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1998
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ANNUAL
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REPORT
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EASTBROKERS
INTERNATIONAL
INCORPORATED
[LOGO]
EASTBROKERS
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[INSIDE FRONT COVER]
[GRAPHIC OMITTED - LOGOS OF VARIOUS WORLD STOCK EXCHANGES]
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MESSAGE TO SHAREHOLDERS
In August 1996, Eastbrokers International Incorporated entered the
European investment banking business. In May 1998, we made a significant
expansion in the United States by acquiring Cohig & Associates, a Denver-based
investment banking firm with 20 offices. Through our two main subsidiaries, EBI
Securities Corporation (formerly Cohig & Associates) in Denver and WMP Bank AG
in Vienna, Austria, Eastbrokers International is an active participant in the
capital markets on both continents. Our mission is to build a highly successful,
global, middle market, investment banking and securities firm.
During the past 12 months, our business has grown dramatically. Despite
significant development costs and unexpected declines in several key emerging
markets where we traditionally prospered, our business continues to grow. To
respond to ongoing changes in the marketplace and to position ourselves for
future growth, we have had to make significant improvements in our European and
United States operations.
In Europe, our holding company, Eastbrokers AG, has been streamlined
and we are in the process of consolidating operations under our largest
subsidiary, WMP Bank AG. Historically, these two subsidiaries have been kept
separate, as WMP Bank focused on the Austrian market and Eastbrokers AG focused
on our Central and Eastern European markets. However, the Austrian capital
market is taking a new direction in order to compete with a consolidation of the
European Union. Austria is positioning itself as an international center of
finance for the EU and also the hub for Central and Eastern European securities.
Since WMP Bank is a leading market maker on the Vienna Stock Exchange and for
cost reasons, we determined that it should replace Eastbrokers AG and become the
holding structure for all Central and Eastern European operations in order to
take advantage of this new direction. In addition, WMP Bank intends to apply for
a full-service banking license in Austria. This would allow WMP Bank to fully
service its clients and would give the entire Eastbrokers European operations
additional strength and stability throughout the region.
[GRAPHIC OMITTED - bar chart (see table below)]
eastbrokers international consolidated annual revenue
(in millions)
1997 $ 5.74
1998 $10.14
1999 $25.15
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In the United States, EBI Securities gives Eastbrokers a solid base on
which to expand its investment banking and brokerage presence throughout the
United States. And, with the financial support of Eastbrokers, EBI Securities
will have the capital and support to significantly enlarge its retail and
institutional broker base, as well as expand its research, trading, and
corporate finance capabilities. Cohig has been a recognized leader in the
financing of emerging growth companies, as well as providing a full range of
brokerage services. Since Eastbrokers has built a similar niche throughout
Central and Eastern Europe and desired to expand into the U.S., the acquisition
was a natural strategic fit. Now, Eastbrokers/ Cohig can jointly pursue this
niche investment strategy on an international basis.
FINANCIAL PERFORMANCE
Since fiscal 1997, Eastbrokers International's annual revenue has grown
500% from $5 million to a projected $25 million for our fiscal year ended 1999.
We have grown from 30 employees to more than 400 and from two offices to more
than 30. This growth has allows us to sustain operations amid one of the most
volatile financial periods in this century. As with many other financial service
firms, the past 12 months has been difficult. During fiscal 1998, we suffered
significant losses in our European operations, when emerging market investors
fled the markets of Central and Eastern Europe as a result of the Asian
financial crisis. During the first half of calendar 1999, our U.S. operations
were hit hard by the extraordinary volatility in the U.S. securities market. We
have taken several necessary steps in our European operations, and as of the
first nine months of fiscal 1999, our European operations have reported a
profit. In the U.S., our operations have stabilized since the end of September
1998, and we expect that the U.S. operations will continue to be stable to
positive throughout the end of our fiscal year.
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CORPORATE STRUCTURE AND CAPABILITIES
THE UNITED STATES
EBI SECURITIES CORPORATION
[GRAPHIC OMITTED - bar chart (see table below)]
eastbrokers international consolidated total assets
(in millions)
1997 $ 31.9
1998 $ 44.8
1999 $ 54.4
Since the acquisition in May 1998, EBI Securities has spent
considerable time and resources building an infrastructure in terms of both
systems and personnel, which will position it to take advantage of what the
Company believes are significant growth opportunities. The year was also
complicated by one of the more severe market downturns of the past decade.
Market corrections are rarely pleasant and always expensive, and this one was no
exception. In this regard, while painful, we believe that the market's shakeout
has created opportunity for us in terms of acquisitions, and we also believe it
has pushed us to think outside the box and better rationalize our strategies and
leverage the components of our business to make the collective entity more
profitable.
EBI Securities expects 1999, to be a year that will be characterized by
significant growth in our retail base. We also believe that we will begin to
realize the benefits of both the acquisition of Cohig and our efforts with
respect to upgrading our systems and infrastructure. More specifically, we will
continue to direct resources toward increasing the breadth of our product
offerings and services, while at the same time continuing to expand and exploit
our expertise in the small cap arena. We believe that augmenting our full
service approach with our small cap niche provides us with a unique product mix,
as well as a myriad of opportunities to drive profits going forward.
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EUROPE
WMP BANK AKTIENGESELLSHAFT
WMP Bank Aktiengesellshaft ("WMP Bank AG") has operated in an
interesting environment for the first nine months of 1998. The period has been
highlighted by the financial meltdown of the Russian economy and subsequent
market turmoil in the former COMECON pact countries. Results for the period from
brokerage activity have not met our expectations due to the crisis and
investors' sudden lack of interest in Eastern European securities. Despite this
disappointment, WMP Bank AG reported record results for the nine months ending
September 30, 1998. Pre-tax income reached a record level of approximately $1.2
million on revenue of $2.5 million. These results are largely due to our
position as the largest specialist on the Vienna Sonstiger Handel Exchange,
where we act as the specialist for more than 800 financial instruments.
In 1999, WMP Bank AG expects to maintain its position as the leading
specialist on the Vienna market, as well as expand our success into other areas.
While we will maintain our current operations in Vienna, we are actively
expanding our Sales and Trading operations located in Klagenfurt, Austria. Due
to its geographic location, Klagenfurt offers WMP Bank AG better access to
clients from the prosperous regions of Austria and Northern Italy. Furthermore,
WMP's corporate finance activity is expected to yield strong results in the new
year. Focusing on emerging growth companies, the corporate finance department
offers traditional investment banking activities such as public and private
securities offering origination and placement as well as merger and acquisition
advisory services.
WMP Bank AG has great expectations for 1999, and looks forward to
expanding its role in Europe as a leading brokerage and investment banking firm.
With the unification of the monetary systems of 11 countries starting January 1,
1999, we expect Europe will start on a road to unity and economic expansion.
This will help our company as we have a strong presence in Austria that will
link us to Germany in the new European Community.
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EASTBROKERS A.G. AND SUBSIDIARIES
Central and Eastern Europe has more than 400 million people with vast
mineral resources and a highly educated population. Those countries that were
part of the Soviet Union bloc did not have the chance to fully develop their
economic potential. Their production was strictly limited to goods and services
as dictated by the Soviet planners. All production facilities were state-owned
and no private enterprises were allowed. Their financial system was totally
subservient to government policies with all banks, savings and loans, and
insurance companies in state hands. This all changed in January 1990, with the
removal of Communists from government and the subsequent elections. Since then,
all of these countries have experienced an enormous amount of difficulties in
the transition. It was hard to change the habits of people who lived under the
controlled system of wages, fixed prices, and no economic risk. The fall of
communism became one of the most momentous historical and political events of
this century. In its wake, an exciting, dynamic investment environment was born.
However, the past year has witnessed many dramatic events throughout
the Central and Eastern European financial markets. Marked by the Russian
economic collapse, the region's markets experienced downward pressure and have
lost the interest of foreign institutional investors. As a result, many of our
country units have reported negative performances for the past year.
In response to the current economic climate, Eastbrokers A.G. has begun
to reposition itself. It has sold its Czech Republic, Hungarian and Bulgarian
operations and closed operations of Eastbrokers Moscow and Eastbrokers Romania.
This decision allows Eastbrokers A.G. to effectively position its resources in
more developed markets that are expected to regain the interest of foreign
institutional investors in the near term. Positive results have been reported by
Eastbrokers Warsaw since the installation of a new management team in May 1998.
Eastbrokers Ljubljana continues to achieve positive results through its strong
local presence and consulting activities. Eastbrokers' operations in Kazakhstan
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and the newly created unit in Azerbaijan have produced promising results for
1998. However, Eastbrokers Vienna expects continued weakness in the Central and
Eastern European investment environment for 1999, with foreign investors
focusing primarily on the markets of Austria and Poland. Therefore, Eastbrokers
A.G. will concentrate its efforts on the developments in the markets of Austria,
Poland, Slovenia and Croatia, but will continue its affiliations in the other
countries as well.
FUTURE GROWTH AND OPPORTUNITY
Looking ahead to 2000, Eastbrokers International expects to continue
its growth by acquiring other similarly sized investment banking and brokerage
operations and building strategic relationships both domestically and
internationally. We will strive to be a leader in our niche u middle market
transactions. We stand ready to expand and are investing heavily into new
systems and solutions that will allow us to better manage our growth. We are
educating our salespeople on new techniques and computerized tools to address
the changing demographics of the investing public. In the United States, our
salespeople are using sophisticated asset allocation modeling software to target
the investor's personal goals. Well researched, diversified portfolios are
earning our brokers a reputation as uniquely qualified, sophisticated client
advisors. As we aggressively add to our sales force, we will continue to stress
the quality and professionalism of our brokers.
Eastbrokers International, through its subsidiaries, offers its clients
unique investment opportunities. Large enough to get the job done, yet small
enough to find and tailor creative emerging growth investment options. We have a
tremendous opportunity to position the firm as a market leader in the emerging
growth, international, investment banking business. We thank you for your
support and pledge to do our very best in providing a solid future to our
shareholders, clients, and employees.
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CORPORATE DATA
EASTBROKERS INTERNATIONAL OFFICERS AND DIRECTORS
INCORPORATED Martin A. Sumichrast
15245 Shady Grove Road Chairman of the Board, President
Suite 340 and Chief Executive Officer
Rockville, Maryland 20850
Tel.: 301.527.1110 Wolfgang Kossner
Fax: 301.527.1112 Vice Chairman of the Board
TRANSFER AGENT Dr. Michael Sumichrast
American Stock Transfer & Trust Company Director
40 Wall Street
New York, New York 10005
Tel.: 212.936.5100 Jay Schifferli
Fax: 718.236.4588 Director
LEGAL COUNSEL Dr. Segfried Samm
Kelley Drye & Warren LLP Director
Two Stamford Plaza
281 Tresser Boulevard
14th Floor Kevin D. McNeil
Stamford, Connecticut 06901 Chief Financial Officer,
Tel.: 203.324.1400 Secretary and Treasurer
Fax: 203.327.2669
OPERATING COMMITTEE
INDEPENDENT ACCOUNTANTS Martin A. Sumichrast
Deloitte & Touche Chairman of the Board, President
1100 Mercantile Bank Building and Chief Financial Officer
2 Hopkins Plaza
Baltimore, Maryland 21201-2983 Wolfgang Kossner
Tel.: 410.576.6708 Vice Chairman of the Board
Fax: 410.837.0510
Steve Hinkle
Chairman of the Board and Chief
CORPORATE SECURITIES Executive Officer,
Eastbrokers International Incorporated common EBI Securities Corporation
stock and common stock warrants trade on the
NASDAQ SmallCap Market under the symbols Kevin D. McNeil
EAST and EASTW, respectively. Chief Finanicial Officer,
Secretary and Treasurer
Gerhard Diesner
Managing Director, WMP Bank AG
Alexandra Beier-Cizek
Managing Director, Eastbrokers
Beteiligungs AG
Mili Kus
Managing Director,
Eastbrokers Slovenia
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LOCATIONS
HEADQUARTERS REGIONAL
Eastbrokers International Incorporated Eastbrokers Beteiligungs AG
15245 Shady Grove Road Schlickgasse 1
Suite 340 1090 Vienna, Austria
Rockville, Maryland 20850 Tel.: 011.43.1.317.2700
Tel.: 301.527.1110 Fax: 011.43.1.317.2700.73
Fax: 301.527.1112
EBI Securities Corporation
CORPORATE OFFICES 6300 Syracuse Way
EBI Securities Corporation Suite 400
Englewood, Colorado Englewood, Colorado 80111
Baltimore, Maryland Tel.: 800.289.5691
Beverly Hills, California Fax: 303.694.3728
Boca Raton, Florida
Charlotte, North Carolina AFFILIATE OR FRANCHISE OFFICES
Cherry Creek, Colorado EBI Securities Corporation
La Jolla, California Albuquerque, New Mexico
New York, New York Aspen, Colorado
Spokane, Washington Colorado Springs, Colorado
Newark, Delaware
Eastbrokers Beteiligungs AG Detroit, Michigan
Warsaw, Poland Denver, Colorado
Zagreb, Croatia Los Angeles, California
Ljubljana, Slovenia Phoenix, Arizona
Almaty, Kazakhstan Santa Monica, California
Baku, Azerbaijan Sea Girt, New Jersey
Seattle, Washington
Eastbrokers
Budapest, Hungary
Sofia, Bulgaria
Prague, Czech Republic,
(Stratego Invest a.s.)
Bratislava, Slovakia
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Certain information set forth in this report under the captions Item 1
"Description of Business", and Item 6 "Management's Discussion and Analysis or
Plan of Operation" includes "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. In addition, from time to
time, the Company may publish "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, or make oral statements that
constitute 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. 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) the risks and
uncertainties set forth under the caption "Risk Factors" which appears in Item
1. Eastbrokers International Incorporated 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. Section 21E of the Securities and Exchange Act of 1934, as
amended, or make oral statements that constitute 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. 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) the risks and uncertainties set forth
under the caption "Risk Factors" which appears in Item 1.
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.
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In 1996, the Company re-evaluated its 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 the
Company's prospects by both providing the Company with a vehicle for its
existing acquisition strategy while extending its opportunities beyond the Czech
Republic to the entirety of Central and Eastern Europe. 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. The Company generally owns
at least 50 percent but less than 100 percent of each of the active subsidiaries
and affiliates. 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 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 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
Eastern and Central 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)
Budapest, Hungary, (c) Bratislava, Slovakia, (d) Almaty, Kazakhstan, (e)
Istanbul, Turkey, (f) Moscow, Russia, (g) Bucharest, Romania, (h) Sofia,
Bulgaria, (i) Ljubljana, Slovenia, (j) Zagreb, Croatia, and (k) Warsaw, Poland.
Through its subsidiaries and affiliate offices, the Company is a member of the
Vienna Stock Exchange, the Budapest Stock Exchange, the Bratislava Stock
Exchange, the Zagreb Stock Exchange, the Ljubljana Stock Exchange, the Bucharest
Stock Exchange, the Central Asian Stock Exchange, and the Warsaw Stock Exchange.
Eastbrokers Vienna also owns 51% 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% 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
Eastern and Central 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.
Eastbrokers Vienna is also a Central and Eastern European investment
banking firm which provides advice to, and raises capital for, Eastern and
Central European companies. Eastbrokers Vienna provides advisory services on key
strategic matters such as mergers, acquisitions, privatizations, joint ventures
as well as long range financial planning. Eastbrokers Vienna seeks to raise
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 Eastbrokers North America, Inc. ("Eastbrokers NA")
in March 1997. Eastbrokers NA is a registered broker-dealer with the SEC and a
member of the National Association of Securities Dealers ("NASD"). It commenced
operations in October 1997. Eastbrokers NA is currently approved to do business
in 17 states and the District of Columbia. Based primarily on the operating
results of Eastbrokers NA for the year ended March 31, 1998, and the hurdles
encountered in locating and marketing suitable investment products developed in
Central and Eastern Europe, the Company determined that its plan to use
Eastbrokers NA to complement the Company's European operations was no longer
viable and a change in both focus and direction was required with respect to
Eastbrokers NA. After the acquisition of EBI Securities in May 1998, the Company
reduced the level of its operations in Eastbrokers NA and is in the process of
evaluating how best to utilize this entity. The office space previously occupied
by Eastbrokers NA is in the process of being 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.
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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 there being at March 31, 1998 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.
During April 1998, a date subsequent to the date of this Report but
prior to the filing date, 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 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, subsequent to the date of this Report, but prior to the
filing date, 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. 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, 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 establish itself with investors and corporate finance clients through
its commitment to a professional but 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, 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 Item 6 "Management's Discussion and Analysis or Plan of
Operation - Impact of the Year 2000".
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%, payable at maturity, and
mature in June 2002.
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In June 1998, subsequent to the date of this Report, but prior to the
filing date, the Company sold 73.55% of its interest in Eastbrokers Prague a.s.
See "Acquisitions and Dispositions Subsequent to the Fiscal Year End" below in
this Item 1 Description of Business.
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 focused on maximizing the
profitability of the acquisitions that have been consummated to date, while it
continues 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 93.68% to
approximately 95.73%.
Through its subsidiary, Eastbrokers Vienna, the Company acquired a
48.1% 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% 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%. 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%.
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. WMP GmbH was originally created to hold the
assets of WMP.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
S+_warenindustrie Beteiligungs GmbH (SWIB) to Peter Schmid, 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).
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, subsequent to the date of this Report, but prior to the
filing date, 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, well-capitalized, 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.
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In June 1998, subsequent to the date of this Report, but prior to the
filing date, 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).
GOVERNMENT REGULATION
The Company has operations based in the United States and 11 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 U.S. Securities and Exchange Commission (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' and
Eastbrokers NA's broker dealer operations are subject to the terms of their
respective Restriction Agreements with the NASD. In the event that EBI
Securities or Eastbrokers NA 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 and Eastbrokers NA is
registered in 17 states. EBI Securities and Eastbrokers NA are subject to the
SEC net capital rules, which require them to maintain prescribed levels of
capital in order to conduct business. Each of EBI Securities and Eastbrokers NA
has capital in excess of the required capital.
The Companies 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 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
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 Eastern and Central 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.
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.
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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 October 30, 1998, the Company currently has 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
environment will not, in the opinion of the Company, have a material effect on
the capital expenditures, earnings, or the competitive position of the Company.
RISK FACTORS
The Company faces a variety of risks in the conduct of its business,
any of which could result in a material adverse effect on the Company, its
business and its financial performance. Certain of these risks are summarized
below. This summary is not intended to be a complete list of all matters that
could adversely affect the Company, and there are many factors beyond the
Company's control that affect it, its business and its financial performance.
VOLATILE NATURE OF SECURITIES BUSINESS
The securities business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the underwriting or ownership of securities, trading, arbitrage
and merchant banking activities, counterparty failure to meet commitments,
customer fraud, employee fraud, misconduct and errors, failures in connection
with the processing of securities transactions and litigation.
A securities firm's business and its profitability are also affected by
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 issue or merger,
acquisition, restructuring, and leveraged capital activities, including
leveraged buyouts and high-yield financing, or the level of participation in
financing and investment related to such activities, generally resulting in
lower revenues from investment and merchant banking fees and underwriting and
corporate development investments. Reduced volume of securities transactions and
reduced market liquidity generally result in lower revenues from dealer and
trading activities and commissions.
Lower price levels of securities may result in a reduced volume of
transactions and in losses from declines in the market value of securities held
in trading, investment and underwriting positions. Sudden sharp declines in
market values of securities and the failure of issuers and counterparties to
perform their obligations can result in illiquid markets. In such markets, the
Company may not be able to sell securities and may have difficulty in covering
its securities positions. Such markets, if prolonged, may also lower the
Company's revenues from investment banking, merchant banking and other
investments, and could have a material adverse effect on the Company's results
of operations and financial condition.
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The Company's principal business activities, investment banking,
securities sales and trading and correspondent brokerage services are, by their
nature, highly competitive and subject to various risks, volatile trading
markets and fluctuations in the volume of market activity. Consequently, the
Company's net income and revenues have been, and may continue to be, subject to
wide fluctuations, reflecting the impact of many factors beyond the Company's
control, including securities market conditions, the level and volatility of
interest rates, competitive conditions and the size and timing of transactions.
The securities business and its profitability are affected by many
factors of a national and international nature, including economic and political
conditions, broad trends in business and finance, legislation and regulation
affecting the national and international business and financial communities,
currency values, inflation, market conditions, the availability of short-term or
long-term funding and capital, the credit capacity or perceived creditworthiness
of the security industry in the marketplace and the level and volatility of
interest rates.
SIGNIFICANT COMPETITION WITHIN THE SECURITIES INDUSTRY
The Company encounters significant competition in all aspects of the
securities business and competes worldwide directly with other domestic and
foreign securities firms, a number of which have greater capital, financial and
other resources than the Company. In addition to competition from firms
currently in the securities business, there has been increasing competition from
other sources, such as commercial banks and investment boutiques.
As a result of anticipated legislative and regulatory initiatives in
the U.S. to remove or relieve certain restrictions on commercial banks, it is
possible that competition in some markets currently dominated by investment
banks may increase in the near future.
Such competition could also affect the Company's ability to attract and
retain highly skilled individuals to conduct its various businesses. The
principal competitive factors influencing the Company's business are its
professional staff, the Company's reputation in the marketplace, its existing
client relationships, the ability to commit capital to client transactions and
its mix of market capabilities. The Company's ability to compete effectively in
securities brokerage and investment banking activities will also be influenced
by the adequacy of its capital levels. In addition, the Company's ability to
expand its business may depend on its ability to raise additional capital. See
"Description of Business - Competition".
BUSINESS SUBJECT TO EXTENSIVE FEDERAL, STATE AND FOREIGN REGULATIONS
The Company's business is, and the securities industry generally is,
subject to extensive regulation in the United States, Austria and all other
Central and Eastern European states where its subsidiaries operate at the state
level, as well as by industry 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 by The Securities and Futures Authority of the United
Kingdom. See Description of Business u Government Regulation.
The Company's business, and the securities industry generally, are
subject to extensive regulation in the United States at both the federal and
state levels. In addition, SROs such as the NASD require strict compliance with
their rules and regulations. Failure to comply with any of these laws, rules or
regulations could result in fines, suspension or expulsion, which could have a
material adverse affect upon the Company.
The scope of EBI Securities' and Eastbrokers NA's broker dealer
operations are subject to the terms of their respective Restriction Agreements
with the NASD. In the event that EBI Securities or Eastbrokers NA violates the
terms of its Restriction Agreement, its NASD membership can be suspended or
revoked and the NASD may impose fines upon or censure either EBI Securities or
Eastbrokers NA.
Compliance with many of the regulations applicable to the Company
involves a number of risks, particularly in areas where applicable regulations
may be unclear. The 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 which may result in
censure, fine, civil penalties (including treble damages in the case of insider
trading violations), the issuance of cease-and-desist orders, the
de-registration or suspension of a broker-dealer, investment adviser or futures
commission merchant, the statutory disqualification of its officers or employees
or other adverse consequences, and, even if none of such actions is taken, could
have a material adverse effect on the Company's perceived creditworthiness,
reputation and competitiveness. Customers of the Company or others who allege
that they have been damaged by the Company's violation of applicable regulations
also may seek to obtain compensation from the Company, including the unwinding
of any transactions with the Company.
Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by the
SEC, the Ministry or other Austrian or foreign governmental regulatory
authorities and SROs or changes in the interpretation or enforcement of existing
laws and rules may adversely affect the manner of operation and profitability of
the Company.
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The Company's businesses may be materially affected not only by
regulations applicable to it directly in the conduct of its business, but also
by the effect laws, rules and regulations of general application may have on the
market for the Company's products and services. For example, the volume of the
Company's underwriting, merger and acquisition and merchant banking business in
any year could be affected by, among other things, existing and proposed tax
legislation, antitrust policy and other governmental regulations and policies
(including the interest rate policies) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high-yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and investment
banking business, which in turn could adversely affect the Company's
underwriting, advisory and trading revenues related thereto.
MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH UNDERWRITING AND TRADING
ACTIVITIES
The Company's underwriting, securities trading, market-making and
arbitrage activities are conducted by the Company as principal and subject the
Company's capital to significant risks, including market, credit (including
counterparty) and liquidity risks.
The Company's underwriting, securities trading, market-making and
arbitrage activities often involve the purchase, sale or short-sale of
securities as principal in markets that may be characterized by relative
illiquidity or that may be particularly susceptible to rapid fluctuations in
liquidity. The Company from time to time has large position concentrations in
certain types of securities or commitments and in the securities of or
commitments to a single issuer, including sovereign governments and other
entities, issuers located in a particular country or geographic area, or issuers
engaged in a particular industry. Through its subsidiaries and affiliate
offices, the Company engages in proprietary trading of Eastern European
securities with an emphasis on government and corporate bonds, local debt
instruments and Central and Eastern European equity securities, which involve
risks associated with the political instability and relative currency values of
the nations in which the issuer principally engages in business as well as the
risk of nationalization. In addition, the Company has, from time to time,
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 the
Company's high-yield securities inventories and the impact of such activities
upon the Company's results of operations can fluctuate from period to period as
a result of customer demands and economic and market considerations.
In addition, the trend in all major capital markets, for competitive
and other reasons, toward larger commitments on the part of lead underwriters
means that, from time to time, an underwriter may retain significant position
concentrations in individual securities. Such concentrations increase the
Company's exposure to specific credit, market and political risks. In addition,
material fluctuations in foreign currencies vis-a-vis the U.S. Dollar, in the
absence of countervailing covering or other procedures, may result in losses or
gains in the carrying value of certain of the Company's assets located or
denominated in non-U.S. jurisdictions or currencies.
The Company derives a significant portion of its revenue from
commissions generated by its broker dealers from retail brokerage transactions
in equity and debt securities, underwriting activities and private placements.
The Company believes 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 a
principal and the risk of a change in the market price of such securities and of
a decrease in the liquidity of markets, all of which may limit the broker
dealer's ability to resell securities it purchased or to repurchase securities
sold in such transactions. 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".
CAPITAL INTENSIVE NATURE OF AND POTENTIAL LOSSES RESULTING FROM MERCHANT
BANKING ACTIVITIES
Securities firms, including the Company, increasingly facilitate major
client transactions and transactions sponsored by their proprietary pools of
capital by using their own capital in a variety of investment activities that
have been broadly described as merchant banking.
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Such activities include, among other things, purchasing equity or debt
securities or making commitments to purchase such securities in merger,
acquisition, restructuring and leveraged capital transactions, including
leveraged buyouts and high-yield financing. Such positions and commitments may
involve substantial amounts of capital and significant exposure to any one
issuer or business, as well as market, credit and liquidity risks. Equity
securities purchased in these transactions generally are held for appreciation,
are not readily marketable and typically do not provide dividend income. Debt
securities purchased in such transactions typically rank subordinate to bank
debt of the issuer and may rank subordinate to other debt of the issuer. In
addition, the Company also provides and arranges bridge financing, which assures
funding for major transactions, with the expectation that refinancing will be
obtained through the placement of high-yield debt or other securities. Such
activities may also involve substantial amounts of capital and significant
exposure to any one issuer as well as various risks associated with credit
conditions and vulnerability to general economic conditions.
There can be no assurance that the Company will not experience
significant losses as a result of such activities. See Item 6 "Management's
Discussion and Analysis or Plan of Operation".
DERIVATIVE FINANCIAL INSTRUMENTS
At the present time, the Company does not engage in the use of
derivatives financial instruments. In many of the countries where the Company
has operations (i.e., Russia, Kazakhstan and Bulgaria), the local currencies are
referred to as "soft" or "exotic". As such, there are very few, if any, cost
effective hedging strategies available to the Company or potential investors.
The Company's inability to engage in currency hedging activities may result in
its earnings being subject to greater volatility due to exchange rate
fluctuations.
REQUIREMENTS FOR ADDITIONAL CAPITAL
The Company may need to raise additional funds to provide working
capital or in order for the Company to respond to unforeseen needs or to take
advantage of unanticipated opportunities. Over the longer term, it is likely
that the Company will require substantial additional monies to continue to fund
the Company's 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 the Company. If adequate funds are not available on acceptable
terms, the Company may not be able to take advantage of market opportunities, to
develop new services or products or otherwise respond to competitive pressures.
Such inability could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON AVAILABILITY OF CAPITAL AND FUNDING
A substantial portion of the Company's total assets consists of highly
liquid marketable securities and short-term receivables arising from securities
transactions. The highly liquid nature of these assets provides the Company with
flexibility in financing and managing its business. However, certain of the
Company's activities such as merchant banking frequently involve substantial
capital commitments in securities which are often illiquid. The funding needs of
the Company are satisfied from internally generated funds and capital, including
equity, long-term debt and short-term borrowings which consist of securities
sold under agreements to repurchase ("repurchase agreements"), master notes and
committed and uncommitted lines of credit.
All repurchase transactions and a portion of the Company's bank
borrowings are made on a collateralized basis. Liquidity management includes the
monitoring of assets available to hypothecate or pledge against short-term
borrowing. The Company maintains borrowing relationships with a broad range of
banks, financial institutions, counterparties and others. The volume of the
Company's borrowings generally fluctuates in response to changes in the amount
of resale transactions outstanding, the level of the Company's securities
inventories and overall market conditions. Availability of financing to the
Company can vary depending upon market conditions, the volume of certain trading
activities, credit ratings, credit capacity and the overall availability of
credit to the securities industry and there can be no assurance that adequate
financing to support the Company's businesses will continue to be available in
the future. See Item 6 "Management's Discussion and Analysis or Plan of
Operation".
POTENTIAL RESTRICTIONS ON BUSINESS OF, AND WITHDRAWAL OF CAPITAL FROM,
REGULATED SUBSIDIARIES RESULTING FROM NET CAPITAL REQUIREMENTS
As a registered broker-dealer and member of numerous stock exchanges
throughout Central and Eastern Europe, the Company is required to comply with
each of the countries' regulatory authorities and net capital rules of the stock
exchanges. These rules, which specify minimum net capital requirements for
registered broker-dealers and stock exchange members, are designed to assure
that broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business and have the effect of
requiring that at least a substantial portion of their assets be kept in cash or
highly liquid investments. Compliance with such net capital requirements could
limit operations that require the intensive use of capital, such as underwriting
and trading activities. These rules also could restrict the Company's ability to
withdraw capital from the regulatory authorities, even in circumstances where
these authorities hold more than the minimum amount of the Company's required
capital, which in turn, could prevent or limit the Company's ability to pay
dividends, repay debt and redeem or repurchase shares of its outstanding capital
stock.
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POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of the Company's business involve substantial risks of
liability. In recent years, there has been increasing incidence of litigation
involving the securities industry, including class actions that generally seek
substantial damages. Companies engaged in the underwriting and distribution of
securities are exposed to substantial liability under applicable securities
laws.
DEPENDENCE ON PERSONNEL AND CERTAIN KEY MANAGEMENT
Most aspects of the Company's business are dependent on highly-skilled
individuals. The Company devotes considerable resources to recruiting, training
and compensating such individuals and has taken further steps to encourage such
individuals to remain in the Company's employ. Individuals employed by the
Company may, however, choose to leave the Company at any time to pursue other
opportunities. In addition, the operation of the Company's business is
principally dependent on certain key management personnel. In particular, Martin
A. Sumichrast, Wolfgang Kossner, and Peter Schmid have played significant roles
in the promotion, development and management of the Company. Wolfgang Kossner
serves in an advisory role and is not compensated by the Company. If Mr.
Kossner's affiliation to the Company were to cease, or he was unable to continue
to serve in this role, there may be a significant adverse effect on the
performance of the Company as a whole. Martin A. Sumichrast and Peter Schmid are
officers, directors, and employees of the Company. If the employment by the
Company of either of these two people terminates, or they are unable to perform
their duties, there may be a significant adverse effect on the performance of
the Company as a whole. The Company's potential growth and any expansion into
areas and activities such as new markets or the development of new products
requiring additional expertise will be expected to place additional demands on
the Company's human resources. These demands are expected to require the
addition of new management personnel and the development of additional expertise
by existing management personnel. The failure to acquire such services or to
develop such expertise could have a material adverse effect on the Company's
prospects for success. Competition for such personnel is intense and no
assurance can be given that the Company will be able to hire and/or retain
adequate personnel. At the present time, the Company has a key-man life
insurance policy in effect on Mr. Sumichrast. However no assurance can be
provided that the proceeds from such policy will be adequate to offset the loss
of his services. The Company does not have key-man life insurance policies in
effect with respect to Messr. Kossner or Schmid. See Item 9 "Directors and
Executive Officers of the Registrant".
OPERATING LOSSES AND FINANCIAL CONDITION
Since its formation, the Company has suffered substantial cash flow
deficits and operating losses. The net loss for the year ended March 31, 1998
was $4,947,557. As of such date, the Company had cash and cash equivalents of
$7,156,702. There can be no assurance that the Company's future operations will
be profitable or that it will have available funds adequate to fund its
operations. Should the operations of the Company be profitable, it is likely
that the Company would retain much or all of its earnings to finance future
growth and expansion.
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY
OF SECURITIES
The SEC has adopted regulations which generally define "penny stock" to
be any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price less than $5.00 per share, subject to certain
exceptions. The Company's Common Stock is currently listed in the Nasdaq
SmallCap Market and, as a result, such securities are currently exempt from the
definition "penny stock". If the Common Stock is removed from listing on Nasdaq
at any time, the Company's securities may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally, those persons with assets in excess of $1,000,000 or annual income
exceeding $200,000, $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of such securities and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities in the
secondary market.
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 the Company's 1996 Stock Option Plan, and other outstanding options
and warrants, the holders thereof 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 terms on which the Company may obtain
additional financing may be adversely affected by the existence of such options
and warrants. For example, the holders of the warrants could exercise them at a
time when the Company was attempting to obtain additional capital through a new
offering of securities on terms more favorable than those provided by the
warrants and options.
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POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
As of December 1997, the Company's Board of Directors authorized the
issuance of up to 10,000,000 shares of preferred stock. As of October 30, 1998,
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 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 and
could be used by the Board of Directors 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, as well as 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.
DELISTING OF SECURITIES TO ADVERSELY AFFECT MARKET
In the event that the Common Stock were to no longer meet applicable
Nasdaq requirements including timely reporting and were delisted from Nasdaq,
the Company would attempt to have its securities traded in the over-the-counter
market via the Electronic Bulletin Board or the "pink sheets". In such event,
holders of the Company's securities would likely encounter greater difficulty in
disposing of these securities and/or obtaining accurate quotations as to the
prices of the Company's securities.
SPECIFIC RISKS OF THE GEOGRAPHIC AREA COVERED BY THE COMPANY
The Company's investments will be primarily in securities of issuers
resident in an area which is currently in a state of flux - Central and Eastern
Europe and Central Asia. Its political institutions and economic policies now
face the challenges of rapid change. Its population is ethnically diverse and
cultural and religious tensions abound. Memories of conflicts, past injustices
and the legacy of the denial of justice and the expropriation of property will
continue to create tension for years to come. These problems will compound the
difficulties of the change from a centrally planned economy to a market economy.
For these reasons the Company's investments will be subject to risks of a nature
and degree not normally encountered in relation to more developed economies and
additional to those inherent in any equity investment. Specific examples of some
of these risks are described below:
o LIQUIDITY OF THE COMPANY'S INVESTMENTS: The nature of the Company's
investments limits their potential secondary market. Accordingly, the Company
may not be able to achieve the full value of its investments on disposal. Once
local stock markets are operational, it is anticipated that liquidity will
improve, but there exists no guarantee that the markets will be as liquid as
those of developed countries.
o POLITICAL AND ECONOMIC FACTORS: The countries in which the Company's
operations are concentrated had centrally-planned, socialist economies for many
years. Attempts at political and economic reform have been made with limited
success and it is impossible to foresee if such reforms will achieve their
intended aims. Restrictions may be imposed on investing in specific companies or
industries which may be considered to be important or sensitive to national
interests and which may also represent the best investment opportunities. In
addition, investments may be expropriated on a change of government policy.
o VALUATION RISK: Accounting and financial reporting standards in the
selected countries are not equivalent to International Accounting Standards and,
consequently, less information is available to investors in the selected
countries than in more developed capital markets. Nevertheless, the Company will
use valuations, financial reports issued by international auditing firms and all
other means will be applied in order to monitor the unlisted investments.
o PROBLEMS OF TRANSITION AND BUSINESS FAILURE: Until very recently,
virtually all industrial output within the Comecon and Warsaw Pact countries was
from state-owned industry. As a result, few individuals understand basic
capitalistic management skills and techniques. Privatization of much of the
region's industry and the transition to a more market-orientated economy will be
difficult. Industry in the region is considerably less developed and less
efficient than industry in Western Europe and, in addition to doubts as to the
continuing viability of much of the region's industry, those businesses which
survive are likely to require considerable capital investment and restructuring.
The failure of one or more businesses in which the Company has invested may have
a significant adverse effect on the performance of the Company as a whole.
o LEGAL INFRASTRUCTURE: The Company and its advisors will be reliant on
legal advisors in the jurisdictions in which it invests. Due to the inadequacy
or immaturity of legal systems in some jurisdictions and the difficulty of
obtaining adequate or satisfactory legal advice, it may be impossible to be
certain that the Company has valid legal title to the investments located in
such jurisdictions or to be able to protect its interests in such investments.
o CHANGES IN LAW AND ENFORCEMENT OF RIGHTS: Legislation relating to
securities, stock markets and property rights is either non existent or has been
introduced very recently in several of the countries where the Company's
operations are located. Existing legislation is likely to be subject to
extensive amendment and significant new legislation may be introduced at any
time. It may be difficult to enforce the Company's rights in cases where
competing claims arise or in case of re-nationalization.
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o INVESTMENT AND REPATRIATION RESTRICTIONS: Repatriation of investment
income, capital and the proceeds of sales by foreign investors may require
governmental registration and/or approval. A number of countries in which the
Company may invest do not have freely convertible currencies or their currencies
may only be convertible at rates determined by their governments. Repatriation
restrictions may also be imposed at any time. Changes in the value of currencies
in which the Company's investments are denominated will result in a
corresponding change in the value of the Company's assets which are generally
denominated in the local functional currencies. Investors should note that the
local currencies involved may be subject to rapid devaluation against the major
"hard" currencies, with the result that delays in currency conversion may cause
significant losses.
o TAXATION: Taxation of dividends and capital gains received by
non-residents varies among the selected countries. In addition, the selected
countries generally have less well-defined tax laws and procedures, and such
laws may permit retroactive taxation. As a result, the Company could in the
future become subject to local tax liabilities that had not been anticipated in
conducting its investment activities or valuing its assets.
ENFORCEABILITY OF CIVIL LIABILITIES
A substantial portion of the Company's assets are located outside the
United States. It may be difficult for investors to enforce outside of the
United States judgments against the Company obtained in the United States in any
actions, including actions predicated upon the civil liability provisions of the
securities laws of the United States. In addition, certain of the officers and
directors of the Company are not citizens or residents of the United States and
all or a substantial portion of the assets of such persons are or may be located
outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States against such persons or to
enforce judgments obtained in the United States, including judgments predicated
upon the civil liability provisions of the securities laws of the United States.
ITEM 2. DESCRIPTION OF PROPERTY
The Company does not own any real property. Its corporate offices are
located in Rockville, Maryland. At March 31, 1998, the Company leased its office
space in Rockville, Maryland and through its subsidiaries it leased office space
in New York, New York; Vienna, Austria; Klagenfurt, Austria; Sofia, Bulgaria;
Zagreb, Croatia; Budapest, Hungary; Almaty, Kazakhstan; Warsaw, Poland;
Bucharest, Romania; Moscow, Russia; Bratislava, Slovak Republic; and Ljubljana,
Slovenia. Commencing with the acquisition of EBI Securities in May 1998 the
Company also leased office space in Denver, Colorado; Aspen, Colorado; Colorado
Springs, Colorado; Meza, Arizona; La Jolla, California; Los Angeles, California;
Newark, Delaware; Boca Raton, Florida; Baltimore, Maryland; Farmington,
Michigan; Aberdeen, New Jersey; Sea Girt, New Jersey; Albuquerque, New Mexico;
Charlotte, North Carolina; Seattle, Washington; and Spokane, Washington.
The leases 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.
ITEM 3. LEGAL PROCEEDINGS
Through its recently acquired subsidiary, EBI Securities, the Company
is subject to several legal proceedings in various jurisdictions throughout the
United States.
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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.
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 titled 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the Company's
fiscal year to a vote of security holders through the solicitation of proxies or
otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market
under the symbol EAST (previously, the symbol was CZCH).
The following table sets forth the reported high and low bid quotations
on a calendar year basis (as adjusted for the one-for-five reverse split of the
Company's Common Stock) 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.
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 (through October 26, 1998) $ 5.0000 $ 3.8750
On October 26, 1998, the closing bid price for the Company's Common
Stock as reported on the NASDAQ SmallCap Market system was $5.00 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.
The following information sets forth all securities of the Company sold
by it within the past three years in transactions that were not registered under
the Securities Act of 1933, as amended:
On August 1, 1996, the Company issued 1,080,000 shares of its Common
Stock to the selling security holders of Eastbrokers 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.
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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% 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.
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.
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.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The information contained in this Item 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 of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
or make oral statements that constitute 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.
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
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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) the risks and uncertainties set forth
under the caption Risk Factors which appears in Item 1. Further, the Company
undertakes no obligation to release publicly any revisions to these forward
looking statements to reflect events or circumstances occurring after the date
hereof or to reflect unanticipated events or developments.
GENERAL
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-KSB.
The Company's principal activities changed dramatically during the
fiscal year ended March 31, 1997. The Company completely disposed of its
interest in the Hotel Fortuna, a.s. (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.
The earnings of the Company are subject to wide fluctuations since
there are many factors over which the Company has little or no control. In
particular, the overall volume of trading, the volatility and general level of
market prices, and fluctuations in foreign currency exchange rates are important
variables which may significantly affect its operations.
Through its subsidiary, Eastbrokers Vienna, the Company acquired a
48.1% 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% 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%. 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%.
PLAN OF OPERATION
On August 1, 1996, the Company consummated its acquisition of
Eastbrokers Vienna reflecting its previously stated objective of seeking to
invest into, merge with or acquire one or more companies in growth oriented
industries. Although the Company's focus had been primarily in the Czech
Republic, its original mission was to pursue such investment opportunities
throughout Eastern and Central Europe. The acquisition of Eastbrokers Vienna is
intended to not only provide an earnings stream from its core brokerage
business, but also positions the Company to provide investment banking and
corporate finance services in an emerging market infrastructure and growth
industries.
The Company's business strategy is to (1) utilize its marketing and
Central and Eastern Europe emerging market expertise to take advantage of
opportunities for growth in this sector of the global securities market; (2)
develop the base of its asset management business through concentrating on
Central and Eastern European debt and equity securities; (3) enhance and develop
the Company's merchant banking activities; (4) identify potential corporate
finance candidates for investment banking opportunities; and (5) utilize its
expertise in the privatization activities still available in Central and Eastern
Europe. Management also believes there are significant opportunities available
in this region for specialized account and institutional sales.
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.
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The value of international fixed income products also responds to
interest rate changes in the U.S. and abroad. In general, the value of such
products will rise when interest rates fall, and fall when interest rates rise.
However, interest rates in each foreign country and the U.S. may change
independently of each other.
Debt and equity securities in emerging markets such as Central and
Eastern Europe may also not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater risk than securities of
U.S companies. Investing in Central and Eastern European securities may further
result in higher expenses than investing in domestic securities because of costs
associated with converting foreign currencies to U.S. Dollars and expenses
related to foreign custody procedures. Investment in Central and Eastern
European securities may also be subject to local economic or political risks,
including instability of some foreign governments, inadequate market controls,
the possibility of currency blockage or the imposition of withholding taxes on
dividend or interest payments and the potential for expropriation,
re-nationalization or confiscatory taxation and limitations on the use or
repatriation of funds or other assets.
RESULTS OF OPERATIONS
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. Readers of this Report 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.
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 S flwarenindustrie Beteiligungs GmbH (SWIB) to Peter Schmid 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 Item 7 "Financial
Statements". The overall increase in the volume of revenue and expenses is
indicative of a change from a one location, single operating unit to a
multi-location, diverse entity.
Pro forma results of operations as presented in Note 5 "- Business
Acquisitions" reflect total revenues for the year ended 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 for future use in the U.S. The Company has established a
valuation allowance for the Austrian 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 quarter ended
March 31, 1998. 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
25
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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.
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 is limited to its investment in Vodni Stavby Praha
a.s., a security traded on the Prague Stock Exchange Main Market (Czech
Republic). As of March 31, 1997, the market value of the Company's ownership
interest in this security was approximately $1,750,000. 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 u $1,030,270, a security of a Bulgarian pharmaceutical
company traded on the Bulgarian Stock Exchange u$3,185,630, and a security of a
Bulgarian oil refinery traded on the Bulgarian Stock Exchange u $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 - $675,456, Bulgaria - $536,587, Slovenia - $150,994, Czech Republic -
$72,994, Others - $75,886; and for 1998 to full consolidation for this
subsidiary. The concentration of receivables from affiliates by country are as
follows: for 1997 7, respectively. The concentration e 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 investments in each affiliate for the year
ended March 31, 1998 were as follows: Eastbrokers NA - $512,036. As noted
elsewhere in this Form 10-KSB, Eastbrokers Vienna owns 51 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.
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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 introductions 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 1998 and 1999 is very positive. In its most
recent projections the Austrian Institute for Economic Research (WIFO) projects
growth rates of 3 percent and 3.2 percent for 1998 and 1999, respectively.
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 peaked in 1995 with 82.3 billion ATS to
107.l billion ATS in 1996 and to 65.7 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
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 the 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 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 have 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 has sold its operations
in the Czech Republic on June 1998.
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<PAGE>
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.
Currently the BUX is approximately 5,100. 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. The market continued its strong closing
performance of 1997 into the first quarter of 1998. Through the end of March
1998, the BUX rose to approximately 8,600. The market capitalization of the
Budapest Stock Exchange also grew during this quarterly period from
approximately $15 billion to approximately $17 billion. Accompanying the stock
market ally of 1997, a number of leading international investment banks
including ABN Amro, ING Barings, Merrill Lynch, Morgan Stanley, and Salomon
Brothers opened operations in Budapest and became member of BSE. Despite this
influx of major competition, the Hungarian office maintained its client base and
doubled its overall turnover. In response to this increased competition, the
Hungarian office has expanded the services offered to clients. The overall
economic and political situation appears to be relatively stable and continues
to improve. This is evident from the level of investor confidence and the
interest by major international investment banks. There has been no significant
change in the availability or cost of capital to the other than the interest
rate fluctuations. The total volume of transactions increased dramatically in
1996 (the last year for which the Company has data) with an overall reduction in
the average profit per transaction. There are no significant restrictions on
transfers of funds to the parent company.
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
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 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 sending a clear signal that change was not only desired
but expected. The overall trading volume in the market is very low and the
shares that are listed are perceived to be fairly illiquid in part due to the
dominance of direct trades. Inflation appeared to be heading lower in 1996 and
interest rates followed. In the first quarter of 1997, inflation appeared to be
on the rise again which moved the national bank to raise interest rates and
restrict the money supply. 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.
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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 u $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.
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 many of the countries
where the Company's primary operations are located (i.e., Russia, Kazakhstan and
Bulgaria), the local currency is considered to be soft or exotic. As such, there
are very few, if any, cost effective hedging strategies available to the Company
or potential investors.
All of these factors have an impact on the Company's net gain from
securities transactions, underwriting, and commissions revenues. In periods of
reduced market activity, profitability is adversely affected because certain
expenses, consisting primarily of non-officer compensation and benefits,
communications, occupancy, and general and administrative expenses remain
relatively constant.
Currently, the Slovak Republic market is experiencing extremely
difficult economic conditions and market reforms may be necessary to restore
this economy to health. In light of these developments, the Company has reduced
the level of its operations in this country. The Company recognizes that it may
be necessary to support negative cash flow from this operation in the next 12 to
24 months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's statements of financial position reflect a liquid
financial position as cash and cash equivalents convertible to cash represent 21
percent and 16 percent of total assets at March 31, 1997, and March 31, 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, 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.
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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 of 1933, as amended (the Securities Act).
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% 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.
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.
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)
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
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-purposes financial statements. This statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time, the Company does not believe that this statement will
have a significant impact on the Company.
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 is effective for fiscal years beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be retained. 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.
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IMPACT OF THE YEAR 2000
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 Off. 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.
As of October 26, 1998, 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 fourth calendar quarter of
1998. 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 in the fourth calendar
quarter of 1998 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 October 26, 1998, 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 Eastern and Central 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.
31
<PAGE>
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
September 30, 1998, the Company estimates that it has expended approximately
$350,000 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
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 comes 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.
32
<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, 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
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
EASTBROKERS INTERNATIONAL INCORPORATED
We have audited the accompanying consolidated statements of financial
condition of Eastbrokers International Incorporated and subsidiaries as of March
31, 1997, and the related consolidated statements of operations, 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, 1997, and the
results of operations and its cash flows for the year ended March 31, 1997 in
conformity with generally accepted accounting principles.
The financial statements as of March 31, 1997, have been restated.
PANNELL KERR FORSTER PC
June 23, 1997
34
<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 986,233 119,274
Or segregated under federal and other regulations
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 1,153,439 926,565
depreciation and amortization of $766,898 and $628,014, respectively)
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 214,888 146,150
2,923,000, shares issued and outstanding at March 31, 1998 and March 31,
1997, respectively
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)
Unrealized loss on available for sale investments - (246,794)
Cumulative translation adjustment (2,140,620) (630,809)
------------- ---------------
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>
35
<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 from continuing operations (4,947,557) 362,573
Discontinued operations
Income (loss) 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 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>
36
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1997
<TABLE>
<CAPTION>
Retained Treasury
Earnings Stock &
Common Stock Paid-in (Accumulated Note
Shares Par Value Capital Deficit) Receivable
------------ ------------- ---------- -------------- ------------
<S> <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 Cumulative
For 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 $(246,794) - (246,794)
investments
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 246,794 - 246,794
investments
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
============= ============= =============
</TABLE>
37
<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 82,415 (85,696)
or deposited with regulatory agencies
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
-------------- --------------
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
============== ==============
See notes to consolidated financial statements.
</TABLE>
38
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated (formerly Czech Industries, Inc.) and its U.S. and international
subsidiaries (collectively, Eastbrokers or the Company). The shareholders of the
Company approved the name change on December 10, 1996 at its Annual Meeting of
Shareholders.
These consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position and the results of the operations of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes that the estimates utilized in the
preparation of the consolidated financial statements are prudent and reasonable.
Actual results could differ from these estimates. 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.
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.
39
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS (CONTINUED)
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.
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.
40
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
41
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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)
Earnings per common share (0.35) (0.37)
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.
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:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
(As Restated)
--------- -------------
<S> <C> <C>
Securities purchased under agreements to resell
Sovereign government debt - Austria $ 887,170 $ --
Sovereign government debt - Hungary -- 229,965
Corporate equities - Hungary -- 179,999
------------- ------------
$ 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
-------------- ------------
</TABLE>
42
<PAGE>
<TABLE>
March 31, March 31,
1998 1997
(As Restated)
--------- -------------
<S> <C> <C>
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
------------- ------------
</TABLE>
*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.
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.
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.
43
<PAGE>
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%.
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.
In September 1996, Eastbrokers Vienna acquired additional shares of
Eastbrokers Wertpapiervermittlungsgesellschaft 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)
44
<PAGE>
6. INVESTMENTS IN AFFILIATED COMPANIES
INVESTMENT IN WMP BANK AKTIENGESELLSCHAFT
Through its subsidiary, Eastbrokers Vienna, the Company acquired a
48.1% 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% 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%. 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%.
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.
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.
45
<PAGE>
7. SHORT-TERM BORROWINGS (CONTINUED)
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.
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.
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% 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
</TABLE>
46
<PAGE>
8. LONG-TERM BORROWINGS (continued)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
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>
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.
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.
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.
47
<PAGE>
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.
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, or a price of $5.00 per unit (approximately
40% 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.
48
<PAGE>
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
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.
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 nted 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 BlacHad 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:
49
<PAGE>
1998 1997
---- ----
(As Restated)
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)
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.
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 % 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 % of the Hotel. Stratego Invest a.s. was at that time
more than 50% 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, Chairman, President, Chief Executive Officer, and Director of the
Company, is also a Director of Eastbrokers GmbH.
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.
50
<PAGE>
12. RELATED PARTY TRANSACTIONS (CONTINUED)
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 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
S 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.
As of December 31, 1997, ZE, a 26.27% owned subsidiary of General
Partners, owned approximately 25% of UCP Beteiligungs AG (UCP AG), an Austrian
holding company. UCP AG, in turn, owns 27.7% 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.
51
<PAGE>
12. RELATED PARTY TRANSACTIONS(CONTINUED)
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 amount is reported in the Receivable from executive
officer in the consolidated statement of financial condition. This Note bears
interest at 8% 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% 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.
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% per annum and is due September 15, 1999.
13. INCOME TAXES
The tax expense recorded of $265,078 for the year ended March 31, 1998
results principally from foreign taxes on earnings at the Company's
subsidiaries.
52
<PAGE>
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:
13. INCOME TAXES(CONTINUED)
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, March 31,
1998 1997
--------------- -------------
<S> <C> <C>
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 1,164,189 697,301
Discontinued operations -- (510,975)
Non-taxable income from Slovak Republic -- (191,515)
Other 34,865 (102,196)
------------- -------------
$ 285,830 $ (8,305)
------------- -------------
The significant components of the Company's deferred tax asset and
liability are as follows:
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 carryfoward 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
--------------- --- --------
</TABLE>
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.
53
<PAGE>
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)
Hungary 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)
--------------- -------------------- ------------- ----------------
Segment information is as follows for the year ended March 31, 1997 (As
Restated):
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)
Hungary 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>
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.
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.
54
<PAGE>
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.
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.
55
<PAGE>
EBI Securities also is involved in an arbitration proceeding related to
the NFC Litigation titled 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%, payable at maturity, and
mature in June 2002.
In June 1998, the Company sold a 73.55% 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.
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-purposes financial statements. This statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time, the Company does not believe that the addition of this
statement will have a significant impact on the Company.
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 is effective for fiscal years beginning
after December 15, 1997. 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.
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:
56
<PAGE>
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 u corporate equities in the accompanying 1998 balance sheet.
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.
ITEM 8. 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, which are incorporated
by reference herein in their entirety. The Company did not have any
disagreements with its former independent accountant regarding accounting
principles and practices or financial statement disclosures within its two most
recent fiscal years.
57
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS AND EXECUTIVE OFFICERS
Biographical information, including the age, position held with the
Company, term of office as officer or director, employment during the past five
years, and certain other directorships of each officer or director is set forth
below. Mr. Kossner has been elected to serve as director until the annual
meeting of stockholders to be held during the year 1999. Messrs. Michael
Sumichrast, Ph.D. and Martin A. Sumichrast have been elected as directors, each
to serve until the annual meeting of stockholders to be held during the year
1998. Mr. Schmid was re-elected to serve as a director for an additional three
year period at the annual meeting of stockholders held on December 17, 1997.
There are no family relationships among any officers and directors of the
Company, except that Michael Sumichrast, Ph.D. and Martin A. Sumichrast are
father and son, respectively.
PETER SCHMID, 32, Chairman of the Board and Chief Executive Officer of
the Company since March 1997; President of the Company since August 1996, a
Director of the Company since January 1994. Since 1991, Mr. Schmid is the
co-founder, Chairman of the Board, Chief Executive Officer, and Member of the
Supervisory Board of Eastbrokers Beteiligungs AG, a Vienna based securities
brokerage firm which was acquired by the Company in August 1996. Mr. Schmid is
also a Member of the Supervisory board of WMP Borsenmakler AG, a Vienna based
investment firm; and Schneiders 1895 AG, a retailing firm. In addition, Mr.
Schmid serves as a Director of Eastbrokers North America, Inc., a subsidiary and
New York , New York-based securities brokerage firm. Mr. Schmid currently serves
on the Supervisory Boards of Eastbrokers' subsidiaries in Bratislava, Zagreb,
Warsaw, Sofia, Budapest, Bucharest and Ljubljana.
MARTIN A. SUMICHRAST, 31, Vice Chairman of the Company since March 1997;
Secretary, and a Director of the Company since its inception in 1993. Mr.
Sumichrast is a founder of the Company and was formerly Executive Vice President
and Chief Financial Officer. Mr. Sumichrast is also Chairman of Eastbrokers
North America, Inc., a subsidiary of the Company and a New York, New York-based
brokerage firm. From 1987 until 1992, Mr. Sumichrast served as the President of
Sumichrast Publications, Inc., a real estate publication located in Rockville,
Maryland. Mr. Sumichrast also serves as President of Sumichrast Enterprises,
Inc., a holding company located in Rockville, Maryland.
KEVIN D. McNEIL, 38, Vice President, 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 and a New York, New York-based
securities brokerage firm. From 1994 to 1996, Mr. McNeil served as a supervising
auditor for Pannell Kerr Forster PC, an international accounting firm. From 1990
until 1994, Mr. McNeil served as a supervising auditor for Schoenadel, Marginot
& Company, CPAs, a 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.
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.
WOLFGANG KOSSNER, 29, 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, 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.
58
<PAGE>
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.
B. COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership of equity securities of the Company with the Securities and Exchange
Commission. Officers, directors and greater-than-ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms that they file.
Based solely on a review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to the Company, or written representations from
certain reporting persons that such persons have filed on a timely basis all
reports required by Section 16 (a), and without researching or making any
inquiry regarding delinquent Section 16 (a) filings, the Company believes that,
during the fiscal year ended March 31, 1998, other than initial statement of
beneficial ownership by Dr. Samm, all such reports were filed on a timely basis.
59
<PAGE>
ITEM 10. 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
$100,000.
<TABLE>
<CAPTION>
ANNUAL LONG TERM COMPENSATION
COMPENSATION AWARDS PAYOUTS
(a) (b) (c) (d) (e) (f) (g) (h) (i)
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS($) OPTIONS/SARS(#) PAYOUTS COMPENSATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Schmid(1) 1998 $138,305 $30,000 - - - - -
Chairman, President and 1997* $129,988 - - - - - -
Chief Executive Officer 1996** - - - - - - -
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 - - - - - -
Operating Officer 1996** - - - - - - -
1995 - - - - - - -
1994 - - - - - - -
Michael Sumichrast, Ph.D.(3)1998 - - $65,980 - - - -
Former Chairman of the 1997* $100,000 - $75,000*** - - - -
Board 1996** $24,999 - - - - - -
1995 $100,000 - - - - - -
1994 - - - - - - -
</TABLE>
- ---------------------
*For the fiscal year ended March 31, 1997.
**For the three month transition period ended March 31, 1996.
***These amounts constitute severance pay.
1 Mr. Schmid has been Chairman of the Board and Chief Executive Officer
since March 1997 and President of the Company since August 1996. Mr.
Bednarik was President and Chief Executive Officer from the time of the
Company's inception in 1993 until August 1996. Mr. De Roode was Chief
Executive Officer and Chief Operating Officer from August 1996 to March
1997.
2 Martin A. Sumichrast became Vice Chairman of the Board in March 1997.
Prior to that, he was Executive Vice President and Chief Financial Officer.
3 Dr. Sumichrast was Chairman of the Board from the time of the Company's
inception in 1993 until March 1997.
4 Dr. de Roode's compensation was paid through VCH Vermogensverwaltung Und
Holding GmbH at his direction.
60
<PAGE>
EMPLOYMENT AGREEMENTS
Effective January 1995, the Company entered into employment agreements
(Employment Agreements) with Messrs. Michael Sumichrast, Ph.D., Petr Bednarik,
Ing., and Martin A. Sumichrast. Mr. Bednarik's employment was terminated
effective August 1, 1996 in connection with the acquisition of Eastbrokers
Vienna. Under the terms of Mr. Bednarik's Employment Agreement, Mr. Bednarik
received $24,000 in severance compensation in August 1996 as a result of such
termination of employment. Dr. Sumichrast's Employment Agreement was terminated
upon his resignation as Chairman effective March 20, 1997 and he was awarded a
sum of $75,000. Mr. Martin Sumichrast's Employment Agreement will expire in
December 1999, and will renew for a period of five years following the
expiration date, unless contrary notice is given by either party. The Company
also entered into Employment Agreements with Messrs. August de Roode and Peter
Schmid, effective as of August 1, 1996. Mr. De Roode's agreement expired upon
his resignation on March 15, 1997. Mr. Schmid's agreement will expire on August
1, 1999, and he will have a three-year renewal option, unless contrary notice is
given by either party. The annual salaries for Martin A. Sumichrast and Peter
Schmid were initially fixed at $120,000 each. The salaries under the agreements
may be increased to reflect annual cost of living increases and may be
supplemented by discretionary merit and performance increases as determined by a
compensation committee to consist of three outside directors of the Company,
except that during the three years following June 8, 1995, Mr. Martin
Sumichrast's salary may not exceed $150,000. In the first three years following
August 1, 1996, Mr. Schmid's salary may not exceed $150,000. Messrs. Martin A.
Sumichrast and Schmid are each eligible to receive an annual bonus of up to 25%
of their salary under their respective agreements, such bonuses to be determined
by the Board and not subject to any specified performance criteria. The
agreements provide, among other things, fo participation in an equitable manner
in any profit-sharing or retirement plan for employees or executives and for
participation in employee benefits applicable to employees and executives of the
Company. The agreements provide that the Company will establish a performance
incentive bonus plan providing each executive the opportunity to earn an annual
bonus of up to five percent of the increase in the Company's pretax income,
based upon the attainment of performance goals to be established by the
Compensation Committee of the Company. The agreements further provide for the
use of an automobile and other fringe benefits commensurate with their duties
and responsibilities. The agreements also provide for benefits in the event of
disability.
Pursuant to the agreements, employment may be terminated by the Company
with cause or by the executive with or without good reason. Termination by the
Company without cause, or by the executive for good reason, would subject the
Company to liability for liquidated damages in an amount equal to the terminated
executive's current salary and a pro rata portion of their prior year's bonus
for the remaining term of the agreement, payable in equal monthly installments,
without any set-off for compensation received from any new employment. In
addition, the terminated executive would be entitled to continue to participate
in and accrue benefits under all employee benefit plans and to receive
supplemental retirement benefits to replace benefits under any qualified plan
for the remaining term of the agreement to the extent permitted by law.
Under the agreements, the Company is obligated to purchase insurance
policies on the lives of Messrs. Martin A. Sumichrast and Schmid. The Company
will pay the premiums on these policies and upon the death of the employee, the
Company will receive an amount equal to the premiums it paid under the policy
and the remaining proceeds will go to the employee's designated beneficiary. The
Company has a one million dollar key man life insurance policy on Martin A.
Sumichrast with the Company as its beneficiary. To date, the Company does not
have a life insurance policy on Mr. Schmid due to the prohibitive cost of
obtaining such a policy.
61
<PAGE>
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.
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
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-The-Money
Underlying Unexercised Options/SARs at
Value Options/SARs at FY-End FY-End ($)
Shares Acquired Realized (#) Exercisable/ 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>
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.
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.
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.
62
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock owned as of October 26, 1998 by (I) each person who is known by the
Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each of the Company's officers and directors; and (iii) all officers
and directors as a group. Except as otherwise noted, the persons named in the
table below do not own any other capital stock of the Company and have sole
voting and investment power with respect to all shares as beneficially owned by
them.
<TABLE>
<CAPTION>
Percentage of
Name and Address (1) Position with Company Number of Shares Shares
-------------------- --------------------- ---------------- -------------
<S> <C> <C> <C>
Peter Schmid (2) Chairman of the Board, 587,659 12.24
President and Chief Executive
Officer, Director
Martin A. Sumichrast(3) Vice-Chairman of the 101,000 2.12
Board and Secretary, Director
Michael Sumichrast, Ph.D. Director -0- *
Segfried Samm, Ph.D. Director -0- *
Wolfgang Kossner (4) Director 1,776,639 33.30
General Partners AG 1,477,139 28.04
Kevin D. McNeil Chief Financial Officer 2,495 *
All Officers and Directors 2,467,793 45.97
as a Group (6 persons)
</TABLE>
- -------------------
* Less than 1%
1 Except as otherwise noted, c/o Eastbrokers International Incorporated,
15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850.
2 359,925 shares are owned by Karntner Landes und Hypothekenbank AG as
nominee for the Tsuyoshi Trust Vaduz and 194,734 are owned by said bank as
nominee for Mr. Schmid. Mr. Schmid has sole voting and investment power
with respect to the trust shares and is a beneficiary of this trust.
Includes 33,000 shares issuable upon exercise of options to acquire Common
Stock at $10.00 per share.
3 50,000 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.
4 977,139 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 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.
63
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the sale by the Company of the Hotel Fortuna a.s. (the Hotel)
on October 1, 1996, the Company owned 50.2 % 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 % of the Hotel. Stratego Invest a.s. was at that time
more than 50% 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, Chairman, President, Chief Executive Officer, and Director of the
Company, is also a Director of Eastbrokers GmbH.
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.
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.
64
<PAGE>
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 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 S_
flwarenindustrie 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).
As of December 31, 1997, ZE, a 26.27% owned subsidiary of General
Partners, owned approximately 25% of UCP Beteiligungs AG (UCP AG), an Austrian
holding company. UCP AG, in turn, owns 27.7% 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% 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.
65
<PAGE>
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% 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.
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% per annum and
is due September 15, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
See Index to Exhibits on page 67 which is incorporated herein in its
entirety.
REPORTS ON FORM 8-K
Current Report on Form 8-K filed on November 6, 1997 - change in
auditor.
Current Report on Form 8-K filed on January 27, 1998 - appointment of
new auditor
66
<PAGE>
[BACK INSIDE COVER]
[GRAPHIC OMITTED - MAP OF WORLD INDICATING EASTBROKERS LOCATIONS]
<PAGE>
[BACK COVER]
[LOGO] EASTBROKERS
International Incorporated
15245 Shady Grove Road
Suite 340
Rockville, Maryland
Tel.: 301.527.1110
Fax: 301.527.1112
