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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON July 21, 1999
REGISTRATION NO. 333-________
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SECURITIES AND EXCHANGE COMMISSION
================================================================================
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EASTBROKERS INTERNATIONAL INCORPORATED
(Name of Small Business Issuer in its Charter)
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<S> <C> <C>
Delaware 6799 52-1807562
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
____________________
15245 SHADY GROVE ROAD, SUITE 340
ROCKVILLE, MARYLAND 20850
(301) 527-1110
(Address and Telephone Number of Principal Executive Offices)
____________________
MARTIN A. SUMICHRAST
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
15245 SHADY GROVE ROAD, SUITE 340
ROCKVILLE, MARYLAND 20850
(301) 527-1110
(Name, Address and Telephone Number of Agent for Service)
____________________
WITH A COPY TO:
JAY R. SCHIFFERLI, ESQ.
KELLEY DRYE & WARREN LLP
TWO STAMFORD PLAZA
281 TRESSER BOULEVARD
STAMFORD, CONNECTICUT 06901
(203) 324-1400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective. If the
only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
____________________
CALCULATION OF REGISTRATION FEE (1)
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----------------------------------------------- -------------- ------------------- ------------------- -----------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(2) OFFERING PRICE REGISTRATION FEE
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.05 per share 13,000 4.28 $ 55,640 $ 15.47
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
Common Stock, par value $.05 per share, 475,000 4.28 $2,033,000 $ 565.18
underlying 5 percent Convertible Debentures
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
Class C Common Stock Purchase Warrants - - - -
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
Common Stock, underlying 10 percent Convertible
Promissory Notes 234,781 4.28 $1,004,862 $ 279.36
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
Common Stock, underlying Class C Common
Stock Purchase Warrants 193,900 4.28 $ 829,892 $ 230.71
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
Total 916,681 $3,923,395 $1,090.72
----------------------------------------------- -------------- ------------------- ------------------- -----------------------
</TABLE>
(1) This Registration Statement on Form SB-2 is being filed pursuant to
Rule 429 under the Securities Act of 1933, as amended. 3,538,222
shares of Common Stock, 1,325,000 Class C Common Stock Purchase
Warrants and 1,237,222 Placement Agent Warrants were previously
registered, and a fee of $5,811.15 was previously paid, under our
Registration Statement on Form SB-2, No. 333-72359, which is hereby
combined with this Registration Statement under Rule 429.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, based on the average of the high and the low
prices of the Common Stock on the Nasdaq SmallCap Market on July 15,
1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
EXPLANATORY NOTE
The purpose of this Registration Statement on Form SB-2 of Eastbrokers
International Incorporated ("we" or "us") is to register an additional 13,000
shares of our common stock, par value $.05 per share (the "Common Stock"), and
903,681 shares of Common Stock issuable pursuant to our 5 percent Convertible
Debentures due 2002, 10 percent Convertible Promissory Notes due 2002 and Class
C Common Stock Purchase Warrants, and 193,900 Class C Common Stock Purchase
Warrants. 3,538,222 shares of Common Stock, 1,352,000 Class C Common Stock
Purchase Warrants and 1,237,222 Placement Agent Warrants were previously
registered under our Registration Statement on Form SB-2, No. 333-72359, which
is hereby combined with this Registration Statement pursuant to Rule 429 under
the Securities Act.
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EASTBROKERS INTERNATIONAL INCORPORATED
CROSS-REFERENCE SHEET
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<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
<S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus..........................................Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus..........................................Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors.........................Summary; Risk Factors
4. Use of Proceeds..............................................Use of Proceeds
5. Determination of Offering Price..............................Not Applicable
6. Dilution.....................................................Not Applicable
7. Selling Security Holders.....................................Selling Security Holders
8. Plan of Distribution.........................................Outside Front Cover of Prospectus; Plan of
Distribution
9. Legal Proceedings............................................Business
10. Directors, Executive Officers, Promoters and
Control Persons..............................................Risk Factors; Management
11. Security Ownership of Certain Beneficial Owners
and Management. .............................................Selling Security Holders; Certain Relationships
and Related Transactions; Security Ownership of
Certain Beneficial Owners and Management
12. Description of Securities....................................Description of Securities
13. Interests of Named Experts and Counsel.......................Experts; Counsel
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...............Disclosure of Commission Position on
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years..........................Business; Certain Relationships and Related
Transactions
16. Description of Business......................................Business
17. Management's Discussion and Analysis or Plan of
Operation....................................................Management's Discussion and Analysis or Plan of
Operation
18. Description of Property......................................Business
19. Certain Relationships and Related Transactions...............Certain Relationships and Related Transactions
20. Market for Common Equity and Related
Stockholder Matters..........................................Market for Common Equity and Related Stockholder
Matters; Risk Factors; Outside Front Cover of
Prospectus
21. Executive Compensation.......................................Executive Compensation
22. Financial Statements.........................................Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
</TABLE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SECURITY HOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 21, 1999
PROSPECTUS
EASTBROKERS INTERNATIONAL INCORPORATED
This Prospectus relates to the offer and sale of 4,307,403 Shares of
Common Stock, 1,545,900 Class C Common Stock Purchase Warrants and
1,237,222 Placement Agent Warrants of Eastbrokers International
Incorporated. The Common Stock and Warrants will be sold by or on
behalf of certain of our security holders.
The security holders anticipate that, if and when offered and sold, the
Common Stock will be offered and sold in transactions (which may
include block transactions) effected on the Nasdaq SmallCap Market at
the then prevailing market prices. The security holders reserve the
right, however, to offer and sell the Common Stock on any other
national securities exchange on which the Common Stock is or may become
listed or in the over-the-counter market, in each case at then
prevailing market prices, or in privately negotiated transactions each
at a price then to be negotiated. The Class C Common Stock Purchase
Warrants and the Placement Agent Warrants will not be listed on any
exchange or in the over-the-counter market and therefore, the security
holders may offer and sell the Class C Common Stock Purchase Warrants
and the Placement Agent Warrants in privately negotiated transactions
at a price then to be negotiated. All offers and sales made on the
Nasdaq SmallCap or any other national securities exchange or in the
over-the-counter market will be made through or to licensed brokers and
dealers.
Eastbrokers' Common Stock is currently traded on the Nasdaq SmallCap
Market under the trading symbol "EAST." Eastbrokers' Common Stock also
trades on the Berlin and Frankfurt Stock Exchanges. The Class C Common
Stock Purchase Warrants and the Placement Agent Warrants do not trade
on any exchange.
_______________
This investment involves a high degree of risk. See "Risk Factors"
beginning on page 8.
_______________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
_______________
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
YOU SHOULD RELY ONLY UPON THE INFORMATION IN THIS PROSPECTUS. WE HAVE
NOT, AND THE SELLING SECURITY HOLDERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE SELLING
SECURITY HOLDERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT
THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE
FRONT COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549; at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and at Seven World Trade Center, 13th Floor, New
York, New York 10048. In addition, Eastbrokers is required to file electronic
versions of these documents through the Commission's Electronic Data Gathering,
Analysis and Retrieval System (EDGAR). The Commission maintains a World Wide Web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. Copies of these materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. The Common
Stock is quoted on the Nasdaq SmallCap. Information regarding the trading of
EAST on the Nasdaq SmallCap Market can be obtained from the Nasdaq SmallCap
Market, 9801 Washingtonian Boulevard, Gaithersburg, Maryland 20878 ((202)
496-2500).
We have filed with the Commission a Registration Statement on Form
SB-2, as amended, under the Securities Act with respect to the securities being
offered by this Prospectus. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits thereto. For further information
with respect to Eastbrokers and the offer and sale of the securities, reference
is made to the Registration Statement and the exhibits thereto. Statements
contained in this Prospectus concerning the provisions of documents filed with
the Registration Statement as exhibits are necessarily summaries of such
documents, and each such statement is qualified in its entirety by reference to
the copy of the applicable document filed with the Commission. The Registration
Statement may be inspected without charge at the Public Reference Section of the
Commission at 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549, and
copies of all or any part thereof may be obtained from the Commission at
prescribed rates.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
2
<PAGE>
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements. These include
statements about anticipated financial performance, future revenues or earnings,
business prospectus, projected ventures, new products, anticipated market
performance and similar matters. The words "budgeted," "anticipate," "project,"
"estimate," "expect," "may," "believe," "potential" and similar statements are
intended to be among the statements that are forward looking statements. Because
such statements reflect the reality of risk and uncertainty that is inherent in
our business, actual results may differ materially from those expressed or
implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward looking statements, which are made as of the
date of this Prospectus.
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, we caution our readers that a variety of factors could cause the
actual results of Eastbrokers to differ materially from the anticipated results
or other expectations expressed in Eastbrokers' forward-looking statements.
These risks and uncertainties, many of which are beyond Eastbrokers' control,
include, but are not limited to:
o transaction volume in the securities markets;
o the volatility of the securities markets, fluctuations in interest
rates;
o changes in regulatory requirements which could affect the cost of
doing business, fluctuations in currency rates;
o general economic conditions, both domestic and international;
o changes in the rate of inflation and related impact on securities
markets;
o competition from existing financial institutions and other new
participants in the securities markets;
o significant and rapid changes in technology which could negatively
affect our internet related projects;
o legal developments affecting the litigation experience of the
securities industry;
o changes in federal and state tax laws which could affect the
popularity of products sold by Eastbrokers; and
o those risks and uncertainties set forth under the caption "Risk
Factors" on page 8 and in Eastbrokers' filings with the SEC.
Eastbrokers undertakes no obligation to release publicly any revisions
to the forward looking statements to reflect events or circumstances after the
date hereof or to reflect unanticipated events or developments.
3
<PAGE>
IMPORTANT TERMS
We use the following terms to identify various companies or groups of
companies. These terms help to simplify the presentation of information in this
Prospectus.
EASTBROKERS refers to Eastbrokers International Incorporated only.
Eastbrokers is the issuer of the publicly traded common stock covered hereby.
EASTBROKERS GROUP, we, us, or our refers collectively to Eastbrokers
and its subsidiaries.
4
<PAGE>
SUMMARY
PLEASE READ ALL OF THIS PROSPECTUS CAREFULLY. IT DESCRIBES US AND OUR
FINANCES AND PRODUCTS. FEDERAL AND STATE SECURITIES LAWS REQUIRE THAT WE INCLUDE
IN THIS PROSPECTUS ALL IMPORTANT INFORMATION THAT INVESTORS WILL NEED TO MAKE AN
INVESTMENT DECISION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS TO MAKE YOUR INVESTMENT DECISION. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROSPECTUS. THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION (INCLUDING
FINANCIAL STATEMENTS AND NOTES THERETO) CONTAINED IN THIS PROSPECTUS AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
HEREIN.
EASTBROKERS
Eastbrokers was incorporated in the State of Delaware on January 20,
1993, as the Czech Fund. Our initial goal was to take advantage of the rapid
growth in business opportunities arising from the privatization of the
newly-democratized Czech Republic by merging with or acquiring Czech businesses.
From 1993 through 1996, we held an interest in a Czech hotel and an interest in
a Czech department store.
In 1996, we re-evaluated our business strategy and after considering a
variety of investment opportunities, acquired Eastbrokers Vienna. Eastbrokers
Vienna is an Austrian brokerage company with offices throughout Central and
Eastern Europe. This transaction enhanced our prospects by both providing us
with a vehicle to implement our acquisition strategy and extend our
opportunities beyond the Czech Republic to the entirety of Central and Eastern
Europe. Thereafter, our name was changed to Eastbrokers International
Incorporated, our present name.
Eastbrokers is primarily a holding company for thirteen subsidiaries
and affiliates which are directly and indirectly owned. Nine of the subsidiaries
and affiliates are incorporated and located in Central and Eastern Europe.
Eastbrokers also owns 100 percent of EBI Securities Corporation, 100 percent of
Eastbrokers Leasing Ltd., 92 percent of Eastbrokers North America, Inc. and
about 48 percent of Ebonlineinc.com. Most of Eastbrokers' subsidiaries and
affiliates are engaged in the investment banking, broker-dealer, consulting,
advisory and securities business. The principal strategic objective has been to
establish controlling ownership of independent broker-dealers located primarily
in Central and Eastern Europe and to create a network that provides access to
emerging market investment opportunities in Central and Eastern Europe. In
fiscal year 1998, we expanded our objective to include establishing controlling
ownership of independent broker-dealers in the United States.
5
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THE OFFERING
Securities offered........................ The resale of 4,307,403 shares of
Common Stock; 1,545,900 Class C
Common Stock Purchase Warrants;
and 1,237,222 Placement Agent
Warrants. See "Description of
Securities."
Common Stock Outstanding prior
to the Offering
(as of July 1, 1999)....................... 5,206,750
Common Stock Outstanding after
the Offering(1)............................ 8,699,653 shares
Risk Factors............................... The offering involves a high degree
of risk. See "Risk Factors" at
page 8.
Use of Proceeds............................ We will not receive any proceeds
from resales of the Shares or the
Class C Common Stock Purchase
Warrants or the Placement Agent
Warrants. We will receive funds if
the Class C Common Stock Purchase
Warrants and the Placement Agent
Warrants are exercised and if the 5
percent Debentures and the 10
percent Notes are converted. Any
funds received by us will be used
for general corporate and working
capital purposes.
____________________
(1) Assumes exercise of all the Class C Common Stock Purchase Warrants and the
Placement Agent Warrants and conversion of all 5 percent Convertible Debentures
due 2002 and 10 percent Convertible Promissory Notes due 2002.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
Financial Statements of the Eastbrokers Group contained herein for the years
ended March 31, 1998 and 1999 and should be read in conjunction with, and are
qualified in their entirety by reference to, such Financial Statements and the
notes thereto, and in conjunction with "Management's Discussion and Analysis of
Financial Condition or Plan of Operation" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the Year For the Year
Ended March Ended March
31, 1998 31, 1999
-------- --------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues
Commission.................................................... $ 2,539,260 $14,246,465
Investment banking............................................ 807,803 2,165,753
Trading profit, net........................................... 4,276,480 10,042,716
Other......................................................... 2,719,433 6,496,546
Total Revenues............................................ 10,342,976 32,951,480
Total costs and expenses
Compensation and benefits..................................... 3,818,549 15,830,533
Consulting and professional fees.............................. 2,447,456 2,522,062
Occupancy..................................................... 997,814 2,389,741
Communications................................................ 698,688 1,962,495
Brokerage, clearing, exchange fees and other ................. 1,163,171 9,195,493
General and administrative.................................... 3,476,026 2,608,037
Other......................................................... 1,417,879 4,354,966
Total expenses............................................ 14,019,583 38,863,327
Net loss.......................................................... $(3,676,607) $ (5,911,847)
============ =============
Weighted average number of shares outstanding..................... 3,149,009 4,800,551
------------ --------------
Basic and diluted loss per share.................................. $ (1.17) $ (1.23)
------------ ---------------
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DATA:
Total assets...................................................... $44,431,509 $48,880,039
Total liabilities................................................. 18,093,930 23,614,002
Minority interest in consolidated subsidiaries.................... 7,173,873 7,619,233
Stockholders' Equity.............................................. 19,163,706 17,646,804
</TABLE>
7
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RISK FACTORS
WE FACE A VARIETY OF RISKS IN THE CONDUCT OF OUR BUSINESS, ANY OF WHICH
COULD MATERIALLY AND ADVERSELY AFFECT US, OUR BUSINESS AND OUR FINANCIAL
PERFORMANCE. SOME OF THESE RISKS ARE SUMMARIZED BELOW. THIS SUMMARY IS NOT
INTENDED TO BE A COMPLETE LIST OF ALL MATTERS THAT COULD ADVERSELY AFFECT US,
AND THERE ARE MANY FACTORS BEYOND OUR CONTROL THAT AFFECT US, OUR BUSINESS AND
OUR FINANCIAL PERFORMANCE.
THE VOLATILE NATURE OF THE SECURITIES BUSINESS COULD ADVERSELY AFFECT
OUR FINANCIAL PERFORMANCE AS WELL AS OUR STOCK PRICE. The securities business is
naturally subject to various risks, particularly in volatile or illiquid
markets. Among the risks are potential losses resulting from the following
activities:
o underwriting or owning securities,
o trading, arbitrage and merchant banking activities,
o failure by the other party to meet commitments,
o customer fraud and employee fraud,
o misconduct and errors,
o failures in connection with processing securities transactions and
o litigation
Various factors affect a securities firm's business and profitability.
These factors include the firm's credit capacity or perceived creditworthiness
and competitive factors, including the ability to attract and retain highly
skilled employees. These and other factors may contribute to reduced levels of
new issuances of securities or merger, acquisition, restructuring, and leveraged
capital activities, including leveraged buyouts and high-yield financing. Such
factors may also help reduce the level of participation in financing and
investment related to these activities. This generally results in lower revenues
from investment and merchant banking fees and from underwriting and corporate
development investments. Reduced volume of securities transactions and reduced
market liquidity generally result in lower revenues from dealer and trading
activities and commissions.
Lower price levels of securities may result in a reduced volume of
transactions and in losses from declines in the market value of securities held
in trading, investment and underwriting positions. Sudden sharp declines in
market values of securities and the failure of companies issuing securities and
parties on the other side of a transaction to perform their obligations can
result in illiquid markets. In such markets, we may not be able to sell
securities and may have difficulty covering our securities positions. Such
markets, if prolonged, may also lower our revenues from investment banking,
merchant banking and other investments, and could have a material adverse effect
on our results of operations, financial condition and cash flows.
Our principal business activities (investment banking, securities sales
and trading and correspondent brokerage services) are naturally highly
competitive and subject to various risks, volatile trading markets and
fluctuations in the volume of market activity. Consequently, our net income and
revenues, as well as our stock price, have been, and may continue to be, subject
to wide fluctuations. This, of course, reflects the impact of many factors that
are beyond our control. These factors include:
o securities market conditions,
o the level and volatility of interest rates,
o competitive conditions, and
o the size and timing of transactions.
8
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Numerous other national and international factors affect the securities
business and the profitability of securities firms. These include:
o economic and political conditions,
o broad trends in business and finance,
o legislation and regulation affecting the national and international
business and financial communities,
o currency values,
o inflation,
o market conditions,
o the availability of short-term or long-term funding and capital,
o the credit capacity or perceived creditworthiness of the securities
industry in the marketplace, and
o the level and volatility of interest rates.
WE COULD BE ADVERSELY AFFECTED BY THE SIGNIFICANT COMPETITION WITHIN
THE SECURITIES INDUSTRY. We encounter significant competition in all aspects of
the securities business and compete worldwide directly with other domestic and
foreign securities firms. Many of these competitors have greater capital,
financial and other resources than we have. In addition to competition from
firms currently in the securities business, there has been increasing
competition from other sources, such as commercial banks and investment
boutiques.
We anticipate legislative and regulatory initiatives in the U.S. to
remove or relieve certain restrictions on commercial banks. Thus, it is possible
that competition in some markets currently dominated by investment banks may
increase in the near future.
Such competition could also affect our ability to attract and retain
highly skilled individuals to conduct our various businesses, which may have an
adverse effect on our business. The principal competitive factors influencing
our business are:
o our professional staff,
o our reputation in the marketplace,
o our existing client relationships,
o the ability to commit capital to client transactions, and
o our mix of market capabilities.
The adequacy of our capital levels will also influence our ability to
compete effectively in securities brokerage and investment banking activities.
In addition, our ability to expand our business may depend on our ability to
raise additional capital. SEE "Description of Business - Competition."
OUR FAILURE TO COMPLY WITH THE EXTENSIVE FEDERAL, STATE AND FOREIGN
REGULATION OF OUR BUSINESS COULD HAVE POSSIBLE MATERIAL ADVERSE EFFECTS UPON US.
Our business (and the securities industry generally) is subject to extensive
regulation. First, we are subject to regulation in the United States, Austria
and all other Central and Eastern European states where our subsidiaries operate
at the state level. Second, we are subject to regulation by various foreign
financial regulatory authorities in the jurisdictions outside of the United
States, Austria and Central and Eastern Europe where we do business, including
regulation by the Securities and Futures Authority of the United Kingdom.
Finally, we are subject to regulation by industry self regulatory organizations
(known as "SROs"). SEE "Description of Business - Governmental Regulation."
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SROs such as the NASD require strict compliance with their rules and
regulations. Our failure to comply with any of these laws, rules or regulations
could result in fines, suspension or expulsion, with which could have possible
material adverse effects upon us and may affect our stock price accordingly.
The scope of EBI Securities' broker-dealer operations is subject to the
terms of its Restriction Agreements with the NASD. In the event that EBI
Securities violates the terms of its Restriction Agreements, the NASD can
suspend or revoke its membership and may impose fines upon or censure EBI
Securities.
Compliance with many of the regulations that apply to us involves a
number of risks, particularly in areas where applicable regulations may be
unclear. The SEC, the Austrian Ministry of Finance (the "Ministry"), other
governmental regulatory authorities, including state securities regulators, and
SROs, including the Vienna Stock Exchange Chamber, may institute administrative
or judicial proceedings or arbitrations. These proceedings or arbitrations may
result in censure, fine, civil penalties (including treble damages in the case
of insider trading violations), issuance of cease-and-desist orders,
de-registration of or suspension of a broker-dealer, investment adviser or
futures commission merchant, statutory disqualification of our officers or
employees or other adverse consequences. Moreover, even if no such actions are
taken, there could be a material adverse effect on our perceived
creditworthiness, reputation and competitiveness. Customers of ours or others
who allege that our violation of applicable regulations have damaged them also
may seek to obtain compensation from us, including unwinding any transactions
with us. Such unwinding could have an adverse impact on our business.
Other changes may adversely affect our manner of operation and
profitability. These include:
o additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers,
o changes in rules promulgated by the SEC, the Ministry or other Austrian
or foreign governmental regulatory authorities and SROs, and
o changes in the interpretation or enforcement of existing laws and rules.
Regulations may materially affect our business in two ways. First,
regulations may directly apply to us in the conduct of our business. Second,
laws, rules and regulations that apply generally to the industry or the market
as a whole may materially affect the market for our products and services. Some
examples of factors that could affect the volume of our underwriting, merger and
acquisition and merchant banking business in any year are:
o existing and proposed tax legislation,
o antitrust policy and other governmental regulations and policies (including
the interest rate policies), and
o changes in interpretation or enforcement of existing laws and rules that
affect the business and financial communities.
From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high-yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and investment
banking business, which in turn could adversely affect our related underwriting,
advisory and trading revenues.
THERE ARE MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH OUR
UNDERWRITING AND TRADING ACTIVITIES WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON US. We conduct our underwriting, securities trading, market-making and
arbitrage activities as principal and in doing so subject our capital to
significant risks, including market, credit (including counterparty) and
liquidity risks.
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Our underwriting, securities trading, market-making and arbitrage
activities often involve the purchase, sale or short-sale of securities as
principal in markets that may be characterized by relative illiquidity or that
may be particularly susceptible to rapid fluctuations in liquidity. From time to
time we have large position concentrations in certain types of securities or
commitments and in the securities of or commitments to a single issuer. The
issuers could include sovereign governments and other entities, issuers located
in a particular country or geographic area, or issuers engaged in a particular
industry. Through our subsidiaries and affiliate offices, we engage in
proprietary trading of United States and Central and Eastern European securities
with an emphasis on government and corporate bonds, local debt instruments and
equity securities. These transactions involve risks associated with the
political instability and relative currency values of the nations in which the
issuer principally engages in business, including the risk of nationalization.
Additionally, from time to time we have substantial position concentrations in
high-yield issuers or commitments to high-yield issuers.
These securities generally involve greater risk than investment-grade
debt securities due to credit considerations, liquidity of secondary trading
markets and vulnerability to general economic conditions. The level of our
high-yield securities inventories and the impact of such activities upon our
results of operations can fluctuate from period to period as a result of
customer demands and economic and market considerations.
For competitive and other reasons, the trend in all major capital
markets toward larger commitments on the part of lead underwriters means that,
from time to time, an underwriter may retain significant position concentrations
in individual securities. Such concentrations increase our exposure to specific
credit, market and political risks. Also, material fluctuations in foreign
currencies against the U.S. Dollar, in the absence of countervailing covering or
other procedures, may result in losses or gains in the carrying value of certain
assets located or denominated in non-U.S. jurisdictions or currencies.
We derive much of our revenue from commissions generated by our
broker-dealers from retail brokerage transactions in equity and debt securities,
underwriting activities and private placements. We believe that as the business
of the broker-dealers develops, the broker-dealers will engage in securities
trading for their own accounts. These activities may involve the purchase, sale
or short sale of securities as principal and may involve certain risks which may
limit our ability to resell securities we purchased or to repurchase securities
sold in such transactions. These risks include change in the market price of
such securities and a decrease in the liquidity of markets. Principal and
underwriting transactions also involve economic, political, credit, currency,
interest rate and other related risks, any of which could result in an adverse
change in the market price of the relevant securities. SEE "Management's
Discussion and Analysis or Plan of Operation."
OUR MERCHANT BANKING ACTIVITIES ARE VERY CAPITAL INTENSIVE AND HAVE A
POTENTIAL FOR LOSS WHICH COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS.
Securities firms, such as ourselves, increasingly promote major client
transactions and transactions sponsored by the clients' own pools of capital by
using their capital in a variety of investment activities that have been broadly
described as merchant banking.
Such activities include, among other things, purchasing equity or debt
securities or making commitments to purchase such securities in various
transactions. These include mergers, acquisitions, and restructuring and
leveraged capital transactions, including leveraged buyouts and high-yield
financing. Such positions and commitments may involve substantial amounts of
capital and significant exposure to any one issuer or business, as well as
market, credit and liquidity risks. Purchasers of equity securities in these
transactions generally hold them for appreciation, and the securities are not
readily marketable and typically do not provide dividend income. Debt securities
purchased in such transactions typically rank subordinate to bank debt of the
issuer and may rank subordinate to other debt of the issuer. We also provide and
arrange bridge financing. Bridge financing assures funding for major
transactions, with the expectation that refinancing will be obtained through the
placement of high-yield debt or other securities. Such activities may also
involve substantial amounts of capital and significant exposure to any one
issuer as well as various risks associated with credit conditions and
vulnerability to general economic conditions.
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There can be no assurance that we will not experience significant
losses as a result of such activities. Such losses may have an adverse effect on
our business. SEE "Management's Discussion and Analysis or Plan of Operation."
ALTHOUGH WE DO NOT CURRENTLY USE DERIVATIVE FINANCIAL INSTRUMENTS, OUR
INABILITY TO ENGAGE IN CURRENCY HEDGING ACTIVITIES MAY RESULT IN OUR EARNINGS
BEING SUBJECT TO GREATER VOLATILITY DUE TO EXCHANGE RATE FLUCTUATIONS. At the
present time, we do not engage in the use of derivative financial instruments.
In some of the countries where we have operations (E.G., Kazakhstan, Czech
Republic, Slovenia, Croatia, Poland and Azerbaijan), the local currencies are
referred to as "soft" or "exotic". Soft currency is the currency of a nation
where a person can exchange the currency only with difficulty. Soft currency
countries typically have minimal amounts of currency reserved for exchange
purposes. As such, there are very few, if any, cost effective hedging strategies
available to us or potential investors. Our inability engage in currency hedging
activities may result in our earnings being subject to greater volatility due to
exchange rate fluctuations.
OUR INABILITY TO RAISE ADDITIONAL REQUIRED CAPITAL COULD HAVE A
MATERIAL ADVERSE EFFECT ON US. We may need to raise additional funds to provide
working capital or to respond to unforeseen needs or to take advantage of
unanticipated opportunities. Over the longer term, it is likely that we will
require substantial additional monies to continue to fund our working capital
needs. There can be no assurance that any such funds will be available at the
time or times needed, or available on terms acceptable to us. If adequate funds
are not available on acceptable terms, we may not be able to take advantage of
market opportunities, to develop new services or products or otherwise respond
to competitive pressures. Such inability could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
INADEQUATE FINANCING TO SUPPORT OUR BUSINESSES COULD HAVE A MATERIAL
ADVERSE EFFECT ON US. A substantial portion of our total assets consists of
highly liquid marketable securities and short-term receivables arising from
securities transactions. The highly liquid nature of these assets provides us
with flexibility in financing and managing our business. However, certain of our
activities, such as merchant banking, frequently involve substantial capital
commitments in securities which are often illiquid. Such funds and capital
include equity, long-term debt and short-term borrowings which consist of
securities sold under agreements to repurchase ("repurchase agreements"), master
notes and committed and uncommitted lines of credit.
All repurchase transactions and a portion of our bank borrowings are
made on a collateralized basis. This means that we have to pledge assets of ours
in order to secure the funds involved in the repurchase transactions or
borrowings. Liquidity management includes monitoring assets available to pledge
against short-term borrowing. We maintain borrowing relationships with a broad
range of banks, financial institutions, counterparties and others. The volume of
our borrowings generally fluctuates in response to changes in the amount of
resale transactions outstanding, the level of our securities inventories and
overall market conditions. Availability of financing can vary depending upon
market conditions, the volume of certain trading activities, credit ratings,
credit capacity and the overall availability of credit to the securities
industry. There can be no assurance that adequate financing to support our
businesses will continue to be available in the future. SEE "Management's
Discussion and Analysis or Plan of Operation."
OUR ABILITY TO PAY DIVIDENDS, REPAY DEBT AND REDEEM OR REPURCHASE
SHARES OF OUR OUTSTANDING CAPITAL STOCK COULD BE ADVERSELY AFFECTED BY POTENTIAL
RESTRICTIONS RESULTING FROM NET CAPITAL REQUIREMENTS ON THE BUSINESS OF
REGULATED SUBSIDIARIES AND ON THE WITHDRAWAL OF CAPITAL. As a registered
broker-dealer and member of numerous stock exchanges throughout the United
States and Central and Eastern Europe, we are required to comply with each of
the countries' regulatory authorities and net capital rules of the stock
exchanges. These rules specify minimum net capital requirements for registered
broker-dealers and stock exchange members. They attempt to ensure that
broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business. Accordingly, the rules
require that at least a substantial portion of assets be kept in cash or highly
liquid investments. Compliance with such net capital requirements could limit
operations that require the intensive use of capital, such as underwriting and
trading activities. These rules also could restrict our ability to withdraw
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capital from restricted accounts governed by regulatory restrictions, even in
circumstances where these accounts hold more than the minimum amount of required
capital. This, in turn, could prevent or limit our ability to pay dividends,
repay debt and redeem or repurchase shares of our outstanding capital stock.
WE HAVE POTENTIAL SECURITIES LAWS LIABILITY EXPOSURE IN CONNECTION WITH
OUR BUSINESS. Many aspects of our business involve substantial risks of
liability. In recent years litigation involving the securities industry has
increased, including class actions that generally seek substantial damages.
Companies engaged in the underwriting and distribution of securities are exposed
to substantial liability under applicable securities laws.
WE DEPEND ON CERTAIN KEY MEMBERS OF MANAGEMENT AND THE LOSS OF ANY ONE
OF THEM COULD HAVE A SIGNIFICANT ADVERSE EFFECT ON OUR PERFORMANCE AS A WHOLE.
Most aspects of our business depend on highly-skilled individuals. We devote
considerable resources to recruiting, training and compensating such individuals
and have taken further steps to encourage such individuals to remain in our
employ. Individuals employed by us may, however, choose to leave at any time to
pursue other opportunities. Moreover, operating our business depends principally
on certain key management personnel. In particular, Martin A. Sumichrast and
Wolfgang Kossner have played significant roles in promoting, developing and
managing Eastbrokers. Wolfgang Kossner serves as a consultant to Eastbrokers. If
Mr. Kossner's affiliation with us were to cease, or if he were unable to
continue to serve in this role, there may be a significant adverse effect on our
performance as a whole. Martin A. Sumichrast is an officer, director and
employee of ours. If we terminate his employment, or if he is unable to perform
his duties, there may be a significant adverse effect on our performance as a
whole. We expect that our potential growth and any expansion into new areas and
activities requiring additional expertise (such as new markets or the
development of new products) will place additional demands on our human
resources. We anticipate such demands will require us to add new management
personnel and to develop additional expertise in our existing management
personnel. The failure to acquire such services or to develop such expertise
could have a material adverse effect on our prospects for success. Competition
for such personnel is intense and we can give no assurance that we will be able
to hire and/or retain adequate personnel. At the present time, we have a key-man
life insurance policy in effect on Mr. Sumichrast. However, we cannot be certain
that the proceeds from such policy will be adequate to offset the loss of his
services. We do not have key-man life insurance policies in effect with respect
to Mr. Kossner.
WE HAVE SUFFERED OPERATING LOSSES AND WE CANNOT PREDICT WHETHER OUR
FUTURE OPERATIONS WILL BE PROFITABLE OR THAT WE WILL HAVE AVAILABLE FUNDS
ADEQUATE TO FUND OUR OPERATIONS. Since the Company's formation, we have suffered
substantial cash flow deficits and operating losses. The net loss for the fiscal
year ended March 31, 1999 was $5,911,847 and the net loss for the fiscal year
ended March 31, 1998 was $3,676,607. Cash and cash equivalents were about
$2,215,000 as of March 31, 1999 and about $7,157,000 as of March 31, 1998. There
can be no assurance that our future operations will be profitable or that we
will have available funds adequate to fund our operations. Should our operations
be profitable, it is likely that we would retain much or all of our earnings to
finance future growth and expansion.
IF OUR COMMON STOCK WERE DELISTED, STOCKHOLDERS MAY HAVE A MORE
DIFFICULT TIME SELLING THEIR SECURITIES. In the event that the Common Stock were
no longer to meet applicable Nasdaq SmallCap requirements including timely
reporting and were delisted from Nasdaq SmallCap, we would attempt to have our
securities traded in the over-the-counter market via the Electronic Bulletin
Board or the "pink sheets." In such event, holders of our securities would
likely encounter greater difficulty in disposing of these securities and/or
obtaining accurate quotations as to the prices of our securities.
IF AT ANY TIME REGULATORS DELIST THE COMMON STOCK FROM THE NASDAQ
SMALLCAP, TRANSACTIONS INVOLVING THE SECURITIES MAY BECOME SUBJECT TO PENNY
STOCK RULES THAT IMPOSE ADDITIONAL SALES PRACTICE REQUIREMENTS ON BROKER-DEALERS
WHO SELL SUCH SECURITIES TO PERSONS OTHER THAN ESTABLISHED CUSTOMERS AND
ACCREDITED INVESTORS. The SEC has adopted regulations which generally define
"penny stock" to be any equity security that has a market price (as defined) of
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. Since our Common Stock is currently listed on the
Nasdaq SmallCap we are exempt from the definition of penny stock at this time .
If at any time regulators delist the Common Stock from the Nasdaq SmallCap,
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transactions involving the securities may become subject to penny stock rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors. (Generally, accredited investors are those persons with assets in
excess of $1,000,000 or annual income exceeding $200,000, $300,000 together with
their spouse.) For transactions subject to penny stock rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, the Commission mandates a risk disclosure
document relating to the penny stock market which the broker-dealer must deliver
prior to any transaction involving a penny stock, unless exempt. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and disclose current quotations
for the securities. If the broker-dealer is the sole market-maker, the
broker-dealer must also disclose this fact as well as its presumed control over
the market. Finally, broker-dealers must send monthly statements disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks. Consequently, the penny stock rules may
restrict the ability of broker-dealers to sell our securities in the secondary
market.
THERE COULD BE POSSIBLE DILUTIVE AND OTHER ADVERSE EFFECTS OF
OUTSTANDING OPTIONS AND WARRANTS BEING EXERCISED WHICH COULD AFFECT OUR ABILITY
TO RAISE ADDITIONAL CAPITAL. Under the terms of the outstanding Class A, B and C
warrants, options issued under our 1996 Stock Option Plan, and other outstanding
options and warrants, the holders of such warrants and options are given an
opportunity to profit from a rise in the market price of the Common Stock with a
resulting dilution in the interests of the other shareholders. The existence of
such options and warrants may adversely affect terms on which we may obtain
additional financing. For example, the holders of the warrants might exercise
them at a time when we are attempting to obtain additional capital through a new
offering of securities on terms more favorable than those which the warrants and
options provide.
THE ISSUANCE OF PREFERRED STOCK COULD MAKE A POSSIBLE TAKEOVER OF
EASTBROKERS, OR REMOVAL OF EASTBROKERS' MANAGEMENT MORE DIFFICULT. As of
December 1997, our Board of Directors authorized the issuance of up to
10,000,000 shares of preferred stock. As of July 1, 1999 no shares of preferred
stock were issued. The Board of Directors has the power to establish the
dividend rates, liquidation preferences, voting rights, redemption and
conversion terms, and all other rights, preferences and privileges with respect
to any series of preferred stock. The issuance of any series of preferred stock
having rights superior to those of the Common Stock may result in a decrease in
the value or market price of the Common Stock. The Board of Directors could use
this as a means to prevent a change in control of the Eastbrokers Group. Future
issuances of preferred stock may provide for dividends, certain preferences in
liquidation and conversion rights. Such preferred stock issuance could make the
possible takeover of the Eastbrokers Group, or the removal of management of the
Eastbrokers Group, more difficult. The issuance of such preferred stock could
discourage hostile bids for control of the Eastbrokers Group 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.
THERE ARE SPECIFIC RISKS OF THE GEOGRAPHIC AREAS COVERED BY US OUTSIDE
THE UNITED STATES WHICH COULD, IF REALIZED, RESULT IN A MATERIAL ADVERSE EFFECT
ON US. Our investments will include securities of issuers resident in areas
currently in a state of flux Central and Eastern Europe and Central Asia. These
regions' political institutions and economic policies now face the challenges of
rapid change. Their populations are ethnically diverse and cultural and
religious tensions abound. Memories of conflicts, past injustices and the legacy
of the denial of justice and the expropriation of property will continue to
create tension for years to come. These problems will compound the difficulties
of the change from a centrally planned economy to a market economy. For these
reasons our investments will be subject to risks of a nature and degree not
normally encountered in more developed economies and additional to those
inherent in any equity investment. Specific examples of some of these risks are
described below:
o LIQUIDITY OF OUR INVESTMENTS: The nature of our investments in these
geographic areas limits their potential secondary market. Accordingly, we
may not be able to achieve the full value of our investments on disposal.
Although we anticipate that liquidity will improve once local stock markets
are operational, there is no guarantee that the markets will be as liquid
as those of developed countries.
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o POLITICAL AND ECONOMIC FACTORS: The countries in which some of our
operations are concentrated had centrally-planned, socialist economies for
many years. Attempts at political and economic reform have been made with
limited success and it is impossible to foresee whether such reforms will
achieve their intended aims. Countries may impose restrictions on investing
in specific companies or industries which they consider to be important or
sensitive to national interests, but which also may be the best investment
opportunities available there. Additionally, changes in government policy
may result in countries expropriating investments.
o VALUATION RISK: Accounting and financial reporting standards in selected
countries are not equivalent to International Accounting Standards or U.S.
Generally Accepted Accounting Standards. Consequently, less information is
available to investors in the selected countries than in more developed
capital markets. Nevertheless, we will use valuations and financial reports
of international auditing firms and will apply all other means to monitor
unlisted investments.
o PROBLEMS OF TRANSITION AND BUSINESS FAILURE: Until very recently, virtually
all industrial output within the Comecon and Warsaw Pact countries was
generated from state-owned industry. As a result, few individuals
understand basic capitalistic management skills and techniques.
Privatization of much of the region's industry and the transition to a more
market-orientated economy will be difficult. Industry in the region is
considerably less developed and less efficient than industry in Western
Europe and the United States. In addition to doubts as to the continuing
viability of much of the region's industry, those businesses which survive
are likely to require considerable capital investment and restructuring.
The failure of one or more businesses in which we have invested may have a
significant adverse effect on our performance as a whole.
o CHANGES IN LAW AND ENFORCEMENT OF RIGHTS: In cases where competing claims
arise or in cases of re-nationalization, it may be difficult to enforce our
rights in several of the countries where we operate. There are several
reasons for this. First, legislation relating to securities, stock markets
and property rights may not exist. Second, these countries may only very
recently have introduced such legislation, and may introduce significant
new legislation at any time. Finally, existing legislation is likely to be
subject to extensive amendment.
o INVESTMENT AND REPATRIATION RESTRICTIONS: We may require governmental
registration and/or approval in order to repatriate investment income,
capital and the proceeds of sales by foreign investors. A number of
countries in which we may invest do not have freely convertible currencies
or their currencies may only be convertible at rates determined by their
governments. Countries may also impose repatriation restrictions at any
time. Changes in the value of currencies in which our investments are
denominated will result in a corresponding change in the value of our
assets which are generally denominated in the local functional currencies.
Investors should note that the local currencies involved may be subject to
rapid devaluation against the major "hard" currencies, with the
corresponding result that delays in currency conversion may cause
significant losses.
o TAXATION: Taxation of dividends and capital gains received by non-residents
varies among the selected countries. In addition, the selected countries
generally have less well defined tax laws and procedures, and such laws may
permit retroactive taxation. As a result, we could, in the future, become
subject to local tax liabilities that had not been anticipated in
conducting our investment activities or valuing our assets.
A SUBSTANTIAL PORTION OF OUR ASSETS ARE LOCATED OUTSIDE THE UNITED
STATES WHICH COULD MAKE IT DIFFICULT TO ENFORCE CIVIL JUDGMENTS OBTAINED AGAINST
US IN THE U.S. A substantial portion of our assets are located outside the
United States. It may be difficult for investors to enforce outside of the
United States judgments against the Eastbrokers Group obtained in the United
States in any actions, including actions based on the civil liability provisions
of the securities laws of the United States. In addition, certain of our
officers and directors are not citizens or residents of the United States and
all or a substantial portion of their assets are or may be located outside the
United States. As a result, it may be difficult for investors to affect service
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of process within the United States against them or to enforce judgments
obtained in the United States, including judgments based on the civil liability
provisions of the securities laws of the United States.
SIGNIFICANT AND RAPID CHANGES IN TECHNOLOGY COULD NEGATIVELY AFFECT OUR
INTERNET-RELATED PROJECTS. The market for internet products and services has
only recently begun to develop and is rapidly evolving. Significant
technological changes could render our existing internet-related products and
services obsolete. To be successful, we must adapt to this rapidly changing
market by continually improving the responsiveness, functionality and features
of our products and services to meet our customers' needs. If we are unable to
respond to technological advances and conform to emerging industry standards in
a cost-effective and timely basis, certain portions of our business could be
materially adversely affected.
USE OF PROCEEDS
Eastbrokers will not receive any proceeds from the sale of the 814,500
shares (the "Common Stock Shares") of Common Stock, the 1,545,900 shares (the
"Warrant Shares") of Common Stock underlying the Class C Common Stock Purchase
Warrants (the "Warrants"), 1,237,222 shares (the "Placement Agent Warrant
Shares") of Common Stock underlying the Placement Agent Warrants (the "Placement
Agent Warrants"), 234,781 shares of Common Stock underlying the 10 percent
Convertible Promissory Notes due 2002 (the "Note Shares") and 475,000 shares of
Common Stock underlying the 5 percent Convertible Debentures due 2002 (the
"Debenture Shares," and, together with the Common Stock Shares, the Warrant
Shares, the Note Shares and the Placement Agent Warrant Shares, the "Shares")
since such Shares will be sold by the selling security holders. Holders of the
Warrants and the Placement Agents Warrants are not obligated to exercise any of
their warrants and holders of the 10 percent Convertible Promissory Notes due
2002 and 5 percent Convertible Debentures due 2002 are not obligated to convert
their securities. However, assuming exercise of all of the Warrants and the
Placement Agent Warrants and conversion of the 10 percent Convertible Promissory
Notes due 2002 and the 5 percent Convertible Debentures due 2002, the net
proceeds to be received by Eastbrokers is estimated to be $22,831,854. The
closing bid price of the Common Stock on the Nasdaq SmallCap on July 1, 1999 was
$3.875. The Warrants and the Placement Agent Warrants are exercisable at $7.00.
Holders of the 10 percent Convertible Promissory Notes due 2002 have the right
to convert their notes into shares of Common Stock at $5.75 per share. Holders
of the 5 percent Convertible Debentures due 2002 have the right to convert their
notes into shares of Common Stock at the lesser of $5.50 per share or 90% of the
average of the three lowest closing bid prices for the 20 trading days ending
five days before the date of delivery of the notice of conversion. Accordingly,
there is no assurance that any of the Warrants and the Placement Agent Warrants
will be exercised or that any of the 10 percent Convertible Promissory Notes due
2002 and the 5 percent Convertible Debentures due 2002 will be converted.
Eastbrokers currently anticipates that it will use the net proceeds to
it of this offering, if any, to fund general corporate and working capital
requirements.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Eastbrokers' Common Stock is traded on the Nasdaq SmallCap under the
symbol "EAST" (previously, the symbol was "CZCH"). The following table sets
forth the reported high and low bid quotations on a calendar year basis (as
adjusted for the one-for-five reverse split of Eastbrokers' Common Stock, which
occurred in September 1996) of the Common Stock for the periods indicated. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
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COMMON STOCK
----------------------------------------
HIGH LOW
-------------------- -------------------
1997
First Quarter $ 5.2500 $3.3750
Second Quarter $ 7.5000 $4.3125
Third Quarter $ 7.2500 $6.5000
Fourth Quarter $11.1250 $6.3750
1998
First Quarter $11.0000 $8.3750
Second Quarter $10.5000 $4.0000
Third Quarter $14.0000 $4.0000
Fourth Quarter $ 5.7500 $2.0313
1999
First Quarter $13.0000 $3.7500
Second Quarter $ 9.3750 $3.5652
Third Quarter (through July 1, 1999) $ 4.0000 $3.8125
On July 1, 1999, the closing bid price for Eastbrokers' Common Stock as
reported on the Nasdaq SmallCap was $3.875 per share. On that date, there were
approximately 70 holders of record of Common Stock (including entities which
hold stock in street name on behalf of other beneficial owners).
Eastbrokers has not paid any cash dividends on its Common Stock to
date, and does not anticipate declaration or payment of any dividends in the
foreseeable future. Eastbrokers anticipates that for the foreseeable future it
will follow a policy of retaining earnings, if any, in order to finance the
expansion and development of its business. Payment of dividends is within the
discretion of Eastbrokers' Board of Directors and will depend upon the earnings,
capital requirements and operating and financial condition of Eastbrokers, among
other factors.
BUSINESS
BACKGROUND
Eastbrokers International Incorporated ("Eastbrokers") was incorporated
in the State of Delaware on January 20, 1993, as the Czech Fund. Eastbrokers'
initial goal was to take advantage of the rapid growth in business opportunities
arising from the privatization of the newly-democratized Czech Republic by
merging with or acquiring Czech businesses. From 1993 through 1996, Eastbrokers
held an interest in a Czech hotel and an interest in a Czech department store.
In 1996, we re-evaluated our business strategy and, after considering a
variety of investment opportunities, acquired Eastbrokers Vienna. Eastbrokers
Vienna is an Austrian brokerage company with offices throughout Central and
Eastern Europe. This transaction enhanced our prospects by both providing us
with a vehicle to implement our acquisition strategy and extend our
opportunities beyond the Czech Republic to the entirety of Central and Eastern
Europe. Thereafter, our name was changed to Eastbrokers International
Incorporated, our present name.
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Eastbrokers is primarily a holding company for thirteen subsidiaries
and affiliates which are directly and indirectly owned. Nine of Eastbrokers'
subsidiaries and affiliates are incorporated and located in Central and Eastern
Europe. Eastbrokers also owns 100 percent of EBI Securities Corporation ("EBI
Securities"), 100 percent of EBI Leasing Corporation, 92 percent of Eastbrokers
North America Inc. ("Eastbrokers NA") and about 48 percent of EBonlineinc.com.
Most of Eastbrokers' subsidiaries and affiliates are engaged in the investment
banking, broker-dealer, consulting, advisory and securities business. The
principal strategic objective of the Eastbrokers Group has been to establish
controlling ownership of independent broker-dealers located primarily in Central
and Eastern Europe and to create a network that provides access to emerging
market investment opportunities in Central and Eastern Europe. In fiscal year
1998, this objective was expanded to include establishing controlling ownership
of independent broker-dealers in the United States.
CURRENT OPERATIONS
Through Eastbrokers Vienna, the Eastbrokers Group provides financial
services in Central and Eastern Europe. Eastbrokers Vienna's primary business is
to provide its customers with stock brokering and investment banking services.
Eastbrokers Vienna conducts business through its head office in Vienna, Austria
and in its subsidiary and affiliate offices located in (a) Klagenfurt, Austria,
(b) Almaty, Kazakhstan, (c) Prague, Czech Republic, (d) Ljubljana, Slovenia, (e)
Zagreb, Croatia, (f) Warsaw, Poland and (g) Baku, Azerbaijan. Although the
Eastbrokers Group sold its operations in Budapest, Hungary, the Eastbrokers
Group continues to have a working relationship with the buyer. Through its
subsidiaries and affiliate offices, the Eastbrokers Group is a member of the
Vienna Stock Exchange, the Budapest Stock Exchange, the Zagreb Stock Exchange,
the Ljubljana Stock Exchange, the Central Asian Stock Exchange, and the Warsaw
Stock Exchange. Eastbrokers Vienna also owns 51 percent of WMP Bank AG (formerly
WMP Borsenmakler AG) ("WMP"), a publicly-held Austrian investment banking and
brokerage firm. Due to the continued decline in the Czech Republic markets and
recurring operating losses generated through its subsidiary office located in
Prague, Czech Republic, the Eastbrokers Group determined that it was in the best
interest of the Eastbrokers Group and shareholders to dispose of this operation.
73.55 percent of the Eastbrokers Group interest in this subsidiary was sold in
June 1998.
Eastbrokers Vienna's brokerage, trading and market making business
generated approximately 10 percent of all the Eastbrokers Group revenues for
fiscal year ended March 31, 1999 and 41 percent of all of the Eastbrokers Group
revenues for the fiscal year ended March 31, 1998. The percentage decline in
fiscal 1999 was largely due to the added revenue generated from EBI Securities.
Eastbrokers Vienna conducts its sales activities as principal and agent on
behalf of its clients. Eastbrokers Vienna primarily distributes and trades
Central and Eastern European equity securities and to a lesser degree, debt
securities. Eastbrokers Vienna, through WMP, actively makes a market in more
than 800 debt and equity securities on the Vienna Stock Exchange. For the fiscal
year ended March 31, 1999, EBI Securities generated approximately 48 percent of
the Eastbrokers Group consolidated revenue.
Eastbrokers Vienna is also a Central and Eastern European investment
banking firm which provides advice to, and raises capital for, Central and
Eastern European companies. Eastbrokers Vienna provides advisory services on key
strategic matters such as mergers, acquisitions, privatizations, joint ventures
as well as long range financial planning. Eastbrokers Vienna seeks to raise
capital for its investment banking clients from institutional and commercial
investors in Western Europe. Since 1993, Eastbrokers Vienna has assisted with
over twenty-five investment banking transactions.
The Eastbrokers Group acquired 90 percent of Eastbrokers NA in March
1997. On January 4, 1999, Eastbrokers NA's request to withdraw its registration
as a broker-dealer with the SEC and a member of the National Association of
Securities Dealers ("NASD") was approved. The office space previously occupied
by Eastbrokers NA has been converted into a branch office of EBI Securities.
In October 1997, we announced our intention to establish a full service
brokerage operation in Kiev, Ukraine subject to obtaining the required
regulatory approvals. Due to the overall instability in the region caused by the
economic crisis in Asia and potential currency problems in Russia, we decided to
continue our evaluation of this market and will delay this expansion until such
time as we feel the expansion is economically viable.
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On February 20, 1998, we consummated a private placement. Under the
terms of this private placement, we sold 1,227,000 units at $5.00 per unit, with
each unit consisting of one share of Eastbrokers' Common Stock, and one Class C
Common Stock purchase warrant with an exercise price of $7.00 per share. After
expenses related to this private placement, Eastbrokers received approximately
$5,400,000. As provided by the terms of the Class A and Class B warrants
outstanding at the time of this private placement, we also announced certain
adjustments relating to the pricing of our Class A and Class B warrants. In
conjunction with this private placement, we announced a 1-for-5 reverse split of
our Class A and Class B warrants with corresponding changes in the number of
warrants required for exercise. This reverse split was in proportion to the
1-for-5 reverse split of the Common Stock in September 1996 and caused each
warrant again to be exercisable for one share of Common Stock. The effect of
these changes resulted in a total of 1,101,000 Class A warrants outstanding with
an exercise price of $18.00 per share and 250,000 Class B warrants outstanding
with an exercise price of $19.00 per share as of March 31, 1998.
During April 1998, the Eastbrokers Group announced that a consortium in
which the Eastbrokers Group was participating was awarded the management
contract for Polish National Investment Fund #9. This consortium consisted of
the Eastbrokers Group, Tonlor Finance, a Polish finance and investment company
based in Warsaw, and General Partners AG, an Austrian investment and holding
company. Subsequent to the signing of the preliminary management agreement but
prior to the signing and ratification of the final management agreement, the
consortium was informed that the Polish national government had reached a
strategic decision to change the focus, structure, and process related to the
privatization of its national investment funds. The consortium was encouraged to
resubmit its application and compete for a management contract under the new
criteria. After considerable deliberation and an evaluation of the time, energy,
effort, and financial commitment originally expended in the bidding process and
an evaluation of the cost required to continue in the bidding process, the
consortium determined that its resources, financial and human, were better
allocated to other worthwhile projects.
In May 1998, Eastbrokers acquired all of the outstanding common stock
of Cohig & Associates, Inc., a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the Common Stock
and an agreement to advance $1,500,000 in additional working capital to Cohig &
Associates. Following the acquisition, Eastbrokers changed the name of Cohig &
Associates, Inc. to EBI Securities Corporation ("EBI Securities"). Eastbrokers
anticipates that EBI Securities will be the first in a series of acquisitions
targeting other successful medium size investment banking and brokerage firms
both domestically and internationally. Eastbrokers believes that its current
organizational structure as an entrepreneurial and international publicly-traded
company will be particularly appealing to potential acquisition candidates.
EBI Securities is a full service brokerage firm specializing in
providing investment advice and counsel to individuals and small to middle
market institutions. At the present time, EBI Securities has approximately 180
licensed representatives. EBI Securities provides its brokerage clients with a
broad range of traditional investment products and services. EBI Securities also
strives to establish itself with investors and corporate finance clients through
its commitment to a professional and personalized service. Its trading
department makes a market in approximately 100 securities which include its
investment banking clients and those securities that its research department has
identified as promising, small to middle-market and potentially high growth
companies. The investment banking department's mission is to enhance and develop
the capital structures of small to middle market emerging growth companies
through private placements, bridge financing, and public offerings in order to
enable the firm's corporate finance clients to capitalize on promising business
opportunities, favorable market conditions, and/or late stage product
development.
EBI Securities is registered as a broker-dealer with the SEC and is
licensed in 50 states and the District of Columbia. It is also a member of the
NASD and the Securities Investor Protection Corporation ("SIPC"). Customer
accounts are insured to $25 million under the SIPC excess insurance program. EBI
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Securities operates pursuant to the exemptive provisions of SEC Rule 15c3-3
(k)(2)(ii) and clears all transactions with and for customers on a fully
disclosed basis.
EBI Securities maintains its clearing arrangement with Fiserv
Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ:
FISV). Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement enables
EBI Securities to offer its clients a broad range of products and services that
is typically only offered by firms that are larger and/or have a larger capital
base. Fiserv has advised the Eastbrokers Group that it is aware of the year 2000
computer issue and is working to mitigate the effect of the year 2000 issue on
its operations. SEE "Management's Discussion and Analysis or Plan of Operation
Impact of the Year 2000".
In June 1998, the Eastbrokers Group largest European subsidiary, WMP,
successfully raised 60 million Austrian Schillings (approximately $4,800,000
USD) in a bond offering. The Eastbrokers Group originally intended to utilize
these proceeds to enhance and further develop its European trading activities.
The bonds were issued in denominations of 10,000 Austrian Schillings
(approximately $800 USD at the then current exchange rates), bear an annual
interest rate of 7.5 percent, payable at maturity, and mature in June 2002. In
December 1998, the Eastbrokers Group redeemed approximately 45 million Austrian
Schillings of these bonds. The Eastbrokers Group intends to redeem the remaining
bonds in the future.
In June 1998, the Eastbrokers Group sold 73.55 percent of its interest
in Eastbrokers Prague a.s. See "Acquisitions and Dispositions During the Fiscal
Year" below.
On November 25, 1998, Eastbrokers sold 10 newly issued units in a
private placement consisting in the aggregate of $1,100,000 in 7 percent
Convertible Debentures (the "7 percent Convertible Debentures") and Class C
Common Stock Purchase Warrants to purchase 125,000 shares of Common Stock. The 7
percent Convertible Debentures were redeemed in March 1999 from a portion of the
proceeds of the offering related to the issuance of the 10 percent Notes (as
defined below).
In December 1998, Eastbrokers sold its subsidiary, Eastbrokers Budapest
Rt. for HUF 217,000,000 (approximately $1,000,000 USD at the then current
exchange rates). The Eastbrokers Group continues to have a working relationship
with the buyer and maintains a presence in Budapest through its relationship
with the buyer.
In January 1999, Eastbrokers sold 125,000 restricted shares of Common
Stock in a private placement to a private investor for $4.00 per share.
Eastbrokers also issued 7,500 shares of its Common Stock to a broker of EBI
Securities as a commission in connection with this transaction.
In March 1999, Eastbrokers issued 10 percent Convertible Promissory
Notes due 2002 (the "10 percent Notes") in an aggregate principal amount of
$1,350,000. Holders of the 10 percent Notes have the right to convert their 10
percent Notes into shares of Common Stock at $5.75 per share. A portion of the
proceeds of the Notes was used to redeem the 7 percent Convertible Debentures.
In May 1999, we issued 5 percent Convertible Debentures due 2002 (the
"5 percent Debentures") in an aggregate principal amount of $2,000,000. Holders
of the 5 percent Debentures have the right to convert their 5 percent Notes into
shares of Common Stock at the lesser of $5.50 per share or 90% of the average of
the three lowest closing bid prices for the 20 trading days ending five days
before the date of delivery of the notice of conversion. A portion of the
proceeds of the 5 percent Debentures will be used to expand our operations.
A key component of the Eastbrokers Group's business plan is to grow
through the purchase and roll-up of complementary businesses both in the United
States and in Europe, with the acquisitions financed by the issuance of Common
Stock. Management believes that consolidation within the industry is inevitable.
Concerns attributable to the volatility currently prevailing in the financial
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markets help explain the increasing number of acquisition opportunities being
introduced to the Company. The Eastbrokers Group is currently focused on
maximizing the profitability of the acquisitions that have been consummated to
date, and it is continuing to selectively seek additional complementary
acquisition and/or merger candidates.
In February 1998, Eastbrokers participated in a capital increase for
its subsidiary, Eastbrokers Vienna. In this capital increase, Eastbrokers
acquired 389,925 shares of the available 390,000 shares for approximately
$4,000,000 USD. The shares were offered at a price of 130 Austrian Schillings
per share (approximately $10.40 USD per share) and raised Eastbrokers' ownership
interest in Eastbrokers Vienna from approximately 94 percent to approximately 96
percent.
Through its subsidiary, Eastbrokers Vienna, Eastbrokers 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, Eastbrokers'
ownership of WMP has exceeded 50 percent when including WMP shares in its
trading portfolio. At December 31, 1996, Eastbrokers' aggregate ownership
percentage in WMP, including its trading position, was approximately 55 percent.
This investment was accounted for using the equity method in the March 31, 1997
financial statements as Eastbrokers 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 Eastbrokers deemed its control of WMP was no longer temporary.
For the fiscal year ended March 31, 1998, WMP was consolidated for the entire
year. At December 31, 1998, Eastbrokers' aggregate ownership interest in WMP was
51 percent.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH") for 2.5 million Austrian Schillings (approximately $200,000 USD at
the then current exchange rates). The sales price approximated the cost basis of
WMP GmbH at the date of disposition. At the date of disposition, WMP GmbH was
primarily an inactive subsidiary.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
SuBwarenindustrie Beteiligungs GmbH ("SWIB") to Peter Schmid, the former
Chairman of the Board, President, Chief Executive Officer and a former Director
of Eastbrokers, for 13 million Austrian Schillings (approximately $1,025,000 USD
at the then current exchange rates). The Eastbrokers Group acquired its
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD at the then current exchange rates). At the time of
acquisition, the principal asset of SWIB was an investment in a company which
was entering bankruptcy proceedings and there was considerable uncertainty
regarding the future realizable value of this asset. By December 1997,
bankruptcy proceedings had progressed to a point where an estimate could be made
on the net realizable value of this primary asset. Based on the information
available at that time SWIB's value at the date of disposition was determined by
the Board of Directors of Eastbrokers to be in the range of 12 million to 14
million Austrian Schillings (approximately $950,000 to $1,100,000 USD at the
then current exchange rates).
In December 1997, Eastbrokers Budapest Rt. sold its wholly owned
subsidiary, 1001 Pengo Kft., to three directors of Eastbrokers Budapest Rt. for
100 million Hungarian Forints (approximately $500,000 USD at the then current
exchange rates). As of the date of disposition, the sales price approximated the
cost basis of 1001 Pengo Kft.
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ACQUISITIONS AND DISPOSITIONS DURING THE FISCAL YEAR
In May 1998, Eastbrokers acquired all of the outstanding common stock
of Cohig & Associates, Inc., a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the Common Stock
and an agreement to advance $1,500,000 in additional working capital to Cohig &
Associates. Following the acquisition, Eastbrokers changed the name of Cohig &
Associates, Inc. to EBI Securities Corporation ("EBI Securities"). Eastbrokers
anticipates that EBI Securities will be the first in a series of acquisitions
targeting other successful medium size investment banking and brokerage firms
both domestically and internationally. Eastbrokers believes that its current
organizational structure as an entrepreneurial and international publicly-traded
company will be particularly appealing to potential acquisition candidates.
In June 1998, Eastbrokers sold 73.55 percent of its interest in
Eastbrokers Prague a.s. to a third party for 15 million Austrian Schillings
(approximately $1,200,000 USD at the then current exchange rates).
In December 1998, Eastbrokers sold its subsidiary, Eastbrokers Budapest
Rt. for HUF 217,000,000 (approximately $1,000,000). The Eastbrokers Group
continues to have a working relationship with the buyer and maintains a presence
through its relationship with the buyer.
In December 1998, Eastbrokers also liquidated two of its
underperforming subsidiaries: Eastbrokers Romania and Eastbrokers Slovakia.
ACQUISITIONS AND DISPOSITIONS SUBSEQUENT TO THE FISCAL YEAR END
In April 1999, Eastbrokers signed a joint venture agreement with A1
Internet.com, Inc. ("A1"), a website development firm, to jointly own and
develop EBonlineinc.com, Inc. ("EBonline"), a newly established subsidiary.
EBonline was owned seventy percent by Eastbrokers and thirty percent by A1.
Under the terms of the joint venture agreement, Eastbrokers will provide
$300,000 in initial funding and A1 will provide $200,000 in developmental costs.
In July 1999, EBonline merged into a publicly traded company and we currently
own about 48% of its issued and outstanding common stock.
GOVERNMENT REGULATION
The Eastbrokers Group has operations based in the United States and 7
foreign countries. The Eastbrokers Group's business is, and the securities
industry generally is, subject to extensive regulation in each of these
jurisdictions at both the federal and state level, as well as by industry
self-regulatory organizations ("SROs"). The Eastbrokers Group is also subject to
regulation by various foreign financial regulatory authorities in the
jurisdictions outside of the United States, Austria and Central and Eastern
Europe where it does business, including, for example, by the Securities and
Futures Authority of the United Kingdom.
In the United States, the Eastbrokers Group's business, and the
securities industry generally, are subject to extensive regulation at both the
federal and state levels. The SEC is the agency primarily responsible for
administration of federal securities laws. Much of the regulation of
broker-dealers, however, has been delegated by the SEC to SROs, primarily the
NASD. The NASD has the authority to adopt rules (which are subject to approval
by the SEC) for governing the industry and the NASD conducts periodic
examinations to ensure compliance. The scope of EBI Securities' broker-dealer
operations are subject to the terms of their respective Restriction Agreements
with the NASD. In the event that EBI Securities violates the terms of its
Restriction Agreement or NASD rules, its NASD membership can be suspended or
revoked and the NASD may impose fines upon it or censure it. Broker-dealers are
also subject to regulation by state securities commissions in the states in
which they are registered. EBI Securities is registered in all 50 states. EBI
Securities is subject to the SEC's net capital rules, which require them to
maintain prescribed levels of capital in order to conduct business. EBI
Securities has capital in excess of the required minimums.
The Eastbrokers Group's non-U.S. business is also subject to extensive
regulation by various non-U.S. governments, securities exchanges, central banks
and regulatory bodies, especially in Austria where Eastbrokers owns WMP, an
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Austrian bank that engages in the securities business, including on the Vienna
Stock Exchange. Each of these authorities impose regulation on the Eastbrokers
Group's activities within the scope of their respective jurisdictions. These
regulations are generally intended to protect the integrity of the stock
exchange, bank or financial market subject to regulation and to protect
customers of the regulated agency, and not primarily to protect investors in the
regulated entity. The Eastbrokers Group is currently in compliance with the net
capital requirements in each of the Central and Eastern European jurisdictions
in which the Eastbrokers Group operates.
The SEC, the Austrian Ministry of Finance, other governmental
authorities and SROs have the authority to institute administrative or judicial
proceedings against any entity subject to their jurisdiction, and the officers
and employees of any such entity. These proceedings may result in censure, fine,
civil penalties (including treble damages in the case of insider trading
violations), the issuance of cease-and-desist orders, the de-registration or
suspension of a broker-dealer, investment adviser or futures commission
merchant, the statutory disqualification of its officers or employees or other
adverse consequences, and, even if none of such actions is taken, could have a
material adverse effect on the Eastbrokers Group's perceived creditworthiness,
reputation and competitiveness. Customers of the Eastbrokers Group or others who
allege that they have been damaged by the Eastbrokers Group's violation of
applicable regulations also may seek to obtain compensation from the Company,
including the unwinding of any transactions with the Eastbrokers Group.
In addition to the existing laws and regulations affecting the
Eastbrokers Group, additional legislation and regulations, amendments to
existing laws and regulations may be adopted in the future, or changes in
interpretations or enforcement of existing laws and regulations may be adopted
in the future. Any such event could directly affect the manner and operation and
profitability of the Eastbrokers Group.
COMPETITION
The Eastbrokers Group is engaged in a highly competitive business. With
respect to one or more aspects of its business, Eastbrokers Group encounters
substantial competition from both foreign and domestic businesses in the United
States and Central and Eastern Europe. Its competitors include an elite list
comprised of member organizations of the New York Stock Exchange and other
registered securities exchanges in North America and Central and Eastern Europe.
A large number of established and well-financed entities including multinational
businesses and investment banking firms such as Bank Austria, Creditanstaldt,
Credit Suisse-First Boston, ING Bearings and ABN Amro have recently and
substantially increased their business activities in Central and Eastern Europe.
Nearly all of such entities have substantially greater financial resources,
technical expertise and managerial capabilities than the Eastbrokers Group.
Discount brokerage firms affiliated with commercial banks and companies which
provide electronic on-line trading provide additional competition. In many
instances, the Eastbrokers Group is also competing directly for customer funds
with investment opportunities offered by real estate, insurance, banking, and
savings and loan industries. The Eastbrokers Group competes principally on the
basis of service, product selection, location and reputation in its local
markets.
EMPLOYEES
At July 1, 1999, Eastbrokers Group had approximately 350 full-time
employees and 25 part-time employees. No employees are covered by collective
bargaining agreements and the Eastbrokers Group believes its relations are good
with both its employees and its independent contractors and consultants.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Eastbrokers Group must comply with various federal, state and local
regulations relating to the protection of the environment. Federal, state, and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment will not, in the opinion of the Eastbrokers Group, have a material
effect on the capital expenditures, earnings, or the competitive position of the
Eastbrokers Group.
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LEGAL PROCEEDINGS
Through its recently acquired subsidiary, EBI Securities, Eastbrokers
is subject to several legal proceedings in various jurisdictions throughout the
United States.
USCAN FREE TRADE ZONES V. COHIG & ASSOCIATES, INC. (EBI SECURITIES), ET
AL., United States District Court for the Western District of Washington. In
March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint against EBI
Securities and Steve Signer, an employee of EBI Securities, alleging that EBI
Securities misled USCAN about the creditworthiness of a third party in
connection with an introduction made by Mr. Signer. EBI Securities categorically
denies this allegation. USCAN informed EBI Securities that it would be working
with a certain third party to secure certain loans on behalf of USCAN which
USCAN would then use to open a trading account with EBI Securities. Once EBI
Securities learned of the relationship to this third party, it refused to enter
into any business arrangements with USCAN as long as the third party was
involved due to regulatory problems encountered in prior business dealings with
this certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that might
have resulted. Mr. Signer was dismissed as a defendant in this case due to lack
of personal jurisdiction and has received an award of fees. Plaintiff originally
sought a judgment of approximately $86,000,000 in compensatory and punitive
damages. However, USCAN recently stated in pleadings and during a court
deposition taken in October 1998 that its damage claim had been reduced to
$332,000 and that it would dismiss its RICO claims. EBI Securities has filed
counterclaims for defamation based upon certain false and defamatory
representations regarding EBI Securities. 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 the case should ever be restored to the active court 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 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 of the judgment and EBI Securities has
cross-appealed the denial of its motion for attorney's fees.
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
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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' motion in the NFC Litigation to vacate
this award was denied by the Court. However, EBI Securities intends to appeal
the decision.
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, both of which have been denied. EBI
Securities has filed a motion to remove this case to the United States District
Court for the district of Arizona. EBI Securities believes that it has
meritorious defenses and intends to vigorously defend against Plaintiff's
claims.
In view of the inherent difficulty of predicting the outcome of such
matters, the Eastbrokers Group cannot state what the eventual outcome of pending
matters against EBI Securities will be. Management believes, based upon
discussions with the Eastbrokers Group's counsel, that the outcome of such
matters will not have a material adverse affect on the consolidated financial
condition of the Eastbrokers Group but may be material to the Eastbrokers
Group's operating results for any particular period depending on the outcome of
the matter and the level of the Eastbrokers Group's income for such period.
In addition to the litigation described above, Eastbrokers, 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 Eastbrokers Group's financial
condition or operating results.
DESCRIPTION OF PROPERTY
The Eastbrokers Group does not own any real property. Leases on the
properties leased by the Eastbrokers Group expire at various times over the next
five years. At current production levels, the Eastbrokers Group believes its
leased space is suitable and adequate. However, if volume and activity
increases, it may necessitate leasing additional office space.
The Eastbrokers Group's corporate offices are located in Rockville,
Maryland. The Eastbrokers Group leases its office space in Rockville, Maryland
and through its subsidiaries. At December 31, 1998 it leased office space in the
following locations: (i) New York, New York; (ii) Vienna, Austria; (iii)
Klagenfurt, Austria; (iv) Zagreb, Croatia; (v) Almaty, Kazakhstan; (vi) Warsaw,
Poland; (vii) Bratislava, Slovak Republic; and (viii) Ljubljana, Slovenia. The
Eastbrokers Group maintains a presence in Budapest, Hungary due to its
relationship with the buyer of its operations previously located there.
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Commencing with the acquisition of Cohig & Associates, Inc. in May
1998, the Eastbrokers Group also leased office space in (i) Denver, Colorado;
(ii) Aspen, Colorado; (iii) Colorado Springs, Colorado; (iv) Meza, Arizona; (v)
La Jolla, California; (vi) Los Angeles, California; (vii) Newark, Delaware;
(viii) Boca Raton, Florida; (ix) Baltimore, Maryland; (x) Farmington, Michigan;
(xi) Aberdeen, New Jersey; (xii) Sea Girt, New Jersey; (xiii) Albuquerque, New
Mexico; (xiv) Charlotte, North Carolina; (xv) Seattle, Washington; and (xvi)
Spokane, Washington.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the Eastbrokers Group's financial condition
and results of operations should be read in conjunction with the financial
statements and notes thereto appearing herein for the fiscal year ended March
31, 1999.
PLAN OF OPERATION
GENERAL OVERVIEW
Prior to August 1996, we engaged in the purchase and sale of newly
privatized businesses in the Czech Republic. In August 1996, we entered the
Central and Eastern European investment banking and securities business through
our acquisition of Eastbrokers Beteiligungs AG ("Eastbrokers AG"), an Austrian
holding company providing financial services in Eastern and Central Europe
through its network of subsidiaries. The acquisition of Eastbrokers AG was
intended to not only provide an earnings stream from brokerage activities, but
also position us to provide investment banking and corporate finance services
throughout Central and Eastern Europe.
In March 1997, we expanded our brokerage operations in the United
States through the acquisition of an existing New York-based broker dealer. In
May 1998, we continued the expansion of our U.S. operations through the
acquisition of Cohig & Associates ("EBI Securities"), a Denver, Colorado based
investment banking and brokerage firm. Currently, we operate a highly
diversified investment banking and securities network, with 20 US offices and 8
international branches and affiliates located in the following countries:
Austria; Czech Republic; Poland; Kazakhstan; Croatia; Slovenia and Azerbaijan.
Overall, the fiscal year ending 1999, was a very challenging year.
First, we had to contend with the global financial crisis, which resulted in the
collapse in the Asian and Russian markets and caused enormous turmoil throughout
the emerging markets of Central and Eastern Europe. Second, the we had to
contend with the correction in the US equities market, which devastated an
already depressed small and micro-cap market. These two factors directly
accounted for 77 percent of our year-end loss.
Despite these unprecedented market conditions, we have continued to
grow our assets under management, our commission revenue, underwriting fees and
distribution capabilities. We have streamlined our operations in Europe and
under-performing assets were sold or liquidated. Also, subsequent to March 31,
1999, we launched a new subsidiary, EBonline, which in July 1999, merged into a
public entity, of which we own about 48%. We remain committed to our mission of
building, through a acquisitions and strategic alliances, a highly successful,
global, middle market, investment banking and securities firm.
EUROPEAN OPERATIONS
Since the acquisition of Eastbrokers AG, in August, 1996, our business
strategy for European operations was to utilize its emerging market expertise in
the areas of merchant banking, corporate finance, privatization and trading, in
order to expand throughout Central and Eastern Europe. However, during 1998, we
modified our business strategy for Europe, in response to an overall economic
downturn that covered much of Central and Eastern Europe. This market downturn,
which peaked in the Summer of 1998, led to sharp decreases in stock markets
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worldwide, particularly in Central and Eastern Europe. In addition, to falling
prices, the overall liquidity throughout much of the region was significantly
reduced. In order to minimize the negative effects on our financial operations,
we reduced our work force in Austria and closed our operations in Slovakia,
Romania, Turkey, Russia and Bulgaria. In Austria, Poland and Croatia, we made
significant changes in our management and cost structures. In the Czech Republic
and Hungary, we sold our operations. See "Business-Acquisitions and Dispositions
During the Fiscal Year." However, we maintain an affiliate relationship with the
management in Hungary. We have also re-entered the Czech Republic through the
purchase of a minority interest in Stratego Invest a.s. Prague. We have also
organized an office in Baku, Azerbaijan. At the time of this filing, this office
was in its development stage.
Despite the negative sentiment in emerging markets during 1998, we
believe that Central and Eastern Europe's ultimate unification into the European
Economic and Monetary Union, will lead to a significant increase in investor
interest in the region. This potential increase in the emerging market interest
will benefit those firms that have had existing operations in the region. We
also intend to maintain our solid long-term involvement in the region and to
continue to providing our clients with quality brokerage and investment banking
services. We also intend to expand its operations into other markets of Western
Europe through possible acquisitions, mergers, joint ventures or strategic
relationships.
Since our acquisition of EBI Securities in May 1998, our European
subsidiaries have had direct access to the US securities marketplace. We expect
that during 1999, our two main subsidiaries, EBI Securities and WMP Bank AG
("WMP"), will cross market, to their respective retail and institutional
clientele, their research, corporate finance and trading opportunities. We
believe that it is possible to significantly increase the overall revenues if
EBI Securities, through WMP, is successful in marketing US securities to Western
European institutional clientele, and vice-versa.
AUSTRIA
Austria's real economic growth was 2.5 percent in 1997, which was
higher than projected mainly due to the solid expansion of real goods exports of
15.3 percent. This favorable development was mainly attributable to an increase
in foreign trade activity and gains in Austria's export markets. Austria's
exports continued to be strong in 1998, with 8.5 percent annual growth, while
imports declined slightly from 9.2 percent in 1997, to 8.3 percent in 1998.
Currently, the 1999, year is estimated to have approximately the same export
growth.
Austria's 1998, Gross Domestic Product ("GDP") increased 3.3 percent,
substantially above the 2.5 percent in 1997. During 1999, GDP is expected to
increase at a 2.8 percent rate. Most forecasts for the year 2000, show
approximately the same rate of growth. Austria's accession into the European
Union and the opening-up of Eastern Europe has 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 downward trend of the real
effective exchange rate in the prior years. Real effective exchange rate dropped
2.6 percent in 1997, and narrowed to minus 0.5 percent in 1998 and an expected
minus 0.3 percent or break even in 1999.
Beginning in 1993, the devaluation of the weak currencies had gradually
undermined Austria's competitiveness. This changed in 1996 and 1997, due to the
establishment of the EMU, and 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 increased the competitiveness of
the Austrian economy during the past three years, returning it to the level it
held in the early 1990s.
At 5.1 percent of GDP, the federal budget deficit was at its highest
level since 1995. By 1997, it had been reduced to 2.7 percent, then to 2.6
percent in 1998, and is projected to remain at about the same level this year.
This was done through public spending and tax increases, in order so that
Austria could meet the fiscal convergence criteria determined by the Maastricht
Treaty. In the opinion of management, the outlook for the Austrian economy in
1999 and 2000, is very positive. In its most recent projections, the Austrian
Institute for Economic Research projects growth rates of 2.8 percent and 3.0
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percent for 1999, and 2000, respectively. Interest rates, as measured by an
average commercial credit, declined from 7.82 percent in 1995, to 6.96 percent
in 1996, 6.50 percent in 1997, and 6.39 percent by 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 budget
deficit was 82.3 billion ATS in 1998, 107.l billion ATS in 1996, and 65.7
billion ATS in 1997. Inflation increased in 1992 by 4.1 percent 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, and 1.3 percent in 1997 and 1.2 percent in the first half of
1998.
We operate two subsidiaries in Austria, Eastbrokers AG, the holding
company for our European operations, and WMP, the Company's Austrian
broker-dealer. During 1998, we significantly streamlined the operations of
Eastbrokers AG, reducing its overall expenditures by approximately 75 percent.
As the holding company for all European operations, Eastbrokers AG divested
itself of its Hungarian, Slovakian, Romanian, Turkish, Russian and Bulgarian
operations.
WMP has historically generated revenue from sales and trading of
Central and Eastern European securities and also market making on the Austrian
Equos (electronic quotation order) system for equities and the PATS (partly
assisted traded) system for options and warrants. During 1999, WMP's plans
include the broadening of its business into three areas. First, WMP has hired an
asset management team and portfolio management director in order to increase
WMP's assets under management. WMP also intends to broaden its client base to
include not only Austrian clients, but also clients located in Italy,
Switzerland and other Western European countries. Second, due to the expansion
of the Xetra system (the German electronic system), we expect that all Austrian
stocks currently quoted on the Equos system will cease trading on Equos and
resume trading on the Xetra. Since WMP is expected to be able to qualify as a
market maker on the Xetra, we will continue to make markets in the Austrian
stocks as well as have access to market making in German stocks. Third, WMP
intends to develop online trading for US equities in the Austrian market and is
reviewing the possible expansion of online trading for Austrian and German
stocks.
In order to facilitate these developments mentioned above, WMP intends
to raise additional equity capital in 1999. In order for us to maintain our
majority equity position in WMP, we will have to increase our equity interest
prior to any financing, so that dilution will not reduce our ownership below 51
percent. In order to accomplish this, we intend to combine Eastbrokers AG and
WMP into a single entity. This will also result in the elimination of
Eastbrokers AG's overhead costs. If successfully completed, WMP would own
Eastbrokers operations in Poland, Czech Republic, Slovenia, Croatia, Kazakhstan
and Azerbaijan.
POLAND
Poland has the fastest growing economy in the region and its reforms
helped minimize the turmoil caused by the Russian crisis and the Balkan war.
Poland is expected to grow by 4.0 percent in 1999 and 5.5 percent in 2000, as
compared to 4.8 percent in 1998. The government is continuing to privatize the
largest companies and the stock market has helped a great deal in this
privatization process.
The Warsaw Stock Exchange is highly regulated and follows 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 increase through May, 1998.
At that time, the Warsaw Stock Exchange Index reached a record high of over
18,000. Unfortunately, this market was affected by the Asian and Russian
economic crises. By mid-October 1998, the Warsaw Stock Exchange Index had
dropped by over 40 percent to below 11,000. However, as of mid 1999, the Warsaw
Stock Exchange Index has recovered to almost 16,000.
Poland's current GDP growth of 4.8 percent is the highest in the former
Soviet block. Poland was able to reduce its inflation rate by more than one half
from 13.7 percent to 6.3 percent. This gave the Polish central bank the platform
to lower the discount rate from 24.5 percent to 15.5 percent. However, Poland's
unemployment rate increased from 10.4 percent in 1998, to the current rate of
12.1 percent.
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Currently, the country is in a period of economic stability with
interest rates and inflation heading lower and its currency, the Polish Zloty,
appears to be stabilizing against the major currencies. The Zloty was 3.9115 per
U.S. dollar as of June 21, 1999, slightly weaker than the 3.4 per U.S. dollar
the previous year. 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 13.7 percent in 1998. In 1999, inflation has dropped
substantially, to only 6.3 percent annual rate or over one half of the 1998
rate.
Eastbrokers WDM SA is a Polish broker-dealer and specialist on the
Warsaw Stock Exchange. Eastbrokers WDM SA generates revenue from four main
sources: commissions from retail clients, investment banking fees from initial
public offerings, sponsorship fees on the Warsaw Stock Exchange, and principal
trading and specialist fees. During 1998, Eastbrokers WDM SA was affected by the
downturn in the Polish market. Revenue was reduced in all categories and the
number of underwritings declined. In October 1998, a new management team was
hired and costs were lowered through reductions in personnel, office
expenditures, and the sales staff was changed from a salary-based to a
commission-based compensation plan. These changes, together with the increased
strength in the Polish market resulted in an increase in performance at the end
of 1998. In 1999, Eastbrokers WDM SA expects to further increase its revenue and
market share. Eastbrokers WDM SA also expects to launch a similar online trading
system as other Eastbrokers subsidiaries.
CZECH REPUBLIC
The Czech Republic's GDP dropped to only a 1 percent in 1998, and is
currently at a minus 2.7 percent rate for 1999. Industrial production, after an
exceptionally strong 10.5 percent in 1998, dropped to 6.5 percent in April 1999,
and for the first four months of 1999, dropped another 8.5 percent compared to
the same period in 1998. GDP per capita dropped from $11,566 in 1998, to $10,787
in 1999. The largest drop came in mining, which was down 19 percent from a year
ago. The largest production increases were in woodworking products, paper, the
publishing industry and transportation. Work productivity dropped 1.5 percent on
a year to year basis, while real wages grew 3.5 percent and nominal wages 6.1
percent.
The budget deficit decreased from a minus 1 percent in 1998, to a minus
1.6 percent. The unemployment rate increased from 5.4 percent in 1998 to 8.2
percent to date. The number of unemployed as of May 1999, reached 421,574 or
146,223 more that at the same time a year ago. This has had an impact on
inflation and interest rates. The Consumer Price Index fell 0.l percent in May
1999, as compared to an increase of 0.l percent a year before. Year-on-year
growth of the Consumer Price Index was 2.4 percent in 1999, versus 13 percent in
May 1998. As the result, the Central Bank decreased the discount rate from 13
percent to 6 percent.
Despite a recession, the Czech economy is still attracting significant
foreign investments which amounted to $6.2 billion in 1998, and $8.7 billion
rate in the first quarter of 1999. Direct foreign investment doubled in 1998,
with services accounting for 29 percent, the financials sector 19 percent,
transportation 12 percent, machinery 10 percent and others 22 percent. Domestic
demand, after dropping from 8 percent in 1996, to minus 3 percent in 1998, is
running now at a plus 1 percent and is expected to recover to 2 percent by 2000.
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 drop was a partial result
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.
During 1998, the Czech stock market was also severely impacted by the
global financial crisis. In addition, the Czech Republic was criticized for not
establishing proper securities regulations. In response to these criticisms, the
Czech government recently adopted new securities legislation and is in the
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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. In June 1998, we sold our operations
in the Czech Republic. However, we were able to re-enter the market on favorable
terms and conditions through our purchase, by WMP, of 49 percent of Stratego
Invest.
In 1998, Stratego Invest was one of the more stable brokerage firms in
the Czech Republic. Even in the difficult year of 1998, Stratego Invest
accounted for a significant amount of the volume on the Prague Stock Exchange.
Stratego Invest's volume of executed transactions continued to increase and in
1998, it was CZK 53 billion ($1.5 billion USD), which represents an annual
increase of more than 30 percent.
Stratego Invest generates its revenue from trading, corporate finance
and asset management. In trading, Stratego Invest continued to enlarge its
international business activities by securing a foreign currency license,
primarily for US, Germany and Great Britain currencies. In connection with the
substantial interest of clients in transactions in these markets, the Company
strengthened its team by hiring brokers who have had many years of experience in
foreign trading. This international expansion is also leading Stratego Invest to
develop an online trading system for US equities in conjunction with EBI
Securities. Stratego Invest believes that this system will be functional during
the summer of 1999. In corporate finance, due to depressed economic conditions,
corporations sought corporate finance alternatives. In order to best manage this
opportunity, Stratego Invest invested into a dedicated subsidiary, which it
named SI Corporate Finance, a.s. In asset management, the average yield of
Stratego Invest's asset managers were above the most advantageous interest rates
of time deposits, despite the official index of the Prague Stock Exchange, which
decreased by more than 20 percent in 1998. This exceptional performance has lead
to the increase in assets under management.
Stratego Invest attaches great importance to public relations. Stratego
Invest provides a bulletin for its clients which is an important source of
information both for the investors and the general public. Stratego Invest
publishes its investment recommendations, which are widely quoted in major
newspapers and economic magazines, and its statistics serve as background
material for Czech television news. An important source of information on events
in the Czech capital market can be found on Stratego Invest's internet home page
(HTTP://WWW.STRATEGO.CZ.).
SLOVENIA AND CROATIA
Sloevenia's current annual inflation rate is 6.5 percent, which is the
lowest rate since 1991. A long period of subdued wage growth, a fall in import
prices, the real appreciation of the Slovenian Tolar ("SIT") against the German
Mark and stronger competition in the domestic market contributed to the
stabilization of prices. After two years, the SIT appreciated significantly in
1998. It increased by 4 percent in real terms against a basket of currencies
measured by relative consumer prices. The high rate of SIT appreciation through
June 1998, was followed by the SIT's depreciation in the second half of 1998,
mainly triggered by interventions on the part of the Bank of Slovenia. After
improving substantially in the first quarter of 1998, GDP decreased throughout
the end of the year. Annual economic growth of 3.9 percent was slightly behind
expectations of 4 percent. Unlike in 1997, when export demand was the driving
force behind economic growth, domestic demand played a major role in 1998. The
main reason for the fall in Slovenia's exports was the deterioration of the
economic situation in its trading partners, resulting from the impact of the
Asian and Russian financial crises. Total exports of goods rose by 8.4 percent,
and the Russian share in total exports dropped from 3.9 percent to 2.6 percent.
The rise in total imports of goods (10.4 percent in real terms) exceeded the
rise in exports. Net foreign capital inflows dropped considerably compared to
1997, due to the lower inflow of foreign direct investment, decreased foreign
investments in securities and the decreased borrowing of domestic companies
abroad. The registered unemployment rate in 1998, was 14.5 percent, compared to
14.4 percent in 1997. The surveyed unemployment rate in 1998, was 7.9 percent
compared to 7.4 percent in 1997. In 1998, the budget deficit amounted to 0.9
percent of estimated GDP, general government revenues rose by 6.5 percent in
real terms while general government expenditures increased by 5.2 percent in
real terms.
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Slovenia was confirmed as an EU Associate Member on February 1, 1999,
with full membership expected in the year 2002. The current EU members are still
preoccupied with the EURO integration and potential Y2K problems, therefore,
corporate takeover activity has been deferred. Starting in the first quarter of
2000, it is anticipated that foreign takeovers of two Slovenian pharmaceuticals
will begin, while closed-end investment funds that hold these shares will be
possible takeover candidates themselves.
In 1998, Eastbrokers Slovenia improved its financial situation and
increased its annual turnover on the Ljubljana Stock Exchange by 390 percent and
its assets under management by 274 percent. In 1999, the emphasis of Eastbrokers
Slovenia will be fee-based, recognizing that 1999 will be a transition year that
management believes will provide significant returns on investment in the year
2000. Partial pension reform has been passed by Parliament, which has already
encourage retail clients to invest in stocks. When a more complete pension
reform is passed, it is anticipated that trading and portfolio management volume
will increase dramatically. Revenues will be generated from increased
transaction commissions due to an enhanced trading facility, the establishment
of an internet site which will offer research reports for a fee, the management
of clients' portfolios, retainers from major European companies seeking
information on local legislative conditions, and advisory fees on takeovers. The
target for assets under management by year end 1999 is 4 billion SIT($25
million) or more than double the 1998 year end number.
During 1998, our operations in Croatia were significantly reduced in
reaction to the Yugoslavian crisis. We intend to maintain a presence in this
market on a limited basis during 1999.
KAZAKHSTAN AND AZERBAIJAN
Kazakhstan is located in mid Asia, between China and Russia and is
geographically as large as Western Europe and one third as large as the United
States, but has only 17 million people. Kazakhstan has the second largest oil
reserve in the world, after Saudi Arabia. It has vast resources of natural gas
and one quarter of the world's uranium, as well as significant reserves of gold.
Since its independence, Kazakhstan has suffered economically with high inflation
and declining industrial output. However, over the past two years, the country
is starting to resurrect its faltering economy. After a major GDP drop of nearly
14% in 1994, the GDP increased 1% in 1996, 2% in 1997 and in 1998. Inflation was
reduced from 17% in 1997 to 10% in 1998. Money raised from privatization will
largely offset the budged deficit. Foreign investment is significant at a rate
of $1.6 billion in 1997 and nearly $2 billion in 1998. Almost every major
international petroleum company has a presence in this market. The Kazak economy
has seen extensive privatization with 21 energy businesses and 34 mining
companies privatized in 1997.
During 1998, Eastbrokers Kazakhstan Securities House, Ltd. was one of
the largest market makers on the Kazakhstan Stock Exchange. A significant part
of our revenue was generated through principal trading activities. Our decision
to focus on generating this type of revenue was due in part to the elimination
of the capital gains tax in Kazakhstan. In 1999, we intend to expand our revenue
base to include mergers and acquisition fees, advisory fees and corporate
finance fees. We also intend to market our services to the country pension
funds.
We have also organized an office in Baku, Azerbaijan. At the time of
this filing, this office was in its development stage.
UNITED STATES OPERATIONS
EBI SECURITIES CORPORATION
Subsequent to the acquisition of Eastbrokers AG, we commenced expansion
of our brokerage operations in the United States. Our goal was to build a strong
US brokerage presence that would enable it to distribute European middle market,
corporate finance product in the US and also to provide its European operations
access to US corporate finance product, trading and research capabilities. In
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the Spring of 1997, the we purchased our first U.S. based broker-dealer,
Eastbrokers North America, Inc. During the process of establishing Eastbrokers
North America, we were approached by numerous U.S. based broker-dealers
interested in being acquired by us. We believe that consolidation within the
securities industry, particularly in the United States, is inevitable. This
consolidation can be attributed to the current volatility prevailing in the
financial markets, the higher degree of capital needed to maintain solid
brokerage functions and the increased regulatory environment. We have decided
that as a well-capitalized, entrepreneurially managed, international,
publicly-traded, investment banking firm, we would be particularly appealing to
the sellers of medium size brokerage firms. In addition, we believe that the
purchase and roll-up of complementary securities businesses both in the United
States and in Europe, can be financed by the issuance of our Common Stock.
In May 1998, we made a significant step in our roll-up strategy in the
United States. We acquired all of the outstanding common stock of Cohig &
Associates, Inc., a Denver, Colorado based investment banking and brokerage
firm. Following the acquisition, we changed the name of Cohig & Associates, Inc.
to EBI Securities Corporation. The office space previously occupied by
Eastbrokers North America, has been converted into a branch office of EBI
Securities. We believe that EBI Securities will be the first in a series of
acquisitions targeting other successful medium size investment banking and
brokerage firms.
EBI Securities operates 20 retail brokerage offices in 16 cities across
the United States. These offices include 10 company owned branches, and 10
franchise branches employing over 200 people, of which 190 are registered
representatives. EBI Securities is registered as a broker-dealer with the SEC
and is licensed in 50 states and the District of Columbia. It is also a member
of the NASD and the Securities Investor Protection Corporation ("SIPC").
Customer accounts are insured to $25 million under the SIPC excess insurance
program. EBI Securities operates pursuant to the exemptive provisions of SEC
Rule 15c3-3 (k)(2)(ii) and clears all transactions with and for customers on a
fully disclosed basis. Since its inception Cohig/EBI has participated in the
underwriting and/or co-underwriting of over $400 million in initial and
secondary equity and debt offerings for over 30 public U.S. companies.
EBI Securities maintains its clearing arrangement with Fiserv
Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ:
FISV). Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement enables
EBI Securities to offer its clients a broad range of products and services that
is typically only offered by firms that are larger and/or have a larger capital
base. Fiserv has advised the Company that it is aware of the year 2000 computer
issue and is working to mitigate the effect of the year 2000 issue on its
operations. See Item 2 "Management's Discussion and Analysis or Plan of
Operation - Impact of the Year 2000".
EBI Securities has primarily operated as a retail brokerage firm
focusing on individual investors with a full service approach which the company
augmented with corporate finance, proprietary research and trading activities.
EBI Securities provides its brokerage clients with a broad range of traditional
investment products and services. EBI Securities also strives to establish
itself with investors and corporate finance clients through its commitment to a
professional but personalized service. Its trading department makes markets in
approximately 100 securities which include its investment banking clients and
those securities that its research department has identified as promising, small
to middle-market, potentially high growth companies. The investment banking
departments' mission is to enhance and develop the capital structures of small
to middle market emerging growth companies through private placements, bridge
financing, and public offerings in order to enable the firm's corporate finance
clients to capitalize on promising business opportunities, favorable market
conditions, and/or late stage product development.
EBI Securities is actively realigning itself in order to create
additional revenue growth that leverages existing resources and creates a more
stable base of revenue. The potential result is increased growth internally,
which compliments external growth through acquisitions. Several initiatives that
EBI Securities has undertaken in this regard are as follows:
1. Fixed Income. In December 1998, EBI Securities added a fixed income
department. This group is responsible for the underwriting, trading, retail
distribution and research of government, municipal and corporate bonds. This
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group adds an additional profit center to the three existing divisions of
retail, corporate finance and equity trading and also creates synergies with the
other departments. As EBI Securities works to broaden the product base of its
retail brokers and their customers, the fixed income department creates new
product through underwritings or independent research ideas. Additionally, the
fixed income department allows EBI Securities corporate finance to capture
business that would not have been previously available.
2. Asset Allocation. EBI Securities has developed an in-house asset
allocation program to augment the breadth of the sales force's efforts. This in
house system was developed utilizing industry software which, along with
additional marketing materials, is customized for the firm. This approach
represents an investment strategy which is based on a Noble Prize winning study
called "Modem Portfolio Theory" (MPT). MPT's basis is that people can create
"optimal" risk vs. return portfolios by mixing varying amounts of different
asset classes according to their correlation to one another. Many market studies
suggest that asset allocation rather than individual investment selection
accounts for over 90 percent of a typical portfolio's returns. EBI Securities
concurs with this notion, and as a result, is educating the sales force to
utilize the program. The results have been very favorable and effective tool for
gathering assets. EBI Securities believes that the new communication systems
that are being implemented and which will be available at the desk top level to
all brokers, will also enhance the sales forces ability utilize the asset
allocation model.
3. Managed Money. In keeping with the changes in the retail brokerage
business, EBI Securities is actively entering the field of managed money and
wrap fee compensation arrangements in place of the more traditional fee per
transaction approaches. In short, the managed money approach charges the client
a flat annual percentage of the money managed rather than a fee for each
transaction. Many people believe that this approach better aligns the investment
advisor's goals with that of the client. This approach requires some additional
accounting and registration procedures, both of which have been set in motion by
the firm and its applicable business partners. EBI Securities intends to hire
additional salespeople with managed money experience in addition to actively
re-educating the existing sales force.
4. Premier Customer Accounts. The formation of an account for the
firm's biggest customers may allow better utilization of several of the
initiatives mentioned above. In addition, this sort of account may also give a
customer a good introduction into several other parts of the business. The most
obvious of these is online trading. Others include joint ventures and cross
selling opportunities with local community banks, mortgage companies, investment
sites and others.
5. Retail Expansion. Currently, EBI Securities is focusing on filling
its existing retail space in order to improve efficiencies. EBI Securities also
believes that retail expansion through additional offices will be most effective
if it occurs in and around the corporate headquarters in Denver, Colorado. EBI
Securities believes that creating a more visible sales force around the
corporate headquarters will create a number of efficiencies on several fronts.
These locations make it easier and less expensive to manage from a corporate
perspective. In addition, economies of scale are created in terms of advertising
and community development, which can help to enhance the EBI Securities name and
make it a more recognizable entity amongst retail clients, corporate finance
clients and additional salespeople.
RESULTS OF OPERATIONS
SEE Note 1 of the Notes to Consolidated Financial Statements for the
twelve months ended March 31, 1999, for an explanation of the basis of
presentation of the financial statements.
For the year ended March 31, 1999, we generated consolidated revenues
in the amount of $32,951,480, compared to $10,342,976, for the previous year
ended March 31, 1998. Total revenues were significantly higher than the previous
year due to the acquisition of EBI Securities, which contributed approximately
$15,877,822, from May 14, 1998, (the date of acquisition of EBI Securities - see
Note 3 to the Consolidated Financial Statements).
33
<PAGE>
We incurred total consolidated costs and expenses of $39,332,731, for
the year ended March 31, 1999, compared to $15,010,815, for the previous year
ended March 31, 1998. Total costs and expenses for the year ended March 31,
1999, are significantly higher than the previous year due to the acquisition of
EBI Securities, which contributed approximately $18,763,724, from May 14, 1998,
(the date of acquisition of EBI Securities (see Note 3 to the Financial
Statements).
Our loss before provision for income taxes and minority interest in
earnings of subsidiaries was $6,381,251, for the previous year ended March 31,
1999, compared to a loss of $4,667,839, for the year ended March 31, 1998. Our
provision for income taxes and minority interest in earnings of subsidiaries for
the year are attributed solely to our European operations, and are primarily
related to WMP and Eastbrokers Budapest Rt.
We reported a consolidated net loss of $5,911,847, for the year ended
March 31, 1999, compared to a consolidated net loss of $3,676,607 for the year
ended March 31, 1998. Of the $5,911,847, consolidated net loss for 1999,
approximately $1,335,518 was from operations and approximately $4,576,330, was
from the following one time items: $2,650,000 for trading losses due to
inventory adjustments incurred in August, September and December 1998;
$1,426,330 was related to the disposition and liquidation of three of our
European operations (Romania, $158,248, Hungary, $491,886 and Slovakia,
$776,196) and approximately $500,000 was a reserve against an outstanding
receivable.
For the year ending March 31, 1999, our operations were impacted by the
global financial crisis that occurred during the Summer of 1998. Specifically,
during the year, our European operations experienced a slowdown in its
commission, trading and corporate finance business. Second, our European
operations incurred costs related to the reduction of the workforce in several
of its European offices. Third, in the US, EBI Securities incurred higher costs
associated with the expansion of its operations in New York, California and
Colorado. In addition, EBI Securities experienced a continued slowdown in its
gross commission revenue through October. However, revenue at EBI Securities
increased significantly in November through the end of March 1999. And fourth,
we continued to incur higher than expected legal and consulting fees through
October, mainly due to costs associated with the completion of its audit for the
fiscal year ended March 31, 1998, which was completed on October 30, 1998.
On March 31, 1999, we had total assets of $48,880,039, and total
liabilities of $23,614,002, compared to $44,431,509, and $18,093,930,
respectively, on March 31, 1998. As of the date of this filing, we believe that
we have adequate liquidity to meet our current obligations. However, no
assurances can be made as to our ability to meet our cash requirements in
connection with any expansion of our operations or any possible business
combinations.
On November 25, 1998, in order to increase its working capital,
Eastbrokers sold 10 newly issued units in a private placement consisting in the
aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock. Eastbrokers has the right
to redeem the Convertible Debentures on or before March 24, 1999, at 115 percent
of the aggregate price or $1,265,000. In March 1999, Eastbrokers redeemed the
debenture in full. Eastbrokers paid an additional 14,000 shares of its common
stock for interest.
In January, 1999, Eastbrokers sold 125,000 restricted shares of its
common stock in a private placement to a private investor for $4.00 per share.
Eastbrokers also issued 7,500 shares of its common stock to a broker at EBI
Securities Corporation as a commission in connection with this transaction.
In March 1999, we issued 10 percent Convertible Promissory Notes due
2002 in an aggregate principal amount of $1,350,000. Holders of the 10 percent
Notes have the right to convert their 10 percent Notes into shares of Common
Stock at $5.75 per share. A portion of the proceeds of the Notes was used to
redeem the 7 percent Convertible Debentures.
34
<PAGE>
In May 1999, we issued 5 percent Convertible Debentures due 2002 in an
aggregate principal amount of $2,000,000. Holders of the 5 percent Debentures
have the right to convert their 5 percent Notes into shares of Common Stock at
the lesser of $5.50 per share or 90% of the average of the three lowest closing
bid prices for the 20 trading days ending five days before the date of delivery
of the notice of conversion. A portion of the proceeds of the 5 percent
Debentures will be used to expand our operations.
The cash flows for the year ended March 31, 1999, reflect the volatile
nature of the securities industry and the reallocation of our assets indicative
of a growing organization. The change in the foreign currency translation
adjustment is primarily related to the fluctuations in our functional currencies
to the U.S. dollar. The U.S. dollar and its unexpected strength coupled with the
unexpected weakness of the European currencies (including the German Deutsche
mark) have negatively impacted our 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 and the Polish
Zloty.
As a broker/dealer in securities, we will periodically acquire
positions in securities on behalf of our clients. As disclosed in "Note 2 -
Financial Instruments", we have title to various financial instruments in the
countries in which we operate. Certain of these investments may be characterized
as relatively illiquid and potentially subject to rapid fluctuations in
liquidity.
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, we believe that such considerations are outweighed
by the benefits of diversification and potentially superior returns.
Among the considerations involved in investing in emerging markets such
as Central and Eastern Europe is that less information may be available about
foreign companies than about domestic companies. Foreign companies are also not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. In addition, unlike investing in U.S.
companies, securities of non-U.S. companies are generally denominated in foreign
currencies, thereby subjecting each security to changes in value when the
underlying foreign currency strengthens or weakens against the U.S. Dollar.
Currency exchange rates can also be affected unpredictably by intervention of
U.S. or foreign governments or central banks or by currency controls or
political developments in the U.S. and abroad.
The value of international fixed income products also responds to
interest rate changes in the U.S. and abroad. In general, the value of such
products will rise when interest rates fall, and fall when interest rates rise.
However, interest rates in each foreign country and the U.S. may change
independently of each other.
Debt and equity securities in emerging markets such as Central and
Eastern Europe may also not be as liquid as U.S. securities and 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.
Our earnings are subject to wide fluctuations since there are many
factors over which we have 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 our operations.
35
<PAGE>
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
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 Eastbrokers Group's overall earnings as well as the
cumulative translation adjustment. The primary functional currencies affecting
us are as follows: U.S. Dollar, Austrian Schilling, Czech Koruna, and the Polish
Zloty.
Assets and liabilities of operations having foreign currencies are
translated at year-end rates of exchange, and the income statements are
translated at weighted average rates of exchange for the year. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," gains or losses resulting from translating foreign
currency financial statements, net of hedge gains or losses and their related
tax effects, are reflected in cumulative translation adjustments, a separate
component of shareholders' 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 Prospectus is based on the weighted average number of shares
outstanding, as calculated.
VIABILITY OF OPERATING RESULTS
The Eastbrokers Group, 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 Eastbrokers Group's investment and
merchant banking services in the countries where its primary operations are
located. The Eastbrokers Group is further affected by changes in valuations of
the local currencies to the U.S. Dollar (the functional currency of the
Eastbrokers Group) in the regions in which it operates, the interest of foreign
investors in the local economies, and governmental regulations restricting the
repatriation of profits. In some of the countries where we have operations
(E.G., Kazakhstan, Czech Republic, Slovenia, Croatia, Poland and Azerbaijan),
the local currencies are referred to as "soft" or "exotic". Soft currency is the
currency of a nation where a person can exchange the currency only with
difficulty. Soft currency countries typically have minimal amounts of currency
reserved for exchange purposes. As such, there are very few, if any, cost
effective hedging strategies available to us or potential investors.
All of these factors have an impact on the Eastbrokers Group'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.
LIQUIDITY AND CAPITAL RESOURCES
Our statements of financial condition reflect a liquid financial
position of cash and cash equivalents convertible to cash, which represented 5
percent at March 31, 1999 and 16 percent of total assets at March 31, 1998.
We are subject to net capital and liquidity requirements in the local
jurisdictions in which we operate. As of March 31, 1999 and 1998, we were in
excess of our minimum net capital and liquidity requirements in all
jurisdictions in which we operate.
We finance our operations primarily with existing capital and funds
generated from our diversified operations and financing activities.
36
<PAGE>
In the opinion of management, our existing capital and cash flow from
operations will be adequate to meet our capital needs for at least the next 12
months in light of currently known and reasonably estimable trends. We are
currently exploring our options with regard to additional debt or equity
financing and there can be no assurance such financing will be available.
However, we recognize that with increased liquidity we 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 our ability to meet its cash
requirements subsequent to any further business combinations.
In April 1997, Eastbrokers 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 Eastbrokers
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.
On February 20, 1998, Eastbrokers sold 1,227,000 newly issued units for
$6,135,000 in cash, or $5.00 per unit, with each consisting of one share of
Common Stock and one Class C Warrant. This price was approximately 40 percent
below the then current market price. These units were offered and sold to
various accredited investors. With regard to this sale, Eastbrokers relied upon
the exemption from registration pursuant to Rule 506 under the Securities Act.
In June 1998, our largest European subsidiary, WMP, successfully raised
60 million Austrian Schillings (approximately $4,800,000 USD) in a bond
offering. We originally intended to utilize these proceeds to enhance and
further develop our 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, we redeemed approximately
45 million Austrian Schillings of these bonds. We intend to redeem the remaining
bonds in the future.
In June 1998, Eastbrokers sold 73.55 percent of its interest in
Eastbrokers Prague a.s. for 15 million Austrian Schillings. Eastbrokers
recognized a profit from the sale of Prague of approximately $1,312,000, at the
then current exchange rates. This amount is reflected in the revenue section
under gain on sale of interest in subsidiary.
On November 25, 1998, Eastbrokers 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. The 7 percent Convertible
Debentures were redeemed in March 1999 from a portion of the proceeds related to
the issuance of the 10 percent Notes.
In January 1999, Eastbrokers sold 125,000 shares of Common Stock for
$500,000. With regard to this sale, the Company relied upon the exemption from
registration pursuant to Rule 506 under the Securities Act.
In March 1999, we issued 10 percent Convertible Promissory Notes due
2002 in an aggregate principal amount of $1,350,000. Holders of the 10 percent
Notes have the right to convert their 10 percent Notes into shares of Common
Stock at $5.75 per share. A portion of the proceeds of the Notes was used to
redeem the 7 percent Convertible Debentures.
In May 1999, we issued 5 percent Convertible Debentures due 2002 in an
aggregate principal amount of $2,000,000. Holders of the 5 percent Debentures
have the right to convert their 5 percent Notes into shares of Common Stock at
the lesser of $5.50 per share or 90% of the average of the three lowest closing
bid prices for the 20 trading days ending five days before the date of delivery
of the notice of conversion. A portion of the proceeds of the Debentures will be
used to expand our operations.
37
<PAGE>
EFFECTS OF INFLATION
We maintain 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 us
in inventory, it may affect our financial position and results of operations.
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. We adopted SFAS No. 128 beginning with the interim
reporting period ended December 31, 1997. The adoption did not affect previously
reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. We adopted this statement
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. We adopted this statement for the fiscal year ended
March 31, 1999. We have restated comparative information for earlier years.
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,
we do not believe that this statement will have a significant impact on us.
IMPACT OF THE YEAR 2000
Many of the world's computer systems (including those in
non-information technology equipment and systems) currently record years in a
two-digit format. If not addressed, such computer systems will be unable to
properly interpret dates beyond the year 1999, which could lead to business
disruptions in the U.S. and internationally (the "Year 2000" issue). The
potential costs and uncertainties associated with the Year 2000 issue will
depend on a number of factors, including software, hardware and the nature of
the industry in which a company operates. Additionally, companies must
coordinate with other entities with which they electronically interact.
The Eastbrokers Group is currently in the process of a systems upgrade
unrelated to the Year 2000 issue. In conjunction with this upgrade, the
Eastbrokers Group is in the process of establishing a program to address issues
associated with the Year 2000. To ensure that the Eastbrokers Group's computer
systems are Year 2000 compliant, the Eastbrokers Group has been reviewing its
systems and programs to identify those that contain two-digit year codes, and
the Eastbrokers Group intends to replace them in conjunction with the systems
upgrade provided by the Baan Corporate Office Solutions. In addition, the
Eastbrokers Group 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.
38
<PAGE>
In addressing the Year 2000 issue, the Eastbrokers Group 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 Eastbrokers Group;
(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
Eastbrokers Group's business critical systems in a
future time environment with external entities.
As of July 1, 1999, the Eastbrokers Group had substantially completed
the Inventory phase and was also conducting the procedures associated with the
Assessment, Remediation, Testing and Implementation phases. The Eastbrokers
Group expects to complete the Inventory and Assessment phase in the third
calendar quarter of 1999. The Remediation and Testing phases with respect to
business critical applications have been completed. The Implementation phase is
expected to be completed by the end of the third calendar quarter of 1999. The
Integration phase will commence at the time the Eastbrokers Group receives its
new operating system which is expected to be implemented in late July 1999 and
will continue through 1999. In addition, the Eastbrokers Group identified the
major business relationships of the Eastbrokers Group, and many of them will be
tested as soon as practicable. The Eastbrokers Group 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 July 1, 1999, the
Eastbrokers Group has not yet received sufficient information from all parties
about their remediation plans to predict the outcomes of their efforts. In
particular, Management believes the level of awareness and remediation efforts
relating to the Year 2000 is issue less advanced in the Central and Eastern
European markets in which the Company conducts business than in the United
States.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Eastbrokers Group's computer and non-information
technology systems. Such failures could have a material adverse effect on the
Eastbrokers Group 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
Eastbrokers Group's exposure to trading risks and disruptions of funding
requirements. In addition, even if the Eastbrokers Group 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 Eastbrokers Group 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
Eastbrokers Group.
If the above mentioned risks are not remedied, the Eastbrokers Group
may experience business interruption or shutdown, financial loss, regulatory
actions, damage to the Eastbrokers Group's global franchise and legal liability.
39
<PAGE>
The Eastbrokers Group 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 Eastbrokers Group's
financial position and results of operation.
The Eastbrokers Group does not have business continuity plans in place
that cover the Year 2000 issue. The Eastbrokers Group intends to evaluate Year
2000 specific contingency plans during 1999 as part of its Year 2000 risk
mitigation efforts.
Based upon current information, the Eastbrokers Group estimates that
the total cost of implementing its Year 2000 initiative will be between $750,000
and $1,500,000, including the cost of its general systems upgrade. The Year 2000
costs include all activities undertaken on Year 2000 related matters across the
Company, including, but not limited to, remediation, testing (internal and
external), third party review, risk mitigation and contingency planning. Through
July 1, 1999, the Eastbrokers Group estimates that it has expended approximately
$600,000 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 Eastbrokers Group'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 Eastbrokers Group 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
Eastbrokers Group'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 Eastbrokers
Group's external counterparties and suppliers, as well as worldwide exchanges,
clearing organizations and depositories, in addressing the Year 2000 issue.
IMPACT OF THE EURO
The Euro issue is the result of the Economic and Monetary Union (the
"EMU") which came into effect on January 1, 1999 and the conversion of member
states to a single currency known as the Euro. The introduction of the Euro will
have a profound impact on the way enterprises operate. Further, it will be one
of the most important changes in the economic landscape of Europe in the next
few years.
The single currency is expected to contribute significantly to further
market integration throughout the member countries. Prices will be easier to
compare which should increase market transparency. As businesses recognize that
they will no longer be exposed to foreign currency exchange rate risks and the
related costs of currency conversion, cross-border transactions within the EMU
are expected to become more attractive.
The introduction of the Euro has been described as a unique event in
history. This uniqueness is also the root of potential problems. During the
transition period, companies will be required to use two different currency
units. This could create a basic input functionality problem whereby enterprises
will receive financial information in both the Euro and the national currency
units. A potential output functionality problem may be that companies will be
required to produce financial information in either the Euro or the national
currency unit or in some cases both currencies. Further adding to potential
problems is a requirement that historical financial information stored in the
system must be converted to the Euro unit.
The Eastbrokers Group 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 Eastbrokers Group 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 Eastbrokers Group is
40
<PAGE>
also monitoring the compliance of its software suppliers in addressing this
issue. Based on a recent evaluation, the Eastbrokers Group has determined that
material costs and resources will not be required to permit its computer systems
to properly handle Euro reporting and transactions.
SELECTED FINANCIAL DATA
The historical selected financial data set forth below for the
respective periods are derived from our financial statements included elsewhere
in this Prospectus and should be read in conjunction with those financial
statements and notes thereto. Those financial statements have been audited by
Spicer, Jeffries & Co., independent certified public accountants. Spicer,
Jeffries & Co.'s report with respect thereto appears elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
BALANCE SHEET DATA
<S> <C> <C>
Assets $48,880,039 $44,431,509
Liabilities 23,614,002 18,093,930
Minority interest in consolidated subsidiaries 7,619,233 7,173,873
Stockholders' equity 17,646,804 19,163,706
STATEMENT OF OPERATIONS DATA
REVENUES
Operating revenues, net $31,082,675 $9,909,793
Interest, dividends & other revenues 1,908,288 401,107
Equity in earnings of unconsolidated affiliates (39,483) 32,076
--------- -------
32,951,480 10,342,976
EXPENSES
Operating expenses 39,332,731 15,010,815
Net loss $(5,911,847) $(3,676,607)
Net loss per share $(1.23) $(1.17)
</TABLE>
41
<PAGE>
MANAGEMENT
A. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Eastbrokers, their ages and
positions are set forth below:
<TABLE>
<CAPTION>
NAME AGE* POSITION
<S> <C> <C>
Martin A. Sumichrast 32 Chairman of the Board, President and Chief
Executive Officer
Kevin D. McNeil 39 Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
Wolfgang Kossner 31 Vice Chairman of the Board
Dr. Lawrence Chimerine 59 Director
Jay R. Schifferli 39 Director
Michael Sumichrast, Ph.D. 78 Director
</TABLE>
__________________
* As of April 30, 1999.
Messrs. Kossner and Martin A. Sumichrast have been elected as
directors, each to serve until the annual meeting of stockholders to be held
during the year 2001. Mr. Jay R. Schifferli and Dr. Michael Sumichrast have been
elected to serve as directors, each until the annual meeting of stockholders to
be held during the year 2000. Dr. Lawrence Chimerine has been elected to serve
as a director until the annual meeting of stockholders to be held in the latter
half of 1999. There are no family relationships among any officers and directors
of the Company, except that Michael Sumichrast, Ph.D. and Martin A. Sumichrast
are father and son, respectively.
MARTIN A. SUMICHRAST, 32, Chairman of the Board, Chief Executive
Officer and President of Eastbrokers since December 1998, and Vice Chairman of
Eastbrokers since March 1997; a Director of Eastbrokers since its inception in
1993. Mr. Sumichrast is a founder of the Company and was formerly Secretary and
Executive Vice President and Chief Financial Officer. Mr. Sumichrast is also
Chairman of Eastbrokers North America, Inc., a subsidiary of the Company. Mr.
Sumichrast is also a Director of EBI Securities Corporation, EBonlineinc.com and
Chairman of Eastbrokers North America, Inc., a subsidiary of the Company.
KEVIN D. MCNEIL, 39, Executive Vice President and Secretary since
December 1998; and Treasurer and Chief Financial Officer since March 1997. Since
August 1996, Mr. McNeil had been the comptroller of the Company. Mr. McNeil is
also Secretary/Treasurer of Eastbrokers North America, Inc., a subsidiary
acquired by the Company in 1996. From 1994 to 1996, Mr. McNeil served as a
supervising auditor for Pannell Kerr Forster PC, an international accounting
firm. From 1990 until 1994, Mr. McNeil served as a supervising auditor for
Schoenadel, Marginot & Company, CPAs, a Washington D.C. regional accounting
firm. Mr. McNeil is a member of the American Institute of Certified Public
Accountants, the Virginia Society of Certified Public Accountants and the
International Auditors Division of the Securities Industry Association.
WOLFGANG KOSSNER, 31, Vice Chairman of the Board since December 1998
and a Director of Eastbrokers since August 1996. Mr. Kossner was Executive Vice
President of Eastbrokers from August 1996 until November 1, 1996. Mr. Kossner is
the co-founder of Eastbrokers Beteiligungs AG. From 1993 through 1995, Mr.
42
<PAGE>
Kossner served as the managing director of WMP Bank AG ("WMP") (formerly named
WMP Borsenmakler AG), a subsidiary acquired by Eastbrokers AG in 1993. Prior to
that, Mr. Kossner was the manager of securities trading at WMP from 1991 to
1993. Mr. Kossner presently serves on the Supervisory Boards of Eastbrokers'
subsidiaries in Vienna, Ljubljana and Zagreb. Mr. Kossner is also principal and
founder of General Partners Beteiligungs AG, Eastbrokers' largest stockholder.
DR. LAWRENCE CHIMERINE, 58, Director of the Company since February
1999, is a Managing Director and Chief Economist at the Economic Strategy
Institute, a position he has held since 1993. Since 1991, he also has served as
President of Radnor International Consulting, Inc., an international consulting
firm. Dr. Chimerine is also a director of Bank United Corp. and Bank United,
Outsource International, Inc. and Sanchez Computer Associates, Inc.
MICHAEL SUMICHRAST, Ph.D., 78, Director of Eastbrokers since 1993, was
Chairman of the Board of Eastbrokers since its inception in 1993 until March
1997. From 1990 to 1994, Dr. Sumichrast served as Chairman of the Board of
Sumichrast Publications, Inc., a real estate publication located in Rockville,
Maryland. During this time, he also served as an economic adviser and
representative of various international American companies. From 1963 to 1990,
Dr. Sumichrast was the senior vice president and chief economist of the National
Association of Home Builders (NAHB), a home builders' professional association.
JAY R. SCHIFFERLI, 39, Director of Eastbrokers since January 1, 1999,
is a Partner at the law firm of Kelley Drye & Warren LLP, an international law
firm with offices in the United States, Europe and Asia. Mr. Schifferli joined
Kelley Drye & Warren LLP in 1986, and concentrates his practice in securities
and corporate law. Kelley Drye & Warren LLP is counsel to the Eastbrokers Group.
COMPENSATION OF DIRECTORS
DIRECTOR COMPENSATION. In April 1999, the Board adopted a company
policy that eliminated all cash payments for services on the Board and
attendance at Board meetings. Instead, each non-officer director of Eastbrokers
will be awarded 7,500 shares of restricted stock at the time they join the Board
and an annual award of 5,000 options pursuant to Eastbrokers' 1996 Stock Option
Plan, as amended. Provisions of the Plan are described under "Executive Officer
Compensation--1996 Stock Option Plan." The restricted stock and options were
granted to each of Dr. Chimerine, Dr. Sumichrast and Mr. Schifferli at the time
the policy was adopted in April 1999.
During the fiscal year ended March 31, 1999, no fees were paid. All
current directors waived such fees for the fiscal year ended March 31, 1999.
B. COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires Eastbrokers' officers and
directors, and persons who own more than 10 percent of a registered class of
Eastbrokers' equity securities, to file reports of ownership of equity
securities of Eastbrokers with the SEC. Officers, directors and greater-than-ten
percent shareholders are required by SEC regulation to furnish Eastbrokers with
copies of all Section 16(a) forms that they file.
Based solely on a review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to Eastbrokers, or written representations from
certain reporting persons that such persons have filed on a timely basis all
reports required by Section 16(a), and without researching or making any inquiry
regarding delinquent Section 16(a) filings, Eastbrokers believes that, during
the fiscal year ended March 31, 1999, its directors and officers and holders of
more than 10% of the outstanding shares of Common stock have complied with all
reporting requirements under Section 16(a), except General Partners Beteiligungs
AG, which did not file on a timely basis.
43
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Eastbrokers'
Common Stock owned as of July 1, 1999 by (i) each person who is known by
Eastbrokers to own beneficially more than five percent of Eastbrokers' Common
Stock; (ii) each of Eastbrokers' officers and directors; and (iii) all officers
and directors as a group. Except as otherwise noted, the persons named in the
table below do not own any other capital stock of Eastbrokers and have sole
voting and investment power with respect to all shares as beneficially owned by
them.
<TABLE>
<CAPTION>
Percentage of
Name and Address (1) Position with Eastbrokers Number of Shares Shares
------------------------------- ------------------------------------- ---------------------- ----------------
<S> <C> <C> <C>
Martin A. Sumichrast (2) Chairman of the Board, President, 390,000 7.28
Chief Executive Officer and Director
Kevin D. McNeil (3) Executive Vice President, 110,078 2.09
Secretary, Treasurer and Chief
Financial Officer
Wolfgang Kossner (4) Vice Chairman 2,420,420 41.68
Dr. Lawrence Chimerine (5) Director 12,500 *
Jay R. Schifferli (5) Director 12,500 *
Michael Sumichrast, Ph.D. Director 12,500 *
(5)
Cherry Creek Investments,
Ltd.(6) 445,000 8.16
General Partners AG (7)
2,187,920 37.68
All Officers and Directors as
a Group (6 persons) 2,957,998 49.06
</TABLE>
____________________
* Less than 1 percent
(1) Except as otherwise noted, c/o Eastbrokers International
Incorporated, 15245 Shady Grove Road, Suite 340, Rockville,
Maryland 20850.
(2) 190,000 shares are owned directly by Martin A. Sumichrast,
50,000 shares are owned by Sumichrast Enterprises, Inc., a
corporation of which Martin A. Sumichrast is an officer and
director and the owner. Includes 150,000 shares issuable upon
exercise of Placement Agent Warrants to acquire Common Stock
at $7.00 per share and which are included, together with the
Placement Agent Warrants, under this registration statement.
If all such included shares are sold, the total percentage of
shares owned will be 4.61%.
44
<PAGE>
(3) Includes 57,583 shares issuable upon exercise of Placement
Agent Warrants to acquire Common Stock at $7.00 per share and
which are included, together with the Placement Agent
Warrants, under this registration statement. If all such
included shares are sold, the total percentage of shares owned
will be 1.01%.
(4) 1,587,920 shares are owned indirectly through General Partners
Beteiligungs AG, formerly KHS Beteiligungs AG ("GP"),
of which Mr. Kossner is a principal stockholder. 200,000
shares were owned by Karntner Landes und Hypothekenbank AG
(the "Bank") as nominee for GP. Mr. Kossner may be deemed to
have shared voting and investment power with respect
to these shares. Also includes 32,500 shares held by the Bank
as nominee for Central and Eastern European Fund ("Fund"), of
which Mr. Kossner is a director. This inclusion of such Fund
shares shall not be construed as an admission that Mr. Kossner
is the beneficial owner of such shares. Includes 200,000
shares issuable upon exercise of options to acquire Common
Stock at $10.00 per share held by GP, and 400,000 shares
issuable upon the exercise of warrants to acquire Common Stock
at $7.00 per share held by GP. The 400,000 shares issuable
upon the exercise of warrants held by GP and 400,000 of the
shares of Common Stock owned indirectly through GP are
included under this registration statement by GP. If all of
such shares are sold by GP the total percentage of shares
owned will be 29.97%.
(5) Includes 7,500 shares of restricted Common Stock and 5,000
options to acquire shares of Common Stock at $5.00 per
share.
(6) Cherry Creek Investments, Ltd.'s address is c/o EBI Securities
Corp., 6300 South Syracuse Way, Suite 645, Englewood, Colorado
80111.
(7) Includes 200,000 shares issuable upon exercise of options to
acquire Common Stock at $10.00 per share, and 400,000 shares
issuable upon the exercise of warrants to acquire Common Stock
at $7.00 per share. GP is including under this registration
statement all such 400,000 Class C Purchase Warrants and
400,000 of its shares of Common Stock. If all such securities
registered hereunder are sold, GP will own 25.67% of
Eastbrokers, including 200,000 shares issuable upon exercise
of options to acquire Common Stock at $10.00 per share held by
GP.
45
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------- ----------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
SECURITIES
NAME AND PRINCIPAL POSITION OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
YEAR SALARY BONUS COMPENSATION STOCK AWARDS($) OPTIONS/SARs(#) PAYOUTS COMPENSATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Martin A. Sumichrast(1) 1999 $ 175,000 $ -- -- -- 75,000 -- --
Chairman, President 1998 $ 120,000 $ 20,000 -- -- -- -- --
and Chief Executive 1997 $ 120,000 $ 11,000 -- -- -- -- --
Officer
Kevin D. McNeil(2) 1999 $ 75,000 $ 25,000 -- -- 50,000 -- --
Chief Financial 1998 $ 57,500 $ 17,250 -- -- -- -- --
Officer, Executive Vice 1997 -- -- -- -- -- -- --
President of Finance,
Treasurer, and Secretary
Peter Schmid(3) 1999 -- -- -- -- -- -- --
Former Chairman, President 1998 $ 138,305 $ 30,000 -- -- -- -- --
and Chief Executive 1997 $ 129,988 -- -- -- -- -- --
Officer
</TABLE>
__________________
(1) Martin A. Sumichrast became Chairman of the Board, President and Chief
Executive Officer of Eastbrokers in December 1998, and was Vice
Chairman of the Board since March 1997. Prior to that, he was Executive
Vice President and Chief Financial Officer.
(2) Kevin D. McNeil became Executive Vice President and Secretary of
Eastbrokers in December 1998. He continues to serve as
Chief Financial Officer and Treasurer.
(3) Mr. Schmid was the Chairman of the Board and Chief Executive Officer
from March 1997 through December 15, 1998 and President
of Eastbrokers from August 1996 through December 1998.
EMPLOYMENT AGREEMENTS
Effective January 1995, Eastbrokers entered into an employment
agreement with Mr. Martin A. Sumichrast. Effective as of December 31, 1998, Mr.
Sumichrast entered into a new Employment Agreement which will expire in December
2004, and will renew for a period of five years following the expiration date,
unless contrary notice is given by either party. Eastbrokers also entered into
an Employment Agreement, effective as of December 31, 1998 with Kevin D. McNeil,
which agreement will expire in December 2002, unless contrary notice is given by
either party. The annual salaries for Martin A. Sumichrast and Mr. McNeil have
been initially fixed at $240,000 and $120,000, respectively, with such
subsequent increases in salary during the term of the agreements as may be
determined by the Board of Directors. Messrs. Martin A. Sumichrast and McNeil
are each eligible to receive a quarterly performance bonus of up to 1 percent
and 1/4 of 1 percent, respectively, of total revenue of Eastbrokers in excess of
$6,000,000 per quarter. Mr. Sumichrast and Mr. McNeil have forgiven any bonuses
owed to them through the period ending March 31, 1999. As an inducement for
entering into each of their respective agreements, Eastbrokers has agreed to
sell 200,000 shares and 50,000 shares at $3.50 and $3.00 per share of Common
46
<PAGE>
Stock, respectively, to Mr. Martin A. Sumichrast and Mr. McNeil, in exchange for
each of Messrs. Sumichrast and McNeil issuing to Eastbrokers a promissory note
in the amount of $700,000 and $150,000, respectively. On January 1, 1999, Martin
A. Sumichrast and Kevin D. McNeil purchased 70,000 Placement Agent Common Stock
Warrants and 32,583 Placement Agent Common Stock Warrants from Eastbrokers NA,
respectively, in each case for an amount equal to $0.25 per warrant. Each
warrant will entitle Mr. Sumichrast and Mr. McNeil, each, to purchase one (1)
share of Eastbrokers' common stock at a price of $7.00 per share. Payment for
the warrants will be in the form of unsecured promissory notes, with one-year
terms and interest accruing at 8 percent. The agreements provide, among other
things, for participation in an equitable manner in any profit-sharing or
retirement plan for employees or executives and for participation in employee
benefits applicable to employees and executives of Eastbrokers. The agreements
further provide for the use of an automobile and other fringe benefits
commensurate with their duties and responsibilities. The agreements also provide
for benefits in the event of disability.
Pursuant to the agreements, employment may be terminated by Eastbrokers
with cause or by the executive with or without good reason. Termination by
Eastbrokers without cause, or by the executive for good reason, would subject
Eastbrokers to liability for liquidated damages in an amount equal to the
terminated executive's current salary and a pro rata portion of their prior
year's bonus for the remaining term of the agreement, payable in equal monthly
installments, without any set-off for compensation received from any new
employment. In addition, the terminated executive would be entitled to continue
to participate in and accrue benefits under all employee benefit plans and to
receive supplemental retirement benefits to replace benefits under any qualified
plan for the remaining term of the agreement to the extent permitted by law.
Under the agreements, Eastbrokers is obligated to purchase insurance policies on
the lives of Messrs. Martin A. Sumichrast and McNeil. Eastbrokers will pay the
premiums on these policies and upon the death of the employee, the Company will
receive an amount equal to the premiums it paid under the policy and the
remaining proceeds will go to the employee's designated beneficiary. Eastbrokers
has a one million dollar key man life insurance policy on Martin A. Sumichrast
and a $500,000 key man life insurance policy on Mr. McNeil, in each case with
the Company as the beneficiary.
Effective January 1, 1999, Wolfgang Kossner, Vice Chairman of the
Board, entered into a one-year Consulting Agreement with Eastbrokers. Mr.
Kossner will receive compensation for his services as a consultant to the
Company of 200,000 Class C Warrants, payable in equal installments on March 31,
1999, June 30, 1999, September 30, 1999 and December 31, 1999. The value of the
Class C Warrants will be determined for compensation purposes using the Black
Scholes method at the time of grant. As additional compensation under the
agreement, Mr. Kossner will receive project success fees to be determined. The
agreement may be terminated by Eastbrokers for cause and in the event that
Eastbrokers terminates the agreement for any reason other than "for cause," Mr.
Kossner shall be entitled to the remaining payments that would have otherwise
been payable had his services not been terminated. The agreement also provides
for full compensation and reimbursement of expenses in the event of disability.
OPTION/SAR GRANTS
There were no grants to any of the named executive officers or
Directors of options, stock appreciation rights or similar instruments during
the fiscal year ended March 31, 1998. On December 23, 1998, the Board of
Directors of Eastbrokers granted stock options to Martin A. Sumichrast, Wolfgang
Kossner and Kevin D. McNeil. Pursuant to these grants, Martin A. Sumichrast and
Wolfgang Kossner are each entitled for 10 years to purchase 75,000 shares of
Eastbrokers' Common Stock at $4.00 per share and Kevin D. McNeil is entitled for
7 years to purchase 50,000 shares of Eastbrokers' Common Stock at $4.00 per
share.
OPTION/SAR EXERCISES
Options for 7,750 shares of Common Stock were exercised during the
fiscal year ended March 31, 1998. Options for 10,000 shares of Common Stock were
exercised during the fiscal year ending March 31, 1999.
47
<PAGE>
FISCAL YEAR-END OPTION/SAR VALUES
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-The-Money
Underlying Unexercised Options/SARs at
Options/SARs at FY-End FY-End($) Exercisable/
Shares Acquired Value (#) Exercisable/ Unexercisable
on Exercise (#) Realized Unexercisable (e)
Name (b) ($) (d)
(a) (c)
- ---------------------------- ------------------ -------------- --------------------------- -----------------------
<S> <C> <C> <C> <C>
Martin A. Sumichrast 0 - 0/75,000 -
Kevin D. McNeil 0 - 0/50,000 -
</TABLE>
1996 STOCK OPTION PLAN
At the Annual Meeting held on December 10, 1996, the stockholders
approved the 1996 Stock Option Plan (the "Plan") pursuant to which officers,
employees, directors and consultants of the Company and its Affiliates are
eligible to be granted Awards. The Plan is administered by the Stock Award
Committee, or, in the absence of such a committee by the entire Board, which has
the plenary authority to grant Awards including Stock Options, Stock
Appreciation Rights, Restricted Stock, or any combination of the foregoing, and
to determine the terms and conditions of the Awards.
The total number of shares of Common Stock reserved and available for
distribution as Awards under the Plan was 400,000. In October 1997, the Plan was
initially amended to provide an additional 200,000 shares available for
distribution. In 1999, the Plan was amended to provide an additional 250,000
shares for distribution. Currently, the total number of shares of Common Stock
available under the Plan is 850,000.
In the fiscal year ended March 31, 1997, an aggregate of 25,000 shares
of Common Stock and options to purchase 35,000 shares were awarded pursuant to
the Plan.
During the fiscal year ended March 31, 1997, an additional 12,000
shares of Common Stock were issued outside of the Plan as compensation for
services to the Company. During the fiscal year ended March 31, 1998, an
additional 10,000 shares were issued outside of the Plan as compensation for
services to the Company.
During the year ended March 31, 1999, 220,000 options to purchase
shares of Common Stock were granted under this plan.
48
<PAGE>
SELLING SECURITY HOLDERS
This Prospectus relates to the resale of 814,500 Common Stock Shares,
1,545,900 Warrants, 1,545,900 Warrant Shares, 1,237,222 Placement Agent
Warrants, 1,237,222 Placement Agent Warrant Shares, 234,781 Note Shares and
475,000 Debenture Shares. The following table sets forth information with
respect to this resale. The following table sets forth, to the knowledge of
Eastbrokers, (i) the number of shares of Common Stock beneficially owned by each
selling security holder, (ii) the number of shares of Common Stock, Warrants and
Placement Agent Warrants to be offered and sold by such selling security holder
and (iii) the number of shares of Common Stock and percentage of outstanding
shares of Common Stock to be beneficially owned by such selling security holder
after such offering and sale, assuming that all the shares offered by such
selling security holder are in fact sold. Unless otherwise indicated, to our
knowledge, each person has sole investment and voting power, if applicable (or
shares such powers with his or her spouse), with respect to the securities set
forth in the following table. As of July 1, 1999 Eastbrokers had 5,206,706
shares of Common Stock issued and outstanding.
<TABLE>
<CAPTION>
---------------------------- --------------------------------
Beneficial Ownership Beneficial Ownership After the
Prior to the Offering Offering (1)
---------------------------- --------------------------------
NUMBER OF
NUMBER SHARES TO NUMBER OF
OF SHARES BE SOLD SHARES PERCENTAGE
COMMON STOCK:
<S> <C> <C> <C> <C>
Allied International Fund Inc. 10,000 10,000 0 *
Robert Alloway 10,000 10,000 0 *
Don Asher 5,000 5,000 0 *
Ellis Belodoff 10,000 10,000 0 *
Ted Burns 66,203 66,203 0 *
Steve Caruso 183,009 183,009 0 *
Barry Cassese 2,000 2,000 0 *
Castletownbere Associates, LLC 10,000 10,000 0 *
Cherry Creek Investments, Ltd. (2) 445,000 20,000 425,000 8.16%
Bud Clarke 183,008 183,008 0 *
Peter Cohen 148,061 148,061 0 *
Michael P. Curtis 20,000 20,000 0 *
James E. Duncan (3) 8,038 8,038 0 *
Susan M. Duncan -
The Kingdom Enlightenment
Scholarship Foundation (3) 26,791 26,791 0 *
Susan M. Duncan (3) 49,563 49,563 0 *
Susan M. Duncan -
Irrevocable Gift Trust (3) 20,094 20,094 0 *
de Castro Trust, Fred & Barbara
de Castro Trustees (3) 6,698 6,698 0 *
Daleford Way 200,000 200,000 0 *
Michael Finnan 2,000 2,000 0 *
Greg Fulton -
Fiserv IRA Rollover (3) 29,634 29,634 0 *
General Partners Beteiligungs,
AG (4) 2,187,920 800,000(5) 1,387,920 25.67%(5)
Michael Gottlieb 5,000 5,000 0 *
Craig Gross 26,482 26,482 0 *
Warren Hardy 182,500 182,500 0 *
Colin Harvey 20,000 20,000 0 *
Jim Heckman, & Lee
Schlessman - FBO Schlessman
Family Foundation (3) 104,486 104,486 0 *
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
---------------------------- --------------------------------
Beneficial Ownership Beneficial Ownership After the
Prior to the Offering Offering (1)
---------------------------- --------------------------------
NUMBER OF
NUMBER SHARES TO NUMBER OF
OF SHARES BE SOLD SHARES PERCENTAGE
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
Nelse Hendricks -
Pension Trust Account' FBO
Comet Press, Limited (3) 42,866 42,866 0 *
Nelse Hendricks -
Profic Sharing Plan
FBO Comet Press, Limited (3) 8,038 8,038 0 *
Interpacific Capital Corp. 80,000 80,000 0 *
Katie Johnson 5,400 5,400 0 *
Lawrence Kaplan 20,000 20,000 0 *
Gary and Linda Kircher 5,000 5,000 0 *
Loren Kramer and Vivian Kramer 10,000 10,000 0 *
Limerick Associates, LLC 10,000 10,000 0 *
Kevin Loomis 5,516 5,516 0 *
Maccabee Investors II LLC 139,000 139,000 0 *
Kevin McNeil (6) 110,078 57,583 52,495 1.00%
Ralph Olson 15,500 13,000 2,500 *
William Orzolek 20,000 20,000 0 *
Punta Investors LLC(7) 515,000 515,000 0 *
Cal J. Rickel &
Amanda Mae Rickel
JTWROS (3) 13,396 13,396 0 *
Paul Savage 4,414 4,414 0 *
Gary L. Schlessman (3) 20,094 20,094 0 *
Lee Schlessman
c /o Dolo Investment
Company (3) 53,583 53,583 0 *
Richard Schmidt 40,000 40,000 0 *
Stephen Schoffman 307,232 307,232 0 *
Robert J. Sforza 15,000 15,000 0 *
Jonathan Siegal 367,232 367,232 0 *
Frank Skelley 26,482 26,482 0 *
Dale Sobek 30,000 30,000 0 *
Martin S. Sumichrast (8) 390,000 150,000 240,000 4.61%
Vincent Trugilio 20,000 20,000 0 *
Hugo Tsai 120,000 120,000 0 *
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CLASS C COMMON STOCK NUMBER OF WARRANTS TO NUMBER OF
PURCHASE WARRANTS: (9) WARRANTS BE SOLD WARRANTS PERCENTAGE
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
Allied International Fund Inc. 10,000 10,000 0 *
Robert Alloway 10,000 10,000 0 *
Ellis Belodoff 5,000 5,000 0 *
Steve Caruso 50,191 50,191 0 *
Castletownbere Associates, LLC 10,000 10,000 0 *
Bud Clarke 50,191 50,191 0 *
Peter Cohen 50,190 50,190 0 *
50
<PAGE>
Michael P. Curtis 10,000 10,000 0 *
James E. Duncan 2,820 2,820 0 *
Susan M. Duncan -
The Kingdom Enlightenment
Scholarship Foundation 9,400 9,400 0 *
Susan M. Duncan 17,390 17,390 0 *
Susan M. Duncan -
Irrevocable Gift Trust 7,050 7,050 0 *
de Castro Trust, Fred &
Barbara de Castro Trustees 2,350 2,350 0 *
Daleford Way 100,000 100,000 0 *
Greg Fulton -
Fiserv IRA Rollover 24,420 24,420 0 *
General Partners Beteiligungs,
AG (4) 400,000 400,000 0 *
Michael Gottlieb 5,000 5,000 0 *
Warren Hardy 100,000 100,000 0 *
Colin Harvey 10,000 10,000 0 *
Jim Heckman & Lee
Schlessman - FBO
Schlessman Family Foundation 36,660 36,660 0 *
Nelse Hendricks -
Pension Trust Account
FBO Comet Press, Limited 15,040 15,040 0 *
Nelse Handricks -
Profit Sharing Plan
FBO Comet Press, Limited 2,820 2,820 0 *
Interpacific Capital Corp. 40,000 40,000 0 *
Katie Johnson 5,400 5,400 0 *
Lawrence Kaplan 20,000 20,000 0 *
Gary and Linda Kircher 5,000 5,000 0 *
Loren Kramer and Vivian
Kramer 10,000 10,000 0 *
Limerick Associates, LLC 10,000 10,000 0 *
Maccabee Investors II LLC 125,000 125,000 0 *
William Orzolek 10,000 10,000 0 *
Punta Investors LLC 40,000 40,000 0 *
Cal J. Rickel &
Amanda Mae Rickel JTWROS 4,700 4,700 0 *
Lee Schlessman 18,800 18,800 0 *
Gary L. Schlessman 7,050 7,050 0 *
Richard Schmidt 20,000 20,000 0 *
Stephen Schoffman 100,714 100,714 0 *
Robert J. Sforza 10,000 10,000 0 *
Jonathan Siegal 100,714 100,714 0 *
Dale Sobek 20,000 20,000 0 *
Vincent Trugilio 10,000 10,000 0 *
Hugo Tsai 60,000 60,000 0 *
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF WARRANTS TO NUMBER OF
PLACEMENT AGENT WARRANTS: (9) WARRANTS BE SOLD WARRANTS PERCENTAGE
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
Ted Burns 66,203 66,203 0 *
Steve Caruso 132,818 132,818 0 *
Barry Cassese 2,000 2,000 0 *
Bud Clarke 132,817 132,817 0 *
Peter Cohen 97,871 97,871 0 *
Michael Finnan 2,000 2,000 0 *
Craig Gross 26,482 26,482 0 *
Kevin Loomis 5,516 5,516 0 *
Kevin McNeil (6) 57,583 57,583 0 *
New Technologies Marketing, Inc. 60,000 60,000 0 *
Paul Savage 4,414 4,414 0 *
Stephen Schoffman 206,518 206,518 0 *
Jonathan Siegal 266,518 266,518 0 *
Frank Skelley 26,482 26,482 0 *
Martin A. Sumichrast (8) 150,000 150,000 0 *
</TABLE>
_______________________
* Less than 1 percent
(1) Assumes the sale of all securities registered hereby.
(2) Cherry Creek Investments, Ltd. ("Cherry Creek") was a party
with Eastbrokers to an agreement, dated as of May 14, 1998,
by which Cherry Creek sold EBI Securities to Eastbrokers.
(3) Includes shares issuable upon conversion of 10 percent Notes
and shares issuable upon exercise of Class C Common Stock
Purchase Warrants.
(4) Beneficial ownership prior to the offering includes 200,000
shares issuable upon exercise of options to acquire Common
Stock at $10.00 per share, and 400,000 shares issuable upon
the exercise of warrants to acquire Common Stock at $7.00
per share. As of July 1, General Partners beneficially
owns 37.68% of Eastbrokers (including the 200,000 shares
issuable upon exercise of options to acquire Common Stock
and the 400,000 shares issuable upon the exercise of
warrants). See "Security Ownership of Certain Beneficial
Owners and Management." Wolfgang Kossner, a Director of
Eastbrokers, is a principal stockholder of General Partners.
(5) The securities to be sold include the 400,000 shares of
Common Stock and 400,000 shares underlying Class C Common
Stock Purchase Warrants, and which are included, together
with 400,000 Class C Common Stock Purchase Warrants, under
this registration statement. If all such shares are sold,
after the offering General Partners will beneficially own
25.67% of the Common Stock (including 200,000 shares of
Common Stock issuable upon exercise of options). See
"Security Ownership of Certain Beneficial Owners and
Management."
(6) Beneficial ownership prior to the offering includes 57,583
shares of Common Stock issuable upon exercise of Placement
Agent Warrants to acquire Common Stock at $7.00 per share
and which are included, together with the 57,583 Placement
Agent Warrants, under this registration statement. Mr.
52
<PAGE>
McNeil is not registering shares of Common Stock other than
those underlying the Placement Agent Warrants; if all such
shares are sold, his beneficial ownership of Eastbrokers'
Common Stock will be 1.01%. Kevin McNeil is Secretary,
Treasurer and Chief Financial Officer of Eastbrokers. See
"Security Ownership of Certain Beneficial Owners and
Management."
(7) Includes 475,000 shares of Common Stock underlying the 5
percent Debentures and 40,000 shares of Common Stock
underlying 40,000 Class C Common Stock Purchase Warrants.
(8) Beneficial ownership prior to the offering includes 190,000
shares of Common Stock owned directly by Martin A.
Sumichrast, 50,000 shares of Common Stock owned by
Sumichrast Enterprises, Inc., a corporation of which Martin
A. Sumichrast is an officer and director and the owner, and
150,000 shares of Common Stock issuable upon exercise of
Placement Agent Warrants to acquire Common Stock at $7.00
per share. Such Placement Agent Warrant Shares are included,
together with the Placement Agent Warrants, under this
registration statement. Mr. Sumichrast is not registering
shares of Common Stock other than those underlying the
Placement Agent Warrants; if all such included shares are
sold, his beneficial ownership of Eastbrokers' Common Stock
will be 4.63%. Martin A. Sumichrast is Chairman of the
Board, President, Chief Executive Officer and Director of
Eastbrokers. See "Security Ownership of Certain Beneficial
Owners and Management."
(9) Assuming each selling security holder sells all of the Class
C Common Stock Purchase Warrants and Placement Agent
Warrants indicated, no holder will beneficially own any
Class C Common Stock Purchase Warrants or Placement Agent
Warrants.
DESCRIPTION OF SECURITIES
The authorized capital of Eastbrokers consists of 10 million shares of
Common Stock, par value $.05, and 10 million shares of preferred stock, par
value $.01 per share (the "Preferred Stock"). As of July 1, 1999 5,206,750
shares of Common Stock are currently issued and outstanding by approximately
70 holders of record, and no shares of Preferred Stock have been issued or are
outstanding.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
stockholders, to issue 10 million shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption (including sinking fund provisions), redemption prices and
liquidation preferences and the number of shares constituting and the
designation of any such series.
The rights and terms relating to any new series of Preferred Stock
could adversely affect the voting power or other rights of the holders of Common
Stock or such Preferred Stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record in the election of directors and with respect to all other
matters to be voted on by stockholders. Holders of shares of Common Stock do not
have cumulative voting rights. Therefore, the holders of more than 50 percent of
53
<PAGE>
such shares voting for the election of directors can elect all of the directors.
The holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of legally available funds. See "Dividend
Policy." In the event of liquidation, dissolution or winding up of Eastbrokers,
the holders of Common Stock are entitled to share ratably in all assets
remaining available for distribution after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the Common Stock. Holders of shares of Common Stock, as such, have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to the Common Stock. The rights of the holders of Common
Stock are subject to any rights that may be fixed for holders of Preferred
Stock, when and if any Preferred Stock is issued. All of the shares of Common
Stock currently outstanding are duly authorized, validly issued, fully paid and
non-assessable.
WARRANTS
There are currently outstanding 1,101,000 Class A Common Stock Purchase
Warrants, 250,000 Class B Common Stock Purchase Warrants, 1,545,900 Class C
Common Stock Purchase Warrants and 1,237,222 Placement Agent Warrants. With
respect to the Class A Warrants, each such warrant entitles the registered
holder to purchase one share of Common Stock, $.05 par value, of Eastbrokers at
an exercise price of $18.00 per share, exercisable until June 6, 2000.
Each Class B Warrant entitles the registered holder to purchase one
share of Common Stock, $.05 par value, of Eastbrokers at an exercise price of
$19.00 per share, exercisable until June, 2000.
Each Class C Warrant entitles the registered holder to purchase one
share of Common Stock, $.05 par value, of Eastbrokers at an exercise price of
$7.00 per share, exercisable from February 20, 1999 until February 20, 2002. The
shares underlying these warrants are subject to a "demand registration" right
upon receipt of a demand for registration from a majority of the holders of the
common stock and the warrants issued in the private placement. Under certain
circumstances, each Class C Warrant is subject to redemption by Eastbrokers at
Eastbrokers' option at a redemption price equal to $0.10 per share.
The Placement Agent Warrants are identical in all material respects to
the Class C Warrants described above except that the Placement Agent Warrants
are not redeemable by Eastbrokers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, whose address is 40 Wall Street, New York, New York,
10005, telephone number (212) 936-5100.
54
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with Mr. Randall F. Greene's resignation from the Board
of Directors of Eastbrokers, Eastbrokers 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 Eastbrokers' 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 Eastbrokers'
Common Stock in full satisfaction for consulting services rendered during the
period August 1, 1996 through March 31, 1997. Also pursuant to this agreement,
Eastbrokers agreed to indemnify Mr. Greene against certain liabilities, the
parties exchanged mutual releases and Mr. Greene agreed to sell his shares of
Eastbrokers' Common Stock to the Company's primary market maker subject to
certain conditions.
Eastbrokers entered into a one year consulting agreement dated March
31, 1997 with Dr. Sumichrast, a Director of Eastbrokers, pursuant to which Dr.
Sumichrast was granted 20,000 shares of Eastbrokers' Common Stock to vest
ratably over the term of the agreement. Dr. Sumichrast provided services to
Eastbrokers 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 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 Eastbrokers until his resignation in January
1998.
Eastbrokers 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, 1998 and 1999.
The terms of this lease were negotiated such that Eastbrokers is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners, an Austrian holding company and the beneficial owner of
2,187,920 shares of Common Stock. Mr. Kossner, a Director of Eastbrokers and an
officer of Eastbrokers from August, 1996 until November, 1996, owns
approximately 30 percent of the outstanding shares of General Partners. He is a
member of General Partners' Supervisory Board, WMP's Supervisory Board, the
Eastbrokers AG Supervisory Board, and is a Director of Eastbrokers.
At December 31, 1998, Eastbrokers has a receivable related to
securities transactions from Mr. Kossner in the amount of 1,132,776 Austrian
Schillings (approximately $97,000 USD).
At December 31, 1998, Eastbrokers has a receivable related to share
transactions from Z.E. Beteiligungs AG ("ZE") in the amount of 7,745,600
Austrian Schillings (approximately $661,000 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 Eastbrokers through its
Directors or Shareholders. For the year ended March 31, 1999, Eastbrokers
generated profits of approximately $1,190,000 USD related to the trading of
shares of these companies.
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
SuBwarenindustrie Beteiligungs GmbH ("SWIB") to Mr. Schmid for 13 million
Austrian Schillings (approximately $1,025,000 USD). Eastbrokers acquired its
55
<PAGE>
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD). At the time of acquisition, the principal asset of
SWIB was an investment in a company which was entering bankruptcy proceedings
and there was considerable uncertainty regarding the future realizable value of
this asset. By December 1997, bankruptcy proceedings had progressed to a point
where an estimate could be made on the net realizable value of this asset. Based
on the information available at that time, SWIB's value at the date of
disposition was determined by the Board of Directors to be in the range of 12
million to 14 million Austrian Schillings (approximately $950,000 to $1,100,000
USD). The sale of SWIB resulted in a gain of approximately $1.0 million USD and
is included in the accompanying consolidated statement of operations.
As of December 31, 1998, 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.
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996,
Eastbrokers assumed a receivable in the amount of 7,387,697 ATS (approximately
$704,000 USD, at the then current exchange rates) from Mr. 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
Eastbrokers' Common Stock. On October 8, 1998, Mr. Schmid repaid 6,748,111
Austrian Schillings of the total amount due. As of March 31, 1999, Mr. Schmid
did not owe any remaining balance under these arrangements.
Periodically, Eastbrokers 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 Eastbrokers 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
December 31, 1998, Eastbrokers had a receivable from URBI in the amount of
2,780,030 Austrian Schillings or approximately $236,000 related to transactions
occurring subsequent to December 31, 1997. In addition, Eastbrokers 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 Eastbrokers 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).
Eastbrokers conducts various business transactions with General
Partners throughout the year. As of December 31, 1998, the Company was owed
$3,787,339 relating to these transactions.
56
<PAGE>
As of December 31, 1997, Eastbrokers 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.
This note was paid in full, with accrued interest in February 1999.
On December 23, 1998, the Board of Directors of the Company granted
stock options to Martin A. Sumichrast, Wolfgang Kossner and Kevin D. McNeil.
Pursuant to these grants, Martin A. Sumichrast and Wolfgang Kossner are each
entitled for 10 years to purchase 75,000 shares of Eastbrokers' Common Stock at
$4.00 per share and Kevin D. McNeil is entitled for 7 years to purchase 50,000
shares of Eastbrokers' Common Stock at $4.00 per share.
Effective as of December 31, 1998, Mr. Martin A. Sumichrast entered
into a new Employment Agreement which will expire in December 2004, and will
renew for a period of five years following the expiration date, unless contrary
notice is given by either party. Eastbrokers also entered into an Employment
Agreement, effective as of December 31, 1998, with Kevin D. McNeil, which
agreement will expire in December 2002, unless contrary notice is given by
either party. The annual salaries for Martin A. Sumichrast and Mr. McNeil have
been initially fixed at $240,000 and $120,000, respectively, with such
subsequent increases in salary during the term of the agreements as may be
determined by the Board of Directors. Messrs. Martin A. Sumichrast and McNeil
are each eligible to receive a quarterly performance bonus of up to 1 percent
and 1/4 of 1 percent, respectively, of total revenue of the Company in excess of
$6,000,000 per quarter, respectively. Mr. Sumichrast and Mr. McNeil have
forgiven any bonuses owed to them through the period ending March 31, 1999. See
"Executive Officer Compensation--Employment Agreements."
On January 1, 1999, Martin A. Sumichrast and Kevin D. McNeil purchased
70,000 Class C Warrants and 32,583 Class C Warrants from Eastbrokers N.A.,
respectively, in each case for an amount equal to $0.25 per warrant. Each
warrant will entitle Mr. Sumichrast and Mr. McNeil, each, to purchase one (1)
share of the Company's common stock at a price of $7.00 per share. Payment for
the warrants will be in the form of unsecured promissory notes, with one-year
terms and interest accruing at 8 percent. Eastbrokers sold 200,000 shares at
$3.50 per share and 50,000 shares at $3.00 per share of common stock to Mr.
Martin A. Sumichrast and Mr. McNeil, respectively, in exchange for each of
Messrs. Sumichrast and McNeil issuing to the Company a promissory note in the
amount of $700,000 and $150,000, respectively.
Effective January 1, 1999, Wolfgang Kossner, Vice Chairman of the
Board, entered into a one-year Consulting Agreement with Eastbrokers. Mr.
Kossner will receive compensation for his services as a consultant to
Eastbrokers of 200,000 Class C Warrants, payable in equal installments on March
31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999. The value of
the Class C Warrants will be determined for compensation purposes using the
Black Scholes method at the time of grant. As additional compensation under the
agreement, Mr. Kossner will receive project success fees to be determined. See
"Executive Officer Compensation--Consulting Agreements."
Effective January 1, 1999, Jay R. Schifferli, a Partner at Kelley Drye
& Warren LLP, became a director of Eastbrokers. Kelley Drye & Warren LLP
received from Eastbrokers legal fees in the amount of $345,311.64 during the
fiscal year ended March 31, 1999. As of the date of this Prospectus, Mr.
Schifferli has received 7,500 shares of restricted Common Stock and 5,000
options to acquire shares of Common Stock at $5.00 per share as non-employee
director compensation.
57
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock Shares, the Warrants, the Warrant Shares, the
Debenture Shares, the Note Shares, the Placement Agent Warrants and the
Placement Agent Warrant Shares may be offered and sold from time to time by one
or more of the selling security holders, or by pledgees, donees, transferees or
other successors in interest. No selling security holder is required to offer or
sell any of his or its Common Stock Shares, Warrants, Warrant Shares, Debenture
Shares, Note Shares, Placement Agent Warrants or Placement Agent Warrant Shares.
The selling security holders anticipate that, if and when offered and sold, the
Common Stock Shares, the Warrant Shares, the Debenture Shares, the Note Shares
and the Placement Agent Warrant Shares will be offered and sold in transactions
(which may include block transactions) effected on the Nasdaq SmallCap at then
prevailing market prices. The selling security holders reserve the right,
however, to offer and sell the Common Stock Shares, the Warrant Shares, the
Debenture Shares, the Note Shares and the Placement Agent Warrant Shares on any
other national securities exchange on which the Common Stock is or may become
listed or in the over-the-counter market, in each case at then prevailing market
prices, or in privately negotiated transactions each at a price then to be
negotiated. The Warrants and the Placement Agent Warrants will not be listed on
any exchange or in the over-the-counter market and therefore, the selling
security holder may offer and sell the Warrants and the Placement Agent Warrants
in privately negotiated transactions at a price then to be negotiated. All
offers and sales made on the Nasdaq SmallCap or any other national securities
exchange or in the over-the-counter market will be made through or to licensed
brokers and dealers. No agreements, arrangements or understandings have been
entered into with any broker or dealer, and no brokers or dealers have been
selected, in connection with the offer and sale of the Common Stock Shares, the
Warrants, the Warrant Shares, the Debenture Shares, the Note Shares, the
Placement Agent Warrants and the Placement Agent Warrant Shares. All proceeds
from the sale of the Common Stock Shares, the Warrant Shares, the Debenture
Shares, the Note Shares and the Placement Agent Warrant Shares will be paid
directly to the selling security holders and will not be deposited in an escrow,
trust or other similar arrangement. Eastbrokers will not receive any of the
proceeds from the sales of the Common Stock Shares, the Warrant Shares, the
Debenture Shares or the Placement Agent Warrant Shares by the selling security
holders. However, Eastbrokers will receive proceeds from the exercise of the
Warrants and the Placement Agent Warrants by the selling security holders. No
discounts, commissions or other compensation will be allowed or paid by the
selling security holders or the Company in connection with the offer and sale of
the Common Stock Shares, the Warrants, the Warrant Shares, the Debenture Shares,
the Note Shares, the Placement Agent Warrants and the Placement Agent Warrant
Shares, except that usual and customary brokers' commissions may be paid by the
selling security holders.
The selling broker may act as agent or may acquire the Shares or
interests therein as principal or pledgee and may, from time to time, effect
distributions of the Shares or interests. If a dealer is utilized in the sale of
the Shares in respect of which the Prospectus is delivered, the selling security
holders will sell the Shares to the dealer, as principal. The dealer may then
resell the Shares to the public at varying prices to be determined by such
dealer at the time of resale.
Eastbrokers has agreed to indemnify the selling security holders and
the selling security holders have agreed to indemnify Eastbrokers, its officers,
directors, employees, agents and controlling persons from certain damages or
liabilities arising out of or based upon any untrue statement or alleged untrue
statement of any material fact contained in or material omission or alleged
omission from the Registration Statement, any preliminary, final or summary
prospectus contained therein, or any amendment or supplement thereto, to the
extent such untrue statement or omission was made in the Registration Statement
or other document in reliance upon information furnished by the indemnifying
party.
The legal, accounting and other fees and expenses related to the offer
and sale of the Shares and Warrants contemplated hereby are estimated to be
$40,000 and will be paid by Eastbrokers. Eastbrokers will pay all expenses
incurred in connection with this offering, excluding commissions charged by any
broker or dealer acting on behalf of a selling security holder.
58
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Eastbrokers Group has changed its accountants from Deloitte &
Touche LLP to Spicer, Jeffries & Co. This change was reported in Eastbrokers'
Current Reports on Form 8-K, dated February 22, 1999 and March 9, 1999. The
decision to change was approved by the Board of Directors. The report of
Deloitte & Touche LLP on the Eastbrokers Group's financial statements for the
fiscal year ended March 31, 1998, contained no adverse opinion or disclaimer of
opinion and was not modified as to uncertainty, audit scope or accounting
principles. The Eastbrokers Group has had no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of Deloitte & Touche LLP, would have caused it to make
reference thereto in their report on the financial statements of the Eastbrokers
Group.
In 1997, Eastbrokers had changed its accountants from Pannell Kerr
Forster PC to Deloitte & Touche LLP. This change was reported in Eastbrokers'
Current Reports on Form 8-K, dated November 4, 1997 and January 22, 1998. The
decision to change was approved by the Board of Directors. The reports of
Pannell Kerr Forster PC on the Eastbrokers Group's financial statements for the
fiscal year ended March 31, 1997, the transition period ended March 31, 1996 and
the fiscal year ended December 31, 1995 contained no adverse opinion or
disclaimer of opinion and were not modified as to uncertainty, audit scope or
accounting principles. The Eastbrokers Group has had no disagreements with
Pannell Kerr Forster PC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of Pannell Kerr Forster PC, would have caused it to
make reference thereto in their report on the financial statements of the
Eastbrokers Group.
EXPERTS
The consolidated statement of financial condition as of March 31, 1998
and March 31, 1999 and the related consolidated statements of operations,
comprehensive income, changes in shareholders' equity and cash flows for the
years then ended included in this prospectus have been audited by Spicer,
Jeffries & Co., independent auditors, as stated in their report appearing herein
(which report expressed an unqualified opinion), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the legality of the securities
offered hereby have been passed upon for Eastbrokers by Kelley Drye & Warren
LLP, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut 06901. Jay
R. Schifferli, a Director of Eastbrokers, is a Partner of Kelley Drye & Warren
LLP. Mr. Schifferli owns 7,500 shares of restricted Common Stock and 5,000
options to acquire shares of Eastbrokers' Common Stock as non-employee director
compensation.
* * * * *
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Historical Financial Statements for
Eastbrokers International Incorporated
PAGE
Independent Auditors' Report............................................ F-2
Consolidated Statements of Financial Condition.......................... F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Comprehensive Income......................... F-5
Consolidated Statements of Changes in Shareholders' Equity.............. F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
F-1
<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, 1999
and 1998, and the related consolidated statements of operations, comprehensive
income, changes in shareholders' equity, and cash flows for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eastbrokers
International Incorporated and subsidiaries as of March 31, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
SPICER, JEFFRIES & CO.
Denver, Colorado
June 29, 1999
F-2
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
---------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,214,705 $ 7,156,702
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 50,431 986,233
Securities purchased under agreements to resell - 887,170
Securities borrowed 1,653,742 -
Receivables
Customers 4,140,016 4,819,958
Broker dealers and other 2,356,965 4,404,608
Affiliated companies 2,103,929 2,286,277
Related to disposition of subsidiary 1,782,814 1,493,913
Financial institutions, net 549,938 1,018,642
Receivable from shareholders and executive officers 3,787,339 517,221
Other 3,414,674 1,890,212
Securities owned, at value
Government and agencies - 692,428
Corporate debt 1,876,229 -
Equities and other 11,665,327 7,985,484
Net assets held for resale 1,836,442 2,362,873
Furniture and equipment, at cost (net of accumulated depreciation
and amortization of $1,140,140 and $766,898, respectively) 2,061,612 1,142,281
Deferred taxes 5,499,245 4,162,615
Goodwill, net 2,215,910 2,073,774
Other assets and deferred amounts 1,670,721 551,118
------------ ------------
Total Assets $ 48,880,039 $ 44,431,509
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 2,408,354 $ 2,570,499
Advances from affiliated companies 4,699,821 31,937
Payables
Customers 2,684,343 5,405,464
Broker dealers and other 2,833,028 6,169,159
Securities sold not yet purchased, at value
Government and agencies 1,036,428 -
Equities and other 1,567,290 -
Accounts payable and accrued expenses 1,185,551 727,512
Other liabilities and deferred amounts 1,994,925 1,118,179
------------ -------------
18,409,740 16,022,750
Deferred tax - 51,093
Long-term borrowings 5,204,262 2,020,087
------------ -------------
Total liabilities 23,614,002 18,093,930
------------ -------------
Minority interest in consolidated subsidiaries 7,619,233 7,173,873
------------ -------------
Commitments and contingencies
Shareholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized; no
shares issued and outstanding at March 31, 1999 and 1998,
respectively - -
Common stock; $.05 par value; 10,000,000 shares authorized; 5,160,250
and 4,297,750 shares issued and outstanding at March 31, 1999 and
1998, respectively 258,013 214,888
Paid-in capital 29,650,450 25,614,348
Accumulated deficit (10,158,283) (4,246,436)
Notes receivable - common stock and warrants (893,214) (313,133)
Accumulated other comprehensive income (1,210,162) (2,105,961)
---------------- -----------------
Total shareholders' equity 17,646,804 19,163,706
---------------- -----------------
Total Liabilities and Shareholders' Equity $ 48,880,039 $ 44,431,509
================ =================
</TABLE>
F-3
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31,
---------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Revenues
Commissions $ 14,246,465 $ 2,539,260
Investment banking 2,165,753 807,803
Interest and dividends 1,908,288 401,107
Principal transactions, net
Trading 2,370,734 4,738,701
Investment 7,671,982 (462,221)
Gain on sale of interest in subsidiary 1,312,057 -
Gain on sale of investment - related party - 1,025,429
Other 3,315,684 1,260,821
Equity in earnings of unconsolidated affiliates (39,483) 32,076
----------------- ------------------
Total revenues 32,951,480 10,342,976
----------------- ------------------
Costs and expenses
Compensation and benefits 15,830,533 3,818,549
Brokerage, clearing, exchange fees and other 9,195,493 1,163,171
General and administrative 2,608,037 3,476,026
Occupancy 2,389,741 997,814
Communications 1,962,495 698,688
Consulting fees 1,446,669 2,233,543
Interest 1,340,421 746,821
Professional Fees 1,075,393 213,913
Travel 792,163 622,722
Office supplies and expense 738,223 435,173
Loss on disposition of subsidiary 491,886 -
Loss on liquidation of subsidiaries 934,444 -
Depreciation and amortization 527,233 604,395
----------------- ----------------
Total costs and expenses 39,332,731 15,010,815
----------------- ------------------
Loss before benefit for income taxes and
minority interest in earnings of subsidiaries (6,381,251) (4,667,839)
Benefit for income taxes 789,315 640,163
(319,911) 351,069
----------------- ------------------
Net loss $ (5,911,847) $ (3,676,607)
----------------- ------------------
Weighted average number of common shares outstanding
Basic and diluted 4,800,551 3,149,009
----------------- ------------------
Loss per common share
Basic and diluted $ (1.23) $ (1.17)
----------------- ------------------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net loss $ (5,911,847) $ (3,676,607)
Other comprehensive income (loss)
Foreign currency translation adjustments 895,799 (1,475,152)
Unrealized holding gains - 246,794
Less: recovery of unrealized holding losses - (246,794)
---------------- ----------------
Comprehensive income (loss) $ (5,016,048) $ (5,151,759)
---------------- ----------------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances at March 31, 1997 2,923,000 $ 146,150 $ 19,314,883 $ (569,829)
Issuance of common stock in
private placement 125,000 6,250 716,945 -
Retirement of treasury stock (45,000) (2,250) (211,500) -
Issuance of common stock in
compensation for services 10,000 500 65,480 -
Issuance of common stock to
officer for note receivable 50,000 2,500 297,500 -
Net unrealized gain on
investments
investments - - - -
Issuance of common stock
in private placement
1,227,000 61,350 5,354,619 -
Exercise of stock options 7,750 388 49,987 -
Sale of subsidiary stock - - 26,434 -
Net loss - - - (3,676,607)
Accrued interest on note
receivable - - - -
Cumulative translation
adjustment - - - -
------------- ------------- -------------- --------------
Balances at March 31, 1998 4,297,750 $ 214,888 $ 25,614,348 $ (4,246,436)
Issuance of common stock in
Cohig & Assoc. acquisition 470,000 23,500 2,326,500 -
Redemption of note receivable - - - -
Issuance of common stock to
officer for note receivable 200,000 10,000 690,000 -
Issuance of common stock to
officer for note receivable 50,000 2,500 147,500 -
Issuance of common stock
in private placement 125,000 6,250 463,750 -
Exercise of stock options 10,000 500 69,500 -
Issuance of common stock in
compensation for services 7,500 375 29,625 -
Issuance of warrants in
connection with debt
offerings - - 283,581 -
Issuance of warrants to
officers for note receivables - - 25,646 -
Net loss - - - (5,911,847)
Accrued interest on notes
receivable - - - -
Cumulative translation
adjustment - - - -
------------- ------------- -------------- --------------
Balances at March 31, 1999 5,160,250 $ 258,013 $ 29,650,450 $ (10,158,283)
------------- ------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED
TREASURY LOSS ON ACCUMULATED
STOCK & AVAILABLE CUMULATIVE OTHER
NOTE FOR SALE TRANSLATION COMPREHENSIVE
RECEIVABLE INVESTMENTS ADJUSTMENT INCOME TOTAL
-------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
$ (213,750) $ (246,794) $ (630,809) $ (877,603) $ 17,799,851
- - - - 723,195
213,750 - - - -
- - - - 65,980
(300,000) - - - -
- 246,794 - 246,794 246,794
- - - - 5,415,969
- - - 50,375
- - - - 26,434
- - - - (3,676,607)
(13,133) - - - (13,133)
- - (1,475,152) (1,475,152) (1,475,152)
-------------- --------------- -------------- -------------- --------------
$ (313,133) $ - $ (2,105,961) $ (2,105,961) $ 19,163,706
- - - - 2,350,000
335,304 - - - 335,304
(700,000) - - - -
(150,000) - - - -
- - - - 470,000
- - - - 70,000
- - - - 30,000
- - - - 283,581
(25,646) - - - -
- - - - (5,911,847)
(39,739) - - - (39,739)
- - 895,799 895,799 895,799
-------------- --------------- -------------- -------------- --------------
$ (893,214) $ - $ (1,210,162) $ (1,210,162) $ 17,646,804
============== =============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements
F-6 (continued)
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,911,847) $ (3,676,607)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 319,911 (351,069)
Losses on dispositions of subsidiaries 1,426,330 -
Gain on sale of subsidiary (1,312,057) (1,025,429)
Allowance for doubtful accounts 549,938 -
Depreciation and amortization 527,233 604,395
Deferred taxes (919,768) (2,305,662)
Other (410,572) 104,368
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies 914,625 82,415
Securities purchased under agreements to resell 887,170 (478,305)
Securities borrowed (1,653,742) -
Receivables (3,851,453) (3,744,971)
Securities owned, at value (2,239,065) (6,443,982)
Other assets (696,035) 827,875
Payables
Customers 1,366,143 4,353,654
Brokers, dealers and others (2,988,422) 5,208,933
Accounts payable and accrued expenses (77,837) (879,123)
----------------- ----------------
Net cash provided by (used in) operating activities (14,069,448) (7,723,508)
----------------- ----------------
Cash flows from investing activities
Net proceeds from (payments for)
Net cash acquired on acquisition of EBI Securities 970,056 -
Investments in affiliates (386,345) (264,036)
Sales of interests in subsidiaries 2,159,204 -
Investments held for resale (526,431) 2,378,054
Capital expenditures (1,384,072) (289,070)
----------------- ----------------
Net cash provided by (used in) investing activities 832,412 1,824,948
----------------- ----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement 500,000 6,139,164
Short-term financings - (1,339,183)
Advances from affiliates 4,850,232 -
Securities sold under agreements to repurchase - (1,200,793)
Proceeds from long term debt 3,284,426 1,085,713
Dividends paid to minority interests on subsidiary's stock (190,277) -
Other 104,702 102,575
----------------- ----------------
Net cash provided by (used in) financing activities 8,549,083 4,787,476
----------------- ----------------
Foreign currency translation adjustment (254,044) 1,400,162
----------------- ----------------
Increase (decrease) in cash and cash equivalents (4,941,997) 289,078
Cash and cash equivalents, beginning of year 7,156,702 6,867,624
----------------- ----------------
Cash and cash equivalents, end of year $ 2,214,705 $ 7,156,702
----------------- ----------------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 130,789 $ 261,633
----------------- -----------------
Cash paid for interest $ 335,116 $ 173,560
----------------- -----------------
Non-cash transactions
Eastbrokers International shares issued as part of
EBI Securities Corporation acquisition $ 2,350,000 $ -
----------------- -----------------
Retirement of treasury stock $ - $ 213,750
----------------- -----------------
Eastbrokers International shares issued in compensation for $ 30,000 $ 65,980
services
----------------- -----------------
Issuance of Eastbrokers International Class C warrants
in connection with debt offerings $ 283,581 $ -
----------------- -----------------
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
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. 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 7 -"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 is March 31.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European Subsidiaries is December
31. These subsidiaries are included on the basis of closing dates that precede
the Company's closing date by three months.
FINANCIAL INSTRUMENTS
Proprietary securities transactions, commission revenues and related
expenses are recorded on a trade date basis. Securities owned and securities
sold, but not yet purchased are recorded at fair value with resulting net
unrealized gains and losses reflected in earnings. Fair value is generally based
on quoted market prices. If quoted market prices are not available, fair value
is estimated based on other relevant factors, including dealer price quotations
and recent price activity. 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 security. 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.
F-9
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Securities borrowed transactions facilitate the settlement process and
may require the Company to deposit cash or other collateral with the lender.
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 syndication
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments,"
requires the Company to report the fair value of financial instruments, as
defined. Substantially all of the Company's assets and liabilities are carried
at fair value or contracted amounts which approximate fair value. Estimates of
fair value are made at a specific point in time, based on relative market
information and information about the financial instrument, specifically, the
value of the underlying financial instrument.
F-10
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities owned and securities sold, but not yet purchased are carried
at fair value. Assets which are recorded at fair value consist largely of
short-term receivables and include reverse repurchase agreements, securities
borrowed and certain other receivables. Similarly, the Company's short-term
liabilities are recorded at contracted amounts approximating fair value. The
estimated fair value of the Company's long-term borrowings, based on market
rates of interest and similar maturities, approximates their carrying value or
contracted amounts.
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 earnings.
FURNITURE, AND EQUIPMENT
Furniture and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets ranging
from three to ten years.
COMMON STOCK DATA
Loss 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.
F-11
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
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 5 to
25 years and is periodically evaluated for impairment on an undiscounted cash
flow basis. The accumulated amortization was $62,492 and $132,015 for the years
ended March 31, 1999 and 1998, respectively.
RECLASSIFICATIONS
Certain amounts in the prior year have been reclassified to conform to
the current year's presentation.
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 $50,431 and $986,233 as of March 31, 1999 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:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------------ ----------------
<S> <C> <C>
Securities purchased under agreements to resell
Sovereign government debt - Austria $ -- $ 887,170
------------------ ----------------
Securities borrowed
Sovereign government debt - Austria $ 1,036,430 $
--
Corporate equities - Austria 617,312 --
------------------ ----------------
$ 1,653,742 $
--
------------------ ----------------
Securities owned at fair value
Corporate debt - Austria $ 1,876,229 $
--
------------------ ----------------
Corporate equities - United States $ 2,972,800 $
--
Corporate equities - Austria 8,009,235(1) 6,587,220(2)
Corporate equities - Hungary -- 410,244
Corporate equities - Czech Republic -- --
</TABLE>
F-12
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 3. FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------------ ----------------
<S> <C> <C>
Corporate equities - Slovak Republic -- 84,074
Corporate equities - Poland 145,725 760,552
Corporate equities - Other 537,567 143,394
------------------
----------------
$11,665,327 $7,985,484
------------------ ----------------
Sovereign government debt
Austria $ $ 621,353
--
Hungary -- 71,075
------------------
----------------
$ $ 692,428
--
------------------ ----------------
</TABLE>
(1) As of March 31, 1999, the Company has 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 -- $1,420,095 and
securities (both debt and equity) of a significant shareholder of the Company
traded on the Vienna Stock Exchange -- $6,011,048. The Company does not have any
material concentrations to high yield issuers or commitments to high-yield
issuers as of the balance sheet date.
(2) 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.
NOTE 4. INVESTMENTS IN SUBSIDIARIES
EASTBROKERS BETEILIGUNGS AKTIENGESELLSCHAFT
Eastbrokers Vienna is an Austrian based holding company that originally
had 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
F-13
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 4. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
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 shares (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.
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.
EBI SECURITIES CORPORATION
In May 1998, the Company acquired all of the outstanding common stock
of Cohig & Associates, Inc. a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the Company's
common stock and an agreement to advance $1,500,000 in additional working
capital. Following the acquisition, the name was changed to EBI Securities
Corporation ("EBI Securities"). The fair value of the net assets acquired under
this transaction approximated $1,700,000 as of the date of acquisition. The
excess of the purchase price over the fair value of the net assets acquired
approximated $750,000 and has been recorded as goodwill and is being amortized
over 25 years on the straight-line method. EBI Securities operates pursuant to
the exemptive provisions of SEC Rule 15c3-3(k)(2)(ii) and clears all
transactions with and for customers on a fully disclosed basis.
PRO FORMA RESULTS OF OPERATIONS
The following summarized, unaudited, pro forma results of operations
for the year ended March 31, 1999 and 1998 assumes the above listed acquisition
occurred at the beginning of fiscal 1998.
F-14
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 4. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, March 31,
1999 1998
------------------ ----------------
<S> <C> <C>
Revenues from continuing operations $37,507,686 $28,071,825
Net loss from continuing operations ( 5,835,951) ( 4,290,719)
Net loss per share from continuing operations (1.22) (1.36)
</TABLE>
SALES OF INTERESTS IN SUBSIDIARIES
In June 1998, the Company sold 73.55 percent of its interest in
Eastbrokers Prague a.s for 15 million Austrian schillings (approximately
$1,180,000 USD at the then current exchange rates). The Company recognized a
gain on the sale of this interest before taxes of approximately $1,312,000 USD,
at the then current exchange rates.
In December 1998, the Company sold its entire interest in its
subsidiary, Eastbrokers Budapest RT. for 217,000,000 HUF (approximately
$1,000,000 USD at the then current exchange rates). The Company recognized a
loss on this sale of approximately $490,000 USD, at the then current exchange
rates.
LIQUIDATION OF INTERESTS IN SUBSIDIARIES
The Company also has liquidated its investments Eastbrokers Romania and
Eastbrokers Slovakia as of December 31, 1998. The effects are a net loss of
$776,197 on the liquidation of Eastbrokers Slovakia and a net loss on the
liquidation of Eastbrokers Romania of $158,247 for a total loss on liquidations
of $934,444.
NOTE 5. INVESTMENTS IN 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.
As of December 31, 1997, these unconsolidated affiliate investments included the
following offices: Zagreb, Croatia; Ljubljana, Slovenia; Moscow, Russia; Sofia,
Bulgaria; and NIF TRUD Investment Fund. As of December 31, 1998, these
unconsolidated affiliate investments included the following offices: Zagreb,
Croatia and Ljubljana, Slovenia. The combined carrying amounts of these
investments as of December 31, 1999 and 1998 was $460,900 and $156,800,
respectively.
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.
F-15
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 6. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of
credit with financial institutions, advances from affiliates, and by entering
into repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
LINES OF CREDIT
The Company had outstanding advances on its lines of credit totaling
$1,182,719 and $2,570,499 as of March 31, 1999 and 1998, respectively. As of
March 31, 1999, 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.
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.
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. These unsecured bonds were redeemed by the
Company on July 31, 1997.
In June 1998, the Company's largest Austrian subsidiary, raised 60
million Austrian schillings (approximately $4,800,000 USD) in a bond offering.
The bonds bear interest at 7.5 percent, payable at maturity, and are scheduled
to mature in June 2002. As of March 31, 1999, the Company has redeemed bonds
equal to 44,850,000 Austrian schillings and is attempting to redeem the
remaining amount outstanding.
UNSECURED DEBENTURES
On November 25, 1998, the Company sold 10 newly issued units in a
private placement consisting in the aggregate of $1,100,000 in 7 percent
convertible debentures and Class C series warrants to purchase 125,000 shares of
common stock. The Company redeemed the debentures prior to its fiscal year end.
NOTE 7. SIGNIFICANT ESTIMATES
As part of the preparation of its fiscal 1999 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 $550,000 receivable from a Yugoslavian 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 statement of financial condition.
o An approximate $1.4 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 statement of financial
condition.
F-16
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 7. SIGNIFICANT ESTIMATES (CONTINUED)
o An approximate $724,000 receivable related to a repurchase agreement and
the related shares of Vodni Stavby, a.s. This amount is included in other
receivables in the accompanying statement of financial condition.
NOTE 8. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Long-term borrowing arrangement with a financial institution
requiring Note payable to a finance company, requiring annual
interest payments which cannot exceed the 10 year government
bond rate plus 2 percent (approximately 10.00 percent),
principal of 12,000,000 Austrian Schillings, principal due at
maturity on December 31, 2001 $ 1,023,601 $ 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, 1999), principal of 10,000,000 Austrian Schillings
and accrued interest payable in full on November 30, 2001 430,912 804,308
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
Convertible promissory notes, convertible at $5.75 per share of
common stock, secured by the common stock of EBI Securities
and certain securities with a fair value of $400,000 bearing
interest at 10 percent and due March 25, 2002 1,249,749 --
Subordinated note payable to clearing organization, bearing
interest at 10 percent and maturing on June 30, 2000 2,500,000 --
----------------
----------------
$ 5,204,262 $ 2,020,087
---------------- ----------------
</TABLE>
The scheduled maturities of long-term debt outstanding at March 31,
1999 are summarized as follows: $225,697 in 2000, $2,986,829 in 2001,
$1,991,736 in 2002.
F-17
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
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 $202,000 and $131,000 for the periods ended March 31,
1999, and March 31, 1998, respectively.
Minimum future rentals under these non-cancelable leases are
approximately as follows: 2000 -- $1,168,000; 2001 -- $1,076,000; 2002 --
$1,063,000; and 2003 -- $896,000; 2004 -- $514,000; thereafter $71,000 and in
the aggregate $4,788,000.
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.
NOTE 10. SHAREHOLDERS' EQUITY
STOCK REPURCHASE
On January 23, 1997, the Company repurchased 45,000 of its outstanding
shares at $4.75 per share under a Board of Director's approved plan. Currently,
no additional buy-backs are anticipated. This treasury stock was retired during
the fiscal year ended March 31, 1998.
STOCK TRANSACTIONS
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, an officer acquired 50,000 shares of Common Stock at
a price of $6.00 per share in exchange for a note receivable bearing an interest
rate of 8 percent in the amount of $300,000. This note was paid in full, with
accrued interest in February 1999.
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 approximately $899,000, the Company netted
approximately $5,416,000. These units were offered and sold to various
accredited investors.
In January 1999, an officer acquired 200,000 shares of Common Stock at
a price of $3.50 per share in exchange for a note receivable bearing an interest
rate of 7 percent in the amount of $700,000.
In January 1999, another officer acquired 50,000 shares of Common Stock
at a price of $3.00 per share in exchange for a note receivable bearing an
interest rate of 7 percent in the amount of $150,000.
F-18
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
In January 1999, the Company sold 125,000 restricted shares of its
common stock in a private placement to an individual investor for $4.00 per
share. The Company also issued 7,500 shares of its common stock to a broker of
EBI Securities as compensation for services provided in connection with this
transaction.
Each of the foregoing issuances was made by the Company without
registration under the Securities Act of 1933, as amended (the "Securities
Act"). In each such case the Company relied upon the exemption from registration
provided by Section 4(2) under the Securities Act and Regulation D promulgated
under the Securities Act.
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.
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 various common stock and debt offerings, the Company
has issued a total of 1,505,900 Class C warrants through March 31, 1999. Each
Class C Warrant entitles the holder to purchase one share of Common Stock during
the period commencing February 20, 1999 and expiring 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
F-19
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
Warrants were issued to the placement agents, including 312,583 Class C
Warrants issued to Eastbrokers NA as one of the placement agents.
OTHER
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., Kazakhstan and Azerbaijan) 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.
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 with exercise prices ranging from $6.50 to $7.00 per share were
granted under this plan during the fiscal year ended March 31, 1997. No options
were granted under this plan during the year ended March 31, 1998. As of March
31, 1999, 25,000 of these options were still outstanding. During the year ended
March 31, 1999, 220,000 options were issued under this plan at a weighted
average exercise price of $4.18 per share with the exercise prices ranging from
$4.00 to $6.00 per share. 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 - 4 percent; expected
option life in years - 3 years; expected stock price volatility - 126.8 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 loss
and loss per share would have been increased to the pro forma amounts indicated
below:
F-20
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 11. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------------------------- ----------------------------
<S> <C> <C>
Net loss
- as reported $(5,911,847) $(3,676,607)
- pro forma (5,991,620) (3,728,043)
Basic and fully diluted earnings per share
- as reported $ (1.23) $ (1.17)
- pro forma (1.25) (1.18)
</TABLE>
During the fiscal year ended March 31, 1997, an additional 200,000
options were granted outside of the plan at a weighted average exercise price of
$10.00 per share and with an expiration date of August 1, 1999. At March 31,
1999, there were 445,000 options outstanding. Of this amount, 225,000 of the
options outstanding were exercisable with 220,000 options subject to various
vesting requirements. The weighted average fair value of the options at the
various grant dates was $6.93.
NOTE 12. RELATED PARTY TRANSACTIONS
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 December 1996, Eastbrokers Vienna loaned Dr. Muller-Tyl
approximately $72,000 USD. Interest on the outstanding balance of this
obligation is computed at 8 percent per annum until paid in full. Dr.
Muller-Tyl was the Chief Operating Officer of the Company until his resignation
in January 1998.
The Company leases office space from General Partners Immobilenz
("GPI")(formerly Residenz Realbesitz AG ("Residenz")) for its Vienna operations
pursuant to a month-to-month lease. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $95,000 USD) in the fiscal years ended March 31, 1997 and 1998.
The terms of this lease were negotiated such that the Company is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners Beteiligungs AG ("General Partners"), an Austrian holding
company and the beneficial owner of 2,420,530 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
F-21
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
At December 31, 1998, the Company has a receivable related to
securities transactions from Mr. Kossner in the amount of 1,132,776 Austrian
Schillings (approximately $97,000 USD).
At December 31, 1998, the Company has a receivable related to share
transactions from Z.E. Beteiligungs AG ("ZE") in the amount of 7,745,600
Austrian Schillings (approximately $661,000 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 or Shareholders. For the year ended March 31, 1999, the Company
generated profits of approximately $1,190,000 USD related to the trading of
shares of these companies.
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.
As of December 31, 1998, 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.
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). 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.
As of March 31, 1999, Mr. Schmid did not owe any remaining balance under these
arrangements.
F-22
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
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
December 31, 1998, the Company had a receivable from URBI in the amount of
2,780,030 Austrian Schillings or approximately $236,000 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).
The Company conducts various business transactions with General
Partners throughout the year. As of December 31, 1998, the Company was owed
$3,787,339 relating to these transactions.
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 receivable in
the amount of $300,000. 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. This note was
paid in full, with accrued interest in February 1999.
F-23
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 13. INCOME TAXES
The tax benefit of $789,315 and $640,163 for the years ended March 31,
1999 and 1998 result primarily from foreign net operating loss carryforwards of
the Company's subsidiaries.
The differences between the tax benefit calculated at the statutory
federal income tax rate and the actual tax benefit for each period is shown in
the table below:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, March 31,
1999 1998
----------------- ---------------
<S> <C> <C>
Tax benefit at federal statutory rate $ 2,079,242 $ 1,587,065
State income taxes, net of federal benefit 294,794 224,991
Foreign taxes 130,789 (266,411)
Unrecognized benefit of net operating losses (2,183,465) (897,153)
Foreign currency fluctuations in deferred taxes 467,955 --
Other -- (8,329)
----------------- ---------------
$ 789,315 $ 640,163
----------------- ---------------
</TABLE>
The significant components of the Company's deferred tax asset and
liability are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, March 31,
1999 1998
----------------- ---------------
<S> <C> <C>
Unrecognized gain from marketable securities $ 28,553 $ 142,633
Adjustments to loan portfolios 93,548 --
Capital loss carryforward 45,445 45,445
Foreign tax credit carryforward 32,652 32,652
Other 155,701 19,428
Net operating loss carryforward 8,327,402 5,202,856
----------------- ---------------
8,683,301 5,443,014
Valuation allowance (3,184,056) (1,331,492)
----------------- ---------------
$ 5,499,245 $ 4,111,522
----------------- ---------------
</TABLE>
The valuation allowance for deferred tax assets was increased by
$1,852,564 and $634,191 during the years ended March 31, 1999 and 1998,
respectively.
At March 31, 1999, the Company has a U.S. federal net operating loss
carryforward of approximately $8,042,000 that may be used against future U.S.
taxable income until it expires between the years March 31, 2012 and March 31,
2019. 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, 1999 and March 31, 2003. At December 31, 1998, the Company has an Austrian
federal net operating loss carryforward of approximately $14,500,000 USD that
has no expiration date and a Polish net operating loss carryforward of
approximately $825,000.
F-24
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 14. SEGMENT INFORMATION
SEGMENT AND GEOGRAPHIC AREA DATA
The Company is primarily engaged in a single line of business as a
securities broker and dealer, which comprises several classes of services, such
as principal transactions, agency transactions, and underwriting and investment
banking. Information regarding the Company's operations for the fiscal years
ended March 31, 1999 and 1998 is as follows:
Segment information is as follows for the year ended March 31, 1999:
<TABLE>
<CAPTION>
SHARE OF
LOSS OF
UNCONSOLIDATED IDENTIFIABLE NET
REVENUES ENTITIES ASSETS LOSS
<S> <C> <C> <C> <C>
Austria $ 5,851,025 $ (39,483) $ 34,119,145 $ (864,163)
Hungary 1,795,804 - - 251,624
Kazakhstan 7,862,783 - 698,584 122,643
Poland 484,807 - 1,846,888 (409,260)
Slovak Republic 595,985 - - 145,345
United States 16,236,483 - 12,215,422 (5,069,249)
Other 124,593 - - (88,787)
------------- ---------------- -------------- --------------
Total $ 32,951,480 $ (39,483) $ 48,880,039 $ (5,911,847)
------------- ---------------- -------------- --------------
</TABLE>
Segment information is as follows for the year ended March 31, 1998:
<TABLE>
<CAPTION>
SHARE OF
LOSS OF
UNCONSOLIDATED IDENTIFIABLE NET
REVENUES ENTITIES ASSETS LOSS
<S> <C> <C> <C> <C>
Austria $ 4,168,674 $ 32,076 $ 22,354,754 $ (1,259,891)
Czech Republic 1,287,954 - 868,961 (279,568)
Hungary 2,108,992 - 7,533,072 214,017
Kazakhstan 950,136 - 993,690 247,285
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 (1,981,618)
Other 226,854 143,374 (221,978)
------------- -------------- ------------- --------------
-
Total $ 10,342,976 $ 32,076 $ 44,431,509 $ (3,676,607)
------------- -------------- ------------- --------------
</TABLE>
NOTE 15. REGULATORY REQUIREMENTS
EBI Securities is a registered broker-dealer and, accordingly, is
subject to Rule 15c3-1 of the Securities Exchange Act of 1934 (the "net capital
rule"). Pursuant to the net capital provisions, EBI Securities is required to
maintain a minimum net capital, as defined under such provisions. At March 31,
1999, the net capital of EBI Securities of $1,207,528 exceeded the minimum
requirement by $957,528.
F-25
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 15. REGULATORY REQUIREMENTS (CONTINUED)
Other 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.
The regulatory rules referred to above may restrict the Company's
ability to withdraw capital from its regulated subsidiaries, which in turn could
limit the Company's ability to pay dividends.
NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's customer activities, through its clearing agencies,
involve the execution, settlement and financing of various customer securities
transactions. These transactions may expose the Company to off-balance sheet
risk in the event that customers are unable to fulfill their contractual
obligations. In the event the customers fail to satisfy their obligations, the
Company may be required to purchase or sell financial instruments at prevailing
market prices in order to fulfill the customers' obligations.
The Company has sold securities that it does not own and it will,
therefore, be obligated to purchase such securities at a future date. The
Company has recorded this obligation in the financial statements at the market
value or fair value of such securities. The Company may incur a loss if the
market value of the securities increases subsequent to March 31, 1999.
The Company bears the risk of financial failure by its clearing
agencies. If the clearing agencies should cease doing business, the Company's
receivable from these agencies could be subject to forfeiture.
NOTE 17. CONTINGENCIES
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.
F-26
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 17. CONTINGENCIES (CONTINUED)
FLORIDA DEPARTMENT OF INSURANCE AS RECEIVER FOR UNITED STATES EMPLOYER
INSURANCE CONSUMER SELF-INSURANCE FUND OF FLORIDA ("USEC") V. DEBENTURE GUARANTY
CORPORATION, ET. AL., United States District Court for the Middle District of
Florida. In November, 1995, the plaintiff, USEC, commenced the above entitled
action against Debenture Guaranty Corporation ("Debenture") and certain other
defendants, including EBI Securities and Steve Signer, an employee of EBI
Securities. In 1994, USEC entered into an arrangement whereby USEC lent money to
Debenture, and Debenture opened an account in Debenture's name to trade U.S.
Treasuries. The note to USEC was in the amount by which the treasuries could be
margined. This transaction was allegedly part of a scheme whereby USEC was
attempting to inflate its assets for regulatory purposes. Debenture allegedly
misappropriated the funds for its own benefit and USEC subsequently failed.
Plaintiffs alleged that EBI Securities and Signer aided, abetted and conspired
with Debenture to defraud USEC and claimed damages of $11,000,000. After a 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.
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' motion to vacate this award was denied
by the court. However, EBI Securities intends to appeal the decision.
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, both of which have been denied. EBI
Securities has filed a motion to
F-27
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 17. CONTINGENCIES (CONTINUED)
remove this case to the United States District Court for the District of
Arizona. 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.
YEAR 2000
The Company has established a program to address the 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 addition, a material portion of the Company's transactions are
processed by its clearing agencies who are external counterparties. The Company
has contacted these clearing agencies, as well as other suppliers, to assess
their compliance and remediation efforts with respect to the Year 2000 problem
and the Company's exposure to them. The ultimate success or failure of the
corrective plan and the extent of such success or failure cannot presently be
determined.
NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128. The new
standard replaces primary and fully diluted earnings per share with basic and
diluted earnings per share. SFAS No. 128 was adopted by the Company beginning
with the interim reporting period ended December 31, 1997. The adoption did not
affect previously reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by the Company beginning with the fiscal year ended March 31, 1999.
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 was adopted by the Company for the fiscal
year ended March 31, 1999. In the initial year of application, comparative
information for earlier years is to be restated.
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.
F-28
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 19. SUBSEQUENT EVENTS
In February 1999, the Company's Austrian subsidiary WMP Bank AG,
purchased a forty-nine (49 percent) 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 April 1999, Eastbrokers signed a joint venture agreement with A1
Internet.com, Inc. (formerly 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. Subsequently EBonline merged into a public company and as a
result the Company owns about 48% of EBonlineinc.com, the surviving company
(formerly known as Cerx Venture Corporation).
In May 1999, the Company issued 5 percent Convertible Debentures due
2002 (the "5 percent Debentures") in an aggregate principal amount of
$2,000,000. Holders of the 5 percent Debentures have the right to convert their
5 percent Notes into shares of Common Stock at the lesser of $5.50 per share or
90% of the average of the three lowest closing bid prices for the 20 trading
days ending five days before the date of delivery of the notice of conversion. A
portion of the proceeds of the 5 percent Debentures will be used to expand
operations.
F-29
<PAGE>
NO DEALER, SALES PERSON OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
US. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY EASTBROKERS INTERNATIONAL
IMPLICATION THAT THERE HAS BEEN NO CHANGE INCORPORATED
IN OUR AFFAIRS SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
4,307,403
TABLE OF CONTENTS
SHARES OF
PAGE COMMON STOCK
---- ($.05 PAR VALUE)
Where You Can Find More Information............ 2
Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities............................ 2
Special Note Regarding Forward Looking
Statements................................. 3
Important Terms................................ 4
Summary........................................ 5 1,545,900
Risk Factors................................... 8
Use of Proceeds................................ 16 CLASS C COMMON STOCK
Market for Common Equity and Related PURCHASE WARRANTS
Stockholder Matters........................ 16
Business....................................... 17
Management Discussion and Analysis
or Plan of Operation....................... 26 1,237,222
Management..................................... 42
Security Ownership of Certain Beneficial PLACEMENT AGENT
Owners and Management...................... 44 CLASS C COMMON
Executive Compensation......................... 46 STOCK PURCHASE WARRANTS
Selling Security Holders....................... 49
Description of Securities...................... 53
Certain Relationships and Related _______________
Transactions............................... 55
Plan of Distribution........................... 58 PROSPECTUS
Changes and Disagreements with Accountants
on Accounting and Financial Disclosure..... 59 ______________
Experts........................................ 59
Legal Matters.................................. 59
Index to Financial Statements.................. F-1
Independent Auditors' Report................... F-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A Delaware corporation may indemnify any person under such
Section who was, is or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure judgment in its favor, by reason of such fact as provided in the
preceding sentence, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit, except that no indemnification shall be made in respect thereof
unless he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and unless, and then only
to the extent that, a court of competent jurisdiction shall determine upon
application that such person is fairly and reasonably entitled to indemnity for
such expenses as the court shall deem proper. A Delaware corporation must
indemnify any person who was successful on the merits or otherwise in defense of
any action, suit or proceeding or in defense of any claim, issue or matter in
any proceeding, by reason of such fact as provided in the preceding two
sentences against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith. A Delaware corporation may pay for the
expenses (including attorneys' fees) incurred by an officer or director in
defending a proceeding in advance of the final disposition to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the corporation.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director shall not be personally liable to
the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for any
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, or (iv) for any transaction from which the
director derived an improper personal benefit. The DGCL permits the purchase of
insurance on behalf of directors and officers against any liability asserted
against directors and officers and incurred by such persons in such capacity, or
arising out of their status as such, whether or not the corporation would have
the power to indemnify directors and officers against such liability.
Eastbrokers has acquired officers' and directors' liability insurance of $2
million for members of its Board of Directors and executive officers.
At present, there is no pending litigation or other proceeding
involving a director or officer of Eastbrokers as to which indemnification is
being sought, nor is Eastbrokers aware of any threatened litigation that may
result in claims for indemnification by any officer or director.
Article Eighth of Eastbrokers' Certificate of Incorporation provides
for indemnification of all persons whom, and to the fullest extent permitted by,
Eastbrokers may indemnify as permitted by Delaware General Corporation Law.
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred
in connection with the distribution of the securities being registered. The
expenses shall be paid by the registrant.
AMOUNT TO
TYPE OR NATURE OF EXPENSE BE PAID
------------------------- ----------
SEC registration fee.................................... $ 6,901.87
Accounting fees and expenses............................ 10,000.00
Legal fees and expenses................................. 20,000.00
Miscellaneous........................................... 3,098.13
----------
Total................................................... $40,000.00
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Eastbrokers believes that each of the following transactions referenced
below were exempt from registration pursuant to Section 4(2) of the Securities
Act and Regulation D promulgated thereunder as transactions by an issuer not
involving a pubic offering.
On August 1, 1996, Eastbrokers issued 1,080,000 shares of its Common
Stock to the selling security holders of Eastbrokers Vienna in a transaction
valued at $5,400,000. During the period surrounding the acquisition, the Common
Stock was trading approximately between $6.25 and $8.00 per share for its fully
registered and unrestricted shares. Due to the nature of restricted shares and
the various covenants restricting the transfer of these shares, the Board of
Directors assigned a value of $5,400,000 to this transaction.
On March 6, 1997, Eastbrokers issued 22,500 shares of Common Stock
valued at $4.00 per share relating to the acquisition of Eastbrokers NA. In a
separate but related transaction to the Eastbrokers NA acquisition, the Company
sold 2,500 shares of the Common Stock to an officer of the Company in exchange
for a promissory note. These shares were transferred to the selling shareholder
of Eastbrokers NA as part of the acquisition. The shares were valued at $4.00
per share.
On March 20, 1997 Eastbrokers entered into a consulting agreement with
JB Sutton Group, Inc. ("Sutton") under which Eastbrokers granted to Sutton
150,000 warrants. Pursuant to a Termination Agreement between Eastbrokers and
Sutton dated August 8, 1997, the consulting agreement was terminated and the
150,000 warrants were accordingly canceled.
During the year ended March 31, 1997, Eastbrokers issued a total of
37,000 shares of Common Stock for consulting services at a per share price
approximating the then current market price for services rendered to the
Company.
In April 1997, Eastbrokers 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, Eastbrokers issued 10,000 shares of Common Stock to
Dr. Michael Sumichrast in compensation for services performed on behalf of
Eastbrokers during the previous six months. The average price per share assigned
to this transaction was $6.598 based on the average closing price for the period
April 1, 1997 through September 30, 1997.
II-2
<PAGE>
In September 1997, Martin A. Sumichrast acquired 50,000 shares of
Common Stock at a price of $6.00 per share in exchange for a note payable
bearing 8 percent interest in the amount of $300,000 to Eastbrokers. In December
1998, this note was cancelled and the shares were returned to the Company.
On February 20, 1998, Eastbrokers sold 1,227,000 newly issued units
consisting of one share of Common Stock and one Class C Warrant in a private
placement for $6,135,000 in cash, or a price of $5.00 per unit (approximately 40
percent below the then current market price as of February 19, 1998.) In
connection with the private placement, 1,237,222 Class C Warrants were issued to
the placement agents, including 312,583 Class C warrants issued to Eastbrokers
NA as one of the placement agents.
On May 14, 1998 in connection with the acquisition of EBI Securities,
Eastbrokers issued 445,000 shares of Common Stock to the selling corporation,
Cherry Creek Investments, Ltd. During the five days before the effective date of
the acquisition, the average closing price of the Common Stock was $9,375 per
share for its fully registered and unrestricted shares. Due to the nature of the
restricted shares, the relatively large block of shares transferred and other
various restrictive covenants regarding the final allocation of these shares,
the Board of Directors assigned a value of $5.00 per share for a total value of
$2,225,000 to this transaction.
Also in connection with the acquisition of EBI Securities, Eastbrokers
incurred an obligation to deliver 25,000 shares of Common Stock to Sutton as an
investment banking advisory fee. To maintain consistency with the assigned
valuation on the acquisition of EBI Securities, the Board of Directors assigned
a value of $5.00 per share for a total value of $125,000 to this transaction.
On November 25, 1998, Eastbrokers 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 connection with this
sale, commission fees of 5 percent were paid.
In January 1999, Eastbrokers sold 125,000 shares of Common Stock for a
total offering price of $500,000 or $4.00 per share. In connection with this
sale, EBI Securities was paid a 6 percent underwriting commission. Eastbrokers
also issued 7,500 shares of Common Stock to a broker at EBI Securities as a
commission in connection with this transaction.
On January 1, 1999, Kevin D. McNeil purchased 50,000 shares of Common
Stock for an aggregate purchase price of $150,000. Mr. McNeil issued a
promissory note to Eastbrokers for the purchase price.
On January 1, 1999, Martin A. Sumichrast and Kevin D. McNeil purchased
70,000 Placement Agent Class C Warrants and 32,583 Placement Agent Class C
Warrants from Eastbrokers N.A., respectively, in each case for an amount equal
to $0.25 per warrant. Each warrant will entitle Mr. Sumichrast and Mr. McNeil,
each, to purchase one (1) share of Eastbrokers' common stock at a price of $7.00
per share. Payment for the warrants will be in the form of unsecured promissory
notes, with one-year terms and interest accruing at 8 percent.
In March 1999, Eastbrokers issued 2,500 shares of Common Stock to a
broker at EBI Securities in connection with a transaction.
In March 1999, Eastbrokers issued 14,000 shares of Common Stock to an
investor as interest and fees related to the redemption of the 7% Convertible
Debentures.
In March 1999, Eastbrokers issued 10 percent Convertible Promissory
Notes due 2002 in an aggregate principal amount of $1,350,000. Holders of the 10
percent Notes have the right to convert their 10 percent Notes into shares of
Common Stock at $5.75 per share. A portion of the proceeds of the Notes was used
to redeem the 7 percent Convertible Debentures.
II-3
<PAGE>
In April 1999, Eastbrokers issued 7,500 shares of Common Stock to a
consultant for services rendered in connection with systems upgrades.
In April 1999, Eastbrokers awarded each of Mr. Schifferli, Dr.
Sumichrast and Dr. Chimerine 7,500 shares of restricted Common Stock and 5,000
options to acquire Common Stock as non-employee director compensation.
In May 1999, Eastbrokers issued 5 percent Convertible Debentures due
2002 (the "5 percent Debentures") in an aggregate principal amount of
$2,000,000. Holders of the 5 percent Debentures have the right to convert their
5 percent Notes into shares of Common Stock at the lesser of $5.50 per share or
90% of the average of the three lowest closing bid prices for the 20 trading
days ending five days before the date of delivery of the notice of conversion. A
portion of the proceeds of the Debentures will be used to expand our operations.
ITEM 27. EXHIBITS
(a) The exhibits listed below have been filed as part of this
Registration Statement.
EXHIBIT NO. DESCRIPTION
(2.1) Agreement and Plan of Merger dated May 14, 1998 by and
among the Registrant, East Merger Corporation, Cohig &
Associates, Inc., and Cherry Creek Investments, Ltd.,
incorporated by reference to the Current Report on Form
8-K dated May 14, 1998 (File No. 0-26202).
(3.1) Certificate of Incorporation, as amended, incorporated
by reference to Eastbrokers' Form 10-QSB for
the nine months ended December 31, 1996.
(3.2) Amendments to the Bylaws, incorporated by reference to
Eastbrokers' Form 10-QSB for the three months ended
June 30, 1996.
(4.1) Specimen copy of Common Stock Certificate, Form of
Class A Warrant Agreement, Form of Class B Warrant
Agreement, and Form of Warrant Agreement are each
incorporated by reference to Eastbrokers' Registration
Statement on Form S-1 as filed with the Securities and
Exchange Commission (No.
33-89544).
(4.3) Warrant Certificate between the Company and J.B. Sutton
Group, LLC, dated March 27, 1997, incorporated by
reference to Eastbrokers' Form S-3 filed with the
Securities and Exchange Commission on May 9, 1997 (No.
333-26825).
(4.4) Subscription Agreement for the Private Placement of the
Units Consisting of Eastbrokers' Common Stock and
Series C Warrants, incorporated by reference to the
Company's Report on Form 10-KSB for the year ended
March 31, 1998.
(4.5) Securities Purchase Agreement for the Private Placement
of Units consisting of Convertible Debentures and
Series C Warrants incorporated by reference to
Eastbrokers' Registration Statement on Form SB-2 as
filed with the Commission (File No. 333-72359).
(4.6) Subscription Agreement for the Private Placement of
Eastbrokers' Common Stock incorporated by reference to
Eastbrokers' Registration Statement on Form SB-2 as
filed with the Commission (File No. 333-72359).
II-4
<PAGE>
(4.7) Placement Agents' Warrant Certificate dated February
20, 1998, incorporated by reference to Eastbrokers'
Registration Statement on Form SB-2 as filed with the
Commission (File No. 333-72359).
(4.8) Warrant Certificate between the Company and Martin A.
Sumichrast in respect of the sale of 70,000 Class C
Warrants, incorporated by reference to Eastbrokers'
Registration Statement on Form SB-2 as filed with the
Commission (File No. 333-72359).
(4.9) Warrant Certificate between the Company and Kevin D.
McNeil in respect of the sale of 32,583 Class C
Warrants, incorporated by reference to Eastbrokers'
Registration Statement on Form SB-2 as filed
with the Commission (File No. 333-72359).
(4.10)* Form of 10 percent Note.
(4.11)* Form of Subscription Agreement pertaining to 10 percent
Note.
(4.12)* Class C Common Stock Purchase Warrant Agreement, dated
May 27, 1999.
(4.13)* 5 percent Convertible Debenture in the aggregate
principal amount of $2,000,000, dated May 28, 1999.
(5)* Opinion on Legality.
(10.1) Employment Agreement between Eastbrokers and Martin A.
Sumichrast dated February 1995, incorporated
by reference to the Company's Form S-1.
(10.2) Employment Agreement between Eastbrokers and Peter
Schmid dated August 1, 1996, the form of such
employment agreement is incorporated by reference to
Eastbrokers' Form 8-K dated August 1, 1996.
(10.3) Form of Restrictive Covenants of Wolfgang M. Kossner,
August A. de Roode and Peter Schmid, such covenants
executed on August 1, 1996, incorporated by reference
to Eastbrokers' Form 10-QSB for the three months ended
June 30, 1996.
(10.4) Stock Option Agreement between the Company and Wolfgang
M. Kossner dated August 1, 1996, the form of such stock
option agreement is incorporated by reference to
Eastbrokers' Form 8-K dated August 1, 1996.
(10.5) Stock Option Agreement between Eastbrokers and August
A. de Roode dated August 1, 1996, the form of such
stock option agreement is incorporated by reference to
Eastbrokers' Form 8-K dated August 1, 1996.
(10.6) Stock Option Agreement between Eastbrokers and Peter
Schmid dated August 1, 1996, the form of such stock
option agreement is incorporated by reference to
Eastbrokers' Form 8-K dated August 1, 1996.
(10.7) Stock Option Agreement between Eastbrokers and
Sumichrast Enterprises dated August 1, 1996, the form
of such stock option agreement is incorporated by
reference from Form 8-K dated August 1, 1996.
(10.8) The 1996 Stock Option Plan of Eastbrokers, incorporated
by reference to the Company's Report on Form 10-QSB
for the nine months ended December 31, 1996.
(10.9) Consulting Agreement between Michael Sumichrast, Ph.D.
and Eastbrokers dated April 1, 1997, incorporated by
reference to the Company's Form 10-KSB for the year
ended March 31, 1997.
(10.10) Employment Agreement between Eastbrokers and Martin A.
Sumichrast dated December 31, 1998, incorporated by
reference to Eastbrokers' Registration Statement on
Form SB-2 as filed with the Commission (File No.
333-72359).
II-5
<PAGE>
(10.11) Employment Agreement between Eastbrokers and Kevin D.
McNeil dated December 31, 1998, incorporated by
reference to Eastbrokers' Registration Statement on
Form SB-2 as filed with the Commission (File
No. 333-72359).
(10.12) Consulting Agreement between Eastbrokers and Wolfgang
Kossner dated December 1, 1998, incorporated by
reference to Eastbrokers' Registration Statement on
Form SB-2 as filed with the Commission (File No.
333-72359).
(10.13) $700,000 Non-Negotiable Term Note dated December 31,
1998 issued by Martin A. Sumichrast in favor of
Eastbrokers, incorporated by reference to Eastbrokers'
Registration Statement on Form SB-2 as filed with the
Commission (File No. 333-72359).
(10.14) $150,000 Non-Negotiable Term Note dated December 31,
1998 issued by Kevin D. McNeil in favor of Eastbrokers,
incorporated by reference to Eastbrokers' Registration
Statement on Form SB-2 as filed with the Commission
(File No. 333-72359).
(16.1) Letter on Change in Certifying Accountant Item 7 of
Current Report on Form 8-K dated November 4, 1997;
incorporated by reference to the Current Report
on Form 8-K dated November 4, 1997 (File No. 0-26202).
(16.2) Letter on Change in Certifying Accountant Item 7 of
Current Report on Form 8-K dated January 22, 1998;
incorporated by reference to the Current Report
on Form 8-K dated January 22, 1998 (File No. 0-26202).
(21.1)* Subsidiaries of Eastbrokers.
(23.1)* Consent of Spicer, Jeffries & Co., dated July 20, 1999.
(23.3)* Consent of Kelley Drye & Warren LLP (contained in
Exhibit 5).
(24)* Power of Attorney (included within signature page).
(27)* Financial Data Schedule (Electronic Filing Only).
-----------------------
* Filed herewith.
II-6
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
A. To file, during any period in which offers or sales are being made,
a post-effective amendment of this registration statement:
(i) To include any Prospectus required by Section 10(a) (3) of
the Securities Act of 1933.
(ii) To include in the Prospectus any facts or events arising after the
effective date of the registration statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement:.
B. That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offiered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
C. To remove from registration by means of post-effective amendment any
of the securities registered which remain unsold at the termination of the
offering.
D. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to any charter provisions, by-laws, contract,
arrangements, statute or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant of expenses incurred or paid by
a director, officer or controlling person of the registrant in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
E. Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant hereby undertakes to
file with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that Section.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorizes this
registration statement to be signed on its behalf by the undersigned, in the
City of Rockville, State of Maryland, on July 21, 1999.
EASTBROKERS INTERNATIONAL INCORPORATED
By: /S/ MARTIN A. SUMICHRAST
----------------------------------------
Name: Martin A. Sumichrast
Title: Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Martin A. Sumichrast and Kevin D.
McNeil, and each of them, his true and lawful agent, proxy and attorney-in-fact,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to (i) act on, sign and file with
the Securities and Exchange Commission any and all amendments (including
post-effective amendments) to this Registration Statement together with all
schedules and exhibits thereto, (ii) act on, sign and file such certificates,
instruments, agreements and other documents as may be necessary or appropriate
in connection therewith, (iii) act on and file any supplement to any prospectus
included in this Registration Statement or any such amendment, and (iv) take any
and all actions which may be necessary or appropriate in connection therewith,
granting unto such agents, proxies and attorneys-in-fact, and each of them, full
power and authority to do and perform each and every act and thing necessary or
appropriate to be done, as fully for all intents and purposes as he might or
could do in person, hereby approving, ratifying and confirming all that such
agents, proxies and attorneys-in-fact, any of them or any of his or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE OR CAPACITIES DATE
- ---------- ------------------- ----
<S> <C> <C>
/S/ MARTIN A. SUMICHRAST Chairman of the Board, President and
- ------------------------------------ Chief Executive Officer and Director July 21, 1999
Martin A. Sumichrast
/S/ KEVIN D. MCNEIL Vice President, Secretary, Treasurer and
- ------------------------------------ Chief Financial Officer (Principal
Kevin D. McNeil Financial and Accounting Officer) July 21, 1999
/S/ MICHAEL SUMICHRAST Director July 21, 1999
- ------------------------------------
Michael Sumichrast, Ph.D.
/S/ WOLFGANG KOSSNER Director July 21, 1999
- ------------------------------------
Wolfgang Kossner
/S/ DR. LAWRENCE CHIMERINE Director July 21, 1999
- ------------------------------------
Dr. Lawrence Chimerine
/S/ JAY R. SCHIFFERLI Director July 21, 1999
- ------------------------------------
Jay R. Schifferli
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
(5) Opinion on Legality.
(4.10) Form of 10 percent Note.
(4.11) Form of Subscription Agreement pertaining to 10 percent
Note.
(4.12) Class C Common Stock Purchase Warrant Agreement, dated
May 27, 1999.
(4.13) 5 Percent Convertible Debenture in the aggregate
principal amount of $2,000,000, dated May 28, 1999.
(21.1) Subsidiaries of Eastbrokers.
(23.1) Consent of Spicer, Jeffries & Co., dated July 20, 1999.
(23.3) Consent of Kelley Drye & Warren LLP (contained in
Exhibit 5).
(27) Financial Data Schedule (Electronic Filing Only).
<PAGE>
KELLEY DRYE & WARREN LLP
TWO STAMFORD PLAZA
281 TRESSER BOULEVARD
STAMFORD, CT 06901
July 20, 1999
Eastbrokers International Incorporated
15245 Shady Grove Road
Suite 340
Rockville, Maryland 20850
Dear Gentlemen:
We have acted as special counsel to Eastbrokers International
Incorporated, a Delaware corporation (the "Company"), in connection with the
proposed offering of 13,000 shares (the "Common Stock Shares") of common stock,
$.05 par value per share ("Common Stock), 193,900 Class C Common Stock Purchase
Warrants (the "Warrants"), 193,900 shares of Common Stock (the "Warrant Shares")
underlying the Class C Warrants, 475,000 shares of Common Stock (the "Debenture
Shares") underlying the 5 percent Convertible Debentures due 2002 (the
"Debentures") and 234,781 shares of Common Stock (the "Note Shares" and together
with the Warrant Shares and Debenture Shares, the "Shares") underlying the 10
percent Convertible Promissory Notes due 2002 (the "Notes") as described in the
Registration Statement on Form SB-2 filed by the Company with the Securities and
Exchange commission (the "Commission") pursuant to the Securities Act of 1933,
as amended (the "Act"), to which this opinion constitutes an exhibit (the
"Registration Statement"). As such counsel, you have requested our opinion as to
the matters described herein relating to the Shares and the Warrants. All
capitalized terms used but not defined herein shall have the meanings assigned
to them in the Registration Statement.
We have examined the Company's Certificate of Incorporation
and By-Laws, in each case as amended and restated through the date hereof;
minutes of the Company's corporate proceedings through the date hereof, as made
available to us by officers of the Company; an executed copy of the Registration
Statement and all exhibits thereto in the form filed with the Commission; and
such matters of law and such documents and other instruments as we have deemed
necessary by us in order to deliver the within opinion. In the course of our
examination, we have assumed the genuineness of all signatures, the authority of
all signatories to sign on behalf of their principals, if any, the authenticity
<PAGE>
Eastbrokers International Incorporated
July 20, 1999
Page Two
of all documents submitted to us as original documents and the conformity to
original documents of all documents submitted to us as certified or photostatic
copies. As to certain factual matters, we have relied upon information furnished
to us by officers of the Company.
Based on the foregoing and solely in reliance thereon, it is
our opinion that the Shares and the Warrants have been duly authorized and (i)
the Common Stock Shares have been validly issued, are fully paid and
non-assessable, and (ii) the Warrant Shares upon exercise of the Warrants
pursuant to the terms of the Warrants and (iii) the Note Shares and the
Debenture Shares upon conversion of the Notes and the Debentures, respectively,
pursuant to the terms of the Notes and the Debentures, respectively, will be
validly issued, fully paid and nonassessable. The Warrants constitute valid and
binding obligations of the Company enforceable in accordance with their terms,
subject to (i) bankruptcy, insolvency, fraudulent transfer, reorganizations,
moratorium, receivership and similar state or federal laws affecting the rights
and remedies of creditors generally, (ii) general principles of equity whether
applied in a proceeding in equity or at law and (iii) the enforceability of any
provision therein providing for specific performance injunctive relief or other
equitable remedies, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
We hereby consent to the filing of this letter as an exhibit
to the Registration Statement and to the reference to it in the Prospectus
included therein under the caption "Legal Matters." In giving such consent, we
do not admit that we are in the category of persons whose consent is required
under Section 7 of the Act.
Very truly yours,
KELLEY DRYE & WARREN LLP
By: /s/ Jay R. Schifferli
----------------------
A Member of the Firm
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAWS AND ACCORDINGLY MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER SAID ACT OR LAWS OR PURSUANT TO AN EXEMPTION THEREFROM.
CONVERTIBLE SECURED
PROMISSORY NOTE
$__________ March 25, 1999
This CONVERTIBLE PROMISSORY NOTE (this "Note") is executed as of this
25th day of March, 1999, by EASTBROKERS INTERNATIONAL INCORPORATED, a Delaware
corporation ("Maker"), whose address is 15245 Shady Grove Road, Suite 340,
Rockville, Maryland 20850, in favor of ___________________ ("Holder"), whose
legal address is ____________________________.
1. PROMISE TO PAY. For value received, Maker hereby promises to pay to
the order of Holder the principal sum of $_________ ("Loan Amount"), together
with interest thereon at the rate as hereinafter specified, all in lawful money
of the United States of America which constitutes legal tender for payment of
debts, public and private, at the time of payment.
2. INTEREST RATE. Interest on the unpaid principal balance of this Note
outstanding from the date hereof and from time to time shall be paid at a rate
equal to 10% per annum ("Interest Rate"). Interest payable hereunder shall be
calculated on a three hundred sixty (360) day year based on the actual number of
days for which any amounts payable hereunder remain outstanding.
3. MATURITY DATE. The "Maturity Date" shall mean March 25, 2002. The
entire outstanding principal balance of this Note, together with all accrued but
unpaid interest, shall, if not previously paid, be finally due and payable on
the Maturity Date.
4. PAYMENT SCHEDULE. Interest shall accrue on the outstanding principal
balance hereunder at the Interest Rate and shall be due and payable monthly,
beginning April 15, 1999. Principal payments shall begin on September 15 (six
months from the date hereof) and shall be paid monthly thereafter. The entire
outstanding principal balance of this Note together with any accrued unpaid
interest shall be due and payable on the Maturity Date, if not previously paid.
<PAGE>
5. PREPAYMENT PRIVILEGE. Maker shall have the right to prepay all or
any portion of the Loan Amount, together with accrued interest thereon, at any
time. If this Note is prepaid within three months from the date hereof, Maker
shall pay a premium of 1/4 of 1% of the Principal Amount (the "Prepayment
Premium"). The Prepayment Premium shall increase by 1/4 of 1% of the Principal
Amount for each additional three month period that this Note remains
outstanding. Any such prepayment shall be made pro rata among the holders of all
promissory notes having the same interest rate and terms as this Note based on
their then outstanding loan amounts.
6. CONVERSION. At any time on or after March 25, 1999, Holder by
delivery of this Note and written notice to Maker (the "Conversion Notice") may
convert all of the outstanding Loan Amount as of the date of delivery of the
Conversion Notice (the "Outstanding Amount") into the number of shares (the
"Conversion Shares") of Common Stock of Maker equal to the Outstanding Amount
divided by Five Dollars and seventy-five Cents ($5.75). Within ten (10) business
days after receipt of the Conversion Notice, Maker shall issue and deliver by
hand against a signed receipt therefor or by mail to the address designated by
Holder in the Conversion Notice, a stock certificate or certificates of the
Corporation representing the number of Conversion Shares to which Holder is
entitled. Such certificates shall bear the appropriate legend restricting
transfer unless Maker is advised by its counsel that such legend is not
required. Notwithstanding the above, Maker shall have no right to convert this
Note into Conversion Shares on or after the date on which this Note has been
fully repaid pursuant to Sections 3 or 5 hereof.
In the event of any capital reorganization or reclassification of the
Common Stock, any consolidation or merger of Maker with or into another
corporation, limited partnership, limited liability Maker or other entity or any
sale, lease or other disposition of all or substantially all of the assets of
Maker, that is effected in such a manner that holders of Common Stock are
entitled to receive securities and/or property (including cash) with respect to
or in exchange for Common Stock and that does not result in a prepayment by
Maker pursuant to Section 5, Maker shall, as a condition precedent to such
transaction, cause effective provision to be made so that Holder shall have the
right thereafter to convert this Note for the kind and amount of securities
and/or other property receivable upon such event by a holder of the number of
Conversion Shares for which this Note could have been converted immediately
prior to such event, subject to the adjustments which shall be as nearly
equivalent as practicable to the adjustments provided for in this Note.
7. REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(a) If at any time prior to the Maturity Date, the Maker files a
registration statement with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), or pursuant to any other act passed after the
date of this Agreement, which filing provides for the sale of
securities by the Maker to the public, the Maker shall offer to
the Holder of this Note the opportunity to register or qualify the
<PAGE>
Conversion Shares issuable upon conversion of this Note, at the
Maker's sole expense. Notwithstanding anything to the contrary,
this subsection (a) shall not be applicable to a registration
statement on Forms S-4, S-8 or their successors or any other
inappropriate forms filed by the Maker with the United States
Securities and Exchange Commission.
The Maker shall deliver written notice to the Holder of this Note
of its intention to file a registration statement at least 60 days
prior to the filing of such registration statement or offering
statement, and the shall have 30 days thereafter to request in
writing that the Maker register or qualify the Conversion Shares
in accordance with this subsection (a). Upon the delivery of such
a written request within the specified time, the Maker shall be
obligated to include in its contemplated registration all
information necessary or advisable to register or qualify the
Conversion Shares for a public offering, if the Maker does file
the contemplated registration statement; provided, however, that
neither the delivery of the notice by the Maker nor the delivery
of a request by a Holder shall in any way obligate the Maker to
file a registration statement. Furthermore, notwithstanding the
filing of a registration statement, the Maker may, at any time
prior to the effective date thereof, determine not to offer the
securities to which the registration statement relates.
The Maker shall comply with the requirements of this subsection
(a) at its own expense. That expense shall include, but not be
limited to, legal, accounting, consulting, printing, federal and
state filing fees, NASD fees, out-of-pocket expenses incurred by
counsel, accountants and consultants retained by the Maker, and
miscellaneous expenses directly related to the registration
statement and the offering. However, this expense shall not
include the portion of any underwriting commissions, transfer
taxes and the underwriter's accountable and nonaccountable expense
allowances attributable to the offer and sale of the Conversion
Shares, all of which expenses shall be borne by the Holder.
(b) In the event that the Maker registers or qualifies the Conversion
Shares pursuant to subsection (a) above, the Maker shall include
in the registration statement, and the prospectus included
therein, all information and materials necessary or advisable to
comply with the applicable statutes and regulations so as to
permit the public sale of the Conversion Shares. As used in
subsection (a) of this Section 7, reference to the Maker's
securities shall include, but not be limited to, any class or
type of the Maker's securities or the securities of any of the
Maker's subsidiaries or affiliates.
(c) In addition to the registration rights described in subsection
(a) above, upon the written request of Holder, the Maker, as
promptly as possible after delivery of such request, shall
cooperate with the requesting Holder in preparing and signing any
<PAGE>
registration statement that the Holder may desire to file in
order to sell or transfer the Conversion Shares. Within ten (10)
days after the delivery of the written request described above,
the Maker shall deliver written notice to all other holders of
notes of even date herewith (the "Notes"), if any, advising them
that the Maker is proceeding with a registration statement and
that their Conversion Shares Securities will be included therein
if they so desire and agree to pay their pro rata share of the
cost of registration or qualification and provided that the
holder delivers written notice to the Maker of their desire to be
included and their agreement to pay their pro rata share of the
cost within thirty (30) days after the delivery of the Maker's
notice to them. The Maker will supply all information necessary
or advisable for any such registration statements or offering
statements; provided, however, that all the costs and expenses of
such registration statements shall be borne, in a manner
proportionate to the number of securities for which they indicate
a desire to register, by the Holders of this Note and the holders
of the Notes who seek the registration of their Conversion
Shares. In determining the amount of costs and expenses to be
borne by those Holders or holders, the only costs and expenses of
the Maker to be included are the additional costs and expenses
that would not have otherwise been incurred by the Maker if those
Holders or holders had not desired to file a registration
statement. As an example, and without limitation, audit fees
would not be charged to those Holders or holders if or to the
extent that the Maker would have incurred the same audit fees for
its year-end or other use in the absence of the registration
statement or offering statement. The Holders or holders
responsible for the costs and expenses shall reimburse the Maker
for those reimbursable costs and expenses reasonably incurred by
the Maker within thirty (30) days after the initial effective
date of the registration statement at issue.
No other securities of the Maker of any type shall be included in,
be the subject of, or be publicly offered pursuant to any
registration statement or offering statement filed within one
hundred eighty (180) days following the latest effective date of
any registration statement or offering statement filed pursuant to
this subsection (c) unless (i) the Maker obtains the prior written
consent of the Holder upon such terms and conditions as the Holder
may deem desirable, and (ii) the owners or holders of those other
securities, including, without limitation, the Maker, agree to
bear an equitable portion, acceptable to the Holder of the costs
and expenses of the registration statement or offering statement
filed pursuant to this subsection (c).
(d) As to each registration statement or offering statement, the
Maker's obligations contained in this Section 7 shall be
conditioned upon a timely receipt by the Maker in writing of the
following:
<PAGE>
(i) Information as to the terms of the contemplated public
offering furnished by and on behalf of each Holder or
holder intending to make a public distribution of the
Conversion Shares; and
(ii)Such other information as the Maker may reasonably require
from such Holders or holders, or any underwriter for any
of them, for inclusion in the registration statement.
(e) In each instance in which the Maker shall take any action to
register the Conversion Shares pursuant to this Section 7, the
Maker shall do the following:
(i) supply to Holder one (1) manually signed copy of each
registration statement, and all amendments thereto, and a
reasonable number of copies of the preliminary, final or
other prospectus, all prepared in conformity with the
requirements of the Act and the rules and regulations
promulgated thereunder;
(ii)cooperate with respect to (A) all necessary or advisable
actions relating to the preparation and the filing of any
registration statements, and all amendments thereto,
arising from the provisions of this Section 7, (B) all
reasonable efforts to establish an exemption from the
provisions of the Act or any other federal or state
securities statutes, (C) all necessary or advisable
actions to register the public offering at issue pursuant
to federal securities statutes and the state "blue sky"
securities statutes of each jurisdiction that the Holders
of the Note or Conversion Shares shall reasonably request,
and (D) all other necessary or advisable actions to enable
the Holder of the Note or Conversion Shares to complete
the contemplated disposition of their securities in each
reasonably requested jurisdiction;
(iii) indemnify and hold harmless each Holder of the Warrant,
each holder of Warrant Securities, and each underwriter
within the meaning of the Act for each such Holder or
holder, from and against all losses, claims, damages, and
liabilities, including, but not limited to, any and all
expenses reasonably incurred in investigating, preparing,
defending or settling any claim, arising from or relating
to (A) any untrue or alleged untrue statement of a
material fact contained in any registration statement or
offering statement to which this Section 7 applies, or (B)
any omission or alleged omission to state a material fact
necessary to make the statements contained in a
registration statement or offering statement to which this
Section 7 applies not misleading; provided, however, that
the indemnification contained in this provision (iii)
shall not apply if the untrue statement or omission, or
alleged untrue statement or omission, was the result of
information furnished in writing to the Maker by the
<PAGE>
Holder or underwriter seeking indemnification expressly
for use in the registration statement at issue. To the
extent that the indemnification contained in this
provision applies, the Maker also shall indemnify and hold
harmless each officer, director, employee, controlling
person or agent of an indemnified Holder or underwriter.
(f) In each instance in which pursuant to this Section 7 the Maker
shall take any action to register or qualify the Conversion
Shares, prior to the effective date of any registration
statement, the Maker and each Holder or holder of Conversion
Shares being registered shall enter into reciprocal
indemnification agreements, in the form customarily used by
reputable investment bankers with respect to public offerings of
securities, containing substantially the same terms as described
in subsection (e)(iii) above. These indemnification agreements
also shall contain an agreement by the Holder or shareholder at
issue to indemnify and hold harmless the Maker, its officers,
directors from and against any and all losses, claims, damages
and liabilities, including, but not limited to, all expenses
reasonably incurred in investigating, preparing, defending or
settling any claim, directly resulting from any untrue statements
of material facts, or omissions to state a material fact
necessary to make a statement not misleading, contained in a
registration statement to which this Sectiona7 applies, if, and
only if, the untrue statement or omission directly resulted from
information provided in writing to the Maker by the indemnifying
Holder or shareholder expressly for use in the registration
statement at issue.
8. SENIOR INDEBTEDNESS.
Maker warrants that no other senior indebtedness exists other than the
indebtedness to West End Capital in the principal amount of $1,100,000.
Maker agrees that it will not after the date of this Note enter into
any borrowing arrangement senior to the Note without first obtaining the written
consent of the Holder, unless such borrowing arrangement provides for payment of
this Note in full.
This Note is a general obligation of the Maker, and as such has a
pledge of the assets of the Maker as well as the specific security interest
described below.
9. SECURITY INTEREST.
As security for payment of this Note, Maker hereby grants to Holder a
security interest in all of the issued and outstanding shares of EBI Securities
Corporation, a wholly owned subsidiary of Maker, and other collateral pursuant
to the Security and Pledge Agreement of even date herewith.
<PAGE>
10. APPLICATION OF PAYMENTS. All payments hereunder shall be applied
first to the payment of accrued and unpaid interest on the principal of this
Note, including interest accrued at the Default Rate as hereinafter provided;
and second, to the reduction of principal of this Note.
11. DEFAULT INTEREST RATE. Any payment not deposited in the investor's
account within five (5) days after the same is due hereunder, and including the
entire balance of principal, interest, and other sums then due, shall bear
interest at 5% above the then current Interest Rate ("Default Rate"), such
interest to accrue from the date due until paid.
12. DEFAULT. Each of the following shall constitute an "Event of
Default" under this Note:
The failure of Maker to pay in full any amount due hereunder by the
date the same is due, as provided herein, and such failure shall continue for
ten (10) days after written notice from Holder to Maker of such failure, or
Maker's failure to pay in full any amount due hereunder upon maturity of this
Note, by acceleration or otherwise; or
The failure of Maker to maintain Total Assets in excess of twenty (20)
million dollars, which failure shall continue for a period of ninety days from
the date of the financial statement which reflects Total Assets below $20
million. For purposes hereof, Total Assets shall be the total assets of the
Maker as calculated under Generally Accepted Accounting Principals (GAAP),
applied on a consistent basis.
The failure of Maker to maintain monthly revenues of at least $700,000,
as calculated under GAAP, which failure shall continue for a period of three
consecutive months. In the event that monthly revenues are below $1 million,
Maker agrees that it will not increase the base salary of its officers by more
than 10% of their current base pay.
The failure of Maker to perform, satisfy and observe in full, when due,
any of the obligations, covenants, conditions and restrictions under this Note,
not involving the payment of money, and such failure shall continue for thirty
(30) days after written notice from Holder to Maker of such failure, or if said
failure cannot reasonably be cured within said thirty (30) day period, Maker
shall not have cured such failure within a reasonable time after the written
notice from Holder to Maker described above.
Any default under the Security and Pledge Agreement of even date
herewith.
12. REMEDIES. Upon the occurrence of an Event of Default Holder may, at
its option, do any one, any combination, or all of the following: (a) declare,
without prior notice or demand, the entire unpaid principal balance of this
Note, together with all accrued interest thereon, immediately due and payable
<PAGE>
regardless of any prior forbearance, and (b) exercise any and all rights and
remedies available to it under applicable law including the right to collect
from Maker all sums due under this Note. Maker shall pay all reasonable costs
and expenses incurred by or on behalf of Holder in connection with Holder's
exercise of any or all of its rights and remedies under this Note, including,
without limitation, reasonable attorneys' fees.
13. WAIVERS OF DEMAND, ETC. Maker waives demand, presentment, notice of
dishonor or nonpayment, protest and notice of protest, and diligence in
collecting, and consent to extensions of time for payment, renewals of this Note
and acceptance of partial payments, whether before, at, or after maturity, all
or any of which may be made without notice to any of said parties and without
affecting their liability to Holder.
14. COSTS OF COLLECTION. Maker agrees to pay all costs and expenses,
including reasonable attorneys' fees, incurred in collecting this Note or any
part thereof.
15. NO USURY PAYABLE. The provisions of this Note and of all agreements
between Maker and Holder are hereby expressly limited so that in no contingency
or event whatsoever shall the amount paid, or agreed to be paid, to Holder for
the use, forbearance, or retention of the Loan Amount ("Interest") exceed the
maximum amount permissible under applicable law. If, for any circumstance
whatsoever, the performance or fulfillment of any provision hereof or of any
other agreement between Maker and Holder shall, at the time performance or
fulfillment of such provision shall be due, exceed the limit for Interest
prescribed by law, then, ipso facto, the obligation to be performed or fulfilled
shall be reduced to such limit, and if, from any circumstance whatsoever, Holder
should ever receive as Interest an amount which would exceed the highest lawful
rate, the amount which would be excessive Interest shall be applied to the
reduction of the principal balance owing hereunder (or, at Holder's option, or
if no principal shall be outstanding, be paid over to Maker) and not to the
payment of Interest.
16. SUBORDINATION. Upon payment of the indebtedness to West End Capital
in the amount of $1,100,000, the indebtedness evidenced by this Note, including
all principal, interest and other sums owing hereunder, will be subordinate and
subject in right of payment to the payment in full of all other prior, senior
indebtedness of Maker.
17. SEVERABILITY OF PROVISIONS. If any provision hereof shall, for any
reason and to any extent, be invalid or unenforceable, then the remainder of the
instrument in which such provision is contained, the application of the
provision to other persons, entities or circumstances, and any other instrument
referred to herein shall not be affected thereby but instead shall be
enforceable to the maximum extent permitted by law.
18. SUCCESSORS TO MAKER OR HOLDER. The term "Maker" as used herein
shall include the original maker of this Note and any party who may subsequently
become primarily liable for the payment hereof. The term "Holder" as used herein
<PAGE>
shall mean the original payee of this Note or, if this Note is transferred, the
then holder of this Note, provided that, until written notice is given to Maker
designating another party as Holder, Maker may consider the Holder to be the
original payee or the party last designated as Holder in a written notice to
Maker.
19. NOTICES. All notices, consent or other instruments or
communications provided for under this Note shall be in writing, signed by the
party giving the same, and shall be deemed properly given and received when
actually delivered and received or three (3) business days after mailed, if sent
by registered or certified mail, postage prepaid, to the address set forth in
the first paragraph of this Note, or to such other address as a party may
designate by written notice to the other party.
20. CAPTIONS FOR CONVENIENCE. The captions to the Sections hereof are
for convenience only and shall not be considered in interpreting the provisions
hereof.
21. GOVERNING LAW. Regardless of the place of its execution, this Note
shall be construed and enforced in accordance with the laws of the State of
Colorado.
MAKER:
EASTBROKERS INTERNATIONAL INCORPORATED
By:____________________________________
Name:_______________________________
Title:______________________________
<PAGE>
SUBSCRIPTION AGREEMENT
THE NOTES AND WARRANTS REFERRED TO IN THIS AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. THE NOTES, WARRANTS
AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES AND WARRANTS, MAY NOT
BE TRANSFERRED OR RESOLD WITHOUT REGISTRATION UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS, UNLESS AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH
LAWS IS THEN AVAILABLE.
THE NOTES AND WARRANTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER
REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THE PRIVATE PLACEMENT MEMORANDUM OR THIS AGREEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Eastbrokers International Incorporated
15245 Shady Grove Road
Rockville, Maryland 20850
Attention: Martin Sumichrast, President
Gentlemen:
SECTION 1.
1.1 Subscription. The undersigned, intending to be legally
bound, hereby applies to purchase a principal amount of $ ________________ of
Notes (the "Notes") and __________ Class C Purchase Warrants (the "Warrants"),
of Eastbrokers International Incorporated, a Delaware corporation (the
"Company"), set forth on the signature page of this Agreement, on such terms and
conditions described herein, and in the Private Placement Memorandum dated
________ (together with all amendments thereof and supplements and exhibits
thereto, the ("Memorandum"), copies of which have been received by the
undersigned.
SECTION 2.
2.1 Acceptance or Rejection. The undersigned understands and
agrees that the Company reserves the right, in the exercise of its reasonable
discretion, to reject this subscription for Notes and Warrants in whole or in
part, at any time prior to the completion of the offering period on February 26,
1999 notwithstanding prior receipt by the undersigned of notice of acceptance of
the subscription of the undersigned. In the event of rejection of this
subscription, or in the event the sale of Notes is not consummated for any
reason (in which event this Agreement shall be deemed to be rejected), the
Company shall cause the return of any amount delivered by the undersigned in
payment for the Notes and Warrants, without deduction or interest, and this
<PAGE>
Agreement shall thereafter be of no force or effect. If this subscription is
rejected, the undersigned agrees to return to the Company any documents which
have been provided to the undersigned for the purpose of evaluating this
offering. If this subscription is accepted, the Company will, as promptly as
practicable following the closing of the sale of Notes to the undersigned,
provide the undersigned with a certificate or certificates representing the
undersigned's Notes and Warrants.
2.2 Payment and Delivery. Simultaneously with the execution
and delivery of this Subscription Agreement, the undersigned is delivering to
EBI Securities Corporation (the "Sales Agent"), an amount equal to the principal
amount of the Notes purchased hereunder (the "Purchase Price"). Payment of the
Purchase Price is being made by check payable to the order of MegaBank,
Arapahoe, Eastbrokers Escrow Agent. The undersigned understands that the
Purchase Price will be held by the Escrow Agent in a non-interest bearing
account until $1,500,000 is received from the sale of the Notes. If $1,500,000
is not deposited by February 26, 1999, unless extended to March 5, 1999, all
funds will be returned.
SECTION 3.
3. Subscriber Representations and Warranties. The undersigned
hereby acknowledges, represents and warrants to, and agrees with, the Company as
follows:
(a) The undersigned is acquiring the Notes and Warrants for
the account of the undersigned as a principal, for investment purposes only, and
not with a view to, or for resale, distribution or fractionalization thereof, in
whole or in part, in connection with any distribution thereof, and no other
person has a direct or indirect beneficial interest in such Notes, other than
through such person's ownership interest in the undersigned if undersigned is a
corporation, partnership or other entity.
(b) The undersigned understands that the offering and sale of
the Notes and Warrants is intended to be exempt from registration under the
Securities Act of 1933 (the "Act") by virtue of Section 4(2) of the Act and the
provisions of Regulation D promulgated thereunder. In furtherance thereof, the
undersigned represents and warrant to and agrees with the Company as follows:
(i) The undersigned has the financial ability to bear the
economic risk of this investment, has adequate means for providing for the
current needs and contingencies of the undersigned and has no need for liquidity
with respect to the investment in the Company;
(ii) The information contained in the Purchaser Questionnaire
is complete and correct as of the date hereof and if there should be any
material change in such information prior to the Closing Date, the undersigned
will immediately furnish such revised or corrected information to the Company.
(iii) The undersigned represents that the undersigned is an
"accredited investor" (as such term is defined in Rule 501(a) of Regulation D
under the Securities Act) and has such knowledge and experience in financial
matters that the undersigned is capable of evaluating the merits and risks of an
investment in the Notes and Warrants.
2
<PAGE>
(c) The undersigned meets any additional or different
suitability standards imposed by the undersigned's state of residence,
incorporation or formation.
(d) The undersigned:
(i) has been furnished with the Memorandum and any documents
that may have been made available upon request, and the undersigned has
carefully read the Memorandum and understands and has evaluated the risks of a
purchase of the Notes and Warrants and has relied solely (except as indicated in
subsections (ii) and (iii) below) on the information contained in the Memorandum
and this Agreement;
(ii) has been given the opportunity to ask questions of, and
receive answers from, the Company concerning the terms and conditions of the
offering and other matters pertaining to this investment, and has been given the
opportunity to obtain such additional information necessary to verify the
accuracy of the information contained in the Memorandum or that which was
otherwise provided in order for the undersigned to evaluate the merits and risks
of the purchase of the Notes and Warrants to the extent the Company possesses
such information or can acquire it without unreasonable efforts or expense, and
has not been furnished with any other offering literature upon which the
undersigned has relied except as mentioned in the Memorandum or this Agreement;
(iii) has not been furnished with any oral or written
representation or oral or written information upon which the undersigned has
relied in connection with the offering of the Notes and Warrants that is not
contained in the Memorandum or this Agreement;
(iv) has investigated the acquisition of the Notes and
Warrants subscribed for to the extent the undersigned has deemed necessary or
desirable and the Company has provided the undersigned with any assistance the
undersigned has requested in connection therewith;
(v) has determined that the Notes and Warrants are a suitable
investment for the undersigned and that at this time the undersigned could bear
a complete loss of an investment in the Notes and Warrants subscribed for, and
(vi) if a corporation or other entity, would not, upon
acquiring the Notes and Warrants, have mare than ten percent (10%) of its assets
invested in one or more investment companies that rely solely on the exclusion
from the definition of "investment company" provided in Section 3(c)(1)(A) of
the Investment Company Act of 1940, as amended.
(e) The undersigned is not relying on the Company or any of
its affiliates or this Agreement with respect to corporate or individual tax
information or other economic considerations involved in the investment.
(f) The undersigned will not sell or otherwise transfer the
Notes and Warrants subscribed for or Common Stock issuable upon conversion of
the Notes or Warrants without registration under the Act or an exemption
therefrom, and fully understands and agrees that the undersigned must bear the
economic risk of the purchase of the Notes and Warrants for an indefinite period
3
<PAGE>
of time, because among other reasons, the Notes and Warrants have not been
registered under the Act or under the securities laws of any state and,
therefore, cannot be resold, assigned or otherwise disposed of unless they are
subsequently registered under the Act and under the applicable securities laws
of such states or an exemption from such registration is available. The
undersigned hereby agrees that the Notes, Warrants and Conversion Shares may
bear a legend regarding the above restrictions. The undersigned also understands
that the Company is under no obligation to register the Notes or Warrants on
behalf of the undersigned or to assist the undersigned in complying with any
exemption from registration under the Act with respect to registration of the
Notes, Warrants or the Conversion Shares, except for certain registration rights
for the Conversion Shares issuable upon conversion of the Notes or Warrants as
set forth in the Memorandum.
(g) There is no established market for the Notes or Warrants
and no such public market will develop.
(h) No federal or state agency has passed upon the Notes or
Warrants or made any finding or determination as to the fairness of this
investment.
(i) There are substantial risks of loss of investment incident
to the purchase of the Notes and Warrants.
(j) If the undersigned is an individual, the undersigned is 21
years of age and legally competent to execute this Agreement. If the undersigned
is a corporation or other entity, it is duly authorized and validly existing in
the state set forth on the signature page hereof, it is empowered, authorized
and qualified to purchase the Notes and Warrants, in the manner contemplated in
this Agreement and the Memorandum, and the person signing this Agreement and the
Purchaser Questionnaire on behalf of the undersigned has been duly authorized by
it to do so.
(k) In the event that the undersigned wishes to transfer the
Notes or Warrants, the Company may require any such transferee to make each of
the representations and warranties contained herein as a condition of approval
of such transfer.
SECTION 4.
4.1 Indemnity. The undersigned agrees to indemnify and hold
harmless the Company and the Sales Agent, and each other person, if any, who
controls the Company and the Sales Agent, within the meaning of Section 15 of
the Act, against any and all loss, liability, claim, damage and expense
whatsoever (including, but not limited to, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim whatsoever) arising out of or
based upon any false representation or warranty or breach or failure by the
undersigned to comply with any covenant or agreement made by the undersigned
herein or in any other document furnished by the undersigned to any of the
foregoing in connection with this transaction.
4
<PAGE>
4.2 Modification. Neither this Agreement nor any provisions
hereof shall be modified, discharged or terminated except by an instrument in
writing signed by the party against whom enforcement of any modification,
discharge or termination is sought.
4.3 Notices. Any notice, demand or other communication that
any party hereto may be required, or may elect, to give to anyone interested
hereunder pursuant to this Agreement shall be sufficiently given if (a)
deposited, postage prepaid, in a United States mail letter box, registered or
certified mail, return receipt requested, addressed to such address as may be
given on the Purchaser Questionnaire, or (b) delivered personally at such
address.
4.4 Counterparts. This Agreement may be executed through the
use of separate signature pages or in any number of counterparts, and each of
such counterparts shall, for all purposes, constitute one agreement binding on
all the parties.
4.5 Binding Effect. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties and
their successors, legal representatives and assigns. The obligation of the
undersigned and the agreements, representations, warranties and acknowledgments
herein contained shall be deemed to be made by and be binding upon the
undersigned and the successors of the undersigned.
4.6 Entire Agreement. This instrument contains the entire
agreement of the parties with respect to the subject matter of this Agreement,
and there are no representations, covenants or other agreements except as stated
or referred to herein.
4.7 Assignability. This Agreement is not transferable or
assignable by the undersigned except as may be provided herein.
4.8 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado as applied to
residents of that state entering into contracts wholly to be performed in that
state.
4.9 State Securities Laws. The offering and sale of the Notes
and Warrants is intended to be exempt from registration under the securities
laws of the state in which the undersigned resides. The undersigned, if a
resident of a state referred to in the Memorandum, has read and understands the
applicable language set forth therein, which is required to be included therein
by the securities laws of such state. The undersigned further acknowledges the
restrictions on transfer of all the Notes and Warrants, as required by state
law.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
Subscription Agreement as of the _______ day of ___________________, 1999.
- -------------------------------
Amount of Notes*
Name of Subscriber typed or printed
- -------------------------------------
- -------------------------------------
Signature
- -------------------------------------
Name and Title typed or printed
- -------------------------------------
If an entity, State of Organization
ACCEPTED:
Eastbrokers International Incorporated
By
Title:
Date:
- -----------------------------------
* Minimum subscription is $25,000.
<PAGE>
CLASS C COMMON STOCK PURCHASE WARRANT AGREEMENT
AGREEMENT, dated as of May 27, 1999, by and between
EASTBROKERS INTERNATIONAL INCORPORATED, a Delaware corporation (the "Company"),
and PUNTA INVESTORS, LLC, as Warrant Holder (the "Warrant Holder").
WHEREAS, the Company has agreed to issue the Warrant Holder
40,000 Class C Common Stock Purchase Warrants (each, a "Warrant"), each to
purchase one (1) share of the Company's Common Stock.
WHEREAS, the Company desires to set forth the terms and
conditions relating to the issuance, registration, transfer, exchange and
redemption of the Warrants, the issuance of certificates representing the
Warrants, the exercise of the Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for the purpose of defining the
terms and provisions of the Warrants and the certificates representing the
Warrants and the respective rights and obligations thereunder of the Company and
the Warrant Holder, the parties hereto agree as follows.
1. DEFINITIONS.
As used herein, the following terms shall have the following
meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock of the Company
of which at the date hereof consists of 10,000,000 authorized shares, $.05 par
value, and shall also include any capital stock of any class of the Company
thereafter authorized which shall not be limited to a fixed sum or percentage in
respect to the rights of the holders thereof to participate in dividends and in
the distribution of assets upon the voluntary liquidation, dissolution or
winding up of the Company; provided, however, that the shares issuable upon
exercise of the Warrants shall include
(i) only shares of such class designated in the
Company's Certificate of Incorporation as Common Stock on the date of
the original issue of the Warrants; or
(ii) in the case of any reclassification, change,
consolidation, merger, sale or conveyance of the character referred to
in Section 9(c) hereof, the stock, securities or property provided for
in such section; or
(iii) in the case of any reclassification or change
in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or a change in par
<PAGE>
value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(b) "Corporate Office" shall mean the office of the Company at
which at any particular time its principal business shall be administered, which
office is located at the date hereof at 15245 Shady Grove Road, Suite 340,
Rockville, Maryland 20850.
(c) "Exercise Date" shall mean, as to any Warrant, the date on
which the Company shall have received both
(i) the Warrant Certificate representing such
Warrant, with the exercise form thereon duly executed by the Registered
Holder (as defined below) thereof or his attorney duly authorized in
writing, and
(ii) payment in cash, or by official bank or
certified check made payable to the Company, of an amount in lawful
money of the United States of America equal to the applicable Purchase
Price (as defined below).
(d) "Initial Warrant Exercise Date" shall mean the date
hereof.
(e) "Purchase Price" shall mean the purchase price per share
to be paid upon exercise of each Warrant in accordance with the terms hereof,
which price shall be $7.00 per share of common stock, subject to adjustment from
time to time pursuant to the terms and provisions of Section 9 hereof and to
prevent dilution, for a three (3) year period commencing on the Initial Warrant
Exercise Date and terminating on the Expiration Date and subject to the
Company's right in its sole discretion upon thirty (30) days written notice to
reduce the purchase price upon notice to all Warrant Holders.
(f) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the terms
hereof, which price shall be $0.10 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of
any particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Company
pursuant to Section 6.
(h) "Warrant Agent" shall mean American Stock Transfer & Trust
Company, as the Company's warrant agent, or its authorized successor, as such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York
time) on February 20, 2002 or the Redemption Date as defined in Section 8,
whichever is earlier; provided that if such date shall in the State of New York
be a holiday or a day on which banks are authorized or required to close, then
5:00 P.M. (New York time) on the next following day which in the State of New
York is not a holiday or a day on which banks are authorized or required to
close. Upon thirty (30) days' written notice to all warrant holders, the Company
shall have the right to extend the warrant expiration date.
2
<PAGE>
2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) A Class C Warrant initially shall entitle the Registered
Holder of the Warrant Certificate representing such Warrant to purchase one
share of Common Stock upon the exercise thereof, in accordance with the terms
hereof, subject to modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants issued pursuant to the Securities Purchase
Agreement dated May 28, 1999 by and between the Company and the Warrant Holder
shall be executed by the Company and delivered to the Warrant Holder.
(c) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver stock certificates in required whole
number denominations representing the shares of Common Stock issuable, subject
to adjustment as described herein, upon the exercise of Warrants in accordance
with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Company shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except
(i) those initially issued hereunder;
(ii) those issued on or after the Initial Warrant
Exercise Date, upon the exercise of fewer than all Warrants represented
by Warrant Certificate, to evidence any unexercised warrants held by
the exercising Registered Holder;
(iii) those issued upon any transfer or exchange of a
Warrant Certificate pursuant to Section 6;
(iv) those issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7; and
(v) those issued at the option of the Company, in
such form as may be approved by the Board of Directors, to reflect any
adjustment or change in the Purchase Price, the number of shares of
Common Stock purchasable upon exercise of the Warrants or the
Redemption Price therefor made pursuant to Section 9 hereof.
3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Class C Warrant Certificates shall be substantially in
the forms annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
3
<PAGE>
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage or to the requirements of Section
2 (b). The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen or destroyed Warrant Certificates) and issued in registered form.
Class C Warrant Certificates shall be numbered serially and designated with the
letters CCW.
(b) Warrant Certificates shall be executed on behalf of the
Company by its President, or any Vice President and by its Secretary or an
Assistant Secretary, by manual signatures or by facsimile signatures printed
thereon, and shall have imprinted thereon a facsimile of the Company's seal. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates, such Warrant Certificates may nevertheless
be issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be an officer of the Company
or to hold such office.
4. EXERCISE.
Each Warrant may be exercised by the Registered Holder thereof
at any time on or after the Initial Warrant Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder of those securities
upon the exercise of the Warrant as of the close of business on the Exercise
Date. Promptly following, and in any event within five (5) business days after
the date of such exercise, the Company shall cause to be issued and delivered by
the Warrant Agent, to the person or persons entitled to receive the same, a
certificate or certificates for the securities deliverable upon such exercise
(plus a certificate for any remaining unexercised Warrants of the Registered
Holder).
5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES, ETC.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable and free from all taxes, liens and charges with
respect to the issue thereof (other than those which the Company shall promptly
pay or discharge) and that upon issuance such shares shall be listed on each
national securities exchange or eligible for inclusion in each automated
quotation system, if any, on which the other shares of outstanding Common Stock
of the Company are then listed or eligible for inclusion.
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(b) The Warrants are subject to a Registration Rights
Agreement dated May 28, 1999 by and between the Company and the Registered
Holder.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance, or delivery of any shares upon exercise
of the Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Company the
amount of transfer taxes or charges incident thereto, if any.
6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Company at its Corporate Office, and upon
satisfaction of the terms and provisions hereof, the Company shall execute,
issue and deliver in exchange therefor the Warrant Certificate or Certificates
which the Registered Holder making the exchange shall be entitled to receive.
(b) The Company shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute, issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company, duly executed by the Registered Holder or his attorney-in-fact duly
authorized in writing.
(d) A service charge may be imposed by the Company for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled by
the Company and thereafter retained by the Company until termination of this
Agreement.
(f) Prior to due presentment for registration of transfer
thereof, the Company may deem and treat the Registered Holder of any Warrant
Certificate as the absolute owner thereof and of each Warrant represented
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thereby (notwithstanding any notations of ownership or writing thereon made by
anyone other than a duly authorized officer of the Company) for all purposes and
shall not be affected by any notice to the contrary.
7. LOSS OR MUTILATION.
Upon receipt by the Company of evidence satisfactory to them
of the ownership of and loss, theft, destruction or mutilation of any Warrant
Certificate and (in case of loss, theft or destruction) of indemnity
satisfactory to them, and (in the case of mutilation) upon surrender and
cancellation thereof, the Company shall execute (in the absence of notice to the
Company that the Warrant Certificate has been acquired by a bona fide purchaser)
and deliver to the Registered Holder in lieu thereof a new Warrant Certificate
of like tenor representing an equal aggregate number of Warrants. Applicants for
a substitute Warrant Certificate shall comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
8. REDEMPTION.
(a) Subject to the provision of paragraph 2(e) hereof,
commencing on the Initial Warrant Exercise Date, the Warrants will be
redeemable, at the option of the Company at a redemption price of $.10 per
share, at any time after the Warrants and the Company's Common Stock underlying
the Warrants are registered for public distribution under the Securities Act and
the closing bid price of the Company's Common Stock during the twenty (20)
consecutive trading days ending within fifteen (15) days of the date of the
notice of redemption is not less than $10.00 per share (the "Class C Target
Price"). "Market Price" for the purpose of this Section 8 shall mean
(i) the average closing bid price for any twenty (20)
consecutive trading days ending within fifteen (15) days of the date of
the notice of redemption, which notice shall be mailed no later than
five (5) days thereafter, of the Common Stock as reported by the
National Association of Securities Dealers, Inc. Automatic Quotation
System or any principal securities exchange or
(ii) the last reported sale price for any twenty (20)
consecutive trading days ending within fifteen (15) days of the date of
the notice of redemption, which notice shall be mailed no later than
five (5) days thereafter, on the primary exchange on which the Common
Stock is traded, if the Common Stock is traded on a national securities
exchange.
No such notice will be given until there is a current registration statement and
prospectus on file with the Securities and Exchange Commission, registering the
Warrants and Warrant Shares for resale under the Securities Act, and at the time
such notice is given to Warrant Holders and the notice may not be mailed to
Warrant Holders prior to the Initial Warrant Exercise Date.
(b) If the conditions set forth in Section 8(a) are met, and
the Company desires to exercise its right to redeem the Warrants, it shall mail
a notice of redemption to each of the Registered Holders of the Warrants to be
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redeemed, first class, postage prepaid, not later than the thirtieth day before
the date fixed for redemption, at their last address as shall appear on the
records maintained pursuant to Section 6(b). Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given whether
or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify:
(i) the redemption price,
(ii) the date fixed for redemption,
(iii) the place where the Warrant Certificates shall
be delivered and the redemption price paid, and
(iv) that the right to exercise the Warrant shall
terminate at 5:00 P.M. (New York time) on the business day immediately
preceding the date fixed for redemption.
The date fixed for the redemption of the Warrant shall be the Redemption Date.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective and then only to the extent that the Registered Holder is prejudiced
thereby. An affidavit of the Secretary or an Assistant Secretary of the Company
that notice of redemption has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00
P.M. (New York time) on the business day immediately preceding the Redemption
Date. On and after the Redemption Date, Registered Holders of the Warrants shall
have no further rights except to receive, immediately upon surrender of the
Warrant, the Redemption Price.
(e) From and after the Redemption Date specified for, the
Company shall, at the place specified on the notice of redemption, upon
presentation and surrender to the Company by or on behalf of the Registered
Holder thereof of one or more Warrant Certificates evidencing Warrants to be
redeemed, immediately deliver or cause to be delivered to or upon the written
order of such Holder a sum in cash equal to the redemption price of each such
Warrant. From and after the Redemption Date and upon the deposit or setting
aside by the Company of a sum sufficient to redeem all the Warrants called for
redemption, such Warrants shall expire and become void and all rights hereunder
and under the Warrant Certificates, except the right to receive payment of the
redemption price, shall cease.
(f) If the shares of the Company's Common Stock are subdivided
or combined into a greater or smaller number of shares of Common Stock, the
Class C Target Price shall be proportionally adjusted by the ratio which the
total number of shares of Common Stock outstanding immediately prior to such
event bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
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9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON
STOCK OR WARRANTS.
(a) Subject to the exception referred to in Section 9(g)
below, in the event the Company shall, at any time or from time to time after
the date hereof, sell or issue any shares of Common Stock for a consideration
per share less than the Market Price of the Common Stock (as defined in Section
8) on the date of the sale or issue any shares of Common Stock as a stock
dividend to the holders of Common Stock, or subdivide or combine the outstanding
shares of Common Stock into a greater or lesser number of shares (any such sale,
issuance, subdivision or combination being herein called a "Change of Shares"),
then, and thereafter upon each further Change of Shares, the Purchase Price in
effect immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent) determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received (determined as
provided in subsection 9(f) below) for the issuance of such additional shares
would purchase at such current market price per share of Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made. Upon
each adjustment of the Purchase Price pursuant to this Section 9, the total
number of shares of Common Stock purchasable upon the exercise of each Warrant
shall (subject to the provisions contained in Section 9(b) hereof) be such
number of shares (calculated to the nearest tenth) purchasable at the Purchase
Price in effect immediately prior to such adjustment multiplied by a fraction,
the numerator of which shall be the Purchase Price in effect immediately prior
to such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the Purchase Price in effect immediately prior to such adjustment and
the denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to this
Section 9, the Company shall, as promptly as practicable, cause to be
distributed to each Registered Holder of Warrant Certificates on the date of
such adjustment Warrant Certificates evidencing, subject to Section 10 hereof,
the number of additional Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the Company, cause to be
distributed to such Holder in substitution and replacement for the Warrant
Certificates held by him prior to the date of adjustment (and upon surrender
thereof, if required by the Company) new Warrant Certificates evidencing the
number of Warrants to which such Holder shall be entitled after such adjustment.
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(c) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a warrant then outstanding shall
have the right thereafter by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The Company shall
not effect any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Company, the obligation to
deliver to the holder of each Warrant such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holders may be entitled to
purchase and the other obligations under this Agreement. The foregoing
provisions shall similarly apply to successive reclassifications, capital
reorganizations and other changes of outstanding shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(d) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder and the Redemption Price
therefor as the Purchase Price per share, the number of shares purchasable and
the Redemption Price therefor were expressed in the Warrant Certificates when
the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to
this Section 9, the Company will promptly prepare a certificate signed by the
President or a Vice President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, of the Company setting forth:
(i) the Purchase Price as so adjusted,
(ii) the number of shares of Common Stock purchasable
upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number
of Warrants to which the registered holder of each Warrant shall then
be entitled, and the adjustment in Redemption Price resulting
therefrom, and
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(iii) a brief statement of the facts accounting for
such adjustment. The Company will promptly cause a brief summary
thereof to be sent by ordinary first class mail to each registered
holder of Warrants at his last address as it shall appear on the
registry books of the Company. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity
thereof except as to the holder to whom the Company failed to mail such
notice, or except as to the holder whose notice was defective.
The affidavit of the Secretary or an Assistant Secretary of the Company that
such notice has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the
following provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Common Stock outstanding
at any given time shall include shares of Common Stock owned or held by
or for the account of the Company and the sale or issuance of such
treasury shares or the distribution of any such treasury shares shall
not be considered a Change of Shares for purposes of said sections.
(ii) No adjustment of the Purchase Price shall be
made unless such adjustment would require an increase or decrease of at
least $.l0 in such price; provided that any adjustments which by reason
of this subsection (ii) are not required to be made shall be carried
forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment(s) so carried
forward, shall require an increase or decrease of at least $.10 in the
Purchase Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for cash
of any rights or warrants to subscribe for or purchase, or any options
for the purchase of, Common Stock or any securities convertible into or
exchangeable for Common Stock without the payment of any further
consideration other than cash, if any (such convertible or exchangeable
securities being herein called "Convertible Securities") , or (2) the
issuance by the Company, without the receipt by the Company of any
consideration therefor, of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or
Convertible Securities, in each case, if (and only if) the
consideration payable to the Company upon the exercise of such rights,
warrants, or options shall consist of cash, whether or not such rights,
warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum
aggregate consideration payable to the Company upon the exercise of
such rights, warrants or options, plus the consideration received by
the Company for the issuance or sale of such rights, warrants or
options, plus, in the case of such Convertible Securities, the minimum
aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or options or upon
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the conversion or exchange of such Convertible Securities issuable upon
the exercise of such rights, warrants or options) is less than the fair
market value of the Common Stock on the date of the issuance or sale of
such rights, warrants or options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or sale of such
rights, warrants or options) shall be deemed to be outstanding shares
of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall
be deemed to have been sold for cash in an amount equal to such price
per share.
(iv) In case of the sale by the Company for cash of
any Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per share
for which Common Stock is issuable upon the conversion or exchange of
such Convertible Securities (determined by dividing (x) the total
amount of consideration received by the Company for the sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, other than such Convertible Securities, payable
upon the conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the fair market
value of the Common Stock on the date of the sale of such Convertible
Securities, then the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of such Convertible Securities
(as of the date of the sale of such Convertible Securities) shall be
deemed to be outstanding shares of Common Stock for purposes of
Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for
cash in an amount equal to such price per share.
(v) In case the Company shall modify the rights of
conversion, exchange or exercise of any of the securities referred to
in subsection (iii) above or any other securities of the Company
convertible, exchangeable, or exercisable for shares of Common Stock,
for any reason other than an event that would require adjustment to
prevent dilution, so that the consideration per share received by the
Company after such modification is less than the market price on the
date prior to such modification, the Purchase Price to be in effect
after such modification shall be determined by multiplying the Purchase
Price in effect immediately prior to such event by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding
multiplied by the market price on the date prior to the modification
plus the number of shares of Common Stock which the aggregate
consideration receivable by the Company for the securities affected by
the modification would purchase at the market price and of which the
denominator shall be the number of shares of Common Stock outstanding
on such date plus the number of shares of Common Stock to be issued
upon conversion, exchange, or exercise of the modified securities at
the modified rate. Such adjustment shall become effective as of the
date upon which such modification shall take effect.
(vi) On the expiration of any such right, warrant or
option or the termination of any such right to convert or exchange any
such Convertible Securities, the Purchase Price then in effect
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hereunder shall forthwith be readjusted to such Purchase Price as would
have obtained (a) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities been made upon
the basis of the issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total consideration received
therefor) upon the exercise of such rights, warrants, or options or
upon the conversion or exchange of such Convertible Securities and (b)
had adjustments been made on the basis of the Purchase Price as
adjusted under clause (a) for all transactions (which would have
affected such adjusted Purchase Price) made after the issuance or sale
of such rights, warrants, options or Convertible Securities.
(vii) In case of the sale for cash of any shares of
Common Stock, any Convertible Securities, any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, the consideration received by the
Company therefor shall be deemed to be the gross sales price therefor
without deducting therefrom any expense paid or incurred by the Company
or any underwriting discounts or commissions or concessions paid or
allowed by the Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to
the number of shares of Common Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the sale or exercise of the Warrants;
(ii) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, whether or not such rights, warrants
or options were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold (including, but not limited
to shares issuable on exercise of any outstanding Class A or Class B
Warrants); or
(iii) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether or not
any adjustment in the Purchase Price was made or required to be made
upon the issuance or sale of such Convertible Securities and whether or
not such Convertible Securities were outstanding on the date of the
original sale of the Warrants or were thereafter issued or sold; or
(iv) upon the issuance or sale of Common Stock or
Convertible Securities in an exempt transaction unless the issuance or
sale price is less than 85% of the fair market value of the Common
Stock on the date of issuance, in which case the adjustment shall only
be for the difference between 85% of the fair market value and the
issue or sale price; or
(v) upon the issuance or sale of Common Stock or
Convertible Securities to shareholders of any corporation which merges
with and/or consolidates into or is acquired by the Company or from
which the Company acquires assets and some or all of the consideration
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consists of equity securities of the Company, in proportion to their
stock holdings of such corporation immediately prior to the acquisition
but only if no adjustment is required pursuant to any other provision
of this Section 9; or
(vi) upon the issuance or exercise of options or upon
the issuance or grant of stock awards granted to the Company's
directors, employees or consultants under a plan or plans (including
for this purpose any arrangement or agreement which would constitute a
"plan" under the instructions to the registration statement on Form
S-8) adopted by the Company's Board of Directors and approved by its
stockholders. For the purposes of determining whether the consideration
received by the Company is less than the Market Price in connection
with any issuance of stock to the Company's directors, employees or
consultants under plans adopted by the Company's Board of Directors and
approved by its stockholders, the consideration received shall be
deemed to be the amount of compensation to the director, employee or
consultant reported by the Company in connection with such issuances;
or
(vii) upon the issuance of Common Stock to the
Company's directors, employees or consultants under a plan or plans
which are qualified under the Internal Revenue Code; or
(viii) upon the issuance of Common Stock in a bona
fide public offering pursuant to a firm commitment underwriting.
(h) As used in this Section 9, the term "Common Stock" shall
mean and include the Company's Common Stock authorized on the date of the
original issue of the Units and shall also include any capital stock of any
class of the Company thereafter authorized which shall not be limited to a fixed
sum or percentage in respect of the rights of the holders thereof to participate
in dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include
(i) only shares of such class designated in the
Company's Certificate of Incorporation as Common Stock on the date of
the original issue of the Units or
(ii) in the case of any reclassification, change,
consolidation, merger, sale or conveyance of the character referred to
in Section 9(c) hereof, the stock, securities or property provided for
in such section or
(iii) in the case of any reclassification or change
in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or a change in par
value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 9, or as to
the amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board of
Directors of the Company.
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(j) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES
(a) If the number of shares of Common Stock purchasable upon
the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the
Company nevertheless shall not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. In such event, the Company may at its option elect
to round up the number of shares to which the Holder is entitled to the nearest
whole share or to pay cash in respect of fractional shares in accordance with
the following: With respect to any fraction of a share called for upon any
exercise hereof, the Company shall pay to the Holder an amount in cash equal to
such fraction multiplied by the current market value of such fractional share,
determined as follows:
(i) If the Common Stock is listed on a National
Securities Exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the NASDAQ Quotation System, the
current value shall be the last reported sale price of the Common Stock
on such exchange on the last business day prior to the date of exercise
of this Warrant or if no such sale is made on such day, the average of
the closing bid and asked prices for such day on such exchange; or
(ii) If the Common Stock is not listed or admitted to
unlisted trading privileges, the current value shall be the mean of the
last reported bid and asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the exercise
of this Warrant; or
(iii) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are
not so reported, the current value shall be an amount determined in
such reasonable manner as may be prescribed by the Board of Directors
of the Company.
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11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS.
No holder of Warrants shall, as such, be entitled to vote or
to receive dividends or be deemed the holder of Common Stock that may at any
time be issuable upon exercise of such Warrants for any purpose whatsoever, nor
shall anything contained herein be construed to confer upon the holder of
Warrants, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issue or reclassification
of stock, change of par value or change of stock to no par value, consolidation,
merger or conveyance or otherwise), or to receive notice of meetings, or to
receive dividends or subscription rights, until such Holder shall have exercised
such Warrants and been issued shares of Common Stock in accordance with the
provisions hereof.
12. RIGHTS OF ACTION.
All rights of action with respect to this Agreement are vested
in the respective Registered Holders of the Warrants, and any Registered Holder
of a Warrant or of the holder of any other Warrant, may, in his own behalf and
for his own benefit, enforce against the Company his right to exercise his
Warrants for the purchase of shares of Common Stock in the manner provided in
the Warrant Certificate and this Agreement.
13. AGREEMENT OF WARRANT HOLDERS.
Every holder of a Warrant, by his acceptance thereof, consents
and agrees with the Company, and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books
of the Company by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates representing
such Warrants are surrendered at the office of the Company, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to the Company in
its discretion, together with payment of any applicable transfer taxes; and
(b) The Company may deem and treat the person in whose name
the Warrant Certificate is registered as the holder and as the absolute, true
and lawful owner of the Warrants represented thereby for all purposes, and the
Company shall not be affected by any notice or knowledge to the contrary, except
as otherwise expressly provided in Section 7 hereof.
14. CANCELLATION OF WARRANT CERTIFICATES.
If the Company shall purchase or acquire any Warrant or
Warrants, the Warrant Certificate or Warrant Certificates evidencing the same
shall thereupon be delivered to the Company and canceled by it and retired. The
Company shall also cancel Common Stock following exercise of any or all of the
Warrants represented thereby or delivered to it for transfer, split up,
combination or exchange.
15
<PAGE>
15. MODIFICATION OF AGREEMENT.
This Agreement shall not be modified, supplemented or altered
in any respect except with the consent in writing of the Company and the
Registered Holders, other than such changes as are specifically prescribed by
this Agreement as originally executed or such changes that are made solely for
the purpose of compliance with applicable law.
16. NOTICES.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first class registered or certified mail, postage prepaid as
follows: if to the Registered Holder of a Warrant Certificate, at the address of
such holder as shown on the registry books maintained by the Company; if to the
Company, 15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850.
17. GOVERNING LAW.
This Agreement shall. be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
18. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit
of the Company and the Registered Holders, and their respective successors and
assigns, and the holders from time to time of Warrant Certificates. Nothing in
this Agreement is intended or shall be construed to confer upon any other person
any right, remedy or claim, in equity or at law, or to impose upon any other
person any duty, liability or obligation.
19. TERMINATION.
This Agreement shall terminate at the close of business on the
Warrant Expiration Date of all the Warrants or such earlier date upon which all
Warrants have been exercised.
20. COUNTERPARTS.
This Agreement may be executed in several counterparts, which
taken together shall constitute a single document.
16
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed as of the date first written above.
EASTBROKERS INTERNATIONAL
INCORPORATED
By: /s/ Martin A. Sumichrast
____________________________________
Name: Martin A. Sumichrast
Title: President and Chief Executive
Officer
17
<PAGE>
THESE SECURITIES (INCLUDING ANY UNDERLYING SECURITIES) HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED.
ISSUE DATE: MAY 28, 1999 PRINCIPAL AMOUNT: $2,000,000.00
EASTBROKERS INTERNATIONAL INCORPORATED
5% CONVERTIBLE DEBENTURE
No: A-1
1. CONSIDERATION. FOR VALUE RECEIVED, EASTBROKERS INTERNATIONAL
INCORPORATED (the "Company"), a Delaware corporation, hereby promises
to pay to the order of Punta Investors LLC, or its registered assigns
(hereinafter, the "Registered Holder"), TWO MILLION DOLLARS
($2,000,000.00), in lawful money of the United States on May 28, 2002
(the "Maturity Date"), with interest thereon from the date of this
Debenture in like money at the rate of five percent (5%) per annum on
the unpaid balance of this Debenture until paid. Principal payments
shall be reduced by that portion of the principal amount of the
Debenture that has been converted into the Company's common stock, par
value $.05 per share (the "Common Stock"), pursuant to Section 4 or
redeemed pursuant to Section 6.
2. PAYMENT; NO PAYMENT. Principal and interest shall be payable at the
most recent address as the Registered Holder shall have designated to
the Company in writing. No payment of the principal of the Debenture
may be made prior to the Maturity Date by the Company without the
consent of the Registered Holder, except as otherwise provided herein.
At the Company's option, any interest payment required to be paid on
this Debenture may be made in the form of Common Stock, with the number
of shares of such Common Stock to be payable in lieu of such interest
payments to be determined in accordance with the provisions of Section
4, as if such interest payment were a portion of the principal amount
of the Debenture to be converted into Common Stock.
3. ISSUANCE OF DEBENTURES. This Debenture has been issued by the Company
pursuant to the authorization of the Board of Directors of the Company
(the "Board") and issued pursuant to a Securities Purchase Agreement,
dated as of May 28, 1999, by and between the Company and the Purchaser
identified therein (the "Securities Purchase Agreement). Pursuant to
the Securities Purchase Agreement, the Company issued units (the
"Units"), each Unit consisting of $100,000 principal amount of the
Debentures and 2,000 five-year non-redeemable warrants (the "Warrants")
to purchase Common Stock. Pursuant to the Securities Purchase
<PAGE>
Agreement, up to $2,000,000 aggregate principal amount of Debentures
may be issued. The Securities Purchase Agreement contains certain
additional terms that are binding upon the Company and each Registered
Holder of the Debentures. A copy of the Securities Purchase Agreement
may be obtained by any Registered Holder of the Debentures from the
Company upon written request. Capitalized terms used but not defined
herein shall have the meanings set forth in the Securities Purchase
Agreement. The Debentures, together with any debentures from time to
time issued in replacement thereof, whether pursuant to transfer and
assignment, partial conversion thereof or otherwise, are collectively
referred to herein as the "Debentures."
4. CONVERSION PRICE. (a) At the option of the Registered Holder hereof,
all or any part of the unpaid principal amount of this Debenture may,
upon execution of the Notice of Conversion attached hereto and the
surrender of this Debenture to the Company for conversion in accordance
with Section 5(b) of the Securities Purchase Agreement, be convertible
into fully-paid, nonassessable shares of Common Stock, at a conversion
price (the "Conversion Price") equal to the lesser of (i) ($5.50) or
(ii) ninety percent (90%) of the average of the three (3) lowest
Closing Bid Prices of the Common Stock for the twenty (20) trading days
ending five (5) days prior to the date of the delivery of the Notice of
Conversion (the "Applicable Conversion Price"). If, during any period
following the issuance of this Debenture, as a result of the occurrence
of any of the events set forth in Section 3(e) or 3(f) of the
Registration Rights Agreement, dated as of May 28, 1999, by and between
the Company and the Registered Holder (the "Registration Rights
Agreement"), the Registered Holder is not able to sell shares of Common
Stock issuable upon conversion of, or in lieu of interest payments on,
this Debenture pursuant to a registration statement filed pursuant to
such agreement, the Registered Holder shall have the right, for any
purpose under this Debenture during such period and thereafter, to
designate as the Applicable Conversion Price any Conversion Price that
would have been applicable during such period had the Registered Holder
delivered a Notice of Conversion with respect to any portion of this
Debenture. "Conversion Date" shall have the meaning given such term in
Section 5(b) of the Securities Purchase Agreement.
(b) For purposes of this Debenture, the term "Closing Bid Price"
means for the Common Stock, as of any date, (i) the closing bid price
on the principal securities exchange or trading market where the
Company's Common Stock is listed or traded, as reported by Bloomberg,
L.P. ("Bloomberg") or The Wall Street Journal (the "Journal") (or, if
not so reported, as otherwise reported by The Nasdaq Smallcap Market)
or, (ii) if applicable, the closing bid price of the Common Stock in
the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg or the Journal, or, if no closing bid
price is reported for the Common Stock by Bloomberg or the Journal,
then the average of the bid prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation
Bureau, Inc. If the Closing Bid Price of the Common Stock cannot be
calculated on such date on any of the foregoing bases, the Closing Bid
Price of the Common Stock on such date shall be the fair market value
as mutually determined by the Company and the Registered Holder for
which the calculation of the Closing Bid Price is required in order to
2
<PAGE>
determine the Conversion Price. "Trading day" shall mean any day on
which the Company's Common Stock is traded for any period on the
principal securities exchange or other securities market on which the
Common Stock is then being traded.
(c) If the Registered Holder does not exercise its right
to convert the Debenture into shares of Common Stock of the Company
during the conversion period, the Debenture will continue to accrue
interest at the rate of five percent (5%) per annum on the unpaid
balance of the Debenture until the Maturity Date, subject to the
provisions of Section 2 above and Section 6 below. All accrued
interest payable on this Debenture for which conversion has been
requested shall be payable on the Conversion Date in shares of Common
Stock at the Conversion Price.
5. CONVERSION AND DELIVERY. Subject to the limitations set forth below and
in Section 6, Notice of Conversion may be given at any time after the
date hereof. The Company shall convert this Debenture pursuant to such
Notice of Conversion into shares of Common Stock in accordance herewith
and Section 5 of the Securities Purchase Agreement.
No fractional shares of Common Stock shall be issued upon conversion of
this Debenture. The Registered Holder expressly waives his rights to
receive a certificate for any fractional shares. If less than all of
the unpaid principal amount evidenced by this Debenture shall be
converted, the Company will, upon such exercise of the conversion
privilege, execute and deliver to the Registered Holder hereof a new
Debenture (dated the date hereof) evidencing the remaining amount of
principal then outstanding.
6. REDEMPTION BY COMPANY. (a) If while this Debenture is outstanding there
shall occur a Change in Control of the Company (as defined below),
then, at the option of the Registered Holder, the Company shall, on
the effective date of and subject to the consummation of such Change
in Control, redeem this Debenture for cash from the Registered Holder
at a redemption price equal to 125% of the aggregate principal and
accrued interest outstanding under this Debenture. Nothing in this
subsection shall limit the Registered Holder's right to convert this
Debenture on or prior to such Change in Control. For purposes hereof,
a "Change in Control" shall be deemed to have occurred if (A) any
person or group (as defined for purposes of Regulation 13D of the
Securities Exchange Act of 1934, as amended) (excluding persons who on
the date hereof are beneficial owners of shares of the Company's
voting stock and affiliates of such persons) shall have become the
beneficial owner or owners of more than 50% of the outstanding voting
stock of the Company; provided, that beneficial ownership of preferred
stock or any convertible security shall not be given effect toward
counting a person's or group's beneficial ownership; (B) there shall
have occurred a merger or consolidation in which the Company or an
affiliate of the Company is not the survivor or in which holders of
the Common Stock of the Company shall have become entitled to receive
cash, securities of the Company other than voting common stock or
securities of any other person; (C) at any time persons constituting
the Existing Board of Directors cease for any reason whatsoever to
constitute at least a majority of the members of the Board of
Directors of the Company; or (D) there shall have occurred a sale of
all or substantially all the assets of the Company. For purposes
hereof, the term "Existing Board of Directors" shall mean the persons
constituting the Board of Directors of the Company on the date hereof,
3
<PAGE>
together with each new director whose election, or nomination for
election by the Company's stockholders is approved by a vote of the
majority of the members of the Existing Board of Directors who are in
office immediately prior to the election or nomination of such
director.
(b) If prior to the time the stockholders of the Company shall
have approved the transactions contemplated by the Securities Purchase
Agreement as provided in clause (B) below, the number of shares of
Common Stock issued (i) upon conversion of the Debentures and (ii) in
lieu of interest payments on the Debentures (collectively, the
"Conversion Shares"), shall equal 19.9% of the number of the shares of
capital stock outstanding on the Closing Date (a "Redemption Event"),
the Company shall have the option to (A) redeem the outstanding
principal amount of this Debenture at the redemption price of one
hundred twenty-five percent (125%) of the principal amount hereof plus
accrued interest on this Debenture, if any, or (B) call a special
meeting of its stockholders for the purpose of approving the
transactions contemplated by the Securities Purchase Agreement,
including the issuance of the Debentures on the terms set forth
therein, together with any other approvals that shall be required so
as to cause the transactions contemplated by the Securities Purchase
Agreement to remain in compliance with the Rules and Regulations of
Nasdaq (including Rule 4460 of Nasdaq's Non-Qualitative Designation
Criteria on the occurrence of a Redemption Event; such approvals are
referred to herein as the "Required Approvals"). The Company shall
determine within five (5) business days following the occurrence of
any Redemption Event which of such actions it shall take, and shall
promptly furnish notice to the Purchaser as to such determination,
including, if applicable, a notice of redemption.
(c) If the Company elects to call a special meeting of its
stockholders pursuant to Section 6(d) to obtain the Required
Approvals, the Company shall obtain such Required Approvals within
thirty (30) days of the distribution of the notice described in such
Section (such thirty (30) day period is referred to herein as an
"Approval Period"). If such approval is not obtained within the
Approval Period, this Debenture shall be redeemed on the first
business day following the Approval Period at the redemption price of
one hundred twenty-five percent (125%) of the principal amount hereof
plus accrued interest on the Debenture.
(d) If the Company fails to have a registration statement
effective within 150 days of the date of the Stock Purchase Agreement,
the Company shall redeem these Debentures at a redemption price of one
hundred twenty-five percent (125%) of the principal amount hereof plus
accrued and unpaid interest thereon.
(e) If the Company elects to redeem the Debentures pursuant to
any of the terms or conditions set forth in this Section 6, the Company
shall remit the redemption price to the Registered Holder thereof
immediately upon such redemption.
7. COVENANTS.
(a) The Company will pay all taxes, assessments and governmental
charges lawfully levied or assessed upon it, its property and any part
thereof, and upon its income for profits, and any part thereof, before
4
<PAGE>
the same shall become delinquent; and will duly observe, and conform
to, all lawful requirements of any governmental authority relative to
any of its property, and all covenants, terms and conditions upon
or under which any of its property is held; provided that nothing
in this Section shall require the Company to observe or conform
to any requirement of governmental authority or to pay any such tax,
assessment or governmental charges so long as the validity thereof
shall be contested in good faith.
(b) Subject to the other provisions of this Debenture, the
Company at all times will maintain its corporate existence and right to
carry on its business and will duly procure all necessary renewals and
extensions thereof and use its best efforts to maintain, preserve and
renew all of its rights, powers, privileges and franchises; PROVIDED,
HOWEVER, that nothing herein contained shall be construed to prevent
the Company from ceasing or omitting to exercise any rights, powers,
privileges or franchises which, in the judgment of the Board, can no
longer be profitably exercised, nor to prevent the consolidation,
merger or liquidation of any subsidiary or subsidiaries of the Company
with or into the Company.
(c) The Company will at no time close its stock transfer books
against the transfer of any shares of Common Stock issued or issuable
upon the conversion of, or in lieu of payments on, the Debentures, in
any manner which interferes with the timely conversion of such
Debentures.
(d) As used in this Debenture, the term "Common Stock" shall
mean the Company's authorized common stock, no par value. The Company
shall not, without the prior written consent of the Registered Holder
of this Debenture, issue any shares of its capital stock, other than
as permitted by Section 4(i) of the Securities Purchase Agreement or
Preferred Stock in exchange for Debentures as provided hereunder.
The term "Common Stock" includes all stock of any class or classes
(however designated) of the Company, authorized on or after the date
hereof, the holders of which shall have the right, without limitation
as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of
which shall ordinarily be entitled to vote for the election of the
directors of the Company.
(e) The Company will not, by amendment of its Articles of
Incorporation or By-laws or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder or pursuant to the
Securities Purchase Agreement by the Company, and will at all times
assist in good faith in the carrying out of all the provisions of this
Debenture and the Securities Purchase Agreement and in the taking of
all such action as may be necessary or appropriate in order to protect
the conversion rights of the Registered Holders of the Debentures
against impairment.
(f) In the event of any taking by the Company of a record of the
holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other
5
<PAGE>
than a cash dividend) or other distribution, any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right,
the Company shall mail to each Registered Holder of the Debentures, at
least ten (10) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
8. TAXES. The issuance of certificates representing shares of Common Stock
upon the conversion of this Debenture shall be made without charge to
the converting Registered Holder of the Debenture for any tax with
respect to such issue.
9. NO RIGHTS AS SHAREHOLDER. The Registered Holder of this Debenture shall
not, by reason of the ownership of this Debenture, have any rights
whatsoever as a shareholder of the Company, or any other rights,
whatsoever, except as stated in this Debenture and in the Securities
Purchase Agreement.
10. LIMITATION ON CERTAIN CORPORATE ACTS. The Company hereby covenants and
agrees that upon any consolidation or merger or upon the transfer of
all or substantially all of the property or assets of the Company, the
due and punctual payment of the principal and interest on all the
Debentures according to their tenor and the due and punctual
performance and observance of all the terms, covenants and conditions
of the Debentures and the Securities Purchase Agreement to be kept and
performed by the Company shall be expressly assumed by the corporation
formed by such consolidation, or into which the Company shall have
merged or by the purchaser of such property or assets; and such
assumption shall be an express condition of such merger or
consolidation agreement or agreement for the transfer of property or
assets.
11. EVENTS OF DEFAULT. In case one or more of the following events of
default shall have occurred:
(a) default in the due and punctual payment of interest upon or
principal of any of the Debentures as and when the same becomes due and
payable either at maturity or otherwise; or
(b) failure to deliver the shares of Common Stock required to be
delivered upon conversion of Debentures in the manner and at the time
required by Section 5 of the Securities Purchase Agreement; or
(c) failure of the Company to have authorized the number of
shares of Common Stock issuable upon conversion of the Debentures or
exercise of the Warrants.
(d) failure on the part of the Company to duly observe or
perform any of its other covenants or agreements contained in the
Debentures or in Section 4(j) of the Securities Purchase Agreement,
or to cure any material breach in a material representation or covenant
contained in the Securities Purchase Agreement or the Registration
Rights Agreement for a period of thirty (30) days after the date on
6
<PAGE>
which written notice of such failure or breach requiring the same to
be remedied has been given by a Registered Holder to the Company; or
(e) a decree or order by a court having jurisdiction has been
entered adjudging the Company a bankrupt or insolvent, or approving
a petition seeking reorganization of the Company under any applicable
bankruptcy law and such decree or order has continued undischarged or
unstayed for a period of sixty (60) days; or a decree or order of a
court having jurisdiction for the appointment of a receiver or
liquidator or trustee or assignee in bankruptcy or insolvency of the
Company or of all or substantially all of its property, or for the
winding-up or liquidation of its affairs, has been entered, and has
remained in force undischarged or unstayed for a period of sixty (60)
days;
(f) the Company institutes proceedings to be adjudicated a
voluntary bankrupt, or consents to the filing of a bankruptcy
proceeding against it, or files a petition or answer or consent seeking
reorganization under applicable law, or consents to the filing of any
such petition or to the appointment of a receiver or liquidator or
trustee or assignee in bankruptcy or insolvency of it or of all or
substantially all of its property, or makes an assignment for the
benefit of creditors, or admits in writing its inability to pay its
debts generally as they become due;
then, and in each and every such case, so long as such event of default
has not been remedied and unless the principal of all the Debentures
has already become due and payable, the holders of not less than
fifty-one percent (51%) in principal amount of the Debentures then
outstanding, by notice in writing to the Company, may declare the
principal of all the Debentures then outstanding and the interest
accrued thereof, if not already due and payable, to be due and payable
immediately, and upon any such declaration the same shall become and
shall be immediately due and payable, anything herein contained to the
contrary notwithstanding.
12. TRANSFERABILITY. This Debenture is transferable, in whole or in part,
only in accordance with the terms of Section 5 of the Securities
Purchase Agreement. The Registered Holder may submit a written request,
in person or by his duly authorized attorney, for a transfer of the
Debenture on the register of the Company maintained at its principal
offices. The Company may deem and treat the person in whose name this
Debenture is registered as the absolute owner hereof, for the purpose
of receiving payment of the principal thereof and interest hereon,
whether or not the same shall be overdue, and for all other purposes
whatsoever, including but without limitation, the giving of any written
notices required hereunder, and the Company shall not be affected by
any notice to the contrary.
13. ACCEPTANCE OF HOLDER. This Debenture is subject to all of the
covenants, obligations, conditions, rights, limitations and other
provisions stated herein, to all of which the holder and each
successive holder hereof by acceptance of any Debenture assents.
14. AMENDMENTS AND MODIFICATION. Changes in or additions to this Debenture
may be made, and compliance with any covenant or condition herein set
forth may be omitted only if the Company shall obtain the written
consent from the Registered Holder of this Debenture.
7
<PAGE>
15. NON-WAIVER. Neither any failure nor any delay on the part of the
Registered Holder of this Debenture in exercising any right, power, or
privilege hereunder shall operate as a waiver of any rights of any
holder hereof, nor shall a single or partial exercise of any right
preclude any other or further exercise of any other right, power of
privilege accorded to any Registered Holder hereof.
16. ATTORNEY'S FEES. If this Debenture shall not be paid when due and shall
be placed by the Registered Holder hereof in the hands of an attorney
for collection, through legal proceedings or otherwise, or if this
Debenture shall not be converted into shares of Common Stock on the
Conversion Date, subject to the provisions of Section 5 hereof, and an
action is brought by the Registered Holder with respect thereto, the
Company shall pay attorney's fees to the Registered Holder hereof,
together with reasonable costs and expenses of collection or
enforcement incurred in connection with any such action.
17. SPECIFIC PERFORMANCE. The Company expressly agrees that each Registered
Holder may not have adequate remedies at law if the Company does not
perform its obligations under this Debenture. Upon a breach of the
terms or covenants of this Debenture by the Company, the Registered
Holder shall, each in addition to all other remedies, be entitled to
obtain injunctive relief, and an order for specific performance of the
Company's obligations hereunder.
18. GOVERNING LAW. This Debenture shall be construed and enforced in
accordance with and governed by the laws of the State of New York,
without giving effect to principles of conflicts of law. The
Company agrees that any final judgment after exhaustion of all appeals
or the expiration of time to appeal in any such action or proceeding
shall be conclusive and binding, and may be enforced in any federal or
state court in the United States by suit on the judgment or in any
other manner provided by law. Nothing contained in this Debenture shall
affect or limit the right of the Registered Holder to serve any process
or notice or motion or other application in any other manner permitted
by law, or limit or affect the right of the Registered Holder to bring
any action or proceeding against the Company or any of its property in
the courts of any other jurisdiction. The Company hereby consents to
the jurisdiction of the federal courts whose districts encompass any
part of the City of New York or the state courts of the State of
New York sitting in the City of New York in connection with any dispute
arising under this Debenture, and hereby waives, to the maximum extent
permitted by law, any objection, including any objections based on
FORUM NON CONVENIENS, to the bringing of any such proceeding in such
jurisdictions.
19. HEADINGS. The headings contained in this Debenture are for reference
purposes only and shall not affect the meaning of interpretation of
this Debenture.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Debenture to be
executed as of the date first written above.
EASTBROKERS INTERNATIONAL INCORPORATED
/s/ Martin A Sumichrast
Attest: _________________________________________
Name: Martin A Sumichrast
Title: President and Chief Executive
Officer
By:___________________________________
Name:
Title:
9
<PAGE>
NOTICE OF CONVERSION
The conversion form appearing below should only be executed by the Registered
Holder desiring to convert all or part of the principal amount of the Debenture
attached hereto.
CONVERSION FORM
Date:_________________________________
TO: EASTBROKERS INTERNATIONAL INCORPORATED
15245 Shady grove Road, Suite 340
Rockville, MD 20850
The undersigned hereby exercises the conversion privilege upon the
terms and conditions set forth in the attached Debenture, to the extent of the
maximum number of shares of Common Stock issuable pursuant to the terms of
Sections 4 and 5 of the Debenture, and accordingly, authorizes the Company to
apply $__________ principal amount of the attached Debenture to payment in full
for such shares of Common Stock. Please register such shares and make delivery
thereof as follows:
Registered in the Name of (Giving First or Middle Name in Full)
Name______________________________________
(Please Print)
Address___________________________________
DELIVERY INSTRUCTIONS
To be completed ONLY if Certificates are to be mailed to persons other
than the Registered Holder.
Name______________________________________
(Please Print)
Address___________________________________
Signature_________________________________
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfer
unto ___________________ ____________________________________ the within
Debenture and all rights thereunder, hereby irrevocably authorizing the Company
to transfer said Debenture on the books of the Company, with full power of
substitution in the premises.
Dated:_________________
Signature: __________________________________
Print Name:__________________________________
<PAGE>
EXHIBIT NO. 21.1
SUBSIDIARIES OF EASTBROKERS
JURISDICTION OF
COMPANY INCORPORATION
------- ---------------
EBI Securities Corporation Colorado
EBI Leasing Corporation Colorado
Eastbrokers North America, Inc. Delaware
EBonlineinc.com. Nevada
Eastbrokers Beteiligungs AG Austria
WMP Bank AG Austria
Eastbrokers Warszawski Dom Maklerski s.a. Poland
Eastbrokers Kazakhstan Securities House Ltd. Kazakhstan
Eastbrokers Zagreb d.d. Croatia
Eastbrokers Baku Ltd. Azerbaijan
EB Holding, druzba za upravljanje druzb d.d. Slovenia
BPD Eastbrokers d.d. Slovenia
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Eastbrokers
International, Inc. on Form SB-2 of our report dated June 29, 1999 (which report
expresses an unqualified opinion), appearing in this Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ SPICER, JEFFRIES & CO.
Denver, Colorado
July 20, 1999
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR THE FISCAL YEAR ENDED MARCH 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,214,705
<SECURITIES> 13,541,556
<RECEIVABLES> 18,135,675
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,596,109
<PP&E> 3,201,752
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0
0
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</TABLE>
