokers, dealers and others (4,442,609) (90,972)
Affiliated companies (3,279,150) (2,448,290)
Other (4,482,168) 368,095
Securities owned, at value (2,518,351) 716,039
Other assets (107) 333,909
Payables
Customers 2,459,048 2,285,956
Brokers, dealers and others (3,095,213) 1,607,029
Accounts payable and accrued expenses 1,599,890 (1,979,861)
------------ ------------
Net cash used in operating activities (12,556,464) (3,423,568)
------------ ------------
Cash flows from investing activities
Net proceeds from (payments for)
Investments in affiliates - (871,162)
Sale of interest in subsidiary 1,180,500 -
Investments held for resale 692,504 311,605
Purchases of furniture and equipment - (280,855)
------------ ------------
Net cash provided by (used in) investing activities 1,873,004 (840,412)
------------ ------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement - 725,000
Securities loaned 1,126,461 -
Short-term financings (1,027,594) 291,579
Short-term borrowings from affiliated companies 1,565,154 1,810,369
Other long-term debt 7,045,770 373,045
------------ ------------
Net cash provided by financing activities 8,709,791 3,199,993
------------ ------------
Foreign currency translation adjustment (163,951) (1,253,999)
------------ ------------
Increase (decrease) in cash and cash equivalents (2,137,620) (2,317,986)
Cash and cash equivalents, beginning of period 7,156,702 6,867,624
------------ ------------
Cash and cash equivalents, end of period $ 5,019,082 $ 4,549,638
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
------------------------------------------------
1998 1997
------------------------ --------------------
(UNAUDITED)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
============ ============
Cash paid for interest $ 28,658 $ 104,262
============ ============
Non cash transactions
Eastbrokers International shares issued as part of
EBI Securities Corporation acquisition $ 2,350,000 $ -
============ ============
</TABLE>
90
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD AND SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated (the
"Company") for the quarterly and six month periods ended September 30, 1998
have been prepared by the Company, are unaudited, and are subject to
year-end adjustments. These unaudited financial statements reflect all
known adjustments (which included only normal, recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods
presented in accordance with generally accepted accounting principles. The
results presented herein for the interim periods are not necessarily
indicative of the actual results to be expected for the fiscal year.
The notes accompanying the consolidated financial statements included
herein for the year ended March 31, 1998 include accounting policies and
additional information pertinent to an understanding of these interim
financial statements.
As of September 30, 1998 and for the quarterly period then ended, the
ccompanying consolidated financial statements include the financial
position, results of operations and cash flows of Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers AG") for the quarterly period ended June
30, 1998, of EBI Securities Corporation ("EBI Securities") (formerly Cohig
& Associates) for the quarterly period ended September 30, 1998, and the
Company for the quarterly period ended September 30, 1998.
As of September 30, 1998 and for the six month period then ended, the
accompanying consolidated financial statements include the financial
position, results of operations and cash flows the financial position, of
Eastbrokers Beteiligungs Aktiengesellschaft ("Eastbrokers AG") for the six
month period ended June 30, 1998, of EBI Securities Corporation ("EBI
Securities") from the date of acquisition (May 14, 1998) through September
30, 1998, and the Company for the six month period ended September 30,
1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated and its U.S. and international subsidiaries (collectively,
"Eastbrokers" or the "Company").
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.
See Note 18 -"Significant Estimates" in the Company's consolidated
financial statements included herein for the year ended March 31, 1998.
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,
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<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its U.S.
subsidiaries other than EBI Securities is March 31. At the time of the
Company's acquisition of EBI Securities in May 1998, the fiscal year end of
EBI Securities was September 30. The Company intends to change the fiscal
year of EBI Securities to match the year end of the parent company
effective March 31, 1999.
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 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 at their original
costs. The carrying value of such equity securities is adjusted when
changes in the underlying fair values are readily ascertainable, generally
as evidenced by listed market prices or transactions which directly affect
the value of such equity securities. Downward adjustments relating to
such equity securities are made in the event that the Company determines
that the eventual realizable value is less than the carrying value.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses on these securities are
determined on a specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities purchased 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.
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<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities. These
receivables are due on demand.
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. The
Company reflects this income in its investment banking revenue.
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. The Company reflects this income in its investment
banking revenue.
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade-date
basis as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations in foreign 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.
OFFICE FACILITIES, FURNITURE, AND EQUIPMENT
Office facilities 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 three to ten years.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. The outstanding warrants and stock
options are currently excluded from the earnings 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 expense for stock-based employee compensation plans at
fair value. The Company has elected to account for its stock-based
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<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
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
Goodwill is amortized on a straight line basis over periods from five to 25
years and is periodically evaluated for impairment on an undiscounted cash
flow basis.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
3. ACQUISITION OF EBI SECURITIES CORPORATION
In May 1998, the Company acquired all of the outstanding common stock of
Cohig & Associates, Inc., a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the
Company's common stock and an agreement to advance $1,500,000 in additional
working capital. Following the acquisition, the Company changed the name of
Cohig & Associates, Inc. to EBI Securities Corporation ("EBI Securities").
The Company intends to develop EBI Securities as the foundation to expand
its U.S. based investment banking and brokerage presence and anticipates
that EBI Securities will be the first in a series of possible acquisitions
targeting other successful medium size investment banking and brokerage
firms both domestically and internationally. Eastbrokers International
believes that its current organizational structure as an entrepreneurial,
well-capitalized, and international publicly traded company will be
particularly appealing to potential acquisition candidates.
EBI Securities is a full service brokerage firm specializing in providing
investment advice and counsel to individuals and small to middle market
institutions. At the present time, EBI Securities has approximately 150
licensed representatives. EBI Securities provides its brokerage clients
with a broad range of traditional investment products and services. EBI
Securities also strives to differentiate itself in the minds of investors
and corporate finance clients through its commitment to a professional but
personalized service, which not only sets it apart from the large firms,
but also serves to develop long-term client relationships. Its trading
department makes a market in approximately 150 securities which include its
investment banking clients and those securities that its research
department has identified as promising, small to middle-market, potentially
high growth companies. EBI Securities' investment banking department
operates with a single goal in mind: to enhance and develop the capital
structures of small to middle market emerging growth companies through
private placements, bridge financing,
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<PAGE>
3. ACQUISITION OF EBI SECURITIES CORPORATION (CONTINUED)
and public offerings which serves to enable the firm's corporate finance
clients to capitalize on promising business opportunities, favorable market
conditions, and/or late stage product development.
EBI Securities is registered as a broker-dealer with the SEC and is
licensed in 50 states and the District of Columbia. It is also a member of
the National Association of Securities Dealers ("NASD") and the Securities
Investor Protection Corporation ("SIPC"). Customer accounts are insured to
$25 million under the SIPC excess insurance program. EBI Securities
operates pursuant to the exemptive provisions of SEC Rule 15c3-3 (k)(2)(ii)
and clears all transactions with and for customers on a fully disclosed
basis.
EBI Securities maintains its clearing arrangement with Fiserv Correspondent
Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ: FISV).
Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement
enables EBI Securities to offer its clients a broad range of products and
services that is typically only offered by firms that are larger and/or
have a larger capital base.
4. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of credit
with financial institutions, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
LINES OF CREDIT
These lines of credit carry interest rates between 7.00 percent and 12.00
percent as computed on an annual basis.
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.
5. SALE OF INTEREST IN SUBSIDIARY
In June 1998, the Company sold 73.55 percent of its interest in Eastbrokers
Prague a.s. for 15 million Austrian Schillings (approximately $1,180,000
USD at the then current exchange rates). The Company recognized a gain on
the sale of this interest in Eastbrokers Prague a.s. before taxes of
approximately $1,312,000, at the then current exchange rates. This amount
is reflected in the revenue section under the caption, "Gain on sale of
interest in subsidiary".
6. COMMITMENTS AND CONTINGENCIES
LEASES AND RELATED COMMITMENTS
The Company occupies office space under leases which expire at various
dates through 2003. The various leases contain provisions for periodic
escalations to the extent of increases in certain operating and other
costs.
The Company's subsidiaries occupy office space under various operating
leases which generally contain cancellation clauses whereby the Company may
cancel the lease with thirty to ninety days written notice.
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<PAGE>
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS
Through its recently acquired subsidiary, EBI Securities, the Company is
subject to several legal proceedings in various jurisdictions throughout
the United States.
USCAN Free Trade Zones v. Cohig & Associates, Inc. (EBI Securities), Et
Al., United States District Court for the Western District of Washington.
In March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint
against EBI Securities and Steve Signer, an employee of EBI Securities,
alleging that EBI Securities misled USCAN about the creditworthiness of a
third party in connection with an introduction made by Mr. Signer. EBI
Securities categorically denies this allegation. USCAN informed EBI
Securities that it would be working with a certain third party to secure
certain loans on behalf of USCAN which USCAN would then use to open a
trading account with EBI Securities. Once EBI Securities learned of the
relationship to this third party, it refused to enter into any business
arrangements with USCAN as long as the third party was involved due to
regulatory problems encountered in prior business dealings with this
certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that
might have resulted. Mr. Signer was dismissed as a defendant in this case
due to lack of personal jurisdiction and has received an award of fees.
Plaintiff originally sought a judgment of approximately $86,000,000 in
compensatory and punitive damages. However, USCAN recently stated in
pleadings and during a court deposition taken in October 1998 that its
damage claim had been reduced to $332,000 and that it would dismiss its
RICO claims. EBI Securities has filed counterclaims for defamation based
upon certain false and defamatory representations regarding EBI Securities.
A trial date has been scheduled for January 1999. EBI Securities believes
it has meritorious defenses and intends to vigorously defend against
USCAN's claims as well as aggressively pursue claims against USCAN and two
of its officers for defamation, abuse of process, and civil conspiracy.
Florida Department of Insurance as Receiver for United States Employer
Insurance Consumer Self-Insurance Fund of Florida ("USEC") v. Debenture
Guaranty Corporation, Et. Al., United States District Court for the Middle
District of Florida. In November, 1995, the plaintiff, USEC, commenced the
above entitled action against Debenture Guaranty Corporation ("Debenture")
and certain other defendants, including EBI Securities and Steve Signer, an
employee of EBI Securities. In 1994, USEC entered into an arrangement
whereby USEC lent money to Debenture, and Debenture opened an account in
Debenture's name to trade U.S. Treasuries. The note to USEC was in the
amount by which the treasuries could be margined. This transaction was
allegedly part of a scheme whereby USEC was attempting to inflate its
assets for regulatory purposes. Debenture allegedly misappropriated the
funds for its own benefit and USEC subsequently failed. Plaintiffs alleged
that EBI Securities and Signer aided, abetted and conspired with Debenture
to defraud USEC and claimed damages of $11,000,000. After a six week trial
96
<PAGE>
held from September 8, 1998, to October 14, 1998, a jury returned a verdict
in favor of EBI Securities. The plaintiffs have filed a motion for a new
trial. EBI Securities has objected to this motion. EBI Securities has filed
a motion for recovery of its attorney's fees incurred in connection with
defending this action.
Euro-American Insurance Company Ltd., Et. Al. v. National Family Care Life
Insurance Company, Et. Al., 191st Judicial District of Dallas County, Texas
(the "NFC Litigation"). In April, 1996, National Family Care Life Insurance
Company ("NFC") commenced the above action against, among others, EBI
Securities and Steve Signer, an employee of EBI Securities. In late 1994 or
early 1995, NFC entered into an arrangement with Debenture Guaranty
Corporation ("Debenture"), another defendant in the NFC Litigation, whereby
NFC lent money to Debenture, and Debenture opened an account in Debenture's
name to trade U.S. Treasuries. The note to NFC was in the amount by which
the treasuries could be margined. This transaction was allegedly part of a
scheme whereby NFC was attempting to inflate its assets for regulatory
purposes. Debenture allegedly misappropriated the funds for its own
benefit. NFC alleged that EBI Securities and Signer aided, abetted and
conspired with Debenture in allegedly defrauding Plaintiff. NFC has reduced
its damages demand from approximately $11,500,000 to $1,100,000. This case
is related to the USEC litigation, described above, which also involves a
claim of fraud against Debenture. EBI Securities believes it has
meritorious defenses and intends to vigorously defend against NFC's claims.
EBI Securities also is involved in an arbitration proceeding related to the
NFC Litigation entitled National Family Care Life Insurance Co. v. Pauli
Company, Inc., Et Al., NASDR Case No. 96-02673 (the "Arbitration"). The
Arbitration panel entered an award against EBI Securities in July 1998 in
favor of third-party plaintiff Pauli & Company, Inc. ("Pauli") of
approximately $370,000, which was significantly below the initial award
sought by Pauli of approximately $1,100,000. EBI Securities has filed a
motion in the NFC Litigation to vacate this award and plans to vigorously
contest this award on appeal.
In addition to the litigation described above, the Company, through its
subsidiaries, is involved in various legal actions and claims arising in
the ordinary course of business. Management believes that each of such
matters will be resolved without material adverse effect on the Company's
financial condition or operating results.
7. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
statement was adopted by the Company beginning with the fiscal year ended
March 31, 1999.
Due to the nature of the items reflected in the Statement of Comprehensive
Income, no effect for income taxes has been recognized. Foreign currency
translation adjustments are primarily related to the investment in the
Company's foreign operations. Unrealized holding losses are related to
securities received in the sale of the Hotel Fortuna. As note in the
consolidated financial statements for the year ended March 31, 1998
included herein, the Company has substantial net operating loss
carryforwards which it may or may not be able to utilize prior to the
expiration. Accordingly, no tax effect for these additional projected
losses has been reflected in these financial statements.
8. SUBSEQUENT EVENTS
In November 1998, the Company sold 10 newly issued units consisting in the
aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock.
In December 1998, the Company sold 125,000 shares of Common Stock for a
total offering price of $500,000 or $4.00 per share. Also in December 1998,
the Company sold its subsidiary, Eastbrokers Budapest Rt. for HUF
217,000,000 (approximately $1,000,000 USD). The Company continues to have a
working relationship with the buyer and maintains a presence in Budapest
through its relationship with the buyer.
In December 1998, the Company entered into a non-binding letter agreement
pursuant to which EBI Securities intends to acquire Lloyd Wade Securities,
Inc. ("Lloyd Wade"), a wholly owned subsidiary of Financial Services, Inc.
Lloyd Wade is a full service securities firm. The acquisition is contingent
upon, among other things, receipt of any necessary corporate and
stockholder approvals, all necessary governmental approvals, completion of
business, legal and financial due diligence and other customary conditions.
There can be no assurance that such transaction will be successfully
completed.
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<PAGE>
NO DEALER, SALES PERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE EASTBROKERS INTERNATIONAL
INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
[ ]
------------------
TABLE OF CONTENTS SHARES OF
COMMON STOCK
PAGE ($.05 PAR VALUE)
Available Information...........................
Disclosure of Commission Position on [ ]
Indemnification for Securities ------------------
Act Liabilities.......................... WARRANTS
Special Note Regarding Forward Looking
Statements.................................
Summary.........................................
Risk Factors....................................
Use of Proceeds.................................
Market for Common Equity and Related
Stockholder Matters....................... _______________
Business........................................
Management Discussion and Analysis PROSPECTUS
or Plan of Operation.........................
Management...................................... _______________
Security Ownership of Certain Beneficial
Owners and Management........................
Executive Compensation..........................
Selling Stockholders............................
Description of Securities.......................
Certain Relationships and Related
Transactions.................................
Plan of Distribution............................
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......
Experts.........................................
Legal Matters...................................
Financial Statements............................
Independent Auditors' Report....................
Independent Auditors' Report....................
98
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A Delaware corporation may indemnify any person under such
Section who was, is or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure judgment in its favor, by reason of such fact as provided in the
preceding sentence, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit, except that no indemnification shall be made in respect thereof
unless he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and unless, and then only
to the extent that, a court of competent jurisdiction shall determine upon
application that such person is fairly and reasonably entitled to indemnity for
such expenses as the court shall deem proper. A Delaware corporation must
indemnify any person who was successful on the merits or otherwise in defense of
any action, suit or proceeding or in defense of any claim, issue or matter in
any proceeding, by reason of such fact as provided in the preceding two
sentences against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith. A Delaware corporation may pay for the
expenses (including attorneys' fees) incurred by an officer or director in
defending a proceeding in advance of the final disposition upon receipt of an
undertaking by the officer or director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director shall not be personally liable to
the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for any
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, or (iv) for any transaction from which the
director derived an improper personal benefit. The DGCL permits the purchase of
insurance on behalf of directors and officers against any liability asserted
against directors and officers and incurred by such persons in such capacity, or
arising out of their status as such, whether or not the corporation would have
the power to indemnify directors and officers against such liability. The
Company has acquired officers' and directors' liability insurance of $2 million
for members of its Board of Directors and executive officers.
At present, there is no pending litigation or other proceeding
involving a director or officer of the Company as to which indemnification is
being sought, nor is the Company aware of any threatened litigation that may
result in claims for indemnification by any officer or director.
Article Eighth of the Company's Certificate of Incorporation provides
for indemnification of all persons whom, to the fullest extent permitted, the
Company may indemnify under Delaware General Corporation Law.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
AMOUNT TO
TYPE OR NATURE OF EXPENSE BE PAID
SEC registration fee...................................... $
Accounting fees and expenses*............................. 4,989.75
Legal fees and expenses*.................................. ___________
Miscellaneous*............................................ ___________
Total*.................................................... $
===========
- ---------------
*To be filed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company believes that each of the following transactions referenced
below were exempt from registration pursuant to Section 4(2) of the Securities
Act and Regulation D promulgated thereunder as transactions by an issuer not
involving a pubic offering.
On August 1, 1996, the Company issued 1,080,000 shares of its Common
Stock to the selling security holders of Eastbrokers Vienna in a transaction
valued at $5,400,000. During the period surrounding the acquisition, the 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
valued at $4.00 per share relating to the acquisition of Eastbrokers NA. In a
separate but related transaction to the Eastbrokers NA acquisition, the Company
sold 2,500 shares of the Common Stock to an officer of the Company in exchange
for a promissory note. These shares were transferred to the selling shareholder
of Eastbrokers NA as part of the acquisition. The shares were valued at $4.00
per share.
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. 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 for consulting services at a per share price
approximating the then current market price for services rendered to the
Company.
In April 1997, the Company sold 125,000 shares of Common Stock to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,000 or $6.00 per share. The net proceeds to the Company
were $723,195. There were no underwriting discounts or commissions.
On February 20, 1998, the Company sold 1,227,000 newly issued units
consisting of one share of Common Stock and one Class C Warrant in a private
placement for $6,135,000 in cash, or a price of $5.00 per unit (approximately 40
percent below the then current market price as of February 19, 1998). In
connection with the private placement, 1,237,222 Class C Warrants were issued to
the placement agents, including 312,583 Class C warrants issued to Eastbrokers
NA as one of the placement agents.
II-2
<PAGE>
On November 25, 1998, the Company sold 10 newly issued units consisting
in the aggregate of $1,100,000 in 7% Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock. In connection with this
sale, commission fees of 5 percent were paid.
On December 15, 1998, the Company sold 125,000 shares of Common Stock
for a total offering price of $500,000 or $4.00 per share. In connection with
this sale, EBI Securities was paid a 6 percent underwriting commission.
In September 1997, the Company issued 10,000 shares of Common Stock to
Dr. Michael Sumichrast in compensation for services performed on behalf of the
Company during the previous six months. The average price per share assigned to
this transaction was $6.598 based on the average closing price for the period
April 1, 1997 through September 30, 1997.
In September 1997, Martin A. Sumichrast acquired 50,000 shares of
Common Stock at a price of $6.00 per share in exchange for a note payable
bearing 8 percent interest in the amount of $300,000 to the Company. In December
1998, this note was cancelled and the shares were returned to the Company.
On May 14, 1998 in connection with the acquisition of EBI Securities,
the Company issued 445,000 shares of Common Stock to the selling corporation,
Cherry Creek Investments, Ltd. During the five days before the effective date of
the acquisition, the average closing price of the Common Stock was $9,375 per
share for its fully registered and unrestricted shares. Due to the nature of the
restricted shares, the relatively large block of shares transferred and other
various restrictive covenants regarding the final allocation of these shares,
the Board of Directors assigned a value of $5.00 per share for a total value of
$2,225,000 to this transaction.
Also in connection with the acquisition of EBI Securities, the Company
incurred an obligation to deliver 25,000 shares of Common Stock to Sutton as an
investment banking advisory fee. To maintain consistency with the assigned
valuation on the acquisition of EBI Securities, the Board of Directors assigned
a value of $5.00 per share for a total value of $125,000 to this transaction.
ITEM 27. EXHIBITS
(a) The exhibits listed below have been filed as part of this
Registration Statement.
EXHIBIT NO. DESCRIPTION
(2.1) Agreement and Plan of Merger dated May 14, 1998 by and among the
Registrant, East Merger Corporation, Cohig & Associates, Inc.,
and Cherry Creek Investments, Ltd., incorporated by reference to
the Current Report on Form 8-K dated May 14, 1998 (File No.
0-26202).
(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) 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).
II-3
<PAGE>
(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).
(4.4) Subscription Agreement for the Private Placement of the Units
Consisting of the Company's Common Stock and Series C Warrants,
incorporated by reference to the Company's Report on Form 10-KSB,
as amended, for the year ended March 31, 1998.
(4.5)* Securities Purchase Agreement for the Private Placement of
Units consisting of Convertible Debentures and Series C Warrants.
(4.6)* Subscription Agreement for the Private Placement of the
Company's Common Stock.
(4.7)* Placement Agents' Warrant Certificate dated February 20, 1998.
(4.8)* Warrant Certificate between the Company and Martin A.
Sumichrast in respect of the sale of 70,000 Class C Warrants.
(4.9)* Warrant Certificate between the Company and Kevin D. McNeil in
respect of the sale of 32,583 Class C Warrants.
(5)** Opinion on Legality.
(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 being
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 being 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 being 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
bring 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 being incorporated by reference from Form 8-K dated
August 1, 1996.
(10.8) 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.
(10.9) Consulting Agreement between Michael Sumichrast, Ph.D. and the
Company dated April 1, 1997, incorporated by reference to the
Company's Form 10-KSB for the year ended March 31, 1997.
(10.10)* Employment Agreement between the Company and Martin A.
Sumichrast dated December 31, 1998.
II-4
<PAGE>
(10.11)* Employment Agreement between the Company and Kevin D. McNeil
dated December 31, 1998.
(10.12)* Consulting Agreement between the Company and Wolfgang Kossner
dated December 1, 1998.
(10.13)* $600,000 Non-Negotiable Term Note dated December 31, 1998
issued by Martin A. Sumichrast in favor of the Company.
(10.14)* $150,000 Non-Negotiable Term Note dated December 31, 1998
issued by Kevin D. McNeil in favor of the Company.
(16.1) Letter on Change in Certifying Accountant
Item 7 of Current Report on Form 8-K dated November 4, 1997;
incorporated by reference to the Current Report on Form 8-K dated
November 4, 1997 (File No. 0-26202).
(16.2) Letter on Change in Certifying Accountant
Item 7 of Current Report on Form 8-K dated January 22, 1998;
incorporated by reference to the Current Report on Form 8-K dated
January 22, 1998 (File No. 0-26202).
(21.1)* Subsidiaries of the Company
(23.1)* Consent of Deloitte & Touche LLP, dated February __, 1999.
(23.2)* Consent of Pannell Kerr Forster PC, dated February __, 1999.
(23.3)** Consent of Kelley Drye & Warren LLP (contained in Exhibit 5).
(24)* Power of Attorney (included within signature page).
(27)* Financial Data Schedule (Electronic Filing Only).
-----------------------
* Filed herewith.
**To be filed by amendment.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
A. To file, during any period in which offers or sales are being made,
a post-effective amendment of this registration statement:
(i) To include any Prospectus required by Section 10(a) (3) of the
Securities Act of 1933.
(ii) To include in the Prospectus any facts or events arising after the
effective date of the registration statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
B. That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-5
<PAGE>
C. To remove from registration by means of post-effective amendment any
of the securities registered which remain unsold at the termination of the
offering.
D. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to any charter provisions, by-laws, contract,
arrangements, statute or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant of expenses incurred or paid by
a director, officer or controlling person of the registrant in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
E. Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant hereby undertakes to
file with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that Section.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorizes this
registration statement to be signed on its behalf by the undersigned, in the
City of Rockville, State of Maryland, on February 12, 1999.
EASTBROKERS INTERNATIONAL INCORPORATED
By: /S/ Martin A. Sumichrast
---------------------------------------
Martin A. Sumichrast
Chairman, President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Martin A. Sumichrast and Kevin D.
McNeil, and each of them, his true and lawful agent, proxy and attorney-in-fact,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to (i) act on, sign and file with
the Securities and Exchange Commission any and all amendments (including
post-effective amendments) to this Registration Statement together with all
schedules and exhibits thereto, (ii) act on, sign and file such certificates,
instruments, agreements and other documents as may be necessary or appropriate
in connection therewith, (iii) act on and file any supplement to any prospectus
included in this Registration Statement or any such amendment, and (iv) take any
and all actions which may be necessary or appropriate in connection therewith,
granting unto such agents, proxies and attorneys-in-fact, and each of them, full
power and authority to do and perform each and every act and thing necessary or
appropriate to be done, as fully for all intents and purposes as he might or
could do in person, hereby approving, ratifying and confirming all that such
agents, proxies and attorneys-in-fact, any of them or any of his or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE OR CAPACITIES DATE
<S> <C> <C>
/S/ MARTIN A. SUMICHRAST Chairman of the Board, President and
- ------------------------------- Chief Executive Officer and Director February 12, 1999
Martin A. Sumichrast
/S/ KEVIN D. MCNEIL Vice President, Secretary, Treasurer and
- ------------------------------- Chief Financial Officer (Principal February 12, 1999
Kevin D. McNeil Financial and Accounting Officer)
/S/ MICHAEL SUMICHRAST, PH. D. Director
- -------------------------------
Michael Sumichrast, Ph.D. February 12, 1999
Director
- -------------------------------
Wolfgang Kossner
/S/ SIEGFRIED SAMM Director
- -------------------------------
Siegfried Samm February 12, 1999
/S/ JAY SCHIFFERLI Director February 12, 1999
- -------------------------------
Jay Schifferli
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(4.5) Securities Purchase Agreement for the Private
Placement of Units consisting of Convertible
Debentures and Series C Warrants.
(4.6) Subscription Agreement for the Private Placement
of the Company's Common Stock.
(4.7) Placement Agents' Warrant Certificate dated
February 20, 1998.
(4.8) Warrant Certificate between the Company and
Martin A. Sumichrast in respect of the sale of 70,000
Class C Warrants.
(4.9) Warrant Certificate between the Company and
Kevin D. McNeil in respect of the sale of 32,583 Class
C Warrants.
(10.10) Employment Agreement between the Company and
Martin A. Sumichrast dated December 31, 1998.
(10.11) Employment Agreement between the Company and
Kevin D. McNeil dated December 31, 1998.
(10.12) Consulting Agreement between the Company and Wolfgang
Kossner dated December 1, 1998.
(10.13) $600,000 Non-Negotiable Term Note dated
December 31, 1998 issued by Martin A. Sumichrast
in favor of the Company.
(10.14) $150,000 Non-Negotiable Term Note dated
December 31, 1998 issued by Kevin D. McNeil in
favor of the Company.
(21.1) Subsidiaries of the Company.
(23.1) Consent of Deloitte & Touche LLP, dated
February __, 1999.
(23.2) Consent of Pannell Kerr Forster PC, dated
February __, 1999.
(23.4) Consent of Kelley Drye & Warren LLP (contained in
Exhibit 5).
(24) Power of Attorney (included within signature page).
(27) Financial Data Schedule (Electronic Filing Only).
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of November 25, 1998, is
entered into by and between EASTBROKERS INTERNATIONAL INCORPORATED, a Delaware
corporation (the "Company"), and MACCABEE INVESTORS II LLC, a Delaware liability
company (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company and the Purchaser are executing and delivering
this Agreement in reliance upon the exemptions from registration provided by
Regulation D ("Regulation D") promulgated by the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), and/or Section 4(2) of the Securities Act; and
WHEREAS, the Purchaser wishes to purchase, and the Company wishes to
issue, upon the terms and subject to the conditions of this Agreement, 10 units
(the "Units"), each Unit consisting of $110,000 principal amount of the
Company's 7% Convertible Debentures (the "Debentures") and Series C warrants to
purchase 12,500 shares of Common Stock of the Company (the "Warrants"). The
Debentures are convertible, at the holder's option, into the Company's common
stock, par value $.05 per share (the "Common Stock"), on the terms set forth
therein, and the Warrants may be exercised for the purchase of Common Stock, on
the terms set forth therein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE
Closing. The Purchaser hereby agrees to purchase from the
Company 10 Units on the Closing Date (as defined herein). The Debentures shall
be issued in substantially the form attached hereto as Exhibit A, and the
Warrants shall be issued in substantially the form attached hereto as Exhibit B.
The purchase price for each Unit shall be $110,000, and shall be payable in same
day funds.
The Debentures and the Warrants to be purchased by the
Purchaser hereunder, in definitive form, and in such denominations and
registered in such names as the Purchaser or its representative, if any, may
request upon notice to the Company, shall be delivered by or on behalf of the
Company for the account of the Purchaser, against payment by the Purchaser or on
its behalf of the purchase price therefor by wire transfer to an account of the
Company, all at the offices of Morrison & Foerster LLP, 1290 Avenue of the
Americas, New York, New York 10104, at 9:30 a.m., New York time on November 25,
1998, or at such other time and date as the Purchaser or its representative, if
any, and the Company may agree upon in writing, such date being referred to
herein as the "Closing Date."
2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Purchaser represents and warrants to, and covenants and
agrees with, the Company as follows:
a. The Purchaser and each of its equity owners is (i)
experienced in making investments of the kind described in this Agreement and
the related documents, (ii) able, by reason of the business and financial
experience of its management, to protect its own interests in connection with
the transactions described in this Agreement and the related documents, and
(iii) able to afford the entire loss of its investment in the Units.
b. All subsequent offers and sales of the Debentures, the
Warrants, and the Common Stock issuable upon conversion or exercise of, or in
lieu of interest payments on the Debentures or the Warrants, shall be made
pursuant to an effective registration statement under the Securities Act or
pursuant to an applicable exemption from such registration.
c. The Purchaser understands that the Units are being
offered and sold to it in reliance upon exemptions from the registration
requirements of the United States federal securities laws, and that the Company
is relying upon the truth and accuracy of the Purchaser's representations and
warranties, and the Purchaser's compliance with its agreements, each as set
forth herein, in order to determine the availability of such exemptions and the
eligibility of the Purchaser to acquire the Units.
d. The Purchaser: (A) has been provided with sufficient
information with respect to the business of the Company and such documents
relating to the Company as the Purchaser has requested and Purchaser has
carefully reviewed the same including, without limitation, the Company's Form
10KSB for the fiscal year ended March 31, 1998 filed with the Securities and
Exchange Commission ("the Commission"), (B) has been provided with such
additional information with respect to the Company and its business and
financial condition as the Purchaser, or the Purchaser's agent or attorney, has
requested, and (C) has had access to management of the Company and the
opportunity to discuss the information provided by management of the Company and
any questions that the Purchaser had with respect thereto have been answered to
the full satisfaction of the Purchaser.
e. The Purchaser has the requisite corporate power and
authority to enter into this Agreement and this Agreement has been duly and
validly authorized, executed and delivered on behalf of the Purchaser and is a
valid and binding agreement of the Purchaser, enforceable in accordance with its
terms, except to the extent that enforcement of this Agreement may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws now or hereafter in effect relating to creditors' rights
generally and to general principles of equity.
f. This Agreement and the registration rights agreement,
dated the date hereof, between the Company and the Purchaser (the "Registration
Rights Agreement"), and the transactions contemplated hereby and thereby, have
been duly and validly authorized by the Purchaser; and such agreements, when
executed and delivered by each of the Purchaser and the Company will each be a
valid and binding agreement of the Purchaser, enforceable in accordance with
their respective terms, except to the extent that enforcement of each such
agreement may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to creditors' rights generally and to general principles of equity.
3. REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to the Purchaser that:
a. ORGANIZATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Each of the Company's subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation in all jurisdictions in which the failure to so qualify
would have a material adverse effect on the Company and its subsidiaries taken
as a whole. Schedule 3a lists all subsidiaries of the Company and, except as
noted therein, all of the outstanding capital stock of such subsidiaries is
owned of record and beneficially by the Company.
b. CAPITALIZATION. On the date hereof, the authorized
capital of the Company consists of 10,000,000 shares of Common Stock, par value
$.05 per share, of which 4,767,750 are issued and outstanding. Schedule 3b sets
forth all of the options, warrants and convertible securities of the Company,
and any other rights to acquire securities of the Company (collectively, the
"Derivative Securities") which are outstanding on the date hereof, including in
each case (i) the name and class of such Derivative Securities, (ii) the issue
date of such Derivative Securities, (iii) the number of shares of Common Stock
of the Company into which such Derivative Securities are convertible as of the
date hereof, (iv) the conversion or exercise price or prices of such Derivative
Securities as of the date hereof and (v) the expiration date of any conversion
or exercise rights held by the owners of such Derivative Securities.
c. CONCERNING THE COMMON STOCK AND THE WARRANTS. The Common
Stock issuable upon conversion of, or in lieu of interest payments on, the
Debentures, and upon exercise of the Warrants, when issued, shall be duly and
validly issued, fully paid and non-assessable, and will not subject the holder
thereof to personal liability by reason of being such a holder. There are no
preemptive rights of any stockholder of the Company, as such, to acquire the
Units, or the Common Stock issuable to the Purchaser pursuant to the terms of
the Debentures and the Warrants. The provisions of the Warrants contained in
Exhibit B are substantially the same as all other Class C Warrants of the
Company.
d. REPORTING COMPANY STATUS. The Common Stock is registered
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company has duly filed all materials and documents required
to be filed pursuant to all reporting obligations under either Section 13(a) or
15(d) of the Exchange Act, if any, prior to the offer and sale of the Units. The
Common Stock is listed and traded on the Nasdaq Smallcap Market ("Nasdaq"), and
the Company is not aware of any pending or contemplated action or proceeding of
any kind to suspend the trading of the Common Stock.
e. AUTHORIZED SHARES. The Company has legally available a
sufficient number of authorized and unissued shares of Common Stock as may be
necessary to effect the conversion of the Debentures and the exercise of the
Warrants. The Company understands and acknowledges the potentially dilutive
effect to the Common Stock of the issuance of shares of Common Stock upon
conversion of the Debentures and the exercise of the Warrants. The Company
further acknowledges that its obligation to issue shares of Common Stock upon
conversion of the Debentures and upon exercise of the Warrants is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company and notwithstanding
the commencement of any case under 11 U.S.C. ss. 101 et seq. (the "Bankruptcy
Code"). In the event the Company becomes a debtor under the Bankruptcy Code, the
Company hereby waives to the fullest extent permitted any rights to relief it
may have under 11 U.S.C. ss. 362 in respect of the conversion of the Debentures
and the exercise of the Warrants. The Company agrees, without cost or expense to
the Purchaser, to take or consent to any and all action necessary to effectuate
relief under 11 U.S.C. ss. 362.
f. LEGALITY. The Company has the requisite corporate power
and authority to enter into this Agreement and to issue and deliver the
Debentures, the Warrants, and the Common Stock issuable upon conversion of, or
in lieu of interest payments on, the Debentures and the exercise of the
Warrants.
g. TRANSACTION AGREEMENTS. This Agreement, the Registration
Rights Agreement, the Debentures and the Warrants (collectively, the "Primary
Documents"), and the transactions contemplated hereby and thereby, have been
duly and validly authorized by the Company; this Agreement has been duly
executed and delivered by the Company and this Agreement is, and the Primary
Documents, when executed and delivered by the Company, will each be, a valid and
binding agreement of the Company, enforceable in accordance with their
respective terms, except to the extent that enforcement of each of the Primary
Documents may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to creditors' rights generally and to general principles of equity.
h. NON-CONTRAVENTION. The execution and delivery of this
Agreement and each of the other Primary Documents, and the consummation by the
Company of the other transactions contemplated by this Agreement and each of the
other Primary Documents, does not and will not conflict with or result in a
breach by the Company of any of the terms or provisions of, or constitute a
default under, the Articles of Incorporation or By-laws of the Company, or any
material indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which they or any
of their properties or assets are bound, or any existing applicable law, rule,
or regulation or any applicable decree, judgment or order of any court or United
States federal or state regulatory body, administrative agency, or any other
governmental body having jurisdiction over the Company, its subsidiaries, or any
of their properties or assets. Except as set forth on Schedule 3(h), neither the
filing of the registration statement required to be filed by the Company
pursuant to the Registration Rights Agreement nor the offering or sale of the
Units, the Debentures, or the Warrants as contemplated by this Agreement gives
rise to any rights, other than those which have been waived or satisfied on or
prior to the Closing Date, for or relating to the registration of any shares of
the Common Stock.
i. APPROVALS. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the entry into or the performance of this Agreement and the
other Primary Documents.
j. SEC FILINGS. Except as set forth in Schedule 3(j), none
of the reports or documents filed by the Company with the Commission contained,
at the time they were filed, any untrue statement of a material fact or omitted
to state any material fact required to be stated therein, or necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
k. STABILIZATION. Neither the Company, nor any of its
affiliates, has taken or may take, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
shares of Common Stock.
l. ABSENCE OF CERTAIN CHANGES. Except as disclosed in the
Company's public filings with the Commission and the trading losses of EBI
Securities, Inc. previously disclosed to Purchaser and provided for on Schedule
3(l), since March 31, 1998, there has been no material adverse change nor any
material adverse development in the business, properties, operations, financial
condition, prospects, outstanding securities or results of operations of the
Company.
m. FULL DISCLOSURE. There is no fact known to the Company
(other than general economic conditions known to the public generally) that has
not been disclosed in writing to the Purchaser (i) that could reasonably be
expected to have a material adverse effect upon the condition (financial or
otherwise) or the earnings, business affairs, properties or assets of the
Company or (ii) that could reasonably be expected to materially and adversely
affect the ability of the Company to perform the obligations set forth in the
Primary Documents.
n. TITLE TO PROPERTIES; LIENS AND ENCUMBRANCES. The Company
has good and marketable title to all of its material properties and assets, both
real and personal, and has good title to all its leasehold interests, in each
case subject only to mortgages, pledges, liens, security interests, conditional
sale agreements, encumbrances or charges created in the ordinary course of
business.
o. Patents and Other Proprietary Rights. The
Company has sufficient title and ownership of all patents, trademarks, service
marks, trade names, copyrights, trade secrets, information, proprietary rights
and processes necessary for the conduct of its business as now conducted and as
proposed to be conducted, and such business does not and would not conflict with
or constitute an infringement on the rights of others.
p. PERMITS. The Company has all franchises, permits,
licenses and any similar authority necessary for the conduct of its business as
now conducted, the lack of which would materially and adversely affect the
business or financial condition of the Company. The Company is not in default in
any respect under any of such franchises, permits, licenses or similar
authority.
q. ABSENCE OF LITIGATION. Except as disclosed in the
Company's public filings with the Commission, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board or
body pending or, to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company or any of its subsidiaries, in which
an unfavorable decision, ruling or finding would have a material adverse effect
on the properties, business, condition (financial or other) or results of
operations of the Company and its subsidiaries, taken as a whole, or the
transactions contemplated by the Primary Documents, or which would adversely
affect the validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, the Primary Documents.
r. NO DEFAULT. Each of the Company and its subsidiaries is
not in default in the performance or observance of any obligation, covenant or
condition contained in any indenture, mortgage, deed of trust or other
instrument or agreement to which it is a party or by which it or its property
may be bound.
s. TRANSACTIONS WITH AFFILIATES. Except as disclosed in the
Company's public filings with the Commission, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors or affiliates that, had they existed on March 31, 1998,
would have been required to be disclosed in the Company's 1998 Annual Report to
stockholders.
t. EMPLOYMENT MATTERS. The Company is in compliance in all
material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including
the regulations and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act, which
would cause the loss of such qualification.
u. INSURANCE. The Company maintains property and casualty,
general liability, personal injury and other similar types of insurance with
financially sound and reputable insurers that is adequate, consistent with
industry standards and the Company's historical claims experience. The Company
has not received notice from, and has no knowledge of any threat by, any insurer
(that has issued any insurance policy to the Company) that such insurer intends
to deny coverage under or cancel, discontinue or not renew any insurance policy
presently in force.
v. TAXES. All applicable tax returns required to be filed by
the Company and each of its subsidiaries have been prepared and filed in
compliance with all applicable laws, or if not yet filed have been granted
extensions of the filing dates which extensions have not expired, and all taxes,
assessments, fees and other governmental charges upon the Company, its
subsidiaries, or upon any of their respective properties, income or franchises,
shown in such returns and on assessments received by the Company or its
subsidiaries to be due and payable have been paid, or adequate reserves therefor
have been set up if any of such taxes are being contested in good faith; or if
any of such tax returns have not been filed or if any such taxes have not been
paid or so reserved for, the failure to so file or to pay would not in the
aggregate have a material adverse effect on the business or financial condition
of the Company and its subsidiaries, taken as a whole.
w. FOREIGN CORRUPT PRACTICES ACT. Neither the Company nor
any of its directors, officers or other employees has (i) used any Company funds
for any unlawful contribution, endorsement, gift, entertainment or other
unlawful expense relating to any political activity; (ii) made any direct or
indirect unlawful payment of Company funds to any foreign or domestic government
official or employee; (iii) violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe,
rebate, payoff, influence payment, kickback or other similar payment to any
person. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
x. INVESTMENT COMPANY ACT. The Company is not conducting,
and does not intend to conduct its business in a manner which would cause it to
become, an "investment company," as defined in Section 3(a) of the Investment
Company Act of 1940, as amended.
y. AGENT FEES. The Company has not incurred any liability
for any finder's or brokerage fees or agent's commissions in connection with the
offer and sale of the transactions contemplated by this Agreement.
z. PRIVATE OFFERING. Subject to the accuracy of the
Purchaser's representations and warranties set forth in Section 2 hereof, the
offer, sale and issuance of the Units and the other securities as contemplated
by this Agreement are exempt from the registration requirements of the
Securities Act. The Company agrees that neither the Company nor anyone acting on
its behalf will offer any of the Units, the Debentures, the Warrants, or any
similar securities for issuance or sale, or solicit any offer to acquire any of
the same from anyone so as to render the issuance and sale of such securities
subject to the registration requirements of the Securities Act. The Company has
not offered or sold the Units by any form of general solicitation or general
advertising, as such terms are used in Rule 502(c) under the Securities Act.
aa. FULL DISCLOSURE. The representations and warranties of
the Company set forth in this Agreement do not contain any untrue statement of a
material fact or omit any material fact necessary to make the statements
contained herein, in light of the circumstances under which they were made, not
misleading.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Purchaser acknowledges that,
except as provided in the Registration Rights Agreement, (1) neither the Units,
the Debentures, the Warrants, nor the Common Stock issuable upon conversion of,
or in lieu of interest payments on, the Debentures or upon exercise of the
Warrants, have been, and are not being, registered under the Securities Act, and
may not be transferred unless (A) subsequently registered thereunder or (B) they
are transferred pursuant to an exemption from such registration; and (2) any
sale of the Debentures, the Warrants or the Common Stock issuable upon
conversion or exchange thereof (collectively, the "Securities") made in reliance
upon Rule 144 under the Securities Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
the Securities under circumstances in which the seller, or the person through
whom the sale is made, may be deemed to be an underwriter, as that term is used
in the Securities Act, may require compliance with another exemption under the
Securities Act and the rules and regulations of the Commission thereunder. The
provisions of Section 4(a) and 4(b) hereof, together with the rights of the
Purchaser under this Agreement and the other Primary Documents, shall be binding
upon any subsequent transferee of the Debentures and the Warrants.
b. Restrictive Legend. The Purchaser acknowledges and agrees
that, until such time as the Securities shall have been registered under the
Securities Act or the Purchaser demonstrates to the reasonable satisfaction of
the Company and its counsel that such registration shall no longer be required,
such Securities may be subject to a stop-transfer order placed against the
transfer of such Securities, and such Securities shall bear a restrictive legend
in substantially the following form:
THESE SECURITIES (INCLUDING ANY UNDERLYING SECURITIES) HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL OR OTHER EVIDENCE
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION SHALL NO LONGER BE REQUIRED.
c. FILINGS. The Company undertakes and agrees that it will
make all required filings in connection with the sale of the Securities to the
Purchaser as required by United States laws and regulations, or by any domestic
securities exchange or trading market, including, if applicable, the filing of a
notice on Form D (at such time and in such manner as required by the Rules and
Regulations of the Commission), and to provide copies thereof to the Purchaser
promptly after such filing or filings.
d. NASDAQ LISTING. The Company agrees and covenants that it
will not seek to have the trading of its Common Stock through Nasdaq suspended
or terminated, will use its best efforts to maintain its eligibility for trading
on Nasdaq and, if such trading of its Common Stock is suspended or terminated,
will use its best efforts to requalify its Common Stock or otherwise cause such
trading to resume.
e. REPORTING STATUS. So long as the Purchaser beneficially
owns any of the Securities, the Company shall timely file all reports required
to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange
Act and shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination.
f. STATE SECURITIES FILINGS. The Company shall from time to
time promptly take such action as the Purchaser or any of its representatives,
if applicable, may reasonably request to qualify the Securities for offering and
sale under the securities laws (other than United States federal securities
laws) of the jurisdictions in the United States as shall be so identified to the
Company, and to comply with such laws so as to permit the continuance of sales
therein, provided that in connection therewith, the Company shall not be
required to qualify as a foreign corporation or to file a general consent to the
service of process in any jurisdiction.
g. USE OF PROCEEDS. The Company will use all of the net
proceeds from the issuance of the Units to satisfy certain net capital
requirements of EBI Securities, Inc.
h. RESERVATION OF COMMON STOCK. The Company will at all
times have authorized and reserved for the purpose of issuance a sufficient
number of shares of Common Stock to provide for the conversion of the Debentures
and the exercise of the Warrants. The Company will use its best efforts at all
times to maintain a number of shares of Common Stock so reserved for issuance
that is no less than two (2) times the number that is then actually issuable
upon the conversion of the Debentures and the exercise in full of the Warrants.
i. SALES OF ADDITIONAL SHARES. The Company shall not,
directly or indirectly, without the prior written consent of the Purchaser,
offer, sell, offer to sell, contract to sell or otherwise dispose of any of its
securities or any security or other instrument convertible into or exchangeable
for shares of its capital stock, in each case, for a period ending on the
earlier of two hundred seventy (270) days after the date of this Agreement or
the date the Debentures are redeemed in full (the "Lock-Up Period"), except that
the Company may (i) issue securities for the aggregate consideration of at least
$15 million in connection with a bona fide, firm commitment, underwritten public
offering under the Securities Act; (ii) may issue shares of Common Stock which
are issued in connection with a bona fide transaction involving the acquisition
of another business entity or segment of any such entity by the Company by
merger, asset purchase, stock purchase or otherwise; (iii) may issue shares of
common stock to directors, officers, employees or consultants of the Company for
the primary purpose of soliciting or retaining their services in an aggregate
amount, together with any New Options (as defined below) vesting or becoming
exercisable during the Lock-Up Period, not to exceed 150,000 shares; (iv) may
issue shares of Common Stock upon the exercise or conversion of currently
outstanding options, warrants and other convertible securities and up to 150,000
shares of Common Stock underlying New Options as provided in clause (v) below;
(v) may issue options to purchase shares of its Common Stock to its directors,
officers, employees and consultants in connection with its existing stock option
plans; provided, that, during the Lock-Up Period, New Options to purchase not
more than 150,000 shares of Common Stock shall vest or become exercisable; (vi)
may issue Common Stock in connection with a stock split, stock dividend or
similar recapitalization of the Company which affects all holders of the
Company's Common Stock on an equivalent basis, in each case, without the prior
written consent of the Purchaser and (vii) may sell securities if the proceeds
of such transaction are applied to redeem in full all of the Debentures. In
addition, the Company agrees that it will not cause any shares of its capital
stock that are issued in connection with a transaction of the type contemplated
by clause (ii) (or upon the conversion or exercise of other securities that are
issued in connection with such transaction) or that were issued in connection
with any financing, acquisition or other transaction that occurred prior or
subsequent to the date of this Agreement to be covered by a registration
statement that is filed with the Commission or declared effective by the
Commission prior to the earlier of the time (A) the Warrants and the Common
Stock underlying the Debentures and the Warrants are covered by a registration
statement filed by the Company pursuant to its obligations under the
Registration Rights Agreement has been effective under the Securities Act for a
period of at least one hundred eighty (180) days during which the Company has
not notified the Purchaser that such registration statement or the prospectus
included in such registration statement includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading or (B) the Debentures are redeemed in full prior
to the time a registration statement is declared effective.
j. STOCKHOLDER APPROVAL. The Company agrees to use its best
efforts (including obtaining any vote of its stockholders required by applicable
law or Nasdaq rules) to authorize and approve the issuance of the Common Stock
issuable upon conversion of the Debentures and Warrants, to the extent that such
conversion or issuance results in the issuance of 20 percent or more of the
Company's outstanding Common Stock.
k. OWNERSHIP. At no time shall the Purchaser (including its
officers, directors and affiliates) maintain in the aggregate beneficial
ownership (as defined for purposes of Section 16 of the Securities Exchange Act
of 1934, as amended) of shares of Common Stock in excess of 4.9 percent of the
Company's outstanding Common Stock unless the Purchaser gives the Company at
least sixty-one days notice that it intends to go higher.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company warrants that no instruction, other than the
instructions referred to in this Section 5 and stop transfer instructions to
give effect to Sections 4(a) and 4(b) hereof prior to the registration and sale
of the Securities in the manner contemplated by the Registration Rights
Agreement, will be given by the Company to the transfer agent and that the
shares of Common Stock issuable upon conversion of, or in lieu of interest
payments on, the Debentures or upon exercise of the Warrants shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement and applicable
law. Nothing in this Section shall affect in any way the Purchaser's obligations
and agreement to comply with all applicable securities laws upon resale of the
Securities. If the Purchaser provides the Company with an opinion of counsel
reasonably satisfactory (as to both the identity of such counsel and the content
of such opinion) to the Company and its counsel that registration of a resale by
the Purchaser of any of the Securities in accordance with clause (1)(B) of
Section 4(a) of this Agreement is not required under the Securities Act, the
Company shall permit the transfer of the Securities and, in the case of the
Common Stock, promptly instruct the Company's transfer agent to issue one or
more certificates for Common Stock without legend in such names and in such
denominations as specified by the Purchaser.
b. The Company will permit the Purchaser to exercise its
right to convert the Debentures or to exercise the Warrants by faxing an
executed and completed Notice of Conversion or Form of Election to Purchase, as
applicable, to the Company, and delivering within three (3) business days
thereafter, the original Notice of Conversion (and the related original
debentures) or Form of Election to Purchase (and the related original Warrants)
to the Company by hand delivery or by express courier, duly endorsed. Each date
on which a Notice of Conversion or Form of Election to Purchase is faxed to and
received in accordance with the provisions hereof shall be deemed a "Conversion
Date." The Company will transmit the certificates representing the Common Stock
issuable upon conversion of any Debenture or upon exercise of any Warrants
(together with the debentures not so converted, or the Warrants not so
exercised) to the Purchaser via express courier as soon as practicable, but in
all events no later than three (3) business days in the case of conversion of
the Debentures or five (5) business days in the case of the exercise of any
Warrant after the Conversion Date (the "Delivery Date"). For purposes of this
Agreement, such conversion of the Debentures or the exercise of the Warrants
shall be deemed to have been made immediately prior to the close of business on
the Conversion Date.
c. In lieu of delivering physical certificates representing
the Common Stock issuable upon the conversion of the Debentures or the exercise
of the Warrants, provided the Company's transfer agent is participating in the
Depositary Trust Company ("DTC") Fast Automated Securities Transfer program, on
the written request of the Purchaser, who shall have previously instructed the
Purchaser's prime broker to confirm such request to the Company's transfer
agent, the Company shall cause its transfer agent to electronically transmit
such Common Stock to the Purchaser by crediting the account of the Purchaser's
prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system no later than the applicable Delivery Date.
d. The Company understands that a delay in the issuance of
Common Stock beyond the applicable Delivery Date could result in an economic
loss to the Purchaser. As compensation to the Purchaser for such loss, the
Company agrees to pay to the Purchaser for late issuance of Common Stock upon
conversion of the Debentures or upon exercise of the Warrants the sum of $5,000
per day for each $100,000 in aggregate principal amount of debentures that are
being converted or for any or all shares of Common Stock purchased upon the
exercise of the Warrants. The Company shall pay any payments that are payable to
the Purchaser pursuant to this Section 5 in immediately available funds upon
demand. Nothing herein shall limit the Purchaser's right to pursue actual
damages for the Company's failure to so issue and deliver Common Stock to the
Purchaser. Furthermore, in addition to any other remedies which may be available
to the Purchaser, in the event that the Company fails for any reason to effect
delivery of such Common Stock within five (5) business days after the relevant
Delivery Date, the Purchaser will be entitled to revoke the relevant Notice of
Conversion or Form of Election to Purchase by delivering a notice to such effect
to the Company, whereupon the Company and the Purchaser shall each be restored
to their respective positions immediately prior to delivery of such Notice of
Conversion or Form of Election to Purchase. For purposes of this Section 5,
"business day" shall mean any day in which the financial markets of New York are
officially open for the conduct of business therein.
6. EXPENSES.
The Company covenants and agrees with the Purchaser that the
Company will pay or cause to be paid the following: (a) the fees, disbursements
and expenses of the Purchaser's counsel in connection with the issuance of the
Securities payable on the Closing Date, (b) all expenses in connection with
registration or qualification of the Securities for offering and sale under
state securities laws as provided in Section 4(f) hereof, and (c) all other
costs and expenses incident to the performance of its obligations hereunder
which are not otherwise specifically provided for in this Section, including the
fees and disbursements of the Company's counsel, accountants and other
professional advisors, if any. If the Company fails to satisfy its obligations
or to satisfy any condition set forth in this Agreement, as a result of which
the Securities are not delivered to the Purchaser on the terms and conditions
set forth herein, the Company shall reimburse the Purchaser for any
out-of-pocket expenses reasonably incurred in making preparations for the
purchase, sale and delivery of the Securities not so delivered.
7. GOVERNING LAW; MISCELLANEOUS
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York, without regard to principles
of conflict of laws. Each of the parties consents to the jurisdiction of the
federal courts whose districts encompass any part of the City of New York or the
state courts of the State of New York sitting in the City of New York in
connection with any dispute arising under this Agreement or any of the
transactions contemplated hereby, and hereby waives, to the maximum extent
permitted by law, any objection, including any objections based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions. This
Agreement may be signed in one or more counterparts, each of which shall be
deemed an original. The headings of this Agreement are for convenience of
reference only and shall not form part of, or affect the interpretation of this
Agreement. This Agreement and each of the Primary Documents have been entered
into freely by each of the parties, following consultation with their respective
counsel, and shall be interpreted fairly in accordance with its respective
terms, without any construction in favor of or against either party. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
unenforceability of this Agreement in any other jurisdiction. This Agreement
shall inure to the benefit of, and be binding upon the successors and assigns of
each of the parties hereto, including any transferees of the Securities. This
Agreement may be amended only by an instrument in writing signed by the party to
be charged with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
8. NOTICES.
Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be effective upon personal
delivery, via facsimile (upon receipt of confirmation of error-free
transmission) or two business days following deposit of such notice with an
internationally recognized courier service, with postage prepaid and addressed
to each of the other parties thereunto entitled at the following addresses, or
at such other addresses as a party may designate by five days advance written
notice to each of the other parties hereto.
Company: EASTBROKERS INTERNATIONAL INCORPORATED
15245 Shady Grove Rd.
Suite 340
Rockville, MD 20850
ATT: Mr. Martin A. Sumicharst
Tel: 301-527-1110
Fax: (301) 527-1112
With a copy to:
Kelley Drye & Warren LLP
2 Stamford Plaza
281 Tresser Blvd.
Stamford, CT 06901
ATT.: Jay Schifferli
Tel: 203-351-8023
Fax: 203-327-2669
PURCHASER: MACCABEE INVESTORS II, LLC
c/o WEST END CAPITAL LLC
One World Trade Center
Suite 4563
New York, New York 10048
ATT.: Ethan E. Benovitz
Tel.: 212-775-9299
Fax: 212-775-9311
With a copy to:
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, New York 10104
ATT.: Ira Greenstein, Esq.
Tel.: 212-468-8000
Fax: 212-468-7900
9. SURVIVAL.
The agreements, covenants representations and warranties of
the Company and the Purchaser shall survive the execution and delivery of this
Agreement and the delivery of the Securities hereunder.
IN WITNESS WHEREOF, this Securities Purchase Agreement has been duly
executed by each of the undersigned.
EASTBROKERS INTERNATIONAL
INCORPORATED
By: /s/ Martin A. Sumicharst
Name: Martin A. Sumicharst
Title: Vice Chairman
MACCABEE INVESTORS II, LLC
By: WEST END CAPITAL LLC, Manager
By: /s/ Ethan E. Benovitz
Name: Ethan E. Benovitz
Title: Managing Director
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER (THE "U. S. SECURITIES ACT"), AND MAY BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES
IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT, (C)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT, AND IN
COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, AND SUBJECT TO THE
CONDITION THAT THE CORPORATION SHALL HAVE RECEIVED A LEGAL OPINION IN FORM AND
SUBSTANCE SATISFACTORY TO IT FROM COUNSEL SATISFACTORY TO IT THAT SUCH OFFER,
SALE OR OTHER TRANSFER IS SO EXEMPT, OR (D) IN A TRANSACTION REGISTERED UNDER
THE U.S. SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS
Dec. 11, 1998
To: Eastbrokers International, Inc.
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(print name)
6300 S. Syracuse Way
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(print address)
Suite 400
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Englewood, CO 80111
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Dear Sirs:
RE: Subscription for Shares of Eastbrokers International Incorporated
We hereby confirm your irrevocable agreement to subscribe for and
purchase, subject to the terms and conditions set forth herein, 125,000 shares
of restricted common stock (the "Securities") of Eastbrokers International
Incorporated (the "Corporation"), for an aggregate purchase price of $500,000
($4.00 per share) (the "Purchase Price").
You (hereinafter referred to as the "Subscriber" or "you") acknowledge
and agree that you have not received an offering memorandum or similar document
and that your decision to enter into this Agreement and to purchase the
Securities has not been made upon any verbal or written representation as to
fact or otherwise made by the Corporation or any other person and that your
decision is based entirely upon your own investigation and due diligence
concerning the corporation. You acknowledge, however, that you have received
from the Corporation a copy of its Form 10-KSB for the fiscal year ended March
31, 1998 and a copy of its Form 10-QSB for the period ended June 30, 1998.
CORPORATION'S CONDITIONS TO CLOSING
The Corporation's obligation to sell and deliver the Securities to you
is conditional upon receipt by the Corporation of documentation relating to the
transaction in form and substance satisfactory to counsel to the Corporation and
you. At any time prior to the Closing Date, the Corporation may choose, in its
sole discretion, not to accept your subscription, in whole or in part. Any
payment for the subscription of Securities not accepted by the Corporation will
be returned to you without interest or deduction. Unless you have returned a
signed copy of this Agreement together with payment of the aggregate Purchase
Price to the Corporation at the address set forth below on or before the Closing
Date, your subscription will not be deemed complete. The Corporation must accept
the completed subscription on or before the Closing Date, otherwise this
Agreement will be deemed not to have been accepted.
CLOSING
Delivery and payment for the Securities will be completed on or about
Dec. 15, 1998 (the "Closing Date") at the offices of EBI Securities Corporation,
6300 S. Syracuse Way, Suite 400, Englewood, Colorado 80111. Payment for the
Securities subscribed for shall be made as described below.
PAYMENT OF PURCHASE PRICE
You will pay the Purchase Price by transferring to the corporation
140,000 free trading shares of Coyote Sports, Inc. ("COYT") on the Closing Date.
At any time prior to six months from the date of the Closing, you shall have the
right to repurchase all of the shares of COYT by payment to the Corporation of
$500,000, and the Corporation shall be obligated to deliver the shares to you
upon such payment. Similarly, during the same six months, the Corporation shall
have a right to sell all of the shares of COYT to you, and you shall be
obligated to pay to the Corporation $500,000. Either party may exercise their
right to purchase or sell by providing written notice to the other party at
least five days prior to payment of the $500,000 and delivery of certificates
representing the shares.
ADJUSTMENT OF SHARE PURCHASED
In the event that the Corporation shall at any time within six months
from the date of this Agreement (i) issue any shares of Common Stock (other than
shares issuable upon exercise of currently outstanding warrants) at a purchase
price less than $4.00, or (ii) issue options, rights or warrants to subscribe
for or purchase Common Stock (or securities convertible into Common Stock) at an
exercise price less than $4.00, the number of shares purchased by you will be
increased to equal 175,000 multiplied by the fraction whose numerator is the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Common Stock that could be purchased at $4.00 per
share with the proceeds to the Corporation from such issuance (including any
payment required upon the exercise of any such options, rights, warrants or
convertible or exchangeable securities) and whose denominator is the number of
shares of Common Stock outstanding immediately after such issuance assuming
immediate exercise of all such options, rights, warrants and convertible or
exchangeable securities; provided, however, that the provisions of this section
shall not apply to the issuance of Common Stock upon exercise of any currently
outstanding options, rights, warrants or convertible or exchangeable securities.
REPRESENTATIONS, WARRANTIES AND COVENANTS
You represent, warrant and covenant to the Corporation (which
representations, warranties and covenants will survive the Closing Date) that
you (or the person on behalf of whom you are contracting):
1. are acquiring the Securities subscribed for hereby as principal for your
own account and not for the benefit of any other person;
2. are purchasing for investment and not with a view to the resale or
distribution of all or any part of such Securities;
3. if you are an individual, or individuals, have obtained the age of majority
and are legally competent to execute this Agreement and to take all actions
required pursuant hereto and upon acceptance by the Corporation, this
Agreement will constitute a legal, valid and binding contract enforceable
against you in accordance with its terms;
4. if you are a corporation, are a valid and subsisting corporation, have the
necessary corporate capacity and authority to execute and deliver this
Agreement and to observe and perform your covenants and obligations
hereunder and have taken all necessary corporate action in respect thereof,
or if you are a partnership, limited liability company or other form of
unincorporated organization, you have the necessary legal capacity and
authority to execute and deliver this Agreement and to observe and perform
your covenants and obligations hereunder and have obtained all necessary
approvals in respect thereof, and in either case, upon acceptance by the
Corporation, this Agreement will constitute a legal, valid and binding
contract enforceable against you in accordance with its terms;
5. have such knowledge and experience in financial and business matters and
private investments of the type contemplated hereby, and are either (a)
experienced in or (b) knowledgeable with regard to, the business of the
Corporation as to be capable of evaluating the merits and risks of the
investment and are able to bear the economic risk of loss of the
investment;
6. have been provided with the opportunity to ask questions and solicit
information concerning the Corporation, its business and its financial
condition and prospects, have utilized such access to your satisfaction and
have received from the Corporation all information requested;
7. acknowledge that you have not purchased the Securities as a result of any
form of general solicitation or general advertising including
advertisements, article, notices or other communications published in any
newspaper, magazine or similar media or broadcast over radio, or television
or any seminar or meeting whose attendees have been invited by general
solicitation or general advertising;
8. assuming compliance by the Corporation with all securities laws applicable
to an issuer and seller of securities, are purchasing the Securities in
compliance with all applicable securities laws in the jurisdiction of your
residence;
9. understand that the Securities have not been and will not be registered
under the U.S. Securities Act or any applicable state securities laws and
that the contemplated sale is being made in reliance on a private placement
exemption to accredited investors (as such term is defined in Rule 501(a)
of the U.S. Securities Act, "Accredited Investors");
10. are an Accredited Investor and are acquiring the Securities for your own
account or for the account of an Accredited Investor as to which you
exercise sole investment discretion and not with a view to any resale,
distribution or other disposition of the Securities in violation of the
United States securities laws or applicable state securities laws and you
have completed the Accredited Investor Questionnaire attached hereto as
Schedule "B";
11. agree that if you decide to offer, sell at otherwise transfer any of the
Securities, you will not offer, sell or otherwise transfer any of such
securities, directly or indirectly, unless (i) the sale is to the
Corporation; (ii) the sale is made outside the United States in compliance
with the requirements of Rule 904 of Regulation S: (iii) the sale is made
pursuant to an exemption from registration under the U.S. Securities Act
and in compliance with any applicable state securities laws; and (iv) the
sale is made pursuant to registration under the federal securities laws and
in compliance with any applicable state securities laws.
12. understand and acknowledge that upon the original issuance thereof and
until such time as the same is no longer required under applicable
requirements of the U.S. Securities Act or applicable state securities
laws, certificates representing the Securities and all certificates issued
in exchange therefor or in substitution thereof, shall bear the following
legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES
AND REGULATIONS PROMULGATED THEREUNDER (THE "U.S. SECURITIES ACT"), AND MAY
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B)
OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER
THE U. S. SECURITIES ACT, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE U.S. SECURITIES ACT, AND IN COMPLIANCE WITH ANY APPLICABLE STATE
SECURITIES LAWS, AND SUBJECT TO THE CONDITION THAT THE CORPORATION SHALL
HAVE RECEIVED A LEGAL OPINION IN FORM AND SUBSTANCE SATISFACTORY TO IT FROM
COUNSEL SATISFACTORY TO IT THAT SUCH OFFER, SALE OR OTHER TRANSFER IS SO
EXEMPT, OR (D) IN A TRANSACTION REGISTERED UNDER THE U.S. SECURITIES ACT
AND ANY APPLICABLE STATE SECURITIES LAWS."
and that all certificates representing the Securities and all certificates
issued in exchange therefor or in substitution thereof, shall bear the same
legend.
13. consent to the Corporation making a notation on its records or giving
instructions to any transfer agent of the Securities in order to implement
the restrictions on transfer set forth and described herein;
14. if required by applicable securities legislation, regulatory policy or
order or by any securities commission, stock exchange or other regulatory
authority, will execute, deliver and file and otherwise reasonably assist
the Corporation in filing reports, questionnaires and other similar
documents with respect to the issue of the Securities;
15. are entirely at arm's length to the Corporation; and
16. have not, in connection with your decision to subscribe for and purchase
the Securities hereunder, relied upon the Corporation or the Corporation's
lawyers or advisors for any legal or tax advice and have, if desired, in
all cases sought the advice of your own legal counsel and tax advisors.
The foregoing representations, warranties and covenants are made by you with the
intent that they survive the purchase of the Securities hereunder and shall
continue in full force and effect notwithstanding any subsequent disposition by
you of the Securities. The Corporation may rely upon such representations,
warranties and covenants in determining your suitability as a purchaser of the
Securities and you hereby agree to indemnify the Corporation and its officers,
directors and agents against all losses, claims, costs, expenses and damages or
liabilities which the Corporation may suffer or incur caused by or arising from
the Corporation's reliance thereon. You undertake to notify the Corporation
immediately of any change in any representation, warranty or other information
relating to you set forth herein which takes place prior to the Closing Date of
the purchase of the Securities subscribed for hereby.
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
The Corporation represents and warrants to you (which representations and
warranties will survive the Closing Date for a period of two years) that:
1. The Corporation is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
2. This Agreement and the Securities subscribed for hereby (collectively, the
"Investment Documents") have been duly authorized by all necessary action,
executed and delivered by the Corporation and constitute the valid and
binding obligations of the Corporation, enforceable in accordance with
their respective terms. The execution, delivery and performance by the
Corporation of the Investment Documents (including without limitation the
issuance of the Common Shares) do not require the consent of any party or
regulatory authority which has not been obtained. Neither the execution nor
delivery of the Investment Documents nor the performance by the Corporation
of its obligations hereunder will constitute a violation of or default
under (a) any indenture, agreement or other instrument to which the
Corporation is a party or by which it bound; or (b) the Corporation's
charter or by-laws.
3 The Securities, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein will be issued in
compliance with all applicable U.S. federal and state securities laws.
4. QUALIFICATION. The Corporation and each of its subsidiaries are duly
qualified to do business and are in good standing in each jurisdiction
wherein such qualification is necessary and where failure to so qualify
could have a material adverse effect on the conditional, financial or
otherwise of the Corporation.
5. NON-CONTRAVENTION. The execution and delivery of this Agreement and the
certificates representing the Securities and all other transactions
contemplated by this Agreement do not and will not with or without the
giving of notice or the lapse of time or both; (i) result in the creation
or imposition of any lien, security interest, charge or encumbrance upon
any of the properties or assets of the Corporation; (ii) violate or
contravene any applicable law, rule or regulation or any applicable decree,
judgment or order of any court or regulatory body, administrative agency or
other governmental body having jurisdiction over the Corporation or any of
its properties or assets; or (iii) have any material adverse effect on any
permit, certificate, registration, approval, consent, license or franchise
necessary for the Corporation to own or lease and operate any of its
properties and to conduct its business.
6 APPROVALS. No authorization, approval or consent of or filing with any
court, government body, regulatory agency, self-regulatory organization or
stock exchange or shareholder of the Corporation is required to be obtained
or made by the Corporation in connection with the execution and delivery of
this Agreement or the certificates representing the Securities.
REGISTRATION RIGHTS
1. REGISTRATION. If at any time prior to the Expiration Date (as defined
below) the Company files a registration statement with the United States
Securities and Exchange Commission (the "Commission") pursuant to the U.S.
Securities Act, or pursuant to any other act passed after the date of this
Agreement, which filing provides for the sale of securities by the Company
to the public, the Company shall offer to each holder of the Securities
(each a "Holder" and together "Holders") the opportunity to include the
Securities, at the Company's sole expense. Notwithstanding anything to the
contrary, this subsection (1) shall not be applicable to a registration
statement on Forms S-4, S-8 or their successors or any other inappropriate
forms filed by the Company with the Commission. Notwithstanding the
foregoing, Holder acknowledges that the Corporation is currently preparing
a registration for resale by certain holders and that the Securities will
not be included in such registration statement unless Maccadee Investors
II, L.L.C. consents to such inclusion. The Corporation will undertake to
obtain such consent.
Participation by any Holder in a Registration Statement relating to an
underwritten offering of securities by the Corporation will be conditioned
upon such Holder's agreement to be bound by the terms of the underwriting
agreement for such offering. If the underwriter determines that the number
of securities proposed to be offered for sale pursuant to such Registration
Statement by the Holders and all other security holders of the Corporation
entitled to participate in such Registration Statement would have an
adverse effect on the offering, then the total number of securities to be
offered by each Holder and each other selling security holder will be
reduced and shall equal the number which bears the same ratio to the
maximum number of securities that the underwriter believes may be included
for all the selling security holders (including the Holder) as the original
number of securities proposed to be sold by the Holder bears to the total
original number of securities proposed to be offered by all of the Holders
and all other selling security holders.
Notwithstanding any of the foregoing provisions, the Corporation shall
have the right at any time to elect not to file any such proposed
Registration Statement, or to withdraw the same after the filing but prior
to the effective date thereof. In addition, the Corporation may require
each Holder of Securities to be registered under a Registration Statement
to furnish to the Corporation such information regarding such Holder and
the distribution of such Holder's Securities thereunder as the Corporation
may from time to time reasonably require for inclusion in such Registration
Statement, and the Corporation may exclude from such registration the
Securities of any Holder that fails to furnish such information within a
reasonable time after receiving such request.
The Company shall comply with the requirements of this subsection (1) at
its own expense. That expense shall include, but not be limited to, legal,
accounting, consulting, printing, federal and state filing fees, NASD fees,
out-of-pocket expenses incurred by counsel, accountants and consultants
retained by the Company, and miscellaneous expenses directly related to the
registration statement or offering statement and the offering. However,
this expense shall not include the portion of any underwriting commissions,
transfer taxes and the underwriter's accountable and nonaccountable expense
allowances attributable to the offer and sale of the Securities, all of
which expenses shall be borne by the Holder or Holders of the Securities
registered or qualified.
In the event that the Company registers or qualifies the Securities, the
Company shall include in the registration statement or qualification, and
the prospectus included therein, all information and materials necessary to
comply with the applicable statutes and regulations of general application
so as to permit the public sale of the Securities.
2. REGISTRATION PROCEDURES. The Corporation will use its reasonable
commercial efforts to cause the Registration Statement to become and remain
effective. Thereafter, until such Securities have been sold or until
_______________ or such time as the Securities may be publicly sold in the
United States without registration under the U.S. Securities Act, whichever
is the shortest period of time (the last day of such shortest period is
referred to herein as the "Expiration Date") the Corporation shall:
(a) Prepare and file with the Commission (the "Commission") such
amendments and supplements to the Registration Statement and
the prospectus included therein (including any preliminary
prospectus) as may be necessary to keep the Registration
Statement effective;
(b) Furnish to you such reasonable number of copies of the
Registration Statement, preliminary prospectus, final
prospectus and such other documents as you may reasonably
request in order to facilitate the public offering of such
Securities;
(c) Use its reasonable commercial efforts to register or qualify
the Securities covered by the Registration Statement under the
state securities laws of such jurisdictions as you may
reasonably request (provided that the Corporation will not be
required to; (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to
qualify but for this subparagraph (c); (ii) subject itself to
taxation in any such jurisdiction; or (iii) consent to general
service of process in any such jurisdiction);
(d) Notify you promptly after it shall receive notice thereof, of
the time when the Registration Statement has become effective
or any amendment or supplement to the Registration Statement
or any prospectus included therein has been filed;
(e) Notify you promptly of any request by the Commission for the
amending or supplementing of the Registration Statement or
prospectus or for additional information;
(f) Prepare and file with the Commission, promptly upon your
request any amendments or supplements to the Registration
Statement or prospectus which, in the opinion of your counsel,
are required under the U.S. Securities Act in connection with
your distribution of Securities; and
(g) Advise you promptly after the Corporation shall receive notice
or obtain knowledge thereof, of the issuance of any stop order
by the Commission suspending the effectiveness of the
Registration Statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
3. DELAY PERIODS; SUSPENSION OF SALES
(a) If at any time prior to the Expiration Date, the Corporation
determines that compliance by the Corporation with its
disclosure obligations in connection with a Registration
Statement may require the disclosure of information which
the Board of Directors of the Corporation has Identified as
material and which the Board of Directors has determined
that the Corporation has a bona fide business purpose for
preserving as confidential, then the Corporation shall not
be required to maintain the effectiveness of or amend or
supplement the Registration Statement for a period (an
"Information Delay Period") expiring three business days
after the earlier to occur of (A) the date on which such
material information is disclosed to the public or ceases to
be material or the Corporation is able to so comply with its
disclosure obligations and Commission requirements or (B) 45
days after the Corporation notifies the Holders of such
determination. There shall not be more than four Information
Delay Periods, and there shall not be two Information Delay
Periods during any contiguous 135 day period.
(b) If at any time prior to the Expiration Date, the Corporation
is advised by an investment banking firm that sales of
Securities pursuant to a Registration Statement at such time
would materially adversely affect any immediately planned
underwritten public offering of securities by the Corporation
of at least $5 million, the Corporation shall not be required
to maintain the effectiveness of such Registration Statement
or amend or supplement such Registration Statement for a
period (a "Transaction Delay Period") commencing on the date
of pricing of such public offering and expiring three business
days after the earliest to occur of (i) the abandonment of
such financing or (ii) 90 days after the completion of such
financing. There shall not be more than two Transaction Delay
Periods.
(c) A Transaction Delay Period and an Information Delay Period are
hereinafter collectively referred to as "Delay Periods" or a
"Delay Period." The Corporation will give prompt written
notice to each Holder of each Delay Period. Such notice shall
be given (i) in the case of a Transaction Delay Period, at
least 20 days in advance of the commencement of such Delay
Period and (ii) in the Case of an Information Delay Period, as
soon as practicable after the Board of Directors makes the
determination referenced in Section 3(a). Such notice shall
state to the extent, if any as is practicable, an estimate of
the duration of Such Delay Period. Each Holder, by his
acceptance of any Securities, agrees that (i) upon receipt of
such notice of a Delay Period it will forthwith discontinue
disposition of Securities pursuant to the Registration
Statement and (ii) will not deliver any prospectus forming a
part of the Registration Statement in connection with any sale
of Securities until the expiration of such Delay Period.
4. INDEMNIFICATION BY THE CORPORATION. Subject to the conditions set forth
below, in connection with any registration of Securities pursuant to
Section 1 above, the Corporation agrees to indemnify and hold harmless
you, each person. if any, who controls you within the meaning of
Section 15 of the U.S. Securities Act and your officers, directors and
agents as follows:
(a) Against any and all loss, claim, damage and expense whatsoever
arising out of or based upon (including but not limited to,
any and all expense whatsoever reasonably incurred in
investigating, preparing or defending any litigation,
commenced or threatened, or any claim whatsoever based upon)
any untrue or alleged material fact contained in any
preliminary prospectus (if used prior to the effective date
of the Registration Statement), the Registration Statement
or the prospectus (as from time to time amended and
supplemented), or in any application or other document
executed by the Corporation or based upon written
information furnished by the Corporation filed in any
jurisdiction in order to qualify the Corporation's
securities under the securities laws thereof; or the
omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the
statements therein not misleading; or any other violation of
applicable federal or state statutory or regulatory
requirements or limitations relating to action or inaction
by the Corporation in the course of preparing, filing, or
implementing the Registration Statement; provided however,
that the indemnity contained in this subsection (a) shall
not apply to a holder of Registrable Securities with respect
to any loss, claim, damage, liability or action arising out
of or based upon any untrue or alleged untrue statement or
omission made in reliance upon and in conformity with any
information furnished in writing to the Corporation by or on
behalf of such holder expressly for use in connection
therewith or arising out of any action or inaction of any
such holder;
(b) Subject to the proviso contained in subsection (a) above,
against any and all loss, liability, claim, damage and expense
whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, commenced or threatened or of
any claim whatsoever based upon any such untrue statement or
omission or any such alleged untrue statement or omission
(including but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing or defending
against any such litigation or claim) if such settlement is
effected with the written consent of the Corporation.
(c) The Corporation shall be entitled to participate at its own
expense in the defense of any suit brought to enforce any such
claim, but if the Corporation elects to assume the defense,
such defense shall be conducted by counsel chosen by it
provided that such counsel is reasonably satisfactory to you
and any other holders of Registrable Securities or controlling
persons who are defendants in any suit so brought. In the
event the Corporation elects to assume the defense of any such
suit and retain such counsel, such holders or controlling
persons shall, after the date they are notified of such
election, bear the fees and expenses of any counsel thereafter
retained by them as well as any other expenses thereafter
incurred by them in connection with the defense thereof
unless, in the reasonable opinion of such holders or
controlling persons, separate representation is advisable
because of conflict in the interests of the parties, in which
case the Corporation shall continue to pay the fees of such
counsel.
5. INDEMNIFICATION OF CORPORATION. You agree to indemnify and hold
harmless the Corporation, any underwriters for the offering and each
of their officers and directors and agents and each other person, if
any, who controls the Corporation or such underwriters within the
meaning of Section 15 of the U.S. Securities Act against any and all
such losses, liabilities, claims, damages and expenses as are
indemnified against by the Corporation under Section 5; provided
however, that such indemnification shall be limited to statements or
omissions, if any, made (or in settlement of any litigation effected
with your written consent, alleged to have been made) in any
preliminary prospectus, the Registration Statement or prospectus or
any amendment or supplement thereof or any application or other
document in reliance upon and in conformity with, written information
furnished by you or on your behalf expressly for use in any
preliminary prospectus, the Registration Statement or prospectus or
any amendment or supplement thereof. In case any action shall be
brought against the Corporation or any other person so indemnified, in
respect of which indemnity may be sought against you, you shall have
the rights and duties given to the Corporation, and each other person
so indemnified shall have the rights and duties given to you by the
provisions of Section 5(c).
PURCHASER'S CONDITIONS TO CLOSING
Your obligation to purchase the Securities as herein provided shall be
subject to the following conditions:
(a) The Corporation shall have complied with all terms and
conditions of this Agreement to be complied with or performed
by the Corporation at or prior to the time of Closing.
GENERAL PROVISIONS
1. This Agreement is governed by the law of the State of Colorado.
2. This Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be
given, except in writing signed by each party.
3. All notices and other communications provided for or permitted
hereunder shall be made in writing and delivered by hand-delivery,
first class mail, telex, telecopier, or air courier guaranteeing
overnight delivery:
(a) if to a Holder, at the address of such Holder maintained by the
Corporation's transfer agent; and
(b) if to the Corporation, at its principal executive office,
attention Vice Chairman;
or to such other addresses as the recipient party has specified to the
sending party by prior written notice to the sending party.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; one business
day after being delivered to a next-day air courier; five business days
after being deposited in the mail; when answered back, if faxed; and
when receipt is acknowledged by the recipient's telecopier machine, if
telecopied.
4. This Agreement contains the entire agreement of the parties with
respect to the subject matter hereof and supercedes all prior and
contemporaneous agreements, written or oral, with respect to the
subject matter hereof.
If the foregoing is in accordance with your understanding, please evidence your
agreement to purchase the Securities on the terms and conditions set forth above
by signing the enclosed duplicate copy of this letter where indicated and
returning it as soon as possible (and in no event later than the Closing Date to
the Corporation.
Yours very truly,
Eastbrokers International Incorporated
/s/ Martin A. Sumichrast
By:-----------------------------------
TO: EASTBROKERS INTERNATIONAL INCORPORATED
The undersigned hereby irrevocably accepts and agrees to be bound by
the foregoing terms and conditions and directs that the Securities be registered
and delivered in accordance with the registration and delivery instructions set
forth below:
DIRECTIONS AS TO REGISTRATION AND DELIVERY
Name of Registered Holder: Investor Resource Services, Inc.
Address of Registered Holder: 932 Burke Street
Winston-Salem, NC 27101
Delivery Instructions: ---------------------------------
---------------------------------
---------------------------------
DATED this 11th day of December, 1998.
Investor Resource Services, Inc.
- --------------------------------------------
(Subscriber's Name)
/s/ Daniel D. Starczewski
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(Signature)
Daniel D. Starczewski
- --------------------------------------------
(Print name of person signing)
President
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(Title)
<PAGE>
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended ("Act"), and may not be offered or sold
except pursuant to (i) an effective registration statement under the Act, (ii)
to the extent applicable, Rule 144 under the Act (or any similar rule under such
Act relating to the disposition of securities), or (iii) an opinion of counsel,
if such opinion shall be reasonably satisfactory to counsel to the issuer, that
an exemption from registration under such Act is available.
312,583 Placement Agents' Warrants
PAW 3
VOID AFTER FEBRUARY 19, 2003
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
EASTBROKERS INTERNATIONAL INCORPORATED
THIS CERTIFIES THAT FOR VALUE RECEIVED
EASTBROKERS NORTH AMERICA, INC.
or registered assigns (the "Registered Holder") is the owner of the number of
Placement Agents' Common Stock Purchase Warrants ("Warrants") specified above.
Each Placement Agents' Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this Certificate and
the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.05 par value ("Common Stock"), of EASTBROKERS
INTERNATIONAL INCORPORATED, a Delaware corporation (the "Company"), at any time
between the Initial Exercise Date (as herein defined) and the Expiration Date
(as hereinafter defined), upon the presentation and surrender of this Placement
Agents' Warrant Certificate with the Subscription Form on the reverse hereof
duly executed, at the corporate office of the Company, accompanied by payment of
$7.00 per share of common stock, subject to adjustment from time to time
pursuant to the terms and provisions of SECTION 9 hereof and to prevent
dilution, for a three (3) year period commencing one (1) year from the date of
the initial closing under the offer (the "Closing Date") and terminating four
(4) years thereafter and subject to the Company's right in its sole discretion
upon thirty (30) days written notice to reduce the purchase price upon notice to
all Warrant Holders, in lawful money of the United States of America in cash or
by official bank or certified check made payable to Eastbrokers International
Incorporated.
This Placement Agents' Warrant Certificate and each Placement Agents'
Warrant represented hereby are issued pursuant to and are subject in all
respects to the terms and conditions set forth in the Warrant Agreement (the
"Warrant Agreement") dated February 20, 1998, by and between the Company and the
Registered Holder. Terms not defined herein shall have the meanings assigned to
them in the Warrant Agreement.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and/or the number of shares of Common Stock
subject to purchase upon the exercise of each placement Agents' Warrant
represented hereby are subject to modifications or adjustment.
Each Placement Agents' Warrant represented hereby is exercisable at the
option of the Registered Holder, but no fractional shares of Common Stock will
be issued. In the case of the exercise of less than all the Placement Agents'
Warrants represented hereby, the Company shall cancel this Placement Agents'
Warrant Certificate upon the surrender hereof and shall execute and deliver a
new Placement Agents' Warrant Certificate or Placement Agents' Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Initial Exercise Date" shall mean February 20, 1999.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
February 19, 2003. If such date shall in the State of New York be a holiday or a
day on which the banks are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
This Placement Agents' Warrant Certificate is exchangeable, upon the
surrender hereof by the Registered Holder at the corporate office of the
Company, for a new Placement Agents' Warrant Certificate or Placement Agents'
Warrant Certificates of like tenor representing an equal aggregate number of
Placement Agents' Warrants, each of such new Placement Agents' Warrant
Certificates to represent such number of Placement Agents' Warrants as shall be
designated by such Registered Holder at the time of such surrender. Upon due
presentment with any transfer fee in addition to any tax or other governmental
charge imposed in connection therewith, for registration of transfer of this
Placement Agents' Warrant Certificate at such office, a new Placement Agents'
Warrant Certificate or Placement Agents' Warrant Certificates representing an
equal aggregate number of Placement Agents' Warrants will be issued to the
transferee in exchange therefor, subject to the limitations provided in the
Placement Agents' Warrant Agreement.
Prior to the exercise of any Placement Agents' Warrant represented hereby,
the Registered Holder shall not be entitled to any rights of a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Placement Agents' Warrant represented hereby (notwithstanding any notations
of ownership or writing hereon made by anyone other than a duly authorized
officer of the Company) for all purposes and shall not be affected by any notice
to the contrary.
This Placement Agents' Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Placement Agents' Warrant
Certificate to be duly executed, manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
EASTBROKERS INTERNATIONAL
INCORPORATED
/s/ Martin A. Sumichrast
By:_______________________________
Name:
Title:
/s/ John Paul DeVito
By:_______________________________
Name:John Paul DeVito
Title: V.P.
Date: February 20, 1998
[Seal]
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Placement
Agents' Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Placement Agents' Warrants represented by this Placement Agents' Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Placement Agents' Warrants, and requests that certificates for such securities
shall be issued in the name of
---------------------------------------------------
(please insert taxpayer identification or other identifying number)
and be delivered to
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
(please print or type name and address)
and if such number of Placement Agents' Warrants shall not be all the Placement
Agents' Warrants evidenced by this Placement Agents' Warrant Certificate, that a
new Placement Agents' Warrant Certificate for the balance of such Placement
Agents' Warrants be registered in the name of, and delivered to, the Registered
Holder at the address stated below:
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
(Address)
--------------------------------
(Date)
--------------------------------
(Taxpayer Identification Number)
SIGNATURE GUARANTEED
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Placement
Agents' Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
---------------------------------------------------
(please insert taxpayer identification or other identifying number)
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
(please print or type name and address)
of the Placement Agents' Warrants represented by this Placement Agents' Warrant
Certificate, and hereby irrevocably constitutes and appoints
________________________________ Attorney to transfer this Placement Agents'
Warrant Certificate on the books of the company, with full power of substitution
in the premises..
--------------------------------
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS PLACEMENT AGENTS' WARRANT CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER,
AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF
THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
<PAGE>
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended ("Act"), and may not be offered or sold
except pursuant to (i) an effective registration statement under the Act, (ii)
to the extent applicable, Rule 144 under the Act (or any similar rule under such
Act relating to the disposition of securities), or (iii) an opinion of counsel,
if such opinion shall be reasonably satisfactory to counsel to the issuer, that
an exemption from registration under such Act is available.
70,000 Placement Agents' Warrants
VOID AFTER FEBRUARY 19, 2003
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
EASTBROKERS INTERNATIONAL INCORPORATED
THIS CERTIFIES THAT FOR VALUE RECEIVED
MARTIN A. SUMICHRAST
or registered assigns (the "Registered Holder") is the owner of the number of
Placement Agents' Common Stock Purchase Warrants ("Warrants") specified above.
Each Placement Agents' Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this Certificate and
the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.05 par value ("Common Stock"), of EASTBROKERS
INTERNATIONAL INCORPORATED, a Delaware corporation (the "Company"), at any time
between the Initial Exercise Date (as herein defined) and the Expiration Date
(as hereinafter defined) , upon the presentation and surrender of this Placement
Agents' Warrant Certificate with the Subscription Form on the reverse hereof
duly executed, at the corporate office of the Company, accompanied by payment of
$7.00 per share of common stock, subject to adjustment from time to time
pursuant to the terms and provisions of SECTION 9 hereof and to prevent
dilution, for a three (3) year period commencing one (1) year from the date of
the initial closing under the offer (the "Closing Date") and terminating four
(4) years thereafter and subject to the Company's right in its sole discretion
upon thirty (30) days written notice to reduce the purchase price upon notice to
all Warrant Holders, in lawful money of the United States of America in cash or
by official bank or certified check made payable to Eastbrokers International
Incorporated.
This Placement Agents' Warrant Certificate and each Placement Agents'
Warrant represented hereby are issued pursuant to and are subject in all
respects to the terms and conditions set forth in the Warrant Agreement (the
"Warrant Agreement") dated December 28, 1998, by and between the Company and the
Registered Holder. Terms not defined herein shall have the meanings assigned to
them in the Warrant Agreement.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and/or the number of shares of Common Stock
subject to purchase upon the exercise of each Placement Agents' Warrant
represented hereby are subject to modifications or adjustment.
Each Placement Agents' Warrant represented hereby is exercisable at the
option of the Registered Holder, but no fractional shares of Common Stock will
be issued. In the case of the exercise of less than all the Placement Agents'
Warrants represented hereby, the Company shall cancel this Placement Agents'
Warrant Certificate upon the surrender hereof and shall execute and deliver a
new Placement Agents' Warrant Certificate or Placement Agents' Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Initial Exercise Date" shall mean February 20, 1999.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
February 19, 2003. If such date shall in the State of New York be a holiday or a
day on which the banks are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
This Placement Agents' Warrant Certificate is exchangeable, upon the
surrender hereof by the Registered Holder at the corporate office of the
Company, for a new Placement Agents' Warrant Certificate or Placement Agents'
Warrant Certificates of like tenor representing an equal aggregate number of
Placement Agents' Warrants, each of such new Placement Agents' Warrant
Certificates to represent such number of Placement Agents' Warrants as shall be
designated by such Registered Holder at the time of such surrender. Upon due
presentment with any transfer fee in addition to any tax or other governmental
charge imposed in connection therewith, for registration of transfer of this
Placement Agents' Warrant Certificate at such office, a new Placement Agents'
Warrant Certificate or Placement Agents' Warrant Certificates representing an
equal aggregate number of Placement Agents' Warrants will be issued to the
transferee in exchange therefor, subject to the limitations provided in the
Placement Agents' Warrant Agreement.
Prior to the exercise of any Placement Agents' Warrant represented hereby,
the Registered Holder shall not be entitled to any rights of a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Placement Agents' Warrant represented hereby (notwithstanding any notations
of ownership or writing hereon made by anyone other than a duly authorized
officer of the Company) for all purposes and shall not be affected by any notice
to the contrary.
This Placement Agents' Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Placement Agents' Warrant
Certificate to be duly executed, manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
EASTBROKERS INTERNATIONAL INCORPORATED
/s/ Kevin D. McNeil
By: --------------------------------------------
Name: Kevin D. McNeil
Title: Chief Financial Officer
/s/ Martin A. Sumichrast
By: --------------------------------------------
Name: Martin A. Sumichrast
Title:
Date: December 28, 1998
[Seal]
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Placement
Agents' Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Placement Agents' Warrants represented by this Placement Agents' Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Placement Agents' Warrants, and requests that certificates for such securities
shall be issued in the name of
-------------------------------------------------------------------
(please insert taxpayer identification or other identifying number)
and be delivered to
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
(please print or type name and address)
and if such number of Placement Agents' Warrants shall not be all the Placement
Agents' Warrants evidenced by this Placement Agents' Warrant Certificate, that a
new Placement Agents' Warrant Certificate for the balance of such Placement
Agents' Warrants be registered in the name of, and delivered to, the Registered
Holder at the address stated below:
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
(Address)
------------------------
(Date)
- -----------------------------------------
(Social Security Number)
(SIGNATURE GUARANTEED)
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Placement
Agents' Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
-------------------------------------------------------------------
(please insert taxpayer identification or other identifying number)
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
-------------------------------------------------------------------
(please print or type name and address)
of the Placement Agents' Warrants represented by this Placement Agents' Warrant
Certificate, and hereby irrevocably constitutes and appoints
_________________________________ Attorney to transfer this Placement Agents'
Warrant Certificate on the books of the Company, with full power of substitution
in the premises.
-----------------------------
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS PLACEMENT AGENTS' WARRANT CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER,
AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF
THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
<PAGE>
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended ("Act"), and may not be offered or sold
except pursuant to (i) an effective registration statement under the Act, (ii)
to the extent applicable, Rule 144 under the Act (or any similar rule under such
Act relating to the disposition of securities), or (iii) an opinion of counsel,
if such opinion shall be reasonably satisfactory to counsel to the issuer, that
an exemption from registration under such Act is available.
32,583 Placement Agents' Warrants
VOID AFTER FEBRUARY 19, 2003
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
EASTBROKERS INTERNATIONAL INCORPORATED
THIS CERTIFIES THAT FOR VALUE RECEIVED
KEVIN D. MCNEIL
or registered assigns (the "Registered Holder") is the owner of the number of
Placement Agents' Common Stock Purchase Warrants ("Warrants") specified above.
Each Placement Agents' Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this Certificate and
the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.05 par value ("Common Stock"), of EASTBROKERS
INTERNATIONAL INCORPORATED, a Delaware corporation (the "Company"), at any time
between the Initial Exercise Date (as herein defined) and the Expiration Date
(as hereinafter defined) , upon the presentation and surrender of this Placement
Agents' Warrant Certificate with the Subscription Form on the reverse hereof
duly executed, at the corporate office of the Company, accompanied by payment of
$7.00 per share of common stock, subject to adjustment from time to time
pursuant to the terms and provisions of SECTION 9 hereof and to prevent
dilution, for a three (3) year period commencing one (1) year from the date of
the initial closing under the offer (the "Closing Date") and terminating four
(4) years thereafter and subject to the Company's right in its sole discretion
upon thirty (30) days written notice to reduce the purchase price upon notice to
all Warrant Holders, in lawful money of the United States of America in cash or
by official bank or certified check made payable to Eastbrokers International
Incorporated.
This Placement Agents' Warrant Certificate and each Placement Agents'
Warrant represented hereby are issued pursuant to and are subject in all
respects to the terms and conditions set forth in the Warrant Agreement (the
"Warrant Agreement") dated December 28, 1998, by and between the Company and the
Registered Holder. Terms not defined herein shall have the meanings assigned to
them in the Warrant Agreement.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and/or the number of shares of Common Stock
subject to purchase upon the exercise of each Placement Agents' Warrant
represented hereby are subject to modifications or adjustment.
Each Placement Agents' Warrant represented hereby is exercisable at the
option of the Registered Holder, but no fractional shares of Common Stock will
be issued. In the case of the exercise of less than all the Placement Agents'
Warrants represented hereby, the Company shall cancel this Placement Agents'
Warrant Certificate upon the surrender hereof and shall execute and deliver a
new Placement Agents' Warrant Certificate or Placement Agents' Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Initial Exercise Date" shall mean February 20, 1999.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
February 19, 2003. If such date shall in the State of New York be a holiday or a
day on which the banks are authorized to close, then the Expiration Date shall
mean 5:00 p.m. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
This Placement Agents' Warrant Certificate is exchangeable, upon the
surrender hereof by the Registered Holder at the corporate office of the
Company, for a new Placement Agents' Warrant Certificate or Placement Agents'
Warrant Certificates of like tenor representing an equal aggregate number of
Placement Agents' Warrants, each of such new Placement Agents' Warrant
Certificates to represent such number of Placement Agents' Warrants as shall be
designated by such Registered Holder at the time of such surrender. Upon due
presentment with any transfer fee in addition to any tax or other governmental
charge imposed in connection therewith, for registration of transfer of this
Placement Agents' Warrant Certificate at such office, a new Placement Agents'
Warrant Certificate or Placement Agents' Warrant Certificates representing an
equal aggregate number of Placement Agents' Warrants will be issued to the
transferee in exchange therefor, subject to the limitations provided in the
Placement Agents' Warrant Agreement.
Prior to the exercise of any Placement Agents' Warrant represented hereby,
the Registered Holder shall not be entitled to any rights of a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Placement Agents' Warrant represented hereby (notwithstanding any notations
of ownership or writing hereon made by anyone other than a duly authorized
officer of the Company) for all purposes and shall not be affected by any notice
to the contrary.
This Placement Agents' Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Placement Agents' Warrant
Certificate to be duly executed, manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
EASTBROKERS INTERNATIONAL INCORPORATED
/s/ Martin A. Sumichrast
By: ------------------------------------------
Name: Martin A. Sumichrast
Title:
/s/ Kevin D. McNeil
By: ------------------------------------------
Name: Kevin D. McNeil
Title:
Date: December 28, 1998
[Seal]
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Placement
Agents' Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Placement Agents' Warrants represented by this Placement Agents' Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Placement Agents' Warrants, and requests that certificates for such securities
shall be issued in the name of
----------------------------------------------------------------------
(please insert taxpayer identification or other identifying number)
and be delivered to
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
(please print or type name and address)
and if such number of Placement Agents' Warrants shall not be all the Placement
Agents' Warrants evidenced by this Placement Agents' Warrant Certificate, that a
new Placement Agents' Warrant Certificate for the balance of such Placement
Agents' Warrants be registered in the name of, and delivered to, the Registered
Holder at the address stated below:
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
(Address)
------------------------
(Date)
--------------------------------------------
(Taxpayer Identification Number)
(SIGNATURE GUARANTEED)
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Placement
Agents' Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
----------------------------------------------------------------------
(please insert taxpayer identification or other identifying number)
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
(please print or type name and address)
of the Placement Agents' Warrants represented by this Placement Agents' Warrant
Certificate, and hereby irrevocably constitutes and appoints
_________________________________ Attorney to transfer this Placement Agents'
Warrant Certificate on the books of the Company, with full power of substitution
in the premises.
---------------------------
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS PLACEMENT AGENTS' WARRANT CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER,
AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF
THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of December 31, 1998, between Eastbrokers
International, Inc., a Delaware corporation ("Company") and Martin A. Sumichrast
("Employee").
WHEREAS, the Employee is currently serving as Chairman, Chief Executive
Officer and President of the Company;
WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions for the employment relationship of the Employee with the
Company;
WHEREAS, the Board of Directors of the Company ("Board") has approved and
authorized the entry into this Agreement with the Employee;
NOW, THEREFORE, it is AGREED as follows;
1. EMPLOYMENT. During the term of this Agreement the Employee shall be
employed as Chairman, Chief Executive Officer and President of the Company. The
Employee shall render executive policy and other management services to the
Company of the type customarily performed by persons serving in similar
executive officer capacities. The Employee shall devote such portion of his
working time to the Company as is reasonably necessary to the business of the
Company. During the term of this Agreement, there shall be no material increase
or decrease in the duties and responsibilities of the Employee otherwise than as
provided herein, unless the parties otherwise agree in writing. The Company
shall use its best efforts during the term of this Agreement to cause die
Employee to be elected to the Board.
2. COMPENSATION.
(a) SALARY. The Company agrees to pay the Employee during the term
of this Agreement A salary at an annual rate equal to $240,000, with such
subsequent increases in salary during the term of this Agreement as may be
determined by the board. In determining salary increases, the Board may
compensate the Employee for increases in the cost of living and may also provide
for performance or merit increases. The salary of the Employee shall not be
decreased at any time during the term of this Agreement from the amount then in
effect unless the Employee otherwise agrees in writing. Participation in
deferred compensation, discretionary bonus, retirement and other employee
benefit plans and in fringe benefits shall not reduce the salary payable to the
Employee under this Section 2(a). The salary under this Section 2(a) shall be
payable to the Employee not less frequently than monthly. The Employee shall not
be entitled to receive fees for serving as a director of the Company or of any
subsidiary or affiliate of the Company or for serving as a member of any
committee of any such board of directors.
<PAGE>
(b) PERFORMANCE BONUS. In addition to his salary under Section 2(a)
above, the Company will pay to the Employee a quarterly Performance bonus of 1%
of total revenue of the Company in excess of $6,000,000 per quarter. The
performance bonus shall be payable 30 days following the filing of the Company's
quarterly 10-Q and Annual Report 10-K.
3. LONG TERM STOCK INCENTIVE. In consideration for Employee entering into
this five year employment Agreement, the Company has deemed it advisable and in
the best interests of the Company that it enter into an Agreement with Employee
relating to the sale of shares of stock in the Company, whereby, the Company
agrees to sell to Employee 200,000 shares of its Common Stock, par value $.05,
of the Company at a price of $3.00 per share in exchange for Employee issuing to
the Company a Promissory Note in the amount of $600,000 with principal and
interest on the Note payable to the Corporation five years from the making of
said Note.
3. DISCRETIONARY AND PERFORMANCE INCENTIVE BONUSES. During the term of this
Agreement, the Employee shall be entitled to participate in an equitable manner
with all other executive employees of the Company in such discretionary bonuses
as may be authorized, declared and paid by the Board to its executive employees.
4. INSURANCE, RETIREMENT AND EMPLOYEE BENEFIT PLANS: FRINGE BENEFITS:
BUSINESS EXPENSES.
(a) LIFE INSURANCE. The Company will pay the premiums on a life
insurance policy on the life of the Employee providing a death benefit of not
less than $1,000,000 ("Policy"). The Company will be the owner of such life
insurance policy1 and upon the death of the Employee, the Company would be paid
from the insurance proceeds an amount equal to the total premiums it paid under
the Policy, with the remaining proceeds to be paid to the Employee's designated
beneficiary
(b) OTHER BENEFITS AND PERQUISITES. The Employee shall be entitled
to participate in any plan of the Company relating to stock options, restricted
stock, employee stock purchase or ownership, pension, thrift, profit sharing,
group life insurance, medical coverage, education or other retirement or
employee benefit plans or arrangements that the Company has adopted or may adopt
for the benefit of its employees or executive officers. The Employee shall also
be entitled to participate in, or enjoy the benefit of; any other fringe
benefits or perquisites that are now or may be OF become applicable to the
Company's executive employees. 1~he Employee shall also be provided with the use
of a suitable automobile at Company expense and will be entitled to have access
to and use, consistent with the rules and regulations of such facility, a club
membership to be obtained in the name of the Company. The Employee shall account
to the Company for the business use of such automobile and club.
(c) BUSINESS EXPENSES. During the term of the employee's
employment by the Company5 the Company shall promptly reimburse the Employee for
all reasonable and customary expenses incurred by the Employee in performing
services for the Company, including all expenses of travel and living expenses
while away from home on business or at the request of and in the service of the
Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.
5. TERM. The initial term of employment under this Agreement shall be for
the five-year period from the date hereof. This Agreement shall be automatically
renewed for an additional five-year term, unless either Employee or the Company
gives contrary written notice to the other party hereto not less than 10 days
before the scheduled expiration of the term of this Agreement. Each term and all
such renewed terms are collectively referred to herein as the term of this
Agreement.
6. VOLUNTARY ABSENCES: VACATIONS. The Employee shall be entitled, without
loss of pay1 to be absent voluntarily for reasonable periods of time from die
PERFORMANCE of the duties and responsibilities under this Agreement. All such
voluntary absences shall count as paid vacation time, unless the Board otherwise
approves. The Employee shall be entitled to an annual paid vacation of at least
six weeks per year or such longer period as the Board may approve. The timing of
paid vacations shall be scheduled in a reasonable manner by the Employee.
7. TERMINATION OF EMPLOYMENT. The Employee's employment may be terminated
without any breach of this Agreement only under the following circumstances:
(a) DEATH. The Employee's employment shall terminate upon his
death.
(b) DISABILITY. The Company may terminate the Employee's employment
because of disability. For this purpose, "Disability" shall MEAN the inability
of the Employee to perform his duties under this Agreement because of physical
or mental illness or incapacity for a continuous period of six months during
which the Employee shall have been absent from his duties under this Agreement
on a substantially full-time basis.
(c) CAUSE. The Company may terminate the Employee's employment for
Cause. For purposes of this Agreement, the Company shall have "Cause" to
terminate the Employee's employment only in the event of (l) the willful and
continued failure by the Employee t" substantially perform his duties hereunder
(other than any such failure resulting from the Employee's inability to perform
such duties as a result of physical or mental illness or incapacity or any such
actual or anticipated failure after the delivery of a Notice of Termination, as
defined in Section 7(c), by the Employee for Good Reason, as defined in Section
7(dX2)), AFTER delivery to the Employee of a written demand for substantial
performance that specifically identifies the manner in WHICH the Company
believes that the Employee has not substantially performed his duties and a
reasonable opportunity to cure; (2) willful misconduct by the Employee that
causes substantial and material injury to the business and operations of the
Company, the continuation of which, in the reasonable judgment of the Board,
will continue to substantially and materially injure the business and operations
of the Company in the future; or (3) conviction of the Employee of a felony. No
act or failure to act shall be considered "willful" for this purpose unless
done, or omitted to be done, by the Employee other than in good faith and other
than with a reasonable belief that his action or omission was in the best
interests of the Company. The Employee shall not be deemed to have been
terminated for Cause unless the Employee shall have been provided with (i) a
reasonable notice setting forth the reasons that the Company believes constitute
Cause for the termination of his employment; (ii) a Notice of Termination as
defined in Section 7(e), from the Board finding that, in the reasonable good
faith opinion of the Board1 Cause for the termination exists and specifying the
particulars thereof in reasonable detail. In the event that the Employee's
employment has been terminated by the Company for Cause and the Employee
disputes in good faith whether such Cause has occurred, the Company shall
continue to make to the employee the payments contemplated by this Agreement as
if his employment had not been terminated upon the Company's receipt of a
written undertaking by the Employee to repay to the Company any amounts to which
it is ultimately determined that he was not entitled under this Agreement.
(d) TERMINATION BY THE EMPLOYEE.
(1) The Employee may terminate his employment (A) for Good
Reason by giving ten days prior written notice to the Company or (B) at any time
by giving 120 days prior written notice to the Company.
(2) For this purposes, "Good Reason" shall mean (A) the
assignment to THE Employee of any duties inconsistent with the Employee'5 titles
and duties as set forth in Section I of this Agreement or any substantial
adverse alteration in the nature or status of the Employee's responsibilities;
(B) any change in the Employee's reporting responsibility such that the Employee
is required to report other than exclusively to the Board; (C) any purported
termination of the Employee's employment by the Company that is not effected
pursuant to a Notice of Termination satisfying the requirements of Section 7(e)
hereof; (D) any other failure by the Company to comply with any material
provision of this Agreement which failure continues for more than ten days after
written notice of such noncompliance from the Employee; or (E) any notices given
by the Company to the Employee under Section 5 hereof that this Agreement will
not be renewed on any anniversary date.
(e) NOTICE OF TERMINATION. Any termination OF the Employee's
employment by the Company or by the Employee (other than termination pursuant to
Section 7(a) hereof shall he communicated to the other party by a written Notice
of Termination. Any Notice of Termination given by a party shall specify the
particular termination provision of this Agreement relied upon by such party and
shall set forth in reasonable detail the facts and circumstances relied upon as
providing a basis for the termination under the provisions specified.
(f) TERMINATION DATE. The Termination Date shall mean (1) if the
Employee's employment is terminated by his death, the date of his death; (2) if
the Employee's employment is terminated pursuant to Section 7(b) hereof, the
date specified in the Notice of Termination, which shall be after the expiration
of the six-month period specified in that subsection; or (3) if (he Employee's
employment is terminated by the Company for Cause, the date specified in the
Notice of Termination.
8. COMPENSATION UPON TERMINATION OF EMPLOYMENT.
(a) TERMINATION BECAUSE OF DEATH FOR CAUSE OR WITHOUT GOOD REASON.
If the Employee's employment is terminated because of his death, by the Company
for Cause or by the Employee other than for Good Reason, the Company shall pay
the Employee his salary and a pro rata portion of the bonus s-led in Section 2~)
based upon the bonus paid in respect of the preceding year) through the
Termination Date and the Company shall have no further obligation to the
Employee hereunder.
(b) TERMINATION BECAUSE OF DISABILITY. If the Employee's employment
is terminated by the Company because of Disability under Section 7(b) hereof the
Company shall pay the Employee an annual disability benefit equal to the excess
of (l) 60 percent of his salary at the rate in effect under Section 2(a) hereof
on the Termination Date plus 60 percent of the bonus amount specified in Section
2(b) hereof (based upon the bonus paid in respect of the preceding year) over
(2) the amount of the long term disability benefit that is payable to the
Employee under any policy of disability insurance provided for the Employee by
the Company at its expense. The disability benefit shall be paid for such period
as is determined by the Board for the Company's senior executives but shall not
be less than the remainder of the scheduled term of employment.
(c) TERMINATION WITHOUT CAUSE OR WITH GOOD REASON. If (i) in breach
of this Agreement, the Company shall terminate the Employee's employment other
than (A) for Cause or ('3) because of Disability or (ii) the Employee shall
terminate his employment for Good Reason; then:
(1) The Company shall pay the Employee his salary and a pro
rata portion of the bonus specified in Section 2(b) hereof based upon the bonus
paid in respect of the preceding year) through the Termination Date and all
other unpaid and pro rata amounts to which the Employee is entitled as of the
Termination Date under any compensation plan or program of the Company,
including, without limitation, any incentive performance bonus and all accrued
va~4tiOn time;
(2) The Company shall pay as liquidated damages to the
Employee, and in lieu of any further salary payments hereunder for periods after
the Termination Date, the Employee's then current salary (payable in
installments in accordance with the Company's normal payroll practices) for the
remainder of the scheduled term of employment and the product of (A) the sum of
(i) the Employee's annual bonus specified in Section 2(b) hereof (based upon the
bonus paid in respect of the preceding year) and (ii) the maximum annual bonus
amount that could have been paid to the Employee under the Company's performance
incentive bonus plan for the year in which the Termination Date occurs, and (B)
the number of years (and any fraction of a year) remaining in the term of this
Agreement under Section 5 hereof as of the Termination Date, which amount shall
be payable in equal monthly installments during the remainder of the scheduled
term of employment;
(3) In addition to the liquidated amounts that &e payable to
the Employee, the following shall apply: (A) the Employee shall continue to
participate in, and accrue benefits under, all retirement, pension, profit
sharing, employee stock ownership, thrift and other deferred compensation plans
of the Company for the remaining term of this Agreement as if the tenn1.~ation
of employment of the Employee had not occurred (with the Employee being deemed
to receive annually for the purposes of such plans the Employee's then current
salary and bonus (at the time of his termination) under Section 2(a) and (b) of
this Agreement), except to the extent that such continued participation and
accrual is expressly prohibited by law or to the extent such plan constitutes a
"qualified plan" under Section 401 of the Internal Revenue Code of 1986, as
amended ("Code"), by the terms of the plan, in which case the Company shall
provide the Employee a substantially equivalent, unfunded, non-qualified
benefit; (B) the Employee shall be entitled to continue to receive all other
employee benefits and then existing fringe benefits referred to in Section 4(a)
and (b) hereof for the remaining term of this Agreement as if the termination of
employment had not occurred; and (C) all insurance or other provisions for
indemnification, defense or hold-harmless of officers or directors of the
Company that are in effect on the date the Notice of Termination is sent to the
Employee shall continue for the benefit of the Employee with respect to all of
his acts and omissions while an officer or director as fully and completely as
if such termination had not occurred,
<PAGE>
and until the final expiration or running of all periods of limitation against
action which may be applicable to such acts or omissions; and
(4) The liquidated amount and other benefits provided for in
this Section 8(c) shall not be reduced by any compensation or benefits that the
Employee may receive for other employment with another employer or through self
employment after termination of employment with the Company.
(d) COST OF ENFORCEMENT. In the event the employment of the Employee
is terminated by the Company because of Disability or without Cause, or by the
Employee for Good Reason, and the Company fails to make timely payment of the
amounts owed to the Employee under this Agreement, the Employee shall be
entitled to reimbursement for all reasonable costs, including attorney's fees,
incurred by the Employee in taking action to collect such amounts or otherwise
to enforce this Agreement, plus interest on such amounts at the rate of one
percent above the prime rate (defined as the base rate on corporate loans at
large U.S. money center commercial banks as published by THE WALL STREET
JOURNAL, compounded monthly, for the period from the date of employment
termination until payment is made to the Employee. Such reimbursement and
interest shall be in addition to all rights. to which the Employee is otherwise
entitled under this Agreement.
(e) PARACHUTE PAYMENT LIMITATION. If any payment or benefit to the
Employee under this Agreement would be considered a "parachute payment" within
the meaning of Section 280G(b)(2) of the Code and if; after reduction for any
applicable federal excise tax imposed by Section 4999 of the Code ("Excise Tax")
and federal income tax imposed by the Code. the Employee's net proceeds of the
amounts payable and the benefits provided under this Agreement would be less
than the amount of the Employee's net proceeds resulting from the payment of the
Reduced Amount described below, after reduction for federal income taxes, then
the amount pay able and the benefits provided under this Agreement shall be
limited to the Reduced Amount. The "Reduced Amount" shall be the largest amount
that could be received by the Employee under this Agreement such that no amount
paid to the Employee under this Agreement and any other agreement, contract or
understanding heretofore or hereafter entered into between the Employee and the
Company ("Other Agreements") and any formal or informal plan or other
arrangement heretofore or hereafter adopted by the Company for the direct or
indirect provision of compensation to ~e Employee (including groups or classes
of participants or beneficiaries of which the Employee is a member)! whether or
not such compensation is deferred, is in cash, or is in the form of a benefit to
or for die Employee ("Benefit Plan") would be subject to the Excise Tax. In the
event that the amount payable to the Employee shall be limited to the Reduced
Amount, then the Employee shall have the right, in the Employee's sole
discretion, to designate those payments or benefits under this Agreement, any
other Agreements, and/or any Benefit Plans, that should be reduced or eliminated
so as to avoid having the payment to the Employee under this Agreement be
subject to the Excise Tax.
9. CONFIDENTIALITY. In consideration of the willingness of the
Company to employ the Employee and the compensation to bc paid and benefits
to be received therefore, any for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Employee agrees as
follows:
(a) THE COMPANY OWNS ALL OF THE EMPLOYEE'S WORK. All improvements,
discoveries, inventions, designs, documents, licenses and patents, or other data
devised, conceived, made, developed, obtained, filed, perfected, acquired, or
first reduced to practice, in whole or in part, or in the regular course of
employment by the Employee during the term of this Agrcemcnt9 and related in any
way to the business, including development and research) of the Company or any
subsidiary or affiliate engaged in business substantially similar to that of the
Company shall be promptly disclosed to the Company. The Employee hereby assigns
and transfers to the Company all his right, interest and title thereto, and such
improvements, discoveries, inventions1 designs, documents, licenses and patents,
or other data shall become the property of the Company. During the term of this
Agreement and at any time thereafter) upon request of the Company, the Employee
will join and render assistance in any proceedings and execute any papers
necessary to file and prosecute applications for, and to acquire) maintain and
enforce, letters patent, trademarks, REGISTRATIONS and/or copyrights, both
domestic and foreign, with respect to such improvements, discoveries,
inventions, designs, documents, licenses and patents, or other data as required
for vesting and maintaining title to same in the Company.
(b) NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Employee
agrees and acknowledges that the term "Confidential and Proprietary Information"
shall mean any and all information not in the public domain, in any form,
emanating from or relating to the Company and its subsidiaries and affiliates,
including, but not limited to, trade secrets, technical information, costs,
designs, drawings, processes systems, methods of operation and procedures,
formulae, test data, know-how, improvements, price lists, financial data, code
books, invoices and other financial statements, computer programs, discs and
printouts, sketches, and plans (engineering, architectural or otherwise),
customer lists, telephone numbers, names, addresses, information about equipment
and processes (including specifications and operating manuals), or any other
compilation of information written or unwritten that is used in the business of
the Company or any subsidiary or affiliate that gives the Company or any
subsidiary or affiliate any opportunity to obtain an advantage over competitors
of tile Company who do not know or use such information. The Employee agrees and
acknowledges that all Confidential and Proprietary Information, in any form, and
all copies and extracts thereof, is and are and shall remain the sole and
exclusive property of the Company and, upon termination of his employment with
the Company, the Employee hereby agrees to return to the Company the originals
and all copies of any Confidential and Proprietary information provided to or
acquired by the Employee during the period of his employment. E~cept as ordered
by a court of competent jurisdiction, the Employee expressly agrees never to
disclose to any person (except to other Company employees, and then only On a
"need to know" basis) or entity any Confidential and Proprietary Information
either during the term of this Agreement or at any lime after termination of his
employment, except with the express written authorization and consent of the
Company.
(c) CUSTOMERS' INFORMATION. The Employee understands and
acknowledges that each customer of the Company or its subsidiaries or affiliates
will disclose information that will be within the Company's control in
connection with the Company's furnishing of services to its customer. The
Employee covenants and agrees to hold such information in the strictest
confidence and shall treat such information in the same manner and be obligated
by tile provisions of this Agreement as if such information were Confidential
and Proprietary Information, as defined in Section 9(b) hereof
10. COVENANT NOT TO COMPETE. During the term of employment, the employee
shall not directly or indirectly own, manage, operate, control or be employed by
Of participate in the ownership, management, operation or control of any
business which is of the type and character engaged in and competitive with that
of the Employer. The Employee shall not, during the term of this Agreement, have
any other paid employment other than with a subsidiary or affiliate of the
Company, except with the prior approval of the Hoard; provided, however, that
the Employee shall be permitted to serve as a director on the boards of other
corporations.
11. AMENDMENTS OR ADDITIONS; ACTION BY BOARD. No amendments or additions
to this Agreement shall be binding unless in writing and signed by all parties
hereto. The prior approval by a majority affirmative vote of the full Board
shall be required in order for the Company to authorize any amendments or
additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
Notice of Termination.
12. MISCELLANEOUS.
(a) NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be personally delivered or mailed by first class
registered or certified mail, postage prepaid, return-receipt-requested, or
transmitted by facsimile or reputable overnight courier, addressed to the
Company or the Employee at the addresses set forth on the signature page of this
Agreement1 Or at such other addresses as such patty may designate by five
business days advance written notice to the other party.
Each notice or communication that shall have been transmitted in
the manner described above shall be deemed sufficiently served, sent or received
for all purposes at such time as it is sent to the addressee or at such time as
delivery is refused by the addressee upon presentation.
(b) SEVERABILITY. Nothing in this Agreement shall be construed so as
to require the commission of any act contrary to law and wherever there is any
conflict between any provision of this Agreement and any law, statute,
ordinance, order or regulation, the latter shall prevail, but in such event any
necessary action will be taken to bring it within applicable legal requirements.
If any provision of this Agreement should be held invalid or unenforceable, the
remaining provisions shall be unaffected by such a holding.
(c) COMPLETE AGREEMENT. This Agreement contains the entire
Agreement and understanding between the parties relating to the subject matter
hereof, and supersedes any prior understandings, agreements or representations
by or between the parties, written or oral, relating to the subject matter
hereof
(d) SUCCESSORS AND ASSIGNS. This Agreement and the rights and
obligations of the parties hereto shall bind and inure to the benefit of any
successor or successors of the Company by way of reorganization, merger or
consolidation and any assignee of all or substantially all of its business and
assets, but except as to any such successor or assignee of the Company, neither
this Agreement nor any rights or benefits. hereunder may be assigned by the
Company or the Employee.
However, in the event of the death of the Employee, all rights to receive
payments hereunder shall become rights of the Employee's estate.
(e) SECTION HEADINGS. The section headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
(f) GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the day and year first above written,
Czech Industries, Inc. Employee
2101 L Street NW
Suite 403
Washington, DC 20037
/s/ Kevin D. McNeil /s/ Martin A. Sumichrast
By:------------------------------------- --------------------------------
Authorized Officer Martin A. Sumichrast
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of December 31, 1998, between Eastbrokers
International, Inc., a Delaware corporation ("Company") and Kevin D. McNeil
("Employee");
WHEREAS, the Employee is currently serving as Executive Vice
President, Chief Financial Officer, Secretary and Treasury, of the Company;
WHEREAS, the parties desire to enter into this Agreement setting
forth the terms and conditions for the employment relationship of the Employee
with the Company;
WHEREAS, the Board of Directors of the Company ("Board") has approved
and authorized the entry into this Agreement with the Employee;
NOW, THEREFORE, it is AGREED as follows;
1. Employment. During the term of this Agreement the Employee shall
be employed as Executive Vice President, Chief Financial Officer, Secretary and
Treasury, of the Company. The Employee shall render executive policy and other
management services to the Company of the type customarily performed by persons
serving in similar executive officer capacities. The Employee shall devote such
portion of his working time to the Company as is reasonably necessary to the
business of the Company. During the term of this Agreement, there shall be no
material increase or decrease in the duties and responsibilities of the Employee
otherwise than as provided herein, unless the parties otherwise agree in
writing.
2. Compensation.
(a) Salary. The Company agrees to pay the Employee during the
term of this Agreement a salary at an annual rate equal to $120,000, with such
subsequent increases in salary during the term of this Agreement as may be
determined by the board. In determining salary increases, the Board may
compensate the Employee for increases in the cost of living and may also provide
for performance or merit increases. The salary of the Employee shall not be
decreased at any time during the term of this Agreement from the amount then in
effect unless the Employee otherwise agrees in writing. Participation in
deferred compensation, discretionary bonus, retirement and other employee
benefit plans and in fringe benefits shall not reduce the salary payable to the
Employee under this Section 2(a). The salary under this Section 2(a) shall be
payable to the Employee not less frequently than monthly. The Employee shall not
be entitled to receive fees for serving as a director of the Company or of any
subsidiary or affiliate of the Company or for serving as a member of any
committee of any such board of directors.
<PAGE>
(b) Performance Bonus. In addition to his salary under Section
2(a) above, the Company will pay to the Employee a quarterly Performance bonus
of 1/4 of 1% of total revenue of the Company in excess of $6,000,000 per
quarter. The performance bonus shall be payable 30 days following the filing of
the Company's quarterly 10-Q and Annual Report 10-K. The Employee will not be
entitled to such performance bonus during any quarter in which the Company's
quarterly 10-Q or Annual Report 10-K is extended or filed late, as defined by
the rules an regulations of the Securities and Exchange Commission.
3. Long Term Stock Incentive. In consideration for Employee
entering into this five year employment Agreement, the Company has deemed it
advisable and in the best interests of the Company that it enter into an
Agreement with Employee relating to the sale of shares of stock in the Company,
whereby, the Company agrees to sell to Employee 50,000 shares of its Common
Stock, par value $.05, of the Company at a price of $3.00 per share in exchange
for Employee issuing to the Company a Promissory Note in the amount of $150,000
with principal and interest on the Note payable to the Corporation three years
from the making of said Note.
4. Insurance, Retirement, Benefit Plans; Fringe Benefits;
Business Expenses.
(a) Life Insurance. The Company will pay the premiums on a
life insurance policy on the life of the Employee providing a death benefit of
not less than $1,000,000 ("Policy"). The Company will be the owner of such life
insurance policy and upon the death of the Employee, the Company would be paid
from the insurance proceeds an amount equal to the total premiums it paid under
the Policy, with the remaining proceeds to be paid to the Employee's designated
beneficiary.
(b) Other Benefits and Perquisites. The Employee shall be
entitled to participate in any plan of the Company relating to stock options,
restricted stock, employee stock purchase or ownership, pension, thrift, profit
sharing, group life insurance, medical coverage, education or other retirement
or employee benefit plans or arrangements that the Company has adopted or may
adopt for the benefit of its employees or executive officers. The Employee shall
also be entitled to participate in, or enjoy the benefit of any other fringe
benefits or perquisites that are now or may be become applicable to the
Company's executive employees. The Employee shall also be provided with the use
of a suitable automobile at Company expense. The Employee shall account to the
Company for the business use of such automobile.
(c) Business Expenses. During the term of the employee's
employment by the Company, the Company shall promptly reimburse the Employee for
all reasonable and customary expenses incurred by the Employee in performing
services for the Company, including all expenses of travel and living expenses
while away from home on business or at the request of and in the service of the
Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.
5. Term. The initial term of employment under this Agreement shall be
for the three year period. This Agreement shall be automatically renewed for an
additional three-year term, unless either Employee or the Company gives contrary
written notice to the other party hereto not less than 180 days before the
scheduled expiration of the term of this Agreement. Each term and all such
renewed terms are collectively referred to herein as the term of this Agreement.
<PAGE>
6. Voluntary Absences: Vacations. The Employee shall be entitled,
without loss of pay, to be absent voluntarily for reasonable periods of time
from the performance of the duties and responsibilities under this Agreement.
All such voluntary absences shall count as paid vacation time, unless the Board
otherwise approves. The Employee shall be entitled to an annual paid vacation of
at least six weeks per year or such longer period as the Board may approve. Such
vacation time accrues and vests without limit. The timing of paid vacations
shall be scheduled it' a reasonable manner by the Employee.
7. Termination of Employment. The Employee's employment may be
terminated without any breach of this Agreement only under the following
circumstances:
(a) Death. The Employee's employment shall terminate upon his
death.
(b) Disability. The Company may terminate the Employee's
employment because of disability. For this purpose, "Disability" shall mean the
inability of the Employee to perform his duties under this Agreement because of
physical or mental illness or incapacity for a continuous period of six months
during which the Employee shall have been absent from his duties under this
Agreement on a substantially full-time basis.
(c) Cause. The Company may terminate the Employee's employment
for Cause. For purposes of this Agreement, the Company shall have "Cause" to
terminate the Employee's employment only in the event of (l) the willful and
continued failure by the Employee to substantially perform his duties hereunder
(other than any such failure resulting from the Employee's inability to perform
such duties as a result of physical or mental illness or incapacity or any such
actual or anticipated failure after the delivery of a Notice of Termination, as
defined in Section 7(e), by the Employee for Good Reason, as defined in Section
7(d)(2), after delivery to the Employee of a written demand for substantial
performance that specifically identifies the manner in which the Company
believes that the Employee has not substantially performed his duties and a
reasonable opportunity to cure; (2) willful misconduct by the Employee that
causes substantial and material injury to the business and operations of the
Company, the continuation of which, in the reasonable judgment of the Board,
will continue to substantially and materially injure the business and operations
of the Company in the future; or (3) conviction of the Employee of a felony. No
act or failure to act shall be considered "willful" for this purpose unless
done, or omitted to be done, by the Employee other than in good faith and other
than with a reasonable belief that his action or omission was in the best
interests of the Company. The Employee shall not be deemed to have been
terminated for Cause unless the Employee shall have been provided with (i) a
reasonable notice setting forth the reasons that the Company believes constitute
Cause for the termination of his employment; (ii) a Notice of Termination as
defined in Section 7(e), from the Board finding that, in the reasonable good
faith opinion of the Board1 Cause for the termination exists and specifying the
particulars thereof in reasonable detail. In the event that the Employee's
employment has been terminated by the Company for Cause and the Employee
disputes in good faith whether such Cause has occurred, the Company shall
continue to make to the employee the payments contemplated by this Agreement as
if his employment had not been terminated upon the Company's receipt of a
written undertaking by the Employee to repay to the Company any amounts to which
it is ultimately determined that he was not entitled under this Agreement.
(d) Termination by the Employee.
(1) The Employee may terminate his employment (A) for
Good Reason by giving ten days prior written notice to the Company or (B) at any
time by giving 120 days prior written notice to the Company.
(2) For this purposes, "Good Reason" shall mean (A)
the assignment to the Employee of any duties inconsistent with the Employee's
titles and duties as set forth in Section 1 of this Agreement or any substantial
adverse alteration in the nature or status of the Employee's responsibilities;
(B) any change in the Employee's reporting responsibility such that the Employee
is required to report other than exclusively to the Board; (C) any purported
termination of the Employee's employment by the Company that is not effected
pursuant to a Notice of Termination satisfying the requirements of Section 7(e)
hereof; (D) any other failure by the Company to comply with any material
provision of this Agreement which failure continues for more than ten days after
written notice of such noncompliance from the Employee; or (E) any notices given
by the Company to the Employee under Section 5 hereof that this Agreement will
not be renewed on any anniversary date.
(e) Notice of Termination. Any termination of the Employee's
employment by the Company or by the Employee (other than termination pursuant to
Section 7(a) hereof) shall he communicated to the other party by a written
Notice of Termination. Any Notice of Termination given by a party shall specify
the particular termination provision of this Agreement relied upon by such party
and shall set forth in reasonable detail the facts and circumstances relied upon
as providing a basis for the termination under the provisions specified.
(f) Termination Date. The Termination Date shall mean (1) if
the Employee's employment is terminated by his death, the date of his death; (2)
if the Employee's employment is terminated pursuant to Section 7(b) hereof, the
date specified in the Notice of Termination, which shall be after the expiration
of the six-month period specified in that subsection; or (3) if (the Employee's
employment is terminated by the Company for Cause, the date specified in the
Notice of Termination.
8. Compensation Upon Termination of Employment.
(a) Termination because of Death for Cause or Without Good
Reason. If the Employee's employment is terminated because of his death, by the
Company for Cause or by the Employee other than for Good Reason, the Company
shall pay the Employee his salary and a pro rata portion of the bonus specified
in Section (2b) (based upon the bonus paid in respect of the preceding year)
through the Termination Date and the Company shall have no further obligation to
the Employee hereunder.
<PAGE>
(b) Termination Because of Disability. If the Employee's
employment is terminated by the Company because of Disability under Section 7(b)
hereof the Company shall pay the Employee an annual disability benefit equal to
the excess of (l) 60 percent of his salary at the rate in effect under Section
2(a) hereof on the Termination Date plus 60 percent of the bonus amount
specified in Section 2(b) hereof (based upon the bonus paid in respect of the
preceding year) over (2) the amount of the long term disability benefit that is
payable to the Employee under any policy of disability insurance provided for
the Employee by the Company at its expense. The disability benefit shall be paid
for such period as is determined by the Board for the Company's senior
executives but shall not be less than the remainder of the scheduled term of
employment.
(c) Termination without Cause or with Good Reason. If (i) in
breach of this Agreement, the Company shall terminate the Employee's employment
other than (A) for Cause or (B) because of Disability or (ii) the Employee shall
terminate his employment for Good Reason; then:
(1) The Company shall pay the Employee his salary and
a pro rata portion of the bonus specified in Section 2(b) hereof (based upon the
bonus paid in respect of the preceding year) through the Termination Date and
all other unpaid and pro rata amounts to which the Employee is entitled as of
the Termination Date under any compensation plan or program of the Company,
including, without limitation, any incentive performance bonus and all accrued
vacation time;
(2) The Company shall pay as liquidated damages to
the Employee, and in lieu of any further salary payments hereunder for periods
after the Termination Date, the Employee's then current salary (payable in
installments in accordance with the Company's normal payroll practices) for the
remainder of the scheduled term of employment and the product of (A) the sum of
(i) the Employee's annual bonus specified in Section 2(b) hereof (based upon the
bonus paid in respect of the preceding year) and (ii) the maximum annual bonus
amount that could have been paid to the Employee under the Company's performance
incentive bonus plan for the year in which the Termination Date occurs, and (B)
the number of years (and any fraction of a year) remaining in the term of this
Agreement under Section 5 hereof as of the Termination Date, which amount shall
be payable in equal monthly installments during the remainder of the scheduled
term of employment;
(3) In addition to the liquidated amounts that are
payable to the Employee, the following shall apply: (A) the Employee shall
continue to participate in, and accrue benefits under, all retirement, pension,
profit sharing, employee stock ownership, thrift and other deferred compensation
plans of the Company for the remaining term of this Agreement as if the
termination of employment of the Employee had not occurred (with the Employee
being deemed to receive annually for the purposes of such plans the Employee's
then current salary and bonus (at the time of his termination) under Section
<PAGE>
2(a) and (b) of this Agreement), except to the extent that such continued
participation and accrual is expressly prohibited by law or to the extent such
plan constitutes a "qualified plan" under Section 401 of the Internal Revenue
Code of 1986, as amended ("Code"), by the terms of the plan, in which case the
Company shall provide the Employee a substantially equivalent, unfunded,
non-qualified benefit; (B) the Employee shall be entitled to continue to receive
all other employee benefits and then existing fringe benefits referred to in
Section 4(a) and (b) hereof for the remaining term of this Agreement as if the
termination of employment had not occurred; and (C) all insurance or other
provisions for indemnification, defense or hold-harmless of officers or
directors of the Company that are in effect on the date the Notice of
Termination is sent to the Employee shall continue for the benefit of the
Employee with respect to all of his acts and omissions while an officer or
director as fully and completely as if such termination had not occurred, final
expiration or running of all periods of limitation against action which may be
applicable to such acts or omissions; and
(4) The liquidated amount and other benefits provided
for in this Section 8(c) shall not be reduced by any compensation or benefits
that the Employee may receive for other employment with another employer or
through self employment after termination of employment with the Company.
(d) Cost of Enforcement. In the event the employment of the
Employee is terminated by the Company because of Disability or without Cause, or
by the Employee for Good Reason, and the Company fails to make timely payment of
the amounts owed to the Employee under this Agreement, the Employee shall be
entitled to reimbursement for all reasonable costs, including attorney's fees,
incurred by the Employee in taking action to collect such amounts or otherwise
to enforce this Agreement, plus interest on such amounts at the rate of one
percent above the prime rate (defined as the base rate on corporate loans at
large U.S. money center commercial banks as published by The Wall Street
Journal), compounded monthly, for the period from the date of employment
termination until payment is made to the Employee. Such reimbursement and
interest shall be in addition to all rights to which the Employee is otherwise
entitled under this Agreement.
(e) Parachute Payment Limitation. If any payment or benefit to
the Employee under this Agreement would be considered a "parachute payment"
within the meaning of Section 280G(b)(2) of the Code and if, after reduction for
any applicable federal excise tax imposed by Section 4999 of the Code ("Excise
Tax") and federal income tax imposed by the Code the Employee's net proceeds of
the amounts payable and the benefits provided under this Agreement would be less
than the amount of the Employee's net proceeds resulting from the payment of the
Reduced Amount described below, after reduction for federal income taxes, then
the amount pay able and the benefits provided under this Agreement shall be
limited to the Reduced Amount. The "Reduced Amount" shall be the largest amount
that could be received by the Employee under this Agreement such that no amount
paid to the Employee under this Agreement and any other agreement, contract or
understanding heretofore or hereafter entered into between the Employee and the
Company ("Other Agreements") and any formal or informal plan or other
arrangement heretofore or hereafter adopted by the Company for the direct or
indirect provision of compensation to the Employee (including groups or classes
of participants or beneficiaries of which the Employee is a member) whether or
<PAGE>
not such compensation is deferred, is in cash, or is in the form of a benefit to
or for the Employee ("Benefit Plan") would be subject to the Excise Tax. In the
event that the amount payable to the Employee shall be limited to the Reduced
Amount, then the Employee shall have the right, in the Employee's sole
discretion, to designate those payments or benefits under this Agreement, any
other Agreements, and/or any Benefit Plans, that should be reduced or eliminated
so as to avoid having the payment to the Employee under this Agreement be
subject to the Excise Tax.
9. Confidentiality. In consideration of the willingness of the
Company to employ the Employee and the compensation to bc paid and benefits to
be received therefore, any for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Employee agrees as
follows:
(a) The Company Owns All of the Employee's Work. All
improvements, discoveries, inventions, designs, documents, licenses and patents,
or other data devised, conceived, made, developed, obtained, filed, perfected,
acquired, or first reduced to practice, in whole or in part, or in the regular
course of employment by the Employee during the term of this Agreement, and
related in any way to the business, including development and research, of the
Company or any subsidiary or affiliate engaged in business substantially similar
to that of the Company shall be promptly disclosed to the Company. The Employee
hereby assigns and transfers to the Company all his right, interest and title
thereto, and such improvements, discoveries, inventions, designs, documents,
licenses and patents, or other data shall become the property of the Company.
During the term of this Agreement and at any time thereafter, upon request of
the Company, the Employee will join and render assistance in any proceedings and
execute any papers necessary to file and prosecute applications for, and to
acquire, maintain and enforce, letters patent, trademarks, registrations and/or
copyrights, both domestic and foreign, with respect to such improvements,
discoveries, inventions, designs, documents, licenses and patents, or other data
as required for vesting and maintaining title to same in the Company.
(b) Non-Disclosure of Confidential Information. The Employee
agrees and acknowledges that the term "Confidential and Proprietary Information"
shall mean any and all information not in the public domain, in any form,
emanating from or relating to the Company and its subsidiaries and affiliates,
including, but not limited to, trade secrets, technical information, costs,
designs, drawings, processes systems, methods of operation and procedures,
formulae, test data, know-how, improvements, price lists, financial data, code
books, invoices and other financial statements, computer programs, discs and
printouts, sketches, and plans (engineering, architectural or otherwise),
customer lists, telephone numbers, names, addresses, information about equipment
and processes (including specifications and operating manuals), or any other
compilation of information written or unwritten that is used in the business of
the Company or any subsidiary or affiliate that gives the Company or any
subsidiary or affiliate any opportunity to obtain an advantage over competitors
of tile Company who do not know or use such information. The Employee agrees and
acknowledges that all Confidential and Proprietary Information, in any form, and
all copies and extracts thereof, is and are and shall remain the sole and
exclusive property of the Company and, upon termination of his employment with
the Company, the Employee hereby agrees to return to the Company the originals
and all copies of any Confidential and Proprietary information provided to or
<PAGE>
acquired by the Employee during the period of his employment. Except as ordered
by a court of competent jurisdiction, the Employee expressly agrees never to
disclose to any person (except to other Company employees, and then only On a
"need to know" basis) or entity any Confidential and Proprietary Information
either during the term of this Agreement or at any lime after termination of his
employment, except with the express written authorization and consent of the
Company.
(c) Customers' Information. The Employee understands and
acknowledges that each customer of the Company or its subsidiaries or affiliates
will disclose information that will be within the Company's control in
connection with the Company's furnishing of services to its customer. The
Employee covenants and agrees to hold such information in the strictest
confidence and shall treat such information in the same manner and be obligated
by tile provisions of this Agreement as if such information were Confidential
and Proprietary Information, as defined in Section 9(b) hereof.
10. Covenant Not to Compete. During the term of employment, the
employee shall not directly or indirectly own, manage, operate, control or be
employed by or participate in the ownership, management, operation or control of
any business which is of the type and character engaged in and competitive with
that of the Employer. The Employee shall not, during the term of this Agreement,
have any other paid employment other than with a subsidiary or affiliate of the
Company, except with the prior approval of the board; provided, however, that
the Employee shall be permitted to serve as a director on the boards of other
corporations.
11. Amendments or Additions; Action by Board. No amendments or
additions to this Agreement shall be binding unless in writing and signed by all
parties hereto. The prior approval by a majority affirmative vote of the full
Board shall be required in order for the Company to authorize any amendments or
additions to this Agreement, to give any consents or waivers of provisions of
this Agreement, or to take any other action under this Agreement including any
Notice of Termination.
12. Miscellaneous.
(a) Notices. Any notice required or permitted hereunder shall
be given in writing and shall be personally delivered or mailed by first class
registered or certified mail, postage prepaid, return-receipt-requested, or
transmitted by facsimile or reputable overnight courier, addressed to the
Company or the Employee at the addresses set forth on the signature page of this
Agreement, or at such other addresses as such party may designate by five
business days advance written notice to the other party.
Each notice or communication that shall have been
transmitted in the manner described above shall be deemed sufficiently served,
sent or received for all purposes at such time as it is sent to the addressee or
at such time as delivery is refused by the addressee upon presentation.
<PAGE>
(b) Severability. Nothing in this Agreement shall be construed
so as to require the commission of any act contrary to law and wherever there is
any conflict between any provision of this Agreement and any law, statute,
ordinance, order or regulation, the latter shall prevail, but in such event any
necessary action will be taken to bring it within applicable legal requirements.
If any provision of this Agreement should be held invalid or unenforceable, the
remaining provisions shall be unaffected by such a holding.
(c) Complete Agreement. This Agreement contains the entire
Agreement and understanding between the parties relating to the subject matter
hereof, and supersedes any prior understandings, agreements or representations
by or between the parties, written or oral, relating to the subject matter
hereof.
(d) Successors and Assigns. This Agreement and the rights and
obligations of the parties hereto shall bind and inure to the benefit of any
successor or successors of the Company by way of reorganization, merger or
consolidation and any assignee of all or substantially all of its business and
assets, but except as to any such successor or assignee of the Company, neither
this Agreement nor any rights or benefits. hereunder may be assigned by the
Company or the Employee.
However, in the event of the death of the Employee, all rights to receive
payments hereunder shall become rights of the Employee's estate.
(e) Section Headings.The section headings used in this
Agreement are included solely for convenience and shall not affect, or be used
in connection with, the interpretation of this Agreement.
(f) Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the day and year first above written,
Eastbrokers International Inc. Employee
15245 Shady Grove Road
Suite 340
Rockville, MD 20850
/s/ Martin A. Sumichrast /s/ Kevin D. McNeil
By: _________________________ ____________________
Authorized Officer Kevin D. McNeil
<PAGE>
CONSULTING AGREEMENT
This Agreement is made and entered into as of the 1st day of December,
1998, by and between Wolfgang Kossner ("Consultant"), an individual residing at
Schloss Freyenthurn, Klagenfurt Austria, and Eastbrokers International
Incorporated ("Company"), a Delaware corporation having offices at 15245 Shady
Grove Road, Suite 340, Rockville, Maryland 20850
WITNESSETH
WHEREAS, the Company wishes to retain the Consultant to render business and
financial advisory and consulting services on the terms and conditions herein
set forth; and
WHEREAS, Consultant wishes to render such service on the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants agreements contained herein, the parties hereto agree as follows:
1. RETENTION. The Company hereby retains the Consultant, for the term
hereof (as set forth in Section 2), to act as Vice Chairman of the Board of
Directors of the Company. His responsibilities as such are to oversee and
implement strategy for the Company's operations in Europe. Mr. Kossner will be
responsible for representing the decisions of the Board of Directors at the
subsidiary operating entities.
2. TERM. The term of this Agreement shall commence as of January 1, 1999,
and shall continue for a period of twelve (12) months, terminating on December
31, 1999.
3. COMPENSATION.
3.1 The Company shall pay the Consultant compensation of 200,000 of
the Company's Class C Warrants, payable in equal installments on March 31, 1999,
June 30, 1999, September 30, 1999 and December 31, 1999. The value of the Class
C Warrants will be determined for compensation purposes using the Black Shole
method at the time of grant.
3.2 As additional compensation to the Consultant for his services
under the Agreement, the Consultant will receive a project success fees to be
determined.
4. REIMBURSEMENT FOR EXPENSES. The Company shall reimburse the Consultant
for all reasonable out-of-pocket expenses paid or incurred by him in the course
of his duties hereunder and approved in writing by the Company, upon
presentation by the Consultant of valid receipts or invoices thereof, utilizing
procedures as are reasonably established by the Company with regard to
reimbursement of employees and consultants for expenses.
5. TERMINATION OF SERVICES.
5.1 DEATH OR DISABILITY. This Agreement shall terminate upon the
death or disability of the Consultant. For purposes hereof, the term
"disability" shall mean physical or mental illness or injury which has prevented
the Consultant from performing his customary duties for the Company for a period
of (30) thirty consecutive days. In the event this agreement is terminated,
pursuant to this section, Consultant's estate shall be entitled to receive full
compensation and reimbursement of expenses as set forth in sections 3 and 4.
5.2 FOR "CAUSE". The Company shall have the right to terminate the
services of Consultant hereunder "for cause", as herein defined. The term "for
cause" shall mean:
(i) the commission by Consultant of an act of theft,
embezzlement, or fraud which is materially injurious to the Company or any
affiliate; or
(ii) the conviction of the Consultant in any jurisdiction
for a criminal offense constituting a felony.
5.3 WITHOUT CAUSE. In the event of the termination by the Company of
the Consultant's services under this Agreement prior to the scheduled expiration
date (as the same may be extended from time to time), for any reason other than
"for cause" pursuant to Section 5.2, the Consultant shall be entitled to the
remaining payments that would have otherwise been payable to the Consultant
under the terms of this Agreement had his services not been terminated.
6. INDEMNIFICATION. The Company shall indemnify and hold harmless the
Consultant, his heirs and legal representatives from and against all claims,
damages, losses, liabilities and expenses, including reasonable legal fees and
expenses (collectively "Losses"), arising out of or relating to his services
under this Agreement; provided, however, that the foregoing shall not apply to
the extent of any Losses resulting from the willful misconduct or negligence of
the Consultant. The Consultant shall indemnify and hold harmless the Company,
its officers, directors and agents, from and against all Loses arising out of
any misrepresentation made by the Consultant to any third party as to the scope
of his authority to act on behalf of or to bind the Company.
7. MISCELLANEOUS.
7.1 LEGAL RELATIONSHIP OF PARTIES. The Consultant shall render
services hereunder as an independent contractor and not as an employee and
nothing herein contained shall be deemed to constitute a partnership between or
a joint venture by the parties, nor shall anything herein contained be deemed to
constitute either the Consultant or the Company the agent of the other except as
is expressly provided herein.
7.2 NOTICES. All notices and communications hereunder shall be in
writing and delivered by hand or sent by registered or certified mail, postage
and other fees prepaid, return receipt requested, or by a nationally recognized
overnight delivery service. Such notice shall be deemed given when hand
delivered or three (3) business days after the date when mailed or one (1)
business day after delivery to an overnight delivery service.
7.3 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the retention of the
Consultant by the Company during the term hereof, and the provisions hereof may
not be altered, amended, waived, terminated or discharged in any way whatsoever
except by subsequent written agreement executed by the party sought to be
charged therewith. This Agreement supersedes all prior agreements,
understandings and arrangements between the Consultant and the Company
pertaining to the subject matter hereof. A waiver by either of the parties of
any of the terms or conditions of this Agreement, or of any breach hereof, shall
not be deemed a waiver of such terms or conditions for the future or of any
other term or condition hereof, or of any subsequent breach hereof.
7.4 SEVERABILITY. The provisions of this Agreement are severable,
and if any provision of this Agreement is invalid, void, inoperative or
unenforceable, the balance of the Agreement shall remain in effect, and if any
provision is inapplicable to any circumstance, it shall nevertheless remain
applicable to all other circumstances.
7.5 SURVIVAL. The provisions of Section 6 shall survive any
termination of the Consultant's services under this Agreement.
7.6 MISCELLANEOUS. The Consultant shall be free to render service to
other persons or entities during the term of this Agreement so long as the same
do not unreasonably interfere with his services hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
EASTBROKERS INTERNATIONAL
INCORPORATED
/s/ Kevin D. McNeil
By:-----------------------------------
Kevin D. McNeil
CONSULTANT
/s/ Wolfgang M. Kossner
--------------------------------------
Wolfgang M. Kossner
<PAGE>
NON-NEGOTIABLE
TERM NOTE
$600,000.00
Rockville, Maryland
December 31, l998
FOR VALUE RECEIVED, the undersigned, Martin A. Sumichrast,
109 Church Gate Lane, Gaithersburg, Maryland 20878 (hereinafter referred to
as the "Maker"), hereby promises to pay to EASTBROKERS INTERNATIONAL
INCORPORATED, a Delaware corporation, at its principal place of business at
15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850 (hereinafter
referred to as the "Holder") or at such other place or places and to such
account or accounts as Holder may direct from time to time by notice to
Maker, the principal amount of SIX HUNDRED THOUSAND DOLLARS ($600,000.00) in
lawful money of the United States in immediately available funds, payable on
December 31, 2003.
Interest shall accrue on the outstanding principal amount
at an annual rate of 7.00%, payable at maturity.
This Note has reference to and is secured by a pledge of
property under a pledge Agreement of even date between Maker and Holder.
As security for payment of this Note, the undersigned has
pledged or deposited with the Holder, and grants it a security interest in
the following property:
200,000 shares of Eastbrokers International Incorporated
Common Stock, par value $.05 per share
and will forthwith deliver to the Holder any and all securities issued in
lieu of, or by way of stock dividends, or otherwise received because of
ownership of any securities herein pledged; and does agree on demand to
deposit with Holder such additional securities or other collateral as it
may, from time to time, require. It is further agreed that the collateral
hereby pledged, together with any that may be pledged hereafter, shall be
applicable in like manner to secure the payment of any past or any future
obligations of the undersigned arising under or out of this Note; and all
such collateral in its hands shall stand as one general continuing
collateral security for the whole of said obligations, so that the
deficiency on any one shall be made good from the collaterals for the rest,
hereby remaining responsible for any deficiency in payment, and waiving any
benefit, exemption or privilege under any law now or hereafter to be in
force. In the event of default, Holder, at its option, may sell, assign, or
otherwise dispose of the collateral.
Notwithstanding anything in this Note to the contrary, the
then outstanding principal amount and accrued but unpaid interest shall, at
Holder's option, be payable on demand in the event that an event of default
occurs as set forth below.
Maker shall be in default hereunder, at the option of
Holder, upon the occurrence of any of the following events: (i) the failure
by Maker to make any payments of principal or interest when due hereunder,
and such failure shall have continued for a period of more than ten (10)
<PAGE>
days after notice and a reasonable opportunity to cure; (ii) the entering
into of a decree or order by a court of competent jurisdiction adjudicating
Maker a bankrupt or the appointing of a receiver or trustee of Maker upon
the application of any creditor in an insolvency or bankruptcy proceeding or
other creditor's suit; (iii) a court of competent jurisdiction approving, as
properly filed, a petition for reorganization or arrangement filed against
Maker under the Federal bankruptcy law and such decree or order not being
vacated within thirty (30) days; (iv) the pendency of any bankruptcy ~ or
other creditors' suit against Maker; (v) a petition or answer seeking
reorganization or arrangement under the Federal bankruptcy laws with respect
to Maker; (vi) an assignment for the benefit of creditors by Maker; (vii)
Maker consents to the appointment of a receiver or trustee in an insolvency
or bankruptcy proceeding or other creditors' suit; (viii) the existence of
any material judgement against, or any material attachment of property of
Maker; or (ix) any other condition which, in the reasonable determination of
Holder, would materially impair the timely repayment of this Note
(individually and collectively, "Event(s) of Default").
If this Note is not paid when due, whether at maturity or
by acceleration, Maker agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder of its rights and remedies under this Note.
Maker reserves the right prepay this Note, in whole or in
part, prior to the due date with no prepayment penalty.
None of the rights or remedies of Holder hereunder is to
be deemed waived or affected by failure or delay on the part of Holder to
exercise the same.
Maker hereby waives presentment, demand for payment,
protest and notice of protest, notice of dishonor, and except as expressly
provided by this Note, all other notices in connection with this Note.
The terms "Maker" and "Holder" shall be construed to
include their respective heirs, personal representatives, successors,
subsequent holder and assigns; provided, however, that the Note shall not
be assignable, negotiable or transferrable by the Holder.
Regardless of the place of execution or performance, this
Note shall be governed by, and construed with the laws of the State of
Delaware without giving effect to such state's conflicts of laws
provisions.
WITNESS the hand of Maker.
/s/ Martin A. Sumichrast
_________________________________
Martin A. Sumichrast
<PAGE>
NON-NEGOTIABLE
TERM NOTE
$150,000.00
Rockville, Maryland
December 31, l998
FOR VALUE RECEIVED, the undersigned, Kevin D. McNeil,
15616 Marathon Circle, #302, Gaithersburg, Maryland 20878 (hereinafter
referred to as the "Maker"), hereby promises to pay to EASTBROKERS
INTERNATIONAL INCORPORATED, a Delaware corporation, at its principal place
of business at 15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850
(hereinafter referred to as the "Holder") or at such other place or places
and to such account or accounts as Holder may direct from time to time by
notice to Maker, the principal amount of ONE HUNDRED AND FIFTY THOUSAND
DOLLARS ($150,000.00) in lawful money of the United States in immediately
available funds, payable on December 31, 2003.
Interest shall accrue on the outstanding principal amount
at an annual rate of 7.00%, payable at maturity.
This Note has reference to and is secured by a pledge of
property under a pledge agreement of even date between Maker and Holder.
As security for payment of this Note, the undersigned has
pledged or deposited with the Holder, and grants it a security interest in
the following property:
50,000 shares of Eastbrokers International Incorporated
Common Stock, par value $.05 per share
and will forthwith deliver to the Holder any and all securities issued in
lieu of, or by way of stock dividends, or otherwise received because of
ownership of any securities herein pledged; and does agree on demand to
deposit with Holder such additional securities or other collateral as it
may, from time to time, require. It is further agreed that the collateral
hereby pledged, together with any that may be pledged hereafter, shall be
applicable in like manner to secure the payment of any past or any future
obligations of the undersigned arising under or out of this Note; and all
such collateral in its hands shall stand as one general continuing
collateral security for the whole of said obligations, so that the
deficiency on any one shall be made good from the collaterals for the rest,
hereby remaining responsible for any deficiency in payment, and waiving any
benefit, exemption or privilege under any law now or hereafter to be in
force. In the event of default, Holder, at its option, may sell, assign, or
otherwise dispose of the collateral.
Notwithstanding anything in this Note to the contrary, the
then outstanding principal amount and accrued but unpaid interest shall, at
Holder's option, be payable on demand in the event that an event of default
occurs as set forth below.
Maker shall be in default hereunder, at the option of
Holder, upon the occurrence of any of the following events: (i) the failure
by Maker to make any payments of principal or interest when due hereunder,
and such failure shall have continued for a period of more than ten (10)
<PAGE>
days after notice and a reasonable opportunity to cure; (ii) the entering
into of a decree or order by a court of competent jurisdiction adjudicating
Maker a bankrupt or the appointing of a receiver or trustee of Maker upon
the application of any creditor in an insolvency or bankruptcy proceeding
or other creditor's suit; (iii) a court of competent jurisdiction
approving, as properly filed, a petition for reorganization or arrangement
filed against Maker under the Federal bankruptcy law and such decree or
order not being vacated within thirty (30) days; (iv) the pendency of any
bankruptcy or other creditors' suit against Maker; (v) a petition or answer
seeking reorganization or arrangement under the Federal bankruptcy laws
with respect to Maker; (vi) an assignment for the benefit of creditors by
Maker; (vii) Maker consents to the appointment of a receiver or trustee in
an insolvency or bankruptcy proceeding or other creditors' suit; (viii) the
existence of any material judgement against, or any material attachment of
property of Maker; or (ix) any other condition which, in the reasonable
determination of Holder, would materially impair the timely repayment of
this Note (individually and collectively, "Event(s) of Default").
If this Note is not paid when due, whether at maturity or
by acceleration, Maker agrees to pay all reasonable costs of collection and
such costs shall include without limitation all costs, attorneys' fees and
expenses incurred by Holder hereof in connection with any insolvency,
bankruptcy, reorganization, arrangement or similar proceedings involving
Holder, or involving any endorser or guarantor hereof, which in any way
affects the exercise by Holder of its rights and remedies under this Note.
Maker reserves the right prepay this Note, in whole or in
part, prior to the due date with no prepayment penalty.
None of the rights or remedies of Holder hereunder is to
be deemed waived or affected by failure or delay on the part of Holder to
exercise the same.
Maker hereby waives presentment, demand for payment,
protest and notice of protest, notice of dishonor, and except as expressly
provided by this Note, all other notices in connection with this Note.
The terms "Maker" and "Holder" shall be construed to
include their respective heirs, personal representatives, successors,
subsequent holder and assigns; provided, however, that the Note shall not
be assignable, negotiable or transferrable by the Holder.
Regardless of the place of execution or performance, this
Note shall be governed by, and construed with the laws of the State of
Delaware without giving effect to such state's conflicts of laws
provisions.
WITNESS the hand of Maker.
/s/ Kevin D. McNeil
_____________________________
Kevin D. McNeil
<PAGE>
Exhibit No. 21.1
Subsidiaries of Eastbrokers International Incorporated
<TABLE>
<CAPTION>
Jurisdiction of
Company Incorporation
------- ---------------
<S> <C>
Eastbrokers Beteiligungs Aktiengesellschaft Austria
EBI Securities Corporation Colorado
EBI Leasing Corporation Colorado
Eastbrokers North America, Inc. Delaware
Eastbrokers Asset Management, Inc. Delaware
WMP Bank Aktiengesellschaft Austria
Eastbrokers Istanbul Menkul Degerler Acentaligi a.s. Turkey
BUL Beteiligungs Aktiengesellschaft Austria
Eastbrokers Warszawski Dom Maklerski s.a. Poland
Eastbrokers Slovakia a.s. Slovakia
Eastbrokers Kazakhstan Securities House Ltd. Kazakhstan
Eastbrokers S.A. Romania
Eastbrokers Zagreb d.d. Croatia
EB Holding, druzba za upravljanje druzb d.d. Slovenia
BPD Eastbrokers d.d. Slovenia
Eastbrokers Bulgaria AG Bulgaria
National Investment Fund TRUD plc Bulgaria
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Eastbrokers
International, Inc. on Form SB-2 of our report dated October 30, 1998 (and
February 12, 1999 as to Note 17) (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to a gain of $1,025,429 from a
related party transaction), appearing in this Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
February 12, 1999
<PAGE>
Exhibit 23.2
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in the Registration Statement on Form SB-2 of
Eastbrokers International Incorporated (the "Company"), of our report dated June
23, 1997 on the Company's consolidated financial statements as of March 31, 1997
and for the year then ended, and to the reference of our firm as experts.
/s/ PANNELL KERR FORSTER PC
Alexandria, Virginia
February __, 1999
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR THE FISCAL YEAR ENDED MARCH 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 7,156,702
<SECURITIES> 8,677,912
<RECEIVABLES> 17,924,744
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,632,761
<PP&E> 1,153,439
<DEPRECIATION> 878,691
<TOTAL-ASSETS> 44,431,510
<CURRENT-LIABILITIES> 16,073,843
<BONDS> 2,020,087
0
0
<COMMON> 214,888
<OTHER-SE> 25,587,914
<TOTAL-LIABILITY-AND-EQUITY> 44,431,510
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<INCOME-CONTINUING> 3,429,305
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<NET-INCOME> 3,809,411
<EPS-PRIMARY> (1.21)
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</TABLE>
