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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A NO. 2
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MARK ONE
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
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DELAWARE 52-1807562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15245 SHADY GROVE ROAD, SUITE 340, ROCKVILLE, MARYLAND 20850
(Address of principal executive offices) (Zip Code)
(301) 527-1110
(Issuer's telephone number, including area code)
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.05 par value
Class A Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |_| No |X|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year: $10,342,976.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average of the bid and ask price of
such common equity on November 2, 1998 was approximately $13,000,000.
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on November 2, 1998 was 4,767,750.
Transitional Small Business Disclosure Format: Yes |_| No |X|
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Explanatory Note
The undersigned registrant hereby amends portions of Item 1, Description
of Business (Risk Factors-Operating Losses and Financial Condition), Item 6,
Management's Discussion and Analysis or Plan of Operation and Item 7, Financial
Statements, of its Form 10-KSB for the fiscal year ended March 31, 1998. The
amendments effected hereby are to accurately report certain changes to the
consolidated statements of operations, consolidated statements of cash flows,
consolidated statements of financial condition and to notes 13 and 16 of notes
to consolidated financial statements, respectively, and to further clearly
reflect the registrant's financial position for the fiscal year ended March 31,
1998.
EASTBROKERS INTERNATIONAL INCORPORATED
INDEX TO FORM 10-KSB/A NO. 2
PAGE
Item 1. Business
Risk Factors................................................. 2
Item 6. Management's Discussion and Analysis or Plan of Operation........ 8
Item 7. Financial Statements
Historical Financial Statements
Independent Auditors' Report at and for the year ended
March 31, 1998.............................................. 21
Independent Auditors' Report at and for the year ended March
31, 1997.................................................... 22
Consolidated Statements of Financial Condition at March 31,
1998 and 1997 .............................................. 23
Consolidated Statements of Operations for the years ended
March 31, 1998 and 1997..................................... 24
Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 1998 and 1997................. 25
Consolidated Statements of Cash Flows for the years ended
March 31, 1998 and 1997..................................... 26
Notes to Consolidated Financial Statements................... 28
Item 13. Exhibits, List and Reports on Form 8-K....................... 50
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ITEM 1. BUSINESS
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.
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
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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 Governmental 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.
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
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entities, issuers located in a particular country or geographic area, or issuers
engaged in a particular industry. Through its subsidiaries and affiliate
offices, the Company engages in proprietary trading of Eastern European
securities with an emphasis on government and corporate bonds, local debt
instruments and Central and Eastern European equity securities, which involve
risks associated with the political instability and relative currency values of
the nations in which the issuer principally engages in business as well as the
risk of nationalisation. In addition, the Company has, from time to time,
substantial position concentrations in 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.
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., 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.
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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.
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
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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 $3,676,607. 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.
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
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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 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:
- - 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.
- - POLITICAL AND ECONOMIC FACTORS: The countries in which the Company's
operations are concentrated had centrally-planned, socialist economies for
many years. Attempts at political and economic reform have been made with
limited success and it is impossible to foresee if such reforms will achieve
their intended aims. Restrictions may be imposed on investing in specific
companies or industries which may be considered to be important or sensitive
to national interests and which may also represent the best investment
opportunities. In addition, investments may be expropriated on a change of
government policy.
- - VALUATION RISK: Accounting and financial reporting standards in the selected
countries are not equivalent to International Accounting Standards and,
consequently, less information is available to investors in the selected
countries than in more developed capital markets. Nevertheless, the Company
will use for valuations, financial reports issued by international auditing
firms and all other means will be applied in order to monitor the unlisted
investments.
- - PROBLEMS OF TRANSITION AND BUSINESS FAILURE: Until very recently, virtually
all industrial output within the Comecon and Warsaw Pact countries was from
state-owned industry. As a result, few individuals understand basic
capitalistic management skills and techniques. Privatization of much of the
region's industry and the transition to a more market-orientated economy will
be difficult. Industry in the region is considerably less developed and less
efficient than industry in Western Europe and, in addition to doubts as to
the continuing viability of much of the region's industry, those businesses
which survive are likely to require considerable capital investment and
restructuring. The failure of one or more businesses in which the Company has
invested may have a significant adverse effect on the performance of the
Company as a whole.
- - LEGAL INFRASTRUCTURE: The Company and its advisors will be reliant on legal
advisors in the jurisdictions in which it invests. Due to the inadequacy or
immaturity of legal systems in some jurisdictions and the difficulty of
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obtaining adequate or satisfactory legal advice, it may be impossible to be
certain that the Company has valid legal title to the investments located in
such jurisdictions or to be able to protect its interests in such
investments.
- - CHANGES IN LAW AND ENFORCEMENT OF RIGHTS: Legislation relating to
securities, stock markets and property rights is either non existent or has
been introduced very recently in several of the countries where the Company's
operations are located. Existing legislation is likely to be subject to
extensive amendment and significant new legislation may be introduced at any
time. It may be difficult to enforce the Company's rights in cases where
competing claims arise or in case of re-nationalization.
- - INVESTMENT AND REPATRIATION RESTRICTIONS: Repatriation of investment income,
capital and the proceeds of sales by foreign investors may require
governmental registration and/or approval. A number of countries in which the
Company may invest do not have freely convertible currencies or their
currencies may only be convertible at rates determined by their governments.
Repatriation restrictions may also be imposed at any time. Changes in the
value of currencies in which the Company's investments are denominated will
result in a corresponding change in the value of the Company's assets which
are generally denominated in the local functional currencies. Investors
should note that the local currencies involved may be subject to rapid
devaluation against the major "hard" currencies, with the result that delays
in currency conversion may cause significant losses.
- - TAXATION: Taxation of dividends and capital gains received by non-residents
varies among the selected countries. In addition, the selected countries
generally have less well-defined tax laws and procedures, and such laws may
permit retroactive taxation. As a result, the Company could in the future
become subject to local tax liabilities that had not been anticipated in
conducting its investment activities or valuing its assets.
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 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 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.
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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
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underlying foreign currency strengthens or weakens against the U.S. Dollar.
Currency exchange rates can also be affected unpredictably by intervention of
U.S. or foreign governments or central banks or by currency controls or
political developments in the U.S. and abroad.
The value of international fixed income products also responds to interest
rate changes in the U.S. and abroad. In general, the value of such products will
rise when interest rates fall, and fall when interest rates rise. However,
interest rates in each foreign country and the U.S. may change independently of
each other.
Debt and equity securities in emerging markets such as Central and Eastern
Europe may also not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater risk than securities of
U.S companies. Investing in Central and Eastern European securities may further
result in higher expenses than investing in domestic securities because of costs
associated with converting foreign currencies to U.S. Dollars and expenses
related to foreign custody procedures. Investment in Central and Eastern
European securities may also be subject to local economic or political risks,
including instability of some foreign governments, inadequate market controls,
the possibility of currency blockage or the imposition of withholding taxes on
dividend or interest payments and the potential for expropriation,
re-nationalization or confiscatory taxation and limitations on the use or
repatriation of funds or other assets.
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 Su(beta)warenindustrie 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 $10,342,976 to pro forma results
of operations for the year ended March 31, 1997, shows an increase of $1,783,190
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 $11,000,000 USD in net operating loss
carryforwards available in Austria and approximately $3,018,000 USD in net
operating loss carryforwards available for future use in the U.S. The Company
has established a valuation allowance for the U.S. net operating losses. The
Company also expects its Austrian operations to return to profitability in the
fiscal year ended March 31, 1999 as its efforts in various privatization
activities are realized and such activities should generate an increase in the
value of certain Company holdings. Further, the Austrian net operating losses
are available for carryforward indefinitely. Accordingly, the Company believes
it is more likely than not that these benefits will be realized in the future.
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
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similar transactions in the future. As noted in the following paragraph, other
activities occurred in the fourth quarter that contributed to the current year's
tax benefit. The U.S. net operating loss carryforwards will expire, if unused,
in varying amounts through the year 2013. The Company does not anticipate any
significant changes in the effective tax rates.
In Europe, the expenses of the Company generally increase in the quarter
ending December 31 as compared to the quarter ending September 30 due primarily
to a "seasonal" effect. July and August are typically "holiday" (vacation)
months in Europe. Revenues and expenses generally respond accordingly to this
seasonal effect. The quarter ending December 31 is typically a strong quarter in
Europe as people return from holiday and seek to complete pending transactions
by calendar year end. The Company is also pursuing several corporate finance
opportunities and has found that outsourcing portions of the work to industry
experts is sound corporate policy to manage personnel and overhead costs. Many
of the projects began in late September/early October 1996 and 1997 and
continued through year end. General and administrative expenses, as well as
other operational expenses, increased due to the Company's increased focus on
privatization activities in countries that are currently in the process of
opening their markets to western investors. Involvement in privatization
activities generally involves much time and patience as the investments begin to
come to fruition. Prior experience in the privatization process is one of the
Company's more important abilities.
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 $3,676,607
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 -- $1,030,270, a security of a Bulgarian
pharmaceutical company traded on the Bulgarian Stock Exchange --$3,185,630, and
a security of a Bulgarian oil refinery traded on the Bulgarian Stock Exchange --
$1,354,830. All other securities are relatively liquid and the carrying value
approximates the market value as of the balance sheet date. The Company does not
have any material concentrations to high yield issuers or commitments to
high-yield issuers as of the balance sheet date.
The Company recognizes it has concentrated a significant amount of its
assets as advances to its affiliates and investments in affiliates. At the
present time, the bulk of these loans have been related to privatization
activities. Since the Company's affiliates are generally accounted for as equity
investments, these advances do not eliminate on consolidation. Receivables from
affiliated companies and other receivables are due on demand. The Company
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expects to collect these receivables within the next 12 months. For the years
ended March 31, 1997 and 1998, the Company has investments in affiliated
companies of $8,272,240 and $156,800, respectively, and receivables from
affiliated companies of $1,511,917 and $2,286,277, respectively. The
concentration of investments in affiliates by country are as follows: for 1997 -
Austria -- $7,755,997, Bulgaria -- $332,584, Slovenia -- $114,529, Others --
$69,130; and for 1998 - Slovenia and Croatia -- $156,800. The significant
decline in the investments in affiliated companies is primarily attributable to
the acquisition of additional ownership interest in WMP and the conversion from
the equity method to full consolidation for this subsidiary. The concentration
of receivables from affiliates by country are as follows: for 1997 - Austria --
$675,456, Bulgaria -- $536,587, Slovenia -- $150,994, Czech Republic -- $72,994,
Others -- $75,886; and for 1998 - Austria -- $2,286,277. The cash investments
noted in the statements of cash flows consist of direct investments in
affiliates and the advances to affiliates. These cash investments in each
affiliate for the year ended March 31, 1997 were as follows: WMP (Austria) --
$2,455,880, Bulgaria -- $894,513, Slovenia -- $150,994, Czech Republic --
$72,994, and Others -- $44,756. These cash 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.
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.
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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.
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 record 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 rally 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
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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.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
The unexpected strength of the U.S. Dollar as compared to the Austrian
Schilling during the fiscal year ended March 31, 1997 had an adverse effect on
the Company. The Company had collateralized a short term borrowing arrangement
with approximately $1,500,000 in cash held in an Austrian Schilling account just
as the U.S. Dollar began to increase in strength relative to the Austrian
Schilling. During the term of this arrangement, the Austrian Schilling lost
approximately 10 percent of its value relative to the U.S. Dollar. This single
transaction makes up the majority of the loss on foreign currency transactions
for the year ended March 31, 1997. The Company is no longer collateralizing its
short term borrowing on a "soft currency" basis.
The U.S. Dollar and its unexpected strength coupled with the unexpected
weakness of the European currencies (including the German Deutchmarke) have
negatively impacted the Company's overall earnings as well as the cumulative
translation adjustment. The primary functional currencies affecting the Company
are as follows: U.S. Dollar, Austrian Schilling, Czech Koruna, Hungarian Forint,
Slovak Koruna and the Polish Zloty. For the year ended March 31, 1997, the
Company reported a foreign currency translation adjustment in its statement of
cash flows of approximately $1.3 million. The effect of the exchange rate
changes on a country by country basis are approximately as follows: Czech
Republic -- $600,000, Austria -- $400,000, Hungary -- $210,000, Poland --
$120,000.
Assets and liabilities of operations having foreign currencies are
translated at year-end rates of exchange, and the income statements are
translated at weighted average rates of exchange for the year. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
14
<PAGE>
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., 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 assets readily 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.
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").
15
<PAGE>
On February 20, 1998, the Company sold 1,227,000 newly issued units for
$6,135,000 in cash, or $5.00 per unit, with each consisting of one share of
Common Stock and one Class C Warrant. This price was approximately 40% 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.
16
<PAGE>
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.
17
<PAGE>
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. Such failures could have a material adverse effect on the
Company and may cause systems malfunctions, incorrect or incomplete transaction
processing resulting in failed trade settlements, the inability to reconcile
accounting books and records, the inability to reconcile trading positions and
balances with counterparties, inaccurate information to manage the Company's
exposure to trading risks and disruptions of funding requirements. In addition,
even if the Company successfully remediates its Year 2000 issues, it can be
materially and adversely affected by failures of third parties to remediate
their own Year 2000 issues. The failure of third parties with which the Company
has financial or operational relationships such as securities exchanges,
clearing organizations, depositories, regulatory agencies, banks, clients,
counterparties, vendors and utilities, to remediate their computer and
non-information technology systems issues in a timely manner could result in a
material financial risk to the Company.
If the above mentioned risks are not remedied, the Company may experience
business interruption or shutdown, financial loss, regulatory actions, damage to
the Company's global franchise and legal liability. The Company is currently
unable to quantify the adverse effect such risks impose, but management believes
that if the Year 2000 issue is not remedied there could be a material adverse
effect on the Company's financial position and results of operation.
The Company does not have business continuity plans in place that cover
the Year 2000 issue. The Company intends to evaluate Year 2000 specific
contingency plans during 1999 as part of its Year 2000 risk mitigation efforts.
Based upon current information, the Company estimates that the total cost
of implementing its Year 2000 initiative will be between $750,000 and $1,500,000
million, 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
18
<PAGE>
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.
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, 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.
19
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Historical Financial Statements
Independent Auditors' Report............................. 21
Independent Auditors' Report............................. 22
Consolidated Statements of Financial Condition as at
March 31, 1998 and 1997................................ 23
Consolidated Statements of Operations for the 12 months
ended March 31, 1998 and 1997.......................... 24
Consolidated Statements of Changes in Shareholders'
Equity for the 12 months ended March 31, 1998 and 1997. 25
Consolidated Statements of Cash Flows for the 12 months
ended March 31, 1998 and 1997.......................... 26
Notes to Consolidated Financial Statements............... 28
20
<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.
SPICER, JEFFERIES & CO.
Denver, Colorado
April 30, 1999
21
<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, except for
footnotes 2 and 6 as to
which the date is
February 12, 1999.
22
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
(As Restated)
<S> <C> <C>
ASSETS
Cash and cash equivalents $7,156,702 6,867,624
Cash and securities deposited with clearing organizations
or segregated under federal and other regulations 986,233 119,274
Securities purchased under agreements to resell 887,170 408,865
Receivables
Customers 4,819,958 1,904,112
Brokers, dealers and clearing organizations 4,404,608 572,399
Affiliated companies 2,286,277 1,511,917
Related to disposition of entity 1,493,913 -
Financial institution 1,018,642 -
Receivable from executive officer 517,221 -
Other 3,384,125 2,043,306
Securities owned, at fair value
Corporate equities 7,985,484 3,349,684
Other sovereign government obligations 692,428 -
Net assets held for sale 868,960 -
Office facilities, furniture and equipment, at cost (less
accumulated depreciation and amortization of $766,898 and
$628,014, respectively) 1,142,281 926,565
Deferred taxes 4,162,615 492,098
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 $44,431,509 $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 1,118,179 1,502,803
------------ -----------
16,022,750 11,679,118
Deferred taxes 51,093 -
Long-term borrowings 2,020,087 934,374
------------ -----------
Total liabilities 18,093,930 12,613,492
------------ -----------
Minority interest in consolidated subsidiaries 7,173,873 1,549,386
------------ -----------
Commitments and contingencies
Shareholders' equity
Preferred stock; $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding at March
31, 1998 or March 31, 1997, respectively - -
Common stock; $.05 par value; 10,000,000 shares
authorized; 4,297,750 and 2,923,000, shares issued and
outstanding at March 31, 1998 and March 31, 1997,
respectively 214,888 146,150
Paid-in capital 25,614,348 19,314,883
Accumulated deficit (4,246,436) (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 adjustments (2,105,961) (630,809)
------------ -----------
Total shareholders' equity 19,163,706 17,799,851
------------ -----------
Total Liabilities and Shareholders' Equity $ 44,431,509 $31,962,729
============ ===========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
(As Restated)
<S> <C> <C>
Revenues
Commissions $2,539,260 $ 439,531
Investment banking 807,803 1,149,195
Principal transactions
Trading 4,738,701 1,806,278
Investment (462,221) 1,872,767
Interest and dividends 401,107 557,188
Equity in losses of unconsolidated subsidiaries 32,076 (396,209)
Gain on sale of investment - related party 1,025,429 -
Other 1,260,821 312,725
----------- -----------
Total revenues 10,342,976 5,741,475
----------- -----------
Costs and expenses
Compensation and benefits 3,818,546 2,181,419
Consulting fees 2,233,543 743,397
Brokerage, clearing, exchange fees and other 1,163,171 -
Occupancy 997,814 333,096
Interest 746,821 236,235
Information processing and communications 698,688 177,473
Office supplies and expenses 435,173 240,448
Professional fees 213,913 123,905
Travel 622,722 209,977
General and administrative 3,505,413 806,056
Depreciation and amortization 604,395 274,573
(Gain)/loss on foreign currency transactions (29,384) 166,044
----------- -----------
Total costs and expenses 15,010,815 5,492,623
----------- -----------
Income (loss) from continuing operations before
provision for income taxes and
minority interest in earnings of subsidiaries (4,667,839) 248,852
Income tax benefit (expense) 640,163 8,305
Minority interest in earnings of subsidiaries 351,069 105,416
------------ -----------
Income (loss) from continuing operations (3,676,607) 362,573
Discontinued operations
Income from discontinued operations (net of
income taxes of $0 for the year ended March 31, 1997) - 41,899
Loss on sale of discontinued operations - (1,323,083)
------------ -----------
Net loss $ (3,676,607) $ (918,611)
------------ -----------
Earnings (loss) per common share from continuing
operations
Basic and Diluted $ (1.17) $ 0.15
------------ -----------
Earnings (loss) per common share
Basic and Diluted $ (1.17) $ (0.37)
------------ -----------
Average common shares outstanding
Basic and Diluted 3,149,009 2,497,137
============ ============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
Unrealized
Retained Treasury Loss on
Earnings Stock & Available Cumulative
Paid-in (Accumulated Note for Sale Translation
Shares Par Value Capital Deficit) Receivable Investments Adjustment Total
--------- --------- ----------- ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1996 1,781,000 $ 89,050 $13,693,733 $ 348,782 - - $ 558,090 $14,689,655
Issuance of common stock in
Eastbrokers AG acquisition 1,080,000 54,000 5,346,000 - - - - 5,400,000
Issuance of common stock in
Eastbrokers NA acquisition 25,000 1,250 98,750 - - - - 100,000
Issuance of common stock in
compensation for services 37,000 1,850 176,400 - - - - 178,250
Acquisition of treasury stock - - - - $(213,750) - - (213,750)
Net unrealized loss on
investments - - - - $(246,794) - (246,794)
Net loss - - - (918,611) - - - (918,611)
Cumulative translation
adjustment - - - - - - (1,188,899) (1,188,899)
--------- --------- ---------- ----------- ---------- --------- ----------- ----------
Balances at March 31, 1997
(as restated) 2,923,000 $146,150 $19,314,883 $ (569,829) $(213,750) $(246,794) $ (630,809) $17,799,851
Issuance of common stock
in private placement 125,000 6,250 716,945 - - - - 723,195
Retirement of treasury
stock (45,000) (2,250) (211,500) - 213,750 - - -
Issuance of common stock in
compensation for services 10,000 500 65,480 - - - - 65,980
Issuance of common stock to
officer for note receivable 50,000 2,500 297,500 - (300,000) - - -
Net unrealized gain on
investments - - - - - 246,794 - 246,794
Issuance of common stock in
private placement 1,227,000 61,350 5,354,619 - - - - 5,415,969
Exercise of stock options 7,750 388 49,987 - - - - 50,375
Sale of Subsidiary Stock 26,434 (26,434)
Net loss - - - (3,676,607) - - - (3,676,607)
Acrued interest on note
receivable - - - - (13,133) - - (13,133)
Cumulative translation
adjustment - - - - - - (1,475,152) (1,475,152)
--------- --------- ---------- ----------- ----------- --------- ----------- -----------
Balances at March 31, 1998 4,297,750 $214,888 $25,614,348 $(4,246,436) $ (313,133) $ - $(2,105,961) $19,163,706
========= ========= =========== =========== =========== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------
March 31, March 31,
1998 1997
--------- ----------
(As Restated)
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,676,607) $ (918,611)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest in subsidiaries (351,069) (105,416)
Gain on the sale of investment (1,025,429) (884,530)
Loss on sale of discontinued operations - 1,323,083
Depreciation and amortization 604,395 274,573
Deferred taxes (2,305,662) (69,377)
Other 104,368 396,209
Changes in operating assets and liabilities
Cash and securities segregated for regulatory
purposes or deposited with regulatory agencies 82,415 (85,696)
Securities purchased under agreements to resell (478,305) 6,278,371
Receivables (3,744,971) 2,041,221
Securities owned, at value (6,443,982) (3,233,293)
Other assets and deferred amounts 827,875 (214,931)
Payables
Customers 4,353,654 (8,529,846)
Brokers, dealers and others 5,208,933 77,726
Accounts payable and accrued expenses (879,123) 1,374,879
---------- ----------
Net cash used in operating activities (7,723,508) (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 1,400,162 1,328,023
---------- ----------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Increase in cash and cash equivalents 289,078 1,677,038
Cash and cash equivalents, beginning of period 6,867,624 5,190,586
----------- -----------
Cash and cash equivalents, end of period $ 7,156,702 $ 6,867,624
=========== ===========
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 261,633 $ 371,534
=========== ===========
Cash paid for interest $ 679,265 $ 87,795
=========== ===========
Non-cash transactions
Retirement of treasury stock $ 213,750 $ -
=========== ===========
Common shares of CEZ and Vodni Stavby, Praha
received in the disposition of the Hotel
Fortuna $ - $ 7,957,012
=========== ===========
Common shares of CEZ and Vodni Stavby, Praha
transferred in lieu of cash payment for
debt and accrued interest $ - $ 1,550,508
=========== ===========
Eastbrokers International shares issued for
acquisition of net assets of Eastbrokers
Beteiligungs AG $ - $ 5,400,000
=========== ===========
Eastbrokers International shares issued in
compensation for services $ 65,980 $ 178,250
=========== ===========
Eastbrokers International shares issued for
acquisition of net assets of Eastbrokers
North America, Inc. $ - $ 90,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated (formerly Czech Industries, Inc.) and its U.S. and international
subsidiaries (collectively, "Eastbrokers" or the "Company"). The shareholders of
the Company approved the name change on December 10, 1996 at its Annual Meeting
of Shareholders.
These consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position and the results of the operations of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes that the estimates utilized in the
preparation of the consolidated financial statements are prudent and reasonable.
Actual results could differ from these estimates. See Note 18 -"Significant
Estimates."
The Company, through its subsidiaries, provides a wide range of financial
services primarily in the United States, Central Europe, and Eastern Europe. Its
businesses include securities underwriting, distribution and trading; merger,
acquisition, restructuring, and other corporate finance advisory activities;
asset management; merchant banking and other principal investment activities;
brokerage and research services; and securities clearance services. These
services are provided to a diversified group of clients and customers, including
corporations, governments, financial institutions, and individuals.
Substantially all of the Company's revenues and expenses are generated through
its European subsidiaries and affiliates.
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its U.S.
subsidiaries other than EBI Securities is March 31. At the time of the Company's
acquisition of EBI Securities in May 1998 the fiscal year of EBI Securities
ended September 30. The Company intends to change the fiscal year of EBI
Securities to March 31 effective as of March 31, 1999.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European Subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede the
Company's closing date by three months.
28
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities and
the Company's trading positions are carried at market or fair values or are
carried at amounts which approximate fair value because of their short-term
nature. Estimates of fair value are made at a specific point in time, based on
relevant market information and information about the financial instrument,
specifically, the value of the underlying financial instrument. These estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial instrument.
The Company has no investments in derivatives.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried at their original costs.
The carrying value of such equity securities is adjusted when changes in the
underlying fair values are readily ascertainable, generally as evidenced by
listed market prices or transactions which directly affect the value of such
equity securities. Downward adjustments relating to such equity securities are
made in the event that the Company determines that the eventual realizable value
is less than the carrying value.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Realized gains and losses on these securities are determined on a
specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities purchased under agreements to resell are treated as financing
arrangements and are carried at contract amounts reflecting the amounts at which
the securities will be subsequently resold as specified in the respective
agreements. The Company takes possession of the underlying securities purchased
under agreements to resell and obtains additional collateral when the market
value falls below the contract value. The maximum term of these agreements is
generally less than ninety-one days.
OTHER RECEIVABLES
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities. These
receivables are due on demand.
UNDERWRITINGS
Underwritings include gains, losses, and fees, net of syndicate expenses
arising from securities offerings in which the Company acts as an underwriter or
agent. Underwriting fees are recorded at the time the underwriting is completed
and the income is reasonably determinable. The Company reflects this income in
its investment banking revenue.
FEES
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered into
by the Company. The Company reflects this income in its investment banking
revenue.
29
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are made to
a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade-date
basis as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations in foreign currencies are translated
at year-end rates of exchange, and the income statements are translated at
weighted average rates of exchange for the year. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
gains or losses resulting from translating foreign currency financial
statements, net of hedge gains or losses and their related tax effects, are
reflected in cumulative translation adjustments, a separate component of
stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in net income.
OFFICE FACILITIES, FURNITURE, AND EQUIPMENT
Office facilities and equipment are carried at cost and are depreciated on
a straight-line basis over the estimated useful life of the related assets
ranging from three to ten years.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. The outstanding warrants and stock options
are currently excluded from the earnings per share calculation as their effect
would be antidilutive.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation expense for stock-based employee compensation plans at fair
value. The Company has elected to account for its stock-based compensation plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Under
the provisions of APB No. 25, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's common stock at
the date of grant over the amount an employee must pay to acquire the stock.
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.
30
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all demand deposits held in banks and certain highly liquid
investments with maturities of 90 days or less other than those held for sale in
the ordinary course of business to be cash equivalents.
GOODWILL
Goodwill is amortized on a straight line basis over periods from five to
25 years and is periodically evaluated for impairment on an undiscounted cash
flow basis. The accumulated amortization was $132,015 and $46,987 for the
periods ended March 31, 1998 and 1997, respectively.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
RESTATEMENT OF 1997 FINANCIAL STATEMENT
During fiscal 1998, management determined that the Austrian net operating
losses available for carryforward had been underreported on the consolidated
statement of financial condition as of March 31, 1997. In addition, management
determined that it had inappropriately recognized an unrealized gain and had
incorrectly classified a portion of its investment in WMP. Accordingly, the
accompanying 1997 financial statements have been restated.
Following is a summary of the effects of the restatement:
AS PREVIOUSLY
REPORTED AS RESTATED
-------- -----------
Corporate equities $4,253,164 $3,349,684
Deferred tax asset 289,938 492,098
Investments in affiliated companies 7,064,064 8,272,240
Goodwill 2,453,454 1,894,398
Trading revenues 1,886,478 1,806,278
Net loss (866,411) (918,611)
Basic and Diluted earnings per share (0.35) (0.37)
31
<PAGE>
NOTE 2. CASH AND SECURITIES SEGREGATED UNDER FEDERAL AND OTHER REGULATIONS
Cash and securities segregated for regulatory purposes or as deposits with
clearing organizations was $119,274 and $986,233 as of March 31, 1997 and 1998,
respectively.
NOTE 3. FINANCIAL INSTRUMENTS
Financial instruments owned consist of the Company's proprietary trading
and investment accounts, securities purchased under agreements to resell, and
investments held for resale. The Company's financial instruments, at estimated
fair market value, are as follows:
March 31, March 31,
1998 1997
------------- ------------
(As
Restated)
Securities purchased under agreements to
resell
Sovereign government debt - Austria $ 887,170 $ --
Sovereign government debt - Hungary -- 228,965
Corporate equities - Hungary -- 179,900
------------- ------------
$ 887,170 $ 408,865
------------- ------------
Securities owned at fair value
Corporate equities - Austria $ 6,587,220* $ 1,305,143
Corporate equities - Hungary 410,244 --
Corporate equities - Czech Republic -- 871,638
Corporate equities - Slovak Republic 84,074 485,141
Corporate equities - Poland 760,552 687,762
Corporate equities - Other 143,394 --
------------- -----------
$ 7,985,484 $ 3,349,684
------------- -----------
Sovereign government debt
Austria $ 621,353 $ --
Hungary 71,075 --
------------- -----------
$ 692,428 $ --
------------- -----------
Available for sale securities
Corporate equities - Austria $ -- $ 40,321
Corporate equities - Czech Republic -- 1,893,115
Corporate equities - Hungary -- 189,610
Corporate equities - Slovak Republic -- 255,008
------------- -----------
$ -- $ 2,378,054
------------- -----------
*As of March 31, 1998, the Company has 3 significant concentrations in the
securities portfolio. A description of these securities and their respective
carrying amounts are as follows: a security of a Russian chemical producer
traded on the OTC market of the Vienna Stock Exchange -- $1,030,270, a security
of a Bulgarian pharmaceutical company traded on the Bulgarian Stock Exchange
- --$3,185,630, and a security of a Bulgarian oil refinery traded on the Bulgarian
Stock Exchange -- $1,354,830. All other securities are relatively liquid and the
carrying value approximates the market value as of the balance sheet date. The
Company does not have any material concentrations to high yield issuers or
commitments to high-yield issuers as of the balance sheet date.
32
<PAGE>
NOTE 4. OFFICE FACILITIES, FURNITURE AND EQUIPMENT
Office facilities, furniture and equipment are summarized below:
March 31, March 31,
1998 1998
----------- -------------
Furniture and equipment $1,909,179 $1,554,579
Less accumulated depreciation (766,898) (628,014)
----------- -------------
$1,142,281 $ 926,565
----------- -------------
Depreciation expense for the years ended March 31, 1997 and 1998, was $108,915
and $418,804, respectively.
NOTE 5. BUSINESS ACQUISITIONS
EASTBROKERS BETEILIGUNGS AKTIENGESELLSCHAFT
Eastbrokers Vienna is an Austrian based holding company that has
established a presence in 12 Central and Eastern European countries through its
network of subsidiaries and affiliate offices. On August, 1, 1996, the Company
acquired 80 percent of the outstanding stock of Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers Vienna") through the issuance of 1,080,000
shares of the Company's common stock valued at $5,400,000. As a participant in
Eastbrokers Vienna's capital increase in the fiscal year ended March 31, 1997,
the Company later acquired an additional 245,320 (out of a total issue of
270,000 shares) for cash, increasing its ownership percentage to 83.62 percent.
In three separate transactions in November and December 1996 and March 1997, the
Company purchased 81,550 additional shares, increasing its ownership percentage
to approximately 94 percent.
The fair value of the net assets acquired under these transactions
approximated $8,200,000. The acquisition has been accounted for under the
purchase method of accounting. The excess of the purchase price over the fair
value of the net assets acquired resulted in the Company recording approximately
$1,950,000 in goodwill, which is being amortized over 25 years on a
straight-line basis. The 1997 consolidated financial statements include the
consolidated results of operations of Eastbrokers Vienna from the date of
acquisition through December 31, 1996 in accordance with Note 1. The purchase
agreement contains certain provisions whereby the selling shareholders may be
eligible to receive an additional 120,000 shares of the Company's common stock
in the event certain earnings targets are achieved by December 31, 1998. No such
shares have been earned to date.
In a capital increase for Eastbrokers Vienna in the fiscal year ended
March 31, 1998, the Company purchased 389,925 (out of a total issue of 390,000)
for cash, increasing its ownership to 96 percent.
Eastbrokers Vienna completed the acquisition of its subsidiary,
Eastbrokers Warsaw, in September 1996. This acquisition has been accounted for
under the purchase method of accounting. The fair value of the net assets
acquired under this transaction approximated $1,124,000 as of the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired by Eastbrokers Vienna approximated $173,000 which has been
recorded as goodwill and is being amortized over 25 years on a straight-line
basis.
33
<PAGE>
NOTE 5. BUSINESS ACQUISITIONS (CONTINUED)
In September 1996, Eastbrokers Vienna acquired additional shares of
Eastbrokers Wertpapiervermittlungs-gesellschaft GmbH ("Eastbrokers GmbH") and
Eastbrokers Slovakia a.s. from related parties (see Note 12). These acquisitions
have been accounted for under the purchase method of accounting. The fair value
of the net assets acquired under this transaction approximated $46,000 as of the
date of acquisition. The excess of the purchase price over the fair value of the
net assets acquired by Eastbrokers Vienna approximated $438,000 which has been
recorded as goodwill and is being amortized over 25 years on a straight-line
basis.
EASTBROKERS NORTH AMERICA, INC.
On March 6, 1997, the Company issued 22,500 shares of Common Stock valued
at $4.00 per share relating to the acquisition of Eastbrokers North America,
Inc. ("Eastbrokers NA"). In a separate but related transaction to the
Eastbrokers NA acquisition, the Company sold 2,500 shares of Common Stock at
$4.00 per share to an officer of the Company in exchange for a promissory note.
These shares were transferred to the selling shareholder of Eastbrokers NA as
part of the acquisition. The net assets acquired under this transaction
approximated $90,000 and the acquisition has been accounted for under the
purchase method of accounting. There was no excess of the purchase price over
the fair value of the net assets received at the date of acquisition.
PRO FORMA RESULTS OF OPERATIONS
The following summarized, unaudited, pro forma results of operations for
the year ended March 31, 1997 assumes the above listed acquisitions occurred at
the beginning of fiscal 1997.
Year Ended
March 31, 1997
---------------
Revenues from continuing operations $8,559,786
Net loss from continuing operations (14,097)
Net loss per share from continuing operations (0.01)
NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES
INVESTMENT IN WMP BANK AKTIENGESELLSCHAFT
Through its subsidiary, Eastbrokers Vienna, the Company acquired a 48.1
percent interest in the outstanding capital stock of WMP on August 1, 1996. WMP
is a stock broker-dealer and market maker in Vienna, Austria and is licensed as
a class B bank under Austrian law. A Class B bank may, at its discretion,
conduct any of the normal activities associated with a bank with one major
exception; it cannot accept customer deposits. From time to time Eastbrokers
Vienna has carried shares of WMP. Accordingly, since August 1996, the Company's
ownership of WMP has exceeded 50 percent including WMP shares in its trading
portfolio. At December 31, 1996, the Company's aggregate ownership percentage in
WMP, including its trading position, was 55 percent. This investment was
accounted for using the equity method in the March 31, 1997 financial statements
as the Company believed that its control of WMP may likely have been lost as the
result of the probable occurrence of certain events that lay outside of its
control. In September, 1997 circumstances surrounding these events were resolved
such that these events were no longer considered probable of occurrence and the
Company deemed its control of WMP was no longer temporary. Accordingly, the
Company began consolidating its investment in WMP effective with its third
quarter of fiscal 1998 financial statements. For the fiscal year ended March 31,
1998, WMP has been consolidated for the entire year. At December 31, 1997, the
Company's aggregate ownership interest in WMP was 52 percent.
34
<PAGE>
NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
The following unaudited pro forma information for the Company has been
prepared as though WMP was acquired at the beginning of fiscal year 1997 and
consolidated from that date:
1997
----
Total revenues $10,138,350
Total assets 44,405,383
INVESTMENTS IN OTHER UNCONSOLIDATED AFFILIATES
The Company also has other investments in unconsolidated affiliates
through Eastbrokers Vienna. These affiliates are accounted for using the equity
method of accounting. These investments are predominantly start-up operations.
At December 31, 1996, these unconsolidated affiliate investments included the
following offices: Zagreb, Croatia; Ljubljana, Slovenia; Almaty, Kazakhstan;
Moscow, Russia; Sofia, Bulgaria; and NIF TRUD Investment Fund. At December 31,
1997, these unconsolidated affiliate investments included the following offices:
Zagreb, Croatia; Ljubljana, Slovenia; Moscow, Russia; Sofia, Bulgaria; and NIF
TRUD Investment Fund. The combined carrying amounts of these investments as of
December 31, 1996 and 1997 was $516,243 and $156,800, respectively. Losses from
these operations totaled approximately $145,000 USD in the period from August 1,
1996 through December 31, 1996. Income from these operations totaled
approximately $122,000 USD for the year ended December 31, 1997.
RECEIVABLES FROM AFFILIATED COMPANIES
Periodically, the Company provides operating advances to its
unconsolidated affiliates. These advances are generally due on demand and are
not subject to interest charges.
NOTE 7. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of credit
with financial institutions, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
LINES OF CREDIT
The Company had outstanding advances on its lines of credit totaling
$1,602,182 and $2,570,499 as of March 31, 1997 and 1998, respectively. As of
March 31, 1998, the Company had unsecured credit lines available of
approximately $3.5 million. These lines of credit carry interest rates between
7.00 percent and 12.00 percent and between 6.500 percent and 9.125 percent for
the years ended March 31, 1997 and 1998, respectively, as computed on an annual
basis.
ADVANCES FROM AFFILIATED COMPANIES
Periodically, the Company's subsidiaries and affiliates will provide
operating advances to other members in the affiliated group. These advances are
generally due on demand and are not subject to interest charges.
35
<PAGE>
NOTE 7. SHORT-TERM BORROWINGS (CONTINUED)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At March 31, 1997, the Company had $1,200,793 outstanding under repurchase
agreements. The weighted average interest rate on these repurchase agreements
was 12.91 percent. Securities listed on the Prague Stock Exchange Main Market
with a market value of approximately $1,700,000 were used to collateralize this
arrangement. During the fiscal year ending March 31, 1998, the underlying
securities were sold to a third party for an amount approximating the Company's
cost basis. The repurchase agreements were transferred to the new owner at the
date of sale.
UNSECURED BONDS PAYABLE
The Company had unsecured bonds with a face value of 25 million Austrian
Schillings requiring annual interest payments at 10 percent per annum which
matured on July 31, 1997. At March 31, 1997, the amount due under these
obligations was $2,307,500. These unsecured bonds were redeemed by the Company
on July 31, 1997.
NOTE 8. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
March 31, March 31,
1998 1997
------------ ------------
Long-term borrowing arrangement with a
financial institution requiring Note payable
to a finance company, requiring annual
interest payments which cannot exceed the 10
year government bond rate plus 2 percent
(approximately 10.00 percent), principal of
12,000,000 Austrian Schillings, principal
due at maturity on December 31, 2001 $ 948,000 $ --
Notes payable to a financial institution
requiring quarterly interest payments
computed at 6.50 percent on a 360 day year,
collateralized by 157,061 shares of WMP
(representing approximately 24 percent of
the Company's WMP shares as of March 31,
1998), principal of 10,000,000 Austrian
Schillings and accrued interest payable in
full on November 30, 2001 804,308 934,374
Notes payable to financial institutions
requiring quarterly interest payments
computed at varying percentages on a 360 day
year, with varying maturity dates but all
due in 1999 267,779 --
------------ -----------
$2,020,087 $934,374
------------ ------------
36
<PAGE>
NOTE 8. LONG-TERM BORROWINGS (CONTINUED)
The scheduled maturities of long-term debt outstanding at March 31, 1998
are summarized as follows: $267,779 in 1999, $0 in 2000, $0 in 2001, $1,752,308
in 2002 and $0 thereafter.
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASES AND RELATED COMMITMENTS
The Company occupies office space under leases which expire at various
dates through 2003. The various leases contain provisions for periodic
escalations to the extent of increases in certain operating and other costs. The
Company incurred rent expense under non-cancelable operating leases in the
approximate amounts of $35,000 and $131,000 for the periods ended March 31,
1997, and March 31, 1998, respectively.
Minimum future rentals under these non-cancelable leases for the fiscal
years ending 1999 through 2003 are approximately as follows: 1999 -- $164,000;
2000 -- $164,000; 2001 -- $104,000; 2002 -- $84,000; and 2003 -- $42,000 and in
the aggregate $558,000.
The Company's subsidiaries occupy office space under various operating
leases which contain cancellation clauses whereby the Company may cancel the
lease with thirty to ninety days written notice.
HOTEL FORTUNA LEASES
During the year ended March 31, 1997, the Hotel was subject to land and
equipment leases. Under the terms of these leases, the Hotel incurred rent
expense in the approximate amounts of $310,000 during fiscal year 1997. These
leases terminated with the disposition of the Hotel. See Note 15.
NOTE 10. SHAREHOLDERS' EQUITY
STOCK REPURCHASE
On December 10, 1996, the Board of Directors approved a plan whereby the
Company was authorized to begin a buy-back program of its Common Stock. Under
the terms of this plan, the Company is authorized to repurchase up to $1,000,000
of Common Stock at a price not to exceed $5.00 per share beginning in January
1997. On January 23, 1997, the Company repurchased 45,000 of its outstanding
shares at $4.75 per share. Currently, no additional buy-backs are anticipated.
This treasury stock was retired during the fiscal year ended March 31, 1998.
STOCK TRANSACTIONS
On August 1, 1996, the Company issued 1,080,000 shares of its Common Stock
to the selling security holders of Eastbrokers Vienna in a transaction valued at
$5,400,000. During the period surrounding the acquisition, the Company's common
stock was trading approximately between $6.25 and $8.00 per share for its fully
registered and unrestricted shares. Due to the nature of restricted shares and
the various covenants restricting the transfer of these shares, the Board of
Directors assigned a value of $5,400,000 to this transaction.
On March 6, 1997, the Company issued 22,500 shares of Common Stock value
relating to the acquisition of Eastbrokers NA, valued at $4.00 per share. In a
separate but related transaction to the Eastbrokers NA acquisition, the Company
sold 2,500 shares of the Company's stock to an officer of the Company in
exchange for a promissory note. These shares were transferred to the selling
shareholder of Eastbrokers NA as part of the acquisition. The shares were also
valued at $4.00 per share.
37
<PAGE>
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
During the year ended March 31, 1997, the Company issued a total of 37,000
shares of Common Stock at a per share price approximating the then current
market price for services rendered to the Company.
In April 1997, the Company sold 125,000 shares of Common Stock to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,000 or $6.00 per share. The net proceeds to the Company
were $723,195. There were no underwriting discounts or commissions.
In September 1997, the Company issued 10,000 shares of Common Stock to Dr.
Michael Sumichrast in compensation for services performed on behalf of the
Company during the previous six months. The average price per share assigned to
this transaction was $6.598 per share based on the average closing price for the
period April 1, 1997 through September 30, 1997.
In September 1997, Martin A. Sumichrast acquired 50,000 shares of Common
Stock at a price of $6.00 per share in exchange for a note payable bearing an
interest rate of 8 percent in the amount of $300,000 to the Company.
On February 20, 1998, the Company sold 1,227,000 newly issued units
consisting of one share of Common Stock and one Class C Warrant in a private
placement for $6,135,000 in cash, or a price of $5.00 per unit (approximately 40
percent below the then current market price as of February 19, 1998.) After
deducting offering expenses of $899,031, the Company netted $5,415,969. These
units were offered and sold to various accredited investors.
Each of the foregoing issuances was made by the Company without
registration under the Securities Act of 1933, as amended (the "Securities
Act"). In each such case the Company relied upon the exemption from registration
provided by Section 4(2) under the Securities Act and Regulation D promulgated
under the Securities Act.
CLASS A WARRANTS
In connection with its June 1995 public offering, the Company issued
5,505,000 Class A Warrants. The Class A Warrants became exercisable on June 7,
1996. By reason of the Company's September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class A Warrants represented
the right to acquire one (1) share of Common Stock for $20. The Class A Warrants
include redemption provisions at the option of the Company and, upon thirty (30)
days' written notice to all holders of Class A Warrants, the Company has the
right to reduce the exercise price and/or extend the term of the Class A
Warrants, subject to compliance with the requirements of certain SEC rules and
regulations to the extent applicable. The Class A Warrant Holders are also
entitled to certain antidilution privileges. In April 1998, the Company
announced an amendment relating to the number of warrants outstanding and the
exercise price. The adjustment to the number of warrants reflected the September
1996 reverse stock split and reduced the number of outstanding warrants by
four-fifths (4/5's), such that one warrant again represents the right to
purchase one share of Common Stock. An adjustment to the exercise price of the
Class A Warrants to $18.00 per share resulted in connection with the February
1998 private placement. Subsequent to this adjustment, there are 1,101,000 Class
A Warrants outstanding. The Class A Warrants expire in June 2000.
38
<PAGE>
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
CLASS B WARRANTS
In connection with the aforementioned public offering whereby the Class A
warrants were issued, the Company issued 1,250,000 Class B Warrants to certain
bridge lenders. By reason of the September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class B Warrants represented
the right to acquire one (1) share of Common Stock for $21. The other terms of
the Class B Warrants are identical to the Class A Warrants, including the
antidilution provisions. In April 1998, the Company announced an amendment
relating to the number of warrants outstanding and the exercise price. The
adjustment to the number of warrants reflected the September 1996 reverse stock
split and reduced the number of outstanding warrants by four-fifths (4/5's),
such that one warrant again represents the right to purchase one share of Common
Stock. An adjustment to the exercise price of the Class B Warrants to $19.00 per
share resulted in connection with the February 1998 private placement.
Subsequent to this adjustment, there are 250,000 Class B Warrants outstanding.
The Class B Warrants have not been registered. These warrants expire in June
2000.
CLASS C WARRANTS
In connection with the private placement in February 1998, the Company
issued 1,227,000 units, each unit consisting of one share of common stock and
one Class C Warrant. Each Class C Warrant entitles the holder to purchase one
share of Common Stock during the period commencing February 20, 1999 and
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.
39
<PAGE>
NOTE 11. STOCK OPTION PLAN
During 1996, the Company adopted a non-qualified stock option plan (the
"plan") as part of an overall compensation strategy designed to facilitate a
pay-for-performance policy and promote internal ownership in order to align the
interests of employees with the long-term interests of the Company's
shareholders.
Under the terms of the plan, stock options granted will have an exercise
price not less than the fair value of the Company's Common Stock on the date of
grant. Such options generally become exercisable over a three-year period and
expire 5 years from the date of grant.
A total of 35,000 options at a weighted average exercise price of $6.64
per share were granted under this plan during the fiscal year ended March 31,
1997. The fair value of the options at the date of grant was estimated using the
Black-Scholes option pricing model utilizing the following weighted average
assumptions: risk-free interest rate - 5 percent; expected option life in years
- - 5 years; expected stock price volatility - 97.7 percent; and expected dividend
yield - 0.0 percent.
Had compensation cost been determined based on the fair value at the grant
dates consistent with the method of FASB Statement 123, the Company's earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1998 1997
---- ----
(As Restated)
Net loss
- as reported $(3,676,607) $ (918,611)
- pro forma (3,728,043) (1,606,135)
Primary and fully diluted
earnings per share
- as reported $ (1.17) $ (.37)
- pro forma (1.18) (.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.
NOTE 12. RELATED PARTY TRANSACTIONS
Prior to the sale by the Company of the Hotel Fortuna a.s. (the "Hotel") on
October 1, 1996, the Company owned 50.2 percent of the Hotel. Stratego Invest
a.s., a broker-dealer and financial consulting company organized under the laws
of the Czech Republic, owned 20.6 percent of the Hotel. Stratego Invest a.s. was
at that time more than 50 percent owned by Stratego a.s., which was controlled
by Ing. Petr Bednarik. Mr. Bednarik was President and CEO of the Company until
August 1996. The sales transaction of the Hotel by the Company was arranged by
Stratego Invest a.s. For providing services related to the transaction, Stratego
Invest a.s. was to have received a commission fee of 1,000,000 CZK
(approximately $37,000 USD), however, Stratego Invest a.s. waived its commission
related to this transaction.
In September 1996, Mr. Peter Schmid received from Eastbrokers Vienna
3,511,422 Austrian Schillings (approximately $340,000 USD) for his 49.95 percent
ownership interest in Eastbrokers Wertpapiervermittlungs-gesellschaft GmbH
("Eastbrokers GmbH"), an Austrian Securities Brokerage Company with limited
liability. The nominal value of these shares was 500,000 Austrian Schillings.
Mr. Schmid, former Chairman, President, Chief Executive Officer, and Director of
the Company, was also a Director of Eastbrokers GmbH.
40
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
In September 1996, Mr. Schmid received 376,275 Austrian Schillings
(approximately $36,500 USD) for his 5.60 percent ownership interest in
Eastbrokers Slovakia a.s., Bratislava ("Eastbrokers Slovakia"). Eastbrokers
Slovakia is the Company's subsidiary operating in the Slovak Republic. The
nominal value of these shares was 280,000 Slovak Koruna.
In September 1996, Mr. August de Roode received 1,110,250 Austrian
Schillings (approximately $107,500 USD) for his 24.40 percent ownership interest
in Eastbrokers Slovakia. The nominal value of these shares was 1,220,000 Slovak
Koruna. Mr. de Roode was Chief Executive Officer, Chief Operating Officer and
Director of the Company until March 1997 and he was also a Director of
Eastbrokers Slovakia at the date of this transaction.
The Company entered into various agreements with Randall F. Greene, a
former director of the Company. Mr. Greene provided consulting services pursuant
to an agreement dated July 26, 1996 in connection with the Company's acquisition
of Eastbrokers Vienna. Pursuant to this agreement, Mr. Green received $20,000 as
a non-accountable expense allowance and 10,000 shares of the Company's Common
Stock. In addition, during the 1997 fiscal year Mr. Greene was paid $37,000 for
consulting services provided to the Company in connection with potential mergers
and/or acquisitions. In connection with Mr. Greene's resignation from the Board
of Directors of the Company, the Company entered into a six month consulting
agreement dated March 27, 1997 pursuant to which Mr. Greene was paid $24,000 and
granted options to purchase 7,750 shares of the Company's Common Stock at $6.50
per share. A related letter agreement was entered into with Mr. Green on March
27, 1997, as amended by a letter dated April 29, 1997. Under the related letter
agreement, Mr. Greene was paid $13,750 and granted 12,500 shares of the
Company's Common Stock in full satisfaction for consulting services rendered
during the period August 1, 1996 through March 31, 1997. Also pursuant to this
agreement, the Company agreed to indemnify Mr. Greene against certain
liabilities, the parties exchanged mutual releases and Mr. Greene agreed to sell
his shares of the Company's common stock to the Company's primary market maker
subject to certain conditions.
The Company entered into a one year consulting agreement dated March 31,
1997 with Dr. Sumichrast, a Director of the Company, pursuant to which Dr.
Sumichrast was granted 20,000 shares of the Company's Common Stock to vest
ratably over the term of the agreement. Dr. Sumichrast provided services to the
Company during the period April 1, 1997 through September 30, 1997 and received
10,000 shares at an average price of $6.598 per share as compensation for these
services.
In March 1997, Eastbrokers Vienna purchased 30,000 shares of Schneiders
1895 AG for 3,618,000 Austrian Schillings (approximately $302,000 USD). Mr.
Peter Schmid is a Director of Schneiders 1895 AG and Mr. Schmid's father is an
officer and Director of Schneiders 1895 AG.
In December 1996, Eastbrokers Vienna loaned Dr. Muller-Tyl approximately
$72,000 USD. Interest on the outstanding balance of this obligation is computed
at 8 percent per annum until paid in full. Dr. Muller-Tyl was the Chief
Operating Officer of the Company until his resignation in January 1998.
41
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases office space from General Partners Immobilenz
("GPI")(formerly Residenz Realbesitz AG ("Residenz")) for its Vienna operations
pursuant to a month-to-month lease. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $95,000 USD) in the fiscal years ended March 31, 1997 and 1998.
The terms of this lease were negotiated such that the Company is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners Beteiligungs AG ("General Partners"), an Austrian holding
company and the beneficial owner of 1,477,139 shares of Common Stock. Mr.
Kossner, a Director of the Company and an officer of the Company from August,
1996 until November, 1996, owns approximately 30 percent of the outstanding
shares of GP. He is a member of GP's Supervisory Board, WMP's Supervisory Board,
the Eastbrokers AG Supervisory Board, and is a Director of the Company.
During 1996, the Company entered into a verbal agreement with RealWorld,
an internet software developer, to design and build an online stock exchange
game and online trading system. The initial deposit to begin development of the
game and system was 530,000 Austrian Schillings (approximately $50,000 USD).
Currently the Company has a liability to RealWorld of 208,000 Austrian
Schillings (approximately $20,000 USD) representing amounts due on progress
billings. The agreement states that costs will be charged on an hourly basis and
monthly progress billings will be made once the original deposit has been
depleted. Dr. Muller-Tyl is a member of the Supervisory Board for RealWorld.
Venture Capital Holdings GmbH, an Austrian company owned and controlled by Mr.
De Roode and Mr. Muller-Tyl ("VCH") and Messrs. Schmid, Kossner, and Muller-Tyl
were at that time shareholders of RealWorld and represented a combined ownership
interest of 26 percent.
At December 31, 1996, the Company has a receivable related to securities
transactions from Mr. Kossner in the amount of 2,269,198 Austrian Schillings
(approximately $209,000 USD).
At December 31, 1996, the Company has a receivable related to share
transactions from Z.E. Beteiligungs AG ("ZE") in the amount of 5,537,202
Austrian Schillings (approximately $511,000 USD). ZE is a subsidiary of General
Partners.
WMP is an Austrian broker-dealer, market maker, and member of the Vienna
Stock Exchange. WMP's common stock is publicly traded on the Main Market of the
Vienna Stock Exchange. From time to time, WMP will make a market in stock of
companies that have a direct relationship to the Company through its Directors.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH"), primarily an inactive subsidiary to COR Industrieberatung GmbH,
for 2.5 million Austrian Schillings (approximately $200,000 USD). The sales
price approximated the cost basis of WMP GmbH at the date of disposition.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Mr. Schmid for 13 million
Austrian Schillings (approximately $1,025,000 USD). The Company acquired its
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD). At the time of acquisition, the principal asset of
SWIB was an investment in a company which was entering bankruptcy proceedings
and there was considerable uncertainty regarding the future realizable value of
this asset. By December 1997, bankruptcy proceedings had progressed to a point
where an estimate could be made on the net realizable value of this asset. Based
on the information available at that time, SWIB's value at the date of
disposition was determined by the Board of Directors to be in the range of 12
million to 14 million Austrian Schillings (approximately $950,000 to $1,100,000
USD). The sale of SWIB resulted in a gain of approximately $1.0 million USD and
is included in the accompanying consolidated statement of operations.
42
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1997, ZE, a 26.27 percent owned subsidiary of General
Partners, owned approximately 25 percent of UCP Beteiligungs AG ("UCP AG"), an
Austrian holding company. UCP AG, in turn, owns 27.7 percent of a Russian
chemical company, UCP AOOT. Shares of UCP AOOT are listed over-the-counter on
the Vienna Stock Exchange. WMP is a market maker in the shares of UCP AOOT on
the Vienna Stock Exchange. During 1997, WMP facilitated the purchase and sale of
several blocks of UCP AOOT shares. As of year end, the Company held
approximately 38,000 shares of UCP AOOT as an investment. At this time, the
estimated value of these shares was approximately $1,030,270. This amount is
reported in the Securities owned at value, Corporate equities section of the
financial statements. Subsequent to year end, the Company sold approximately
8,000 shares in 6 separate transactions for approximately $400,000. As of
October 26, 1998, the current market price of UCP AOOT shares was approximately
$54 per share on the Vienna Stock Exchange. For the fiscal year ended March 31,
1998, the Company recorded, as a charge to earnings, a market value adjustment
of approximately ($610,000). Although the UCP AOOT shares are trading at a
premium to the original cost basis, the Company wrote down the carrying value of
this item based on an independent valuation of UCP AOOT and the uncertainty
surrounding the Russian economy.
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996, the Company
assumed a receivable in the amount of 7,387,697 ATS (approximately $704,000 USD,
at the then current exchange rates) from Peter Schmid. As of December 31, 1997,
the receivable increased due to cash advances to 8,046,177 ATS (approximately
$635,000 USD, at the then current exchange rates). 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 percent per annum and matures May 31,
2000. It was collateralized by 150,000 shares of the Common Stock. On October 8,
1998, Mr. Schmid repaid 6,748,111 Austrian Schillings of the total amount due.
Mr. Schmid has informed the Company that he intends to repay the remaining
outstanding balance by December 31, 1998.
Periodically, the Company engages in securities transactions with URBI
S.A., ("URBI"), a Spanish investment company. Mr. Kossner was a member of URBI's
Supervisory Board from November 1996 through June 1998 and Mr. Schmid was a
member until May 1997. All transactions between URBI and the Company were
consummated at the then current market prices. At December 31, 1997, the amount
due from URBI was 7,023,576 Austrian Schillings or approximately $555,000,
arising exclusively from various securities transactions. This amount is
reported in the Receivable from affiliated companies in the consolidated
statement of financial condition. Prior to June 30, 1998, URBI had repaid all
amounts due with respect to the transactions open at December 31, 1997. As of
June 30, 1998, the Company had a receivable from URBI in the amount of 4,698,215
Austrian Schillings or approximately $370,000 related to transactions occurring
subsequent to December 31, 1997. In addition, the Company entered into a
repurchase agreement with URBI in June 1997. This repurchase agreement and the
related shares of Vodni Stavby a.s., a Czech construction company, were sold to
a non-affiliated Czech Republic company in October 1997.
During October 1997, WMP entered into a stock loan transaction with VCH in
the amount of 4,065,000 Austrian Schillings (approximately $325,000). In August,
1998, VCH repaid the Company in full for this stock loan transaction. WMP
periodically engages in stock loan transactions as a portion of its normal
business operations.
In December 1997, WMP purchased 7,200,000 ATS (approximately $576,000) of
8 percent bonds due April 1, 2000 of ZE. This amount is reported in the
Securities owned at value, Corporate equities in the consolidated statement of
financial condition. The ZE bonds earn a comparatively higher interest rates
(350 basis point above comparable Austrian governmental rates).
43
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
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 percent per annum and is due September 15, 1999.
NOTE 13. INCOME TAXES
The tax benefit of $640,163 for the year ended March 31, 1998 results
primarily from foreign net operating loss carryforwards at the Company's
subsidiaries.
The differences between the tax provision (benefit) calculated at the
statutory federal income tax rate and the actual tax provision (benefit) for
each period is shown in the table below:
Year Ended Year ended
March 31, March 31,
1998 1997
------------ ------------
Tax benefit at federal statutory rate $(1,587,065) $ 84,678
State income taxes, net of federal
benefit (244,991) 14,402
Foreign taxes 266,411 --
Unrecognized benefit of net operating
losses 897,153 697,301
Discontinued operations -- (510,975)
Non-taxable income from Slovak
Republic -- (191,515)
Other 8,329 (102,196)
----------- ------------
$ (640,163) $ (8,305)
------------ ------------
44
<PAGE>
NOTE 13. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax asset and
liability are as follows:
Year Ended Year ended
March 31, March 31,
1998 1997
------------ ------------
Unrecognized gain from marketable securities $ 142,633 $ (105,385)
Capital loss carryforward 45,445 --
Foreign tax credit carryforward 32,652 --
Other 19,428 (5,405)
Net operating loss carryforward 5,202,856 1,112,193
------------ ------------
5,443,014 1,001,403
Valuation allowance (1,331,492) (697,301)
------------ ------------
4,111,522 304,102
Eastbrokers AG deferred taxes acquired -- 187,996
------------ ------------
$4,111,522 $ 492,098
------------ ------------
At March 31, 1998, the Company has a U.S. federal net operating loss
carryforward of approximately $3,018,000 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 $11,000,000 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, 1996.
Distributions of this nature are non-taxable under Slovak Republic regulations.
45
<PAGE>
NOTE 14. SEGMENT INFORMATION
Segment information is as follows for the year ended March 31, 1998:
Share of
Income of
Unconsolidated Identifiable Net
Revenues Entities Assets (Loss)
----------- -------------- ------------ -----------
Austria $ 4,152,076 $ 32,076 $22,354,754 $ (493,359)
Czech Republic 1,304,552 - 868,961 (279,568)
Hungry 2,108,992 - 7,533,072 214,017
Poland 1,372,325 - 2,529,672 33,585
Slovak Republic 9,842 - 1,945,028 (428,439)
United States 218,199 - 8,062,958 (2,746,065)
Other 1,176,990 1,137,064 23,222
----------- -------------- ------------ -----------
Total $10,342,976 $ (32,076) $44,431,509 $(3,676,607)
----------- -------------- ------------ -----------
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)
----------- -------------- ------------ -----------
Austria $ 1,433,897 $ (396,209) $13,023,750 $ 165,188
Czech Republic 656,079 - 2,202,134 (130,214)
Hungry 387,519 - 2,117,066 56,166
Poland 921,856 - 2,341,507 (20,705)
Slovak Republic 1,124,339 - 3,071,805 596,560
United States 1,161,940 - 9,136,486 (1,606,814)
Other 55,845 - 69,981 21,208
----------- -------------- ------------ -----------
Total $ 5,741,475 $ (396,209) $31,962,729 $ (918,611)
----------- -------------- ------------ -----------
46
<PAGE>
NOTE 15. DISCONTINUED OPERATIONS
In October 1996, the Company agreed to sell its interest in the Hotel for
100,000 shares of Ceske energeticke zavody a.s. and 86,570 shares of Vodni
stavby Praha a.s., based on the then current market prices for each stock. In
November 1996, the sales transaction was completed. As of the sale date, the
Company revised its estimate of the net realizable value of the shares received
based on the then current market prices for each stock. As a result, the Company
recognized a loss on the sale of discontinued operations of ($1,323,083 USD).
Income from discontinued operations was $41,899 through the sale date.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
In May 1998, a date subsequent to the fiscal year end date of March 31,
1998, the Company acquired all of the outstanding common stock of EBI
Securities, a Denver, Colorado based investment banking and brokerage firm, in
exchange for 445,000 unregistered shares of the Company's Common Stock and an
agreement to advance $1,500,000 in additional working capital to EBI Securities.
EBI Securities is subject to the following legal proceedings.
USCAN FREE TRADE ZONES V. COHIG & ASSOCIATES, INC. (EBI SECURITIES), ET
AL., United States District Court for the Western District of Washington. In
March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint against EBI
Securities and Steve Signer, an employee of EBI Securities, alleging that EBI
Securities misled USCAN about the credit worthiness of a third party in
connection with an introduction made by Mr. Signer. EBI Securities categorically
denies this allegation. USCAN informed EBI Securities that it would be working
with a certain third party to secure certain loans on behalf of USCAN which
USCAN would then use to open a trading account with EBI Securities. Once EBI
Securities learned of the relationship to this third party, it refused to enter
into any business arrangements with USCAN as long as the third party was
involved due to regulatory problems encountered in prior business dealings with
this certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that might
have resulted. Mr. Signer was dismissed as a defendant is this case due to lack
of personal jurisdiction and has received an award of fees. Plaintiff originally
sought a judgment of approximately $86,000,000 in compensatory and punitive
damages. However, USCAN recently stated in a pleading and during a court
deposition taken in October 1998 that its damage claim had been reduced to
$332,000. EBI Securities has filed counterclaims for defamation based upon
certain false and defamatory representations regarding EBI Securities. The trial
had been scheduled to start in January 1999 but the court removed the case from
its docket after USCAN filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code. In the event that that the case should ever be
restored to the active docket for trial, 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. Plaintiffs' motion for a new trial was
denied. EBI Securities filed a motion seeking recovery of its costs and
attorney's fees incurred in connection with defending this action. The Court
awarded EBI Securities $12,500 in costs but denied its motion for attorney's
fees. Plaintiffs have filed an appeal to the judgment and EBI Securities has
cross-appealed the denial of its motion for attorney's fees.
47
<PAGE>
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
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. The case is
presently scheduled for trial in October 1999.
EBI Securities also is involved in an arbitration proceeding related to
the NFC Litigation entitled NATIONAL FAMILY CARE LIFE INSURANCE CO. V. PAULI
COMPANY, INC., ET AL., NASDR Case No. 96-02673 (the "Arbitration"). The
Arbitration panel entered an award against EBI Securities in July 1998 in favor
of third-party plaintiff Pauli & Company, Inc. ("Pauli") of approximately
370,000, which was significantly below the initial award sought by Pauli of
approximately $1,100,000. EBI Securities has filed a motion to vacate and plans
to vigorously contest this award on appeal.
JACK G. LARSEN, AS RECEIVER FOR SOUTHWEST INCOME, TRUST ADVANTAGE INCOME
TRUST AND INVESTORS TRADING TRUST V. COHIG AND ASSOCIATES, INC. ET AL., Maricopa
County Superior Court, Arizona, Case No. CV 98-20281. Plaintiff commenced this
action against EBI Securities and one of its brokers in December 1998 (and
process was served on EBI Securities in January 1999) seeking damages in excess
of $8 million dollars against EBI Securities as well as an accounting of funds
allegedly in possession of EBI Securities. Plaintiff, who apparently has been
appointed receiver for three trusts, alleges that customer accounts established
at EBI Securities by third parties contained funds that actually belonged to the
Trusts, and that EBI Securities negligently failed to supervise its employees,
in failing to determine that the third parties' trading activities, which
allegedly resulted in significant trading losses, were in violation of the terms
of agreements between the third parties and the Trusts. Plaintiff also contends
that EBI Securities has in its possession and has wrongfully refused to return
approximately $270,000 belonging to the Trusts. EBI Securities has filed a
Motion to Compel Arbitration and a Motion to Dismiss for Lack of Subject Matter
Jurisdiction. A court hearing on these two motions is presently scheduled for
May 20, 1999. EBI Securities believes that it has meritorious defenses and
intends to vigorously defend against Plaintiff's claims.
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, the Company's largest European subsidiary, WMP, successfully
raised 60 million Austrian Schillings (approximately $4,800,000 USD) in a bond
offering. The Company intends to utilize these proceeds to enhance and further
develop its European trading activities. The bonds were issued in denominations
of 10,000 Austrian Schillings (approximately $800 USD at the then current
exchange rates), bear an annual interest rate of 7.5 percent, payable at
maturity, and mature in June 2002. In December 1998, the Company redeemed
approximately 42 million Austrian Schillings of these bonds. The Company intends
to redeem the remaining bonds in the future.
48
<PAGE>
NOTE 16. SUBSEQUENT EVENTS (CONTINUED)
In June 1998, the Company sold a 73.55 percent interest in Eastbrokers
Prague a.s. for 15 million Austrian Schillings (approximately $1,200,000 USD at
the then current exchange rate). The net assets related to this transaction are
presented in the accompanying balance sheet as "Net assets held for sale."
In November 1998, the Company sold 10 newly issued units consisting in the
aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock..
In December 1998, Eastbrokers sold its subsidiary, Eastbrokers Budapest
Rt. for HUF 217,000,000 (approximately $1,000,000). The Company continues to
have a working relationship with the buyer and maintains a presence through its
relationship with the buyer.
In January 1999, the Company sold 125,000 shares of Common Stock for a
total offering price of $500,000 or $4.00 per share.
In February 1999, the Company's Austrian subsidiary WMP Bank AG, purchased
a forty-nine (49%) percent equity interest in Stratego Invest a.s. Prague, a
Czech securities and investment firm. The purchase price was valued at
approximately $2.9 million USD at the then current exchange rates. The book
value of Stratego Invest at the time of purchase was approximately 190 million
Czech koruna, or approximately $6.1 million USD at the then current exchange
rates.
Stratego Invest is one of the leading Czech securities and investment
firms. The current management of Stratego Invest has a proven record of
profitability and they have well positioned the firm in order to expand into the
international securities marketplace. The partnership with Stratego Invest will
give the Company a strong partner in the Czech marketplace, and at the same
time, will provide Stratego Invest access to the international marketplace
through the Company's operations in Europe and the US.
In February 1999, Martin A. Sumichrast sold 50,000 share of Common Stock
acquired in September 1997 with a promissory note. Proceeds from such sale were
used to repay the note.
In March 1999, Eastbrokers issued the 10% Note due 2003. Holders of the
10% Notes have the right to convert their Notes into shares of Common Stock at
$5.75 per share. Proceeds of the Notes were used to redeem the 7% Convertible
Debentures.
In April 1999, Eastbrokers signed a joint venture agreement with
CyberRealm, Inc., a website development firm, to jointly own and develop
EBonlineinc.com, a newly established subsidiary. EBonlineinc.com is owned
seventy percent by Eastbrokers and thirty percent by CyberRealm, Inc. Under the
terms of the joint venture agreement, Eastbrokers will provide $300,000 in
initial funding and CyberRealm will provide $200,000 in developmental costs.
EBonlineinc.com is an internet based service (www.Ebonline.com) that will
allow domestic and internationally based companies to post their businesses,
match with buyers and sellers and have access to the investment banking and
securities network of the Company. Eastbrokers believes that EBonlineinc.com
will have potentially three revenue streams: monthly membership fees, consulting
income and banner advertising income. Eastbrokers intends to begin marketing the
Website in May 1999 in international print media and major search engines on the
internet.
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. The new standard
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 was adopted by the Company beginning with the
interim reporting period ended December 31, 1997. The adoption did not affect
previously reported earnings per share amounts.
49
<PAGE>
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by the Company beginning with the fiscal year ended March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement will be effective for the Company's
annual report for the fiscal year ended March 31, 1999. In the initial year of
application, comparative information for earlier years is to be restated. At
this time, the Company does not believe that this statement will have a
significant impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. At this time,
the Company does not believe that this statement will have a significant impact
on the Company.
NOTE 18. SIGNIFICANT ESTIMATES
As part of the preparation of its fiscal 1998 financial statements, the
Company has made several valuation estimates. Such estimates could be impacted
by changes in facts and circumstances in the near term. Such changes, if they
occur, could have a significant effect on the Company's financial position and
results of operations. The net amounts recorded related to these estimates are
summarized as follows:
o An approximate $1 million receivable from a Serbian financial institution
related to the Company selling its creditor position with a bankrupt company.
This amount is included in financial institution receivable in the
accompanying 1998 balance sheet.
o An approximate $1 million investment in the shares of UCP AOOT (See Note 12),
a Russian chemical company. This amount is included in securities owned -
corporate equities in the accompanying 1998 balance sheet.
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 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Not applicable.
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EASTBROKERS INTERNATIONAL INCORPORATED
(Registrant)
By: /S/ Martin A. Sumichrast
---------------------------------------------------- May 24, 1999
Martin A. Sumichrast
Chairman, President, Chief Executive Officer and Director
In accordance with the Exchange Act, this amendment to report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /S/ Martin A. Sumichrast
---------------------------------------------------- May 24. 1999
Martin A. Sumichrast
Chairman, President, Chief Executive Officer and Director
/s/ Kevin D. McNeil May 24, 1999
-----------------------------------------------------
Kevin D. McNeil
Vice President, Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Michael Sumichrast, Ph.D May 24, 1999
------------------------------------------------------
Michael Sumichrast, Ph.D.
Director
/s/ Wolfgang Kossner May 24, 1999
------------------------------------------------------
Wolfgang Kossner
Director
/S/ Jay R. Schifferli
-------------------------------------------------------- May 24, 1999
Jay R. Schifferli
Director
51
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR THE FISCAL YEAR ENDED MARCH 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 7,156,702
<SECURITIES> 8,677,912
<RECEIVABLES> 17,924,744
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,632,761
<PP&E> 1,909,179
<DEPRECIATION> 766,898
<TOTAL-ASSETS> 44,431,509
<CURRENT-LIABILITIES> 16,022,750
<BONDS> 2,020,087
0
0
<COMMON> 214,888
<OTHER-SE> 18,948,818
<TOTAL-LIABILITY-AND-EQUITY> 44,431,509
<SALES> 0
<TOTAL-REVENUES> 10,342,976
<CGS> 0
<TOTAL-COSTS> 15,010,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 746,821
<INCOME-PRETAX> (4,667,839)
<INCOME-TAX> (640,163)
<INCOME-CONTINUING> (3,676,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,676,607)
<EPS-BASIC> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
