<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1999
REGISTRATION NO. 333-72359
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
EASTBROKERS INTERNATIONAL INCORPORATED
(Name of Small Business Issuer in its Charter)
Delaware 6799 52-1807562
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number) Identification Number)
of Incorporation
or Organization)
----------------------
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. |_|
_____________________________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE PRICE PER OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED UNIT(1) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.05 per share 949,000 5.78125 5,486,406.25 $1,525.22
- -------------------------------------------------------------------------------------------------
Class C Common Stock Purchase Warrants - - -
- -------------------------------------------------------------------------------------------------
Common Stock, underlying Class C
Common Stock Purchase Warrants 1,352,000 5.78125 7,816,250.00 2,172.92
- -------------------------------------------------------------------------------------------------
Placement Agent Warrants - 5.78125 - -
- -------------------------------------------------------------------------------------------------
Common Stock, underlying Placement
Agent Warrants 1,237,222 5.78125 7,152,689.69 1,988.45
- -------------------------------------------------------------------------------------------------
Total 3,538,222 5.78125 20,455,345.94 5,686.59
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the average of the high and the low prices of the Common
Stock on the Nasdaq SmallCap Market on May 3, 1999. $4,989.75 was previously
paid.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant To Rule 457.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
--------------------------------- ---------------------
<S> <C> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus........ Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus...................... Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information and Risk Factors..... Summary; Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Not Applicable
6. Dilution................................. Not Applicable
7. Selling Security Holders................. Selling 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 STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 5, 1999
PROSPECTUS
EASTBROKERS INTERNATIONAL INCORPORATED
This Prospectus relates to the offer and sale of 3,538,222 shares of
Common Stock, 1,352,000 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 selling 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 selling 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
selling 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 7.
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
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, as amended (the "Exchange Act") 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
such material may also be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Judiciary Plaza, Room 1024,
Washington, D.C. 20549. The Common Stock is quoted on the Nasdaq SmallCap.
Information regarding the trading of EAST on the Nasdaq SmallCap 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,
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
2
<PAGE>
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 hereof.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, 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:
. transaction volume in the securities markets;
. the volatility of the securities markets, fluctuations in interest
rates;
. changes in regulatory requirements which could affect the cost of
doing business, fluctuations in currency rates;
. general economic conditions, both domestic and international;
. changes in the rate of inflation and related impact on securities
markets;
. competition from existing financial institutions and other new
participants in the securities markets;
. legal developments affecting the litigation experience of the
securities industry;
. changes in federal and state tax laws which could affect the
popularity of products sold by Eastbrokers; and
. those risks and uncertainties set forth under the caption "Risk Factors"
on page 7 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.
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.
3
<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, 1992,
as the Czech Fund. Our initial goal was to take advantage of the rapid growth in
business opportunities arising from the privatization of the newly-democratized
Czech Republic by merging with or acquiring Czech businesses. From 1993 through
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 Beteiligungs AG, 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.
We are primarily a holding company for sixteen subsidiaries and affiliates
which are directly and indirectly owned. Twelve of the subsidiaries and
affiliates are incorporated and located in Central and Eastern Europe. We also
own 100 percent of EBI Securities Corporation, 100 percent of Eastbrokers
Leasing Ltd., 90 percent of Eastbrokers North America, Inc. and 70 percent of
EBonline.com. All of our subsidiaries and affiliates are engaged in the
investment banking, broker-dealer, consulting, advisory and securities business.
Our principal strategic objective has been to establish controlling ownership of
independent broker-dealers located primarily in Central and Eastern Europe and
to create a network that provides access to emerging market investment
opportunities in Central and Eastern Europe. In fiscal year 1998, we expanded
our objective to include establishing controlling ownership of independent
broker-dealers in the United States.
THE OFFERING
Securities offered............... The resale of 3,538,222 shares of
Common Stock; 1,352,000 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 April 30,
1999)............................ 5,184,250 shares
Common Stock Outstanding after
the Offering(1).................. 7,773,472 shares
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Risk Factors..................... The offering involves a high degree of
risk. See "Risk Factors" at page 7.
Use of Proceeds.................. We will not receive any proceeds from
resales of the Shares or 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. 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.
- --------------------------------------------------------------------------------
5
<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, 1997 and 1998 and for the nine months ended December 31, 1997
and 1998, and should be read in conjunction with, and are qualified in their
entirety by reference to, such Financial Statements and the notes thereto, and
in conjunction with "Management's Discussion and Analysis of Financial Condition
or Plan of Operation" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended For the Nine Months
March March Ended December 31,
31, 1997 31, 1998 1997 1998
-------- -------- ---- ----
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues
Commission.................. $ 439,531 $ 2,539,261 $ 1,615,510 $ 8,237,084
Investment Banking.......... 1,149,195 807,803 380,951 2,146,639
Trading Profit, net......... 3,679,045 4,276,480 243,229 2,889,047
Other....................... 473,704 2,719,433 1,056,253 3,756,094
----------- ----------- ----------- -----------
Total Revenues............ 5,741,475 10,342,976 5,476,043 17,028,864
----------- ----------- ----------- -----------
Expenses
Compensation and benefits... 2,181,419 3,818,546 1,803,672 10,687,266
Consulting and professional
fees........................ 867,302 2,447,456 1,142,680 1,705,796
Occupancy................... 333,096 997,814 621,601 1,302,584
Communications.............. 177,473 698,688 340,290 1,314,265
Brokerage, clearing,
exchange fees and other .... - 1,163,171 575,661 1,324,647
General and administrative.. 806,056 3,505,413 1,207,957 1,088,917
Other....................... 1,127,277 2,379,729 1,313,491 2,164,503
----------- ----------- ----------- -----------
Total expenses............ 5,492,623 15,010,817 7,005,302 19,587,978
----------- ----------- ----------- -----------
Income (loss) from continuing
operations................. 362,573 (3,676,609) (1,198,507) (3,011,273)
Discontinued operations........ (1,281,184) - - -
----------- ----------- ----------- -----------
Net loss....................... $ (918,611) $(3,676,609) $(1,198,507) $(3,011,273)
=========== =========== =========== ===========
Weighted average number of
shares outstanding.......... 2,497,137 3,149,009 3,063,000 4,595,202
----------- ----------- ----------- -----------
Basic and diluted loss per share $ (0.37) $ (1.17) $ (0.39) $ (0.66)
----------- ----------- ----------- -----------
CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION DATA:
Total assets................... $31,962,729 $44,431,509 $40,424,733 $61,516,532
Total liabilities.............. 12,613,492 18,093,930 14,833,076 34,127,514
Minority interest in
consolidated subsidiaries...... 1,549,386 7,173,873 9,396,018 7,884,482
Stockholders' Equity........... 17,799,851 19,163,706 16,195,639 19,504,536
</TABLE>
6
<PAGE>
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:
. underwriting or owning securities,
. trading, arbitrage and merchant banking activities,
. failure by the other party to meet commitments,
. customer fraud and employee fraud,
. misconduct and errors,
. failures in connection with processing securities transactions and
. 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:
. securities market conditions,
7
<PAGE>
. the level and volatility of interest rates,
. competitive conditions, and
. the size and timing of transactions.
Numerous other national and international factors affect the
securities business and the profitability of securities firms. These
include:
. economic and political conditions,
. broad trends in business and finance,
. legislation and regulation affecting the national and international
business and financial communities,
. currency values,
. inflation,
. market conditions,
. the availability of short-term or long-term funding and capital,
. the credit capacity or perceived creditworthiness of the securities
industry in the marketplace, and
. 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:
. our professional staff,
. our reputation in the marketplace,
. our existing client relationships,
. the ability to commit capital to client transactions, and
. our mix of market capabilities.
8
<PAGE>
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."
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:
. additional legislation and regulations, including those relating to
the activities of affiliates of broker-dealers,
. changes in rules promulgated by the SEC, the Ministry or other
Austrian or foreign governmental regulatory authorities and SROs, and
. 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:
. existing and proposed tax legislation,
9
<PAGE>
. antitrust policy and other governmental regulations and policies
(including the interest rate policies), and
. changes in interpretation or enforcement of existing laws and rules that
affect the business and financial communities.
From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high-yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and investment
banking business, which in turn could adversely affect 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.
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
10
<PAGE>
transactions and transactions sponsored by the clients' own pools of capital by
using their capital in a variety of investment activities that have been broadly
described as merchant banking.
Such activities include, among other things, purchasing equity or debt
securities or making commitments to purchase such securities in various
transactions. These include mergers, acquisitions, and restructuring and
leveraged capital transactions, including leveraged buyouts and high-yield
financing. Such positions and commitments may involve substantial amounts of
capital and significant exposure to any one issuer or business, as well as
market, credit and liquidity risks. Purchasers of equity securities in these
transactions generally hold them for appreciation, and the securities are not
readily marketable and typically do not provide dividend income. Debt securities
purchased in such transactions typically rank subordinate to bank debt of the
issuer and may rank subordinate to other debt of the issuer. We also provide and
arrange bridge financing. Bridge financing assures funding for major
transactions, with the expectation that refinancing will be obtained through the
placement of high-yield debt or other securities. Such activities may also
involve substantial amounts of capital and significant exposure to any one
issuer as well as various risks associated with credit conditions and
vulnerability to general economic conditions.
There can be no assurance that we will not experience significant losses
as a result of such activities. Such losses may have an adverse effect on our
business. See "Management's Discussion and Analysis or Plan of Operation."
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., Slovakia, 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
11
<PAGE>
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 INABILITY 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
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 year ended March
31, 1998 was $3,676,607 and for the nine months ended December 31, 1998 was
$3,011,273. Cash and cash equivalents were $7,156,702 as of March 31, 1998 and
$2,553,876 as of December 31, 1998. There can be no assurance that our future
operations will be profitable or that we will have available funds adequate to
12
<PAGE>
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,
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 April 30, 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 Company. Future issuances
of preferred stock may provide for dividends, certain preferences in liquidation
and conversion rights. Such preferred stock issuance could make the possible
takeover of the Company, or the removal of management of the Company, more
difficult. The issuance of such preferred stock could discourage hostile bids
for control of the Company in which shareholders could receive premiums for
their Common Stock or warrants, could adversely affect the voting and other
13
<PAGE>
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:
. LIQUIDITY OF OUR INVESTMENTS: The nature of our investments in these
geographic areas limits their potential secondary market. Accordingly, we may
not be able to achieve the full value of our investments on disposal.
Although we anticipate that liquidity will improve once local stock markets
are operational, there is no guarantee that the markets will be as liquid as
those of developed countries.
. POLITICAL AND ECONOMIC FACTORS: The countries in which some of our operations
are concentrated had centrally-planned, socialist economies for many years.
Attempts at political and economic reform have been made with limited success
and it is impossible to foresee whether such reforms will achieve their
intended aims. Countries may impose restrictions on investing in specific
companies or industries which they consider to be important or sensitive to
national interests, but which also may be the best investment opportunities
available there. Additionally, changes in government policy may result in
countries expropriating investments.
. VALUATION RISK: Accounting and financial reporting standards in selected
countries are not equivalent to International Accounting Standards or U.S.
Generally Accepted Accounting Standards. Consequently, less information is
available to investors in the selected countries than in more developed
capital markets. Nevertheless, we will use valuations and financial reports
of international auditing firms and will apply all other means to monitor
unlisted investments.
. PROBLEMS OF TRANSITION AND BUSINESS FAILURE: Until very recently, virtually
all industrial output within the Comecon and Warsaw Pact countries was
generated from state-owned industry. As a result, few individuals understand
basic capitalistic management skills and techniques. Privatization of much of
the region's industry and the transition to a more market-orientated economy
will be difficult. Industry in the region is considerably less developed and
less efficient than industry in Western Europe and the United States. In
addition to doubts as to the continuing viability of much of the region's
industry, those businesses which survive are likely to require considerable
capital investment and restructuring. The failure of one or more businesses
in which we have invested may have a significant adverse effect on our
performance as a whole.
. CHANGES IN LAW AND ENFORCEMENT OF RIGHTS: In cases where competing claims
arise or in cases of re-nationalization, it may be difficult to enforce our
rights in several of the countries where we operate. There are several
reasons for this. First, legislation relating to securities, stock markets
and property rights may not exist. Second, these countries may only very
recently have introduced such legislation, and may introduce significant new
14
<PAGE>
legislation at any time. Finally, existing legislation is likely to be
subject to extensive amendment.
. INVESTMENT AND REPATRIATION RESTRICTIONS: We may require governmental
registration and/or approval in order to repatriate investment income,
capital and the proceeds of sales by foreign investors. A number of countries
in which we may invest do not have freely convertible currencies or their
currencies may only be convertible at rates determined by their governments.
Countries may also impose repatriation restrictions at any time. Changes in
the value of currencies in which our investments are denominated will result
in a corresponding change in the value of our assets which are generally
denominated in the local functional currencies. Investors should note that
the local currencies involved may be subject to rapid devaluation against the
major "hard" currencies, with the corresponding result that delays in
currency conversion may cause significant losses.
. TAXATION: Taxation of dividends and capital gains received by non-residents
varies among the selected countries. In addition, the selected countries
generally have less well defined tax laws and procedures, and such laws may
permit retroactive taxation. As a result, we could, in the future, become
subject to local tax liabilities that had not been anticipated in conducting
our investment activities or valuing our assets.
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 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.
USE OF PROCEEDS
Eastbrokers will not receive any proceeds from the sale of the 949,000
shares (the "Common Stock Shares") of Common Stock, the 1,352,000 shares (the
"Warrant Shares") of Common Stock underlying the Class C Common Stock Purchase
Warrants (the "Warrants") and 1,237,222 shares (the "Placement Agent Warrant
Shares" and, together with the Common Stock Shares and the Warrant Shares, the
"Shares") of Common Stock underlying the Placement Agent Warrants (the
"Placement Agent Warrants") since such Shares will be sold by the Selling
Stockholders. Holders of the Warrants and the Placement Agents Warrants are not
obligated to exercise any of their warrants. However, assuming exercise of all
of the Warrants and the Placement Agent Warrants, the net proceeds to be
received by Eastbrokers is estimated to be $18,124,554. The closing bid price of
the Common Stock on the Nasdaq SmallCap on April 30, 1999 was $6.1875. The
Warrants and the Placement Agent Warrants are exercisable at $7.00. Accordingly,
there is no assurance that any of the Warrants and the Placement Agent Warrants
will be exercised.
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 fiscal 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
15
<PAGE>
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
COMMON STOCK
-------------------------------
HIGH LOW
-------------------------------
FISCAL 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
FISCAL 1998
First Quarter $ 11.0000 $8.3750
Second Quarter $ 10.5000 $4.0000
Third Quarter $ 14.0000 $4.0000
Fourth Quarter $ 5.7500 $2.3100
FISCAL 1999
First Quarter $ 13.0000 $3.7500
Second Quarter (through 9.3750 3.9063
April 30, 1999)
On April 30, 1999, the closing bid price for Eastbrokers' Common Stock as
reported on the Nasdaq SmallCap was $6.1875 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.
On December 10, 1996, the Board of Directors approved a plan whereby
Eastbrokers was authorized to begin a buy-back program of its Common Stock.
Under the terms of this plan, Eastbrokers was authorized to repurchase up to
$1,000,000 of Common Stock at a price not to exceed $5.00 per share beginning in
January 1997. On January 23, 1997, Eastbrokers repurchased 45,000 of its
outstanding shares at $4.75 per share. Currently, no additional buy-backs are
anticipated.
BUSINESS
BACKGROUND
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.
16
<PAGE>
In 1996, Eastbrokers re-evaluated its business strategy and, after
considering a variety of investment opportunities, acquired Eastbrokers Vienna.
This transaction enhanced Eastbrokers' prospects by both providing Eastbrokers
with a vehicle to implement its acquisition strategy and extend its
opportunities beyond the Czech Republic to the entirety of Central and Eastern
Europe. Following the acquisition, Eastbrokers name was changed to Eastbrokers
International Incorporated, its present name.
Eastbrokers is primarily a holding company for sixteen subsidiaries and
affiliates which are directly and indirectly owned. Twelve 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 Eastbrokers Leasing Ltd., 90 percent of Eastbrokers
North America Inc. ("Eastbrokers NA") and 70 percent of EBonline.com. All 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) Bratislava, Slovakia, (c) Almaty, Kazakhstan, (d) Prague, Czech Republic,
(e) Ljubljana, Slovenia, (f) Zagreb, Croatia, (g) Warsaw, Poland and (h) 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
Bratislava Stock Exchange, the Zagreb Stock Exchange, the Ljubljana Stock
Exchange, the Central Asian Stock Exchange, and the Warsaw Stock Exchange.
Eastbrokers Vienna also owns 52 percent of WMP Bank AG (formerly WMP
Borsenmakler AG) ("WMP"), a publicly-held Austrian investment banking and
brokerage firm. Due to the continued decline in the Czech Republic markets and
recurring operating losses generated through its subsidiary office located in
Prague, Czech Republic, the 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 25 percent of all the Eastbrokers Group revenues for
fiscal year ended March 31, 1997 and 41 percent of all of the Eastbrokers Group
revenues for the fiscal year ended March 31, 1998. 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 nine months ended December 31, 1998, EBI
Securities generated approximately 55 percent of all 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
17
<PAGE>
National Association of Securities Dealers ("NASD") was approved. The office
space previously occupied by Eastbrokers NA has been converted into a branch
office of EBI Securities.
In October 1997, the Eastbrokers Group announced its intention to
establish a full service brokerage operation in Kiev, Ukraine subject to
obtaining the required regulatory approvals. Due to the overall instability in
the region caused by the economic crisis in Asia and potential currency problems
in Russia, the Eastbrokers Group has decided to continue its evaluation of this
market and will delay this expansion until such time as it feels the expansion
is economically viable.
On February 20, 1998, Eastbrokers consummated a private placement. Under
the terms of this private placement, Eastbrokers 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, Eastbrokers
also announced certain adjustments relating to the pricing of its Class A and
Class B warrants. In conjunction with this private placement, Eastbrokers
announced a 1-for-5 reverse split of its Class A and Class B warrants with
corresponding changes in the number of warrants required for exercise. This
reverse split was in proportion to the 1-for-5 reverse split of the Common Stock
in September 1996 and caused each warrant again to be exercisable for one share
of Common Stock. The effect of these changes resulted in a total of 1,101,000
Class A warrants outstanding with an exercise price of $18.00 per share and
250,000 Class B warrants outstanding with an exercise price of $19.00 per share
as of March 31, 1998.
During April 1998, the 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. Eastbrokers intends to develop EBI
Securities as the foundation to expand its U.S. based investment banking and
brokerage presence and anticipates that EBI Securities will be the first in a
series of acquisitions targeting other successful medium size investment banking
and brokerage firms both domestically and internationally. 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 150 securities which include its
investment banking clients and those securities that its research department has
identified as promising, small to middle-market and potentially high growth
companies. EBI Securities' investment banking department operates with a single
goal in mind: to enhance and develop the capital structures of small to middle
18
<PAGE>
market emerging growth companies through private placements, bridge financing,
and public offerings in order to enable the firm's corporate finance clients to
capitalize on promising business opportunities, favorable market conditions,
and/or late stage product development.
EBI Securities is registered as a broker-dealer with the SEC and is
licensed in 50 states and the District of Columbia. It is also a member of the
NASD and the Securities Investor Protection Corporation ("SIPC"). Customer
accounts are insured to $25 million under the SIPC excess insurance program. EBI
Securities operates pursuant to the exemptive provisions of SEC Rule 15c3-3
(k)(2)(ii) and clears all transactions with and for customers on a fully
disclosed basis.
EBI Securities maintains its clearing arrangement with Fiserv
Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ:
FISV). Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement enables
EBI Securities to offer its clients a broad range of products and services that
is typically only offered by firms that are larger and/or have a larger capital
base. Fiserv has advised the 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 42 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 Subsequent to the
Fiscal Year End" 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% Convertible Debentures") and Class C Common Stock Purchase
Warrants to purchase 125,000 shares of Common Stock. The 7% Convertible
Debentures were redeemed in March 1999 from a portion of the proceeds of the
offering related to the issuance of the 10% 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% Convertible Promissory Notes due
2003 (the "10% Notes") in an aggregate principal amount of $1,350,000. Holders
of the 10% Notes have the right to convert their 10% 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% Convertible Debentures.
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
19
<PAGE>
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.
ACQUISITIONS AND DISPOSITIONS DURING THE FISCAL YEAR
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 has been consolidated for the
entire year. At December 31, 1997, Eastbrokers' aggregate ownership interest in
WMP was 52 percent.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH") for 2.5 million Austrian Schillings (approximately $200,000 USD at
the then current exchange rates). The sales price approximated the cost basis of
WMP GmbH at the date of disposition. At the date of disposition, WMP GmbH was
primarily an inactive subsidiary.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Peter Schmid, the former
Chairman of the Board, President, Chief Executive Officer and a Director of EII,
for 13 million Austrian Schillings (approximately $1,025,000 USD at the then
current exchange rates). The 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.
ACQUISITIONS AND DISPOSITIONS SUBSEQUENT TO THE FISCAL YEAR END
In May 1998, Eastbrokers acquired all of the outstanding common stock of
EBI Securities in exchange for 445,000 unregistered shares of Eastbrokers'
Common Stock and an agreement to advance $1,500,000 in additional working
capital into EBI Securities. Eastbrokers intends to develop EBI Securities as
20
<PAGE>
the foundation to expand its U.S. based investment banking and brokerage
presence and anticipates that EBI Securities will be the first in a series of
acquisitions targeting other successful medium size investment banking and
brokerage firms both domestically and internationally. Eastbrokers believes that
its current organizational structure as an entrepreneurial and international
publicly traded company will be particularly appealing to potential acquisition
candidates. The office space presently occupied by Eastbrokers NA is in the
process of being converted to a branch office of EBI Securities.
In June 1998, 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
in Budapest through its relationship with the buyer.
In April 1999, Eastbrokers signed a joint venture agreement with
CyberRealm, Inc., a website development firm, to jointly own and develop
EBonlineinc.com, a newly established subsidiary. EBonlineinc.com is owned
seventy percent by Eastbrokers and thirty percent by CyberRealm, Inc. Under the
terms of the joint venture agreement, Eastbrokers will provide $300,000 in
initial funding and CyberRealm will provide $200,000 in developmental costs.
EBonlineinc.com is an Internet based service (www.EBonline.com) that will
allow domestic and internationally based companies to post their businesses,
match with buyers and sellers and have access to the investment banking and
securities network of the Eastbrokers Group. Eastbrokers believes that
EBonlineinc.com will have potentially three revenue streams: monthly membership
fees, consulting income and banner advertising income. Eastbrokers intends to
begin marketing the Website in May 1999 in international print media and major
search engines on the internet.
GOVERNMENT REGULATION
The Eastbrokers Group has operations based in the United States and 8
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
Austrian bank that engages in the securities business, including on the Austrian
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.
21
<PAGE>
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 April 30, 1999, Eastbrokers Group had approximately 400 full-time
employees and 40 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.
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
22
<PAGE>
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 six
week trial held from September 8, 1998, to October 14, 1998, a jury returned a
verdict in favor of EBI Securities. Plaintiffs motion for a new trial was
denied. EBI Securities has 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
case is related to the USEC litigation, described above, which also involves a
claim of fraud against Debenture. EBI Securities believes it has meritorious
defenses and intends to vigorously defend against NFC's claims. The case is
presently scheduled for trial in October 1999.
EBI Securities also is involved in an arbitration proceeding related to
the NFC Litigation entitled NATIONAL FAMILY CARE LIFE INSURANCE CO. V. PAULI
COMPANY, INC., ET AL., NASDR Case No. 96-02673 (the "Arbitration"). The
Arbitration panel entered an award against EBI Securities in July 1998 in favor
of third-party plaintiff Pauli & Company, Inc. ("Pauli") of approximately
$370,000, which was significantly below the initial award sought by Pauli of
approximately $1,100,000. EBI Securities has filed a motion in the NFC
Litigation to vacate this award and plans to vigorously contest this award on
appeal.
23
<PAGE>
JACK G. LARSEN, AS RECEIVER FOR SOUTHWEST INCOME, TRUST ADVANTAGE INCOME
TRUST AND INVESTORS TRADING TRUST V. COHIG AND ASSOCIATES, INC. ET AL., Maricopa
County Superior Court, Arizona, Case No. CV 98-20281. Plaintiff commenced this
action against EBI Securities and one of its brokers in December 1998 (and
process was served on EBI Securities in January 1999) seeking damages in excess
of $8 million dollars against EBI Securities as well as an accounting of funds
allegedly in possession of EBI Securities. Plaintiff, who apparently has been
appointed receiver for three trusts, alleges that customer accounts established
at EBI Securities by third parties contained funds that actually belonged to the
Trusts, and that EBI Securities negligently failed to supervise its employees,
in failing to determine that the third parties' trading activities, which
allegedly resulted in significant trading losses, were in violation of the terms
of agreements between the third parties and the Trusts. Plaintiff also contends
that EBI Securities has in its possession and has wrongfully refused to return
approximately $270,000 belonging to the Trusts. EBI Securities has filed a
Motion to Compel Arbitration and a Motion to Dismiss for Lack of Subject Matter
Jurisdiction. A court hearing on these two motions is presently scheduled for
May 20, 1999. EBI Securities believes that it has meritorious defenses and
intends to vigorously defend against Plaintiff's claims.
In 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.
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, 1998 and for the quarter and nine months ended December 31, 1998.
PLAN OF OPERATION
GENERAL OVERVIEW
Prior to August 1996, Eastbrokers engaged in the purchase and sale of
newly privatized businesses in the Czech Republic. In August 1996, Eastbrokers
entered the Central and Eastern European investment banking and securities
business through its acquisition of Eastbrokers Vienna, an Austrian holding
company providing financial services in Central and Eastern Europe through its
network of subsidiaries. The acquisition of Eastbrokers Vienna was intended to
not only provide an earnings stream from brokerage activities, but also position
Eastbrokers to provide investment banking and corporate finance services.
In March 1997, Eastbrokers expanded its operations into the brokerage
business in the United States through its acquisition of an existing New
York-based broker-dealer. In May 1998, Eastbrokers continued the expansion of
its U.S. operations through the acquisition of EBI Securities.
24
<PAGE>
The Eastbrokers Group currently operates a highly diversified investment
banking and securities network, with 20 US offices and 8 international branches
located in the following countries: Austria; Poland; Slovakia; Czech Republic;
Kazakhstan; Azerbaijan; Croatia; Slovenia. The Eastbrokers Group's mission is to
build, through acquisitions and strategic alliances, a highly successful,
global, middle market, investment banking and securities firm.
EUROPEAN OPERATIONS
When Eastbrokers Vienna was acquired in August 1996, Eastbrokers' business
strategy for its European operations was to: (1) market its emerging market
expertise; (2) develop an asset management business focused on Central and
Eastern European debt and equity securities; (3) enhance and develop the
Eastbrokers Group merchant banking activities; (4) identify potential corporate
finance candidates for investment banking opportunities and; (5) utilize its
expertise in the privatization activities throughout the region. During the past
12 months, the Eastbroker Group has had to modify this business strategy in
response to the global financial crisis, which peaked in the Summer of 1998,
when the Russian Ruble was devalued. This devaluation led to sharp decreases in
stock markets worldwide, particularly in Central and Eastern Europe. In
addition, due to falling prices, liquidity in much of the region was
significantly reduced. In order to minimize the negative effects on the
Eastbrokers Group's financial operations, the Eastbrokers Group reduced its work
force in Austria, Romania, Turkey, Russia and Bulgaria. In Poland, Slovenia,
Croatia, Kazakhstan and Slovakia, the Eastbrokers Group has reevaluated its
operations for additional cost savings. In the Czech Republic, the Eastbrokers
Group sold approximately 73 percent of its operations (see dispositions).
Depending upon further changes in market conditions, the Eastbrokers Group may
determine to close, sell or merge with third parties its other European
operations as it deems necessary. In February 1999, Eastbrokers' Austrian
subsidiary WMP purchased a forty-nine (49%) percent equity interest in Stratego
Invest a.s. Prague, a Czech securities and investment firm. The purchase price
was valued at approximately $2.9 million USD at the then current exchange rates.
The book value of Stratego Invest at the time of purchase was approximately 190
million Czech koruna, or approximately $6.1 million USD at the then current
exchange rates.
Stratego Invest is one of the leading Czech securities and investment
firms. The current management of Stratego Invest has a proven record of
profitability and they have well positioned the firm in order to expand into the
international securities marketplace. The partnership with Stratego Invest will
give the Eastbrokers Group a strong partner in the Czech marketplace, and at the
same time, will provide Stratego Invest access to the international marketplace
through the Eastbrokers Group's operations in Europe and the US.
Despite the current negative sentiment in emerging markets, the
Eastbrokers Group believes that Central and Eastern Europe's ultimate
unification into the European Economic and Monetary Union will lead to a
significant increase in investor interest in the region. This potential increase
in these emerging markets will benefit those firms that have existing operations
in the region. The Eastbrokers Group intends to maintain its solid long term
involvement in the region and to continue to provide its clients with quality
brokerage and investment banking services.
While investing in the emerging markets of Central and Eastern Europe
involves risk considerations not typically associated with investing in
securities of U.S. issuers, the Eastbrokers Group believes that such
considerations are outweighed by the benefits of diversification and potentially
superior returns. Among the considerations involved in investing in emerging
markets, such as Central and Eastern Europe, is that less information may be
available about foreign companies than about domestic companies. Foreign
companies are also not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies. In addition, unlike
investing in U.S. companies, securities of non-U.S. companies are generally
denominated in foreign currencies, thereby subjecting each security to changes
in value when the underlying foreign currency strengthens or weakens against the
U.S. dollar. Currency exchange rates can also be affected unpredictably by
intervention of U.S. or foreign governments or central banks or by currency
controls or political developments in the U.S. and abroad.
25
<PAGE>
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.
UNITED STATES OPERATIONS
Subsequent to the acquisition of Eastbrokers Vienna, Eastbrokers commenced
expansion of its brokerage operations in the United States. Eastbrokers' goal
was to build a strong US brokerage presence that would enable it to distribute
middle market, international corporate finance product. In the Spring of 1997,
Eastbrokers purchased a U.S. based broker-dealer, Eastbrokers North America,
Inc. During the process of establishing the Eastbrokers North America,
Eastbrokers was approached by numerous U.S. based broker-dealers interested in
being acquired by Eastbrokers. Management believes that consolidation within the
securities industry, particularly in the United States, is inevitable. This
consolidation can be attributed to the current volatility prevailing in the
financial markets, the higher degree of capital needed to maintain solid
brokerage functions and the increased regulatory environment. Eastbrokers
decided that as a well-capitalized, entrepreneurially managed, international,
publicly-traded, investment banking firm, it would be particularly appealing to
the sellers of medium size brokerage firms. In addition, Eastbrokers believes
that the purchase and roll-up of complementary securities businesses both in the
United States and in Europe, can be financed by the issuance of its Common
Stock.
In May 1998, Eastbrokers made a significant step in its roll-up strategy
in the United States. 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. See "Business--Current Operations."
In April 1999, Eastbrokers signed a joint venture agreement with
CyberRealm, Inc., a website development firm, to jointly own and develop
EBonlineinc.com, a newly established subsidiary. EBonlineinc.com will allow
domestic and internationally based companies to post their businesses, match
with buyers and sellers and have access to the Eastbrokers investment banking
and securities network. See "Business - Acquisitions and Dispositions Subsequent
to the Fiscal Year End."
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO QUARTER
AND NINE MONTHS ENDED DECEMBER 31, 1997
For the quarterly period ended December 31, 1998, the Eastbrokers Group
generated consolidated revenues in the amount of $6,683,867, compared to
$1,374,823, for the quarterly period ended December 31, 1997. For the nine month
period ended December 31, 1998, the Eastbrokers Group generated consolidated
revenues in the amount of $17,028,864, compared to $5,476,043, for the nine
month period ended December 31, 1997. Total revenues for the three and nine
month periods ended December 31, 1998, are significantly higher than the
previous periods due to the acquisition of EBI Securities, which contributed
approximately $4,933,232, and $9,300,016, for the quarterly and nine month
periods, respectively (the nine month numbers are reported from May 14, 1998,
the date of acquisition of EBI Securities - see Note 3 to the Financial
Statements). Total revenue for the nine months was also effected from the sale
of Eastbrokers Prague a.s. The Eastbrokers Group recognized a gain on the sale
of its interest in Eastbrokers Prague a.s. of approximately $1,312,000 before
taxes. This amount is reflected in the revenue section under the caption "Gain
on sale of interest in subsidiary."
The Eastbrokers Group incurred total consolidated costs and expenses of
$7,016,482, for the quarterly period ended December 31, 1998, and $19,587,978,
26
<PAGE>
for the nine month period ended December 31, 1998, compared to $1,705,031, for
the quarterly period ended December 31, 1997, and $7,005,302, for the nine month
period ended December 31, 1997. Total costs and expenses for the three month and
nine month periods ended December 31, 1998, are significantly higher than the
previous periods due to the acquisition of EBI Securities, which contributed
approximately $5,073,382, for the three month period and $11,703,382, for the
nine month period, respectively (the nine month numbers are reported from May
14, 1998, the date of acquisition of EBI Securities- see Note 3 to the Financial
Statements).
The Eastbrokers Group's loss before provision for income taxes and
minority interest in earnings of subsidiaries was $332,615, for the quarterly
period ended December 31, 1998, and $2,559,114, for the nine month period ended
December 31, 1998, compared to a loss of $330,208, for the quarterly period
ended December 31, 1997, and $1,529,259, for the nine month period ended
December 31, 1997. The Eastbrokers Group's provision for income taxes and
minority interest in earnings of subsidiaries for the quarterly and nine month
periods, are attributed solely to the Eastbrokers Group's European operations
and are primarily related to WMP Bank AG and Eastbrokers Budapest Rt.
The Eastbrokers Group reported consolidated net income of $53,639, for the
quarterly period ended December 31, 1998, and a consolidated net loss of
$3,011,273, for the nine month period ended December 31, 1998, compared to a
consolidated net loss of $101,260 for the quarterly period ended December 31,
1997, and a consolidated net loss of $1,198,507, for the nine month period ended
December 31, 1997.
The Eastbrokers Group's slight net profit for the quarter ended December
31, 1998, was attributable to several factors. First, in Europe, the Eastbrokers
Group's operations were impacted by the global financial crisis that occurred
during the Summer of 1998. Since the Eastbrokers Group's financial statements
for the period ended December 31, 1998, include the Eastbrokers Group's European
operations for the period ended September 30, 1998, this period of financial
market volatility is reflected in the Eastbrokers Group's quarter ended December
31, 1998. Specifically, during this period, the Eastbrokers Group's European
operations experienced a slowdown in its commission, trading and corporate
finance business. Second, the Eastbrokers Group's 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 and December. And fourth, the Eastbrokers Group
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 December 31, 1998, the Eastbrokers Group had total assets of
$61,516,532, and total liabilities of $34,127,514, compared to $40,424,733, and
$14,833,076, respectively, on December 31, 1997. As of the date of this filing,
the Eastbrokers Group believes that it has adequate liquidity to meet its
current obligations. However, no assurances can be made as to the Eastbrokers
Group's ability to meet its cash requirements in connection with any expansion
of the Eastbrokers Group's 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% of the
aggregate price or $1,265,000. Eastbrokers intends to redeem the Convertible
Debentures in full.
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 as a commission in connection with this transaction.
In March 1999, Eastbrokers issued the 10% Notes. Holders of the 10% Notes
have the right to convert their 10% Notes into shares of Common Stock at $5.75
per share. Proceeds from the Notes were used to redeem the 7% Convertible
Debentures issued in November 1998.
27
<PAGE>
The cash flows for the nine month period ended December 31, 1998, reflect
the volatile nature of the securities industry and the reallocation of the
Eastbrokers Group's assets indicative of a growing organization. The change in
the foreign currency translation adjustment is primarily related to the
fluctuations in the Eastbrokers Group's functional currencies to the U.S.
dollar. The U.S. dollar and its unexpected strength coupled with the unexpected
weakness of the European currencies (including the German Deutchmarke) have
negatively impacted the Eastbrokers Group's overall earnings as well as the
cumulative translation adjustment. The primary functional currencies affecting
the Eastbrokers Group are as follows: U.S. Dollar, Austrian Schilling, Czech
Koruna, Hungarian Forint, Slovak Koruna and the Polish Zloty.
As a broker/dealer in securities, the Eastbrokers Group will periodically
acquire positions in securities on behalf of its clients. As disclosed in "Note
2 - Financial Instruments", the Eastbrokers Group has title to various financial
instruments in the countries in which it operates. Certain of these investments
may be characterized as relatively illiquid and potentially subject to rapid
fluctuations in liquidity. Those securities are classified as "available for
sale securities".
FISCAL YEAR 1997 COMPARED WITH THE FISCAL YEAR 1998
As noted in the "General" section, the Eastbrokers Group's principal
activities have changed dramatically during the past two fiscal years. During
the fiscal year ended March 31, 1997, the Eastbrokers Group completely disposed
of its interest in the Hotel and acquired Eastbrokers Vienna, an Austrian based
securities broker-dealer providing financial services in Central and Eastern
Europe through its network of subsidiaries and affiliate offices. Potential
purchasers of the securities offered hereby are cautioned that a comparison
between Fiscal Year Ended March 31, 1997 and the Fiscal Year Ended March 31,
1998 may provide only minimal meaningful information.
A non-recurring item reflected in the operations of the Eastbrokers Group
for the year ended March 31, 1997 is the gain on the disposition of available
for sale securities of Moravacentrum a.s. of $229,574. Other non-recurring items
reflected in the operations for the year ended March 31, 1997 are the loss on
discontinued operations of approximately $1,300,000 on the disposition of
Eastbrokers' entire interest in the Hotel and the gain on the disposition of
available for sale securities which resulted in a fourth quarter gain of
approximately $655,000. A non-recurring item reflected in the operations of the
Eastbrokers Group for the year ended March 31, 1998 includes the sale of the 51
percent interest in SWIB to Peter Schmid, the Eastbrokers Group's former
Chairman, President and Chief Executive Officer, for approximately $1,000,000.
As an overview of the year ended March 31, 1997, Eastbrokers Vienna was
first consolidated on August 1, 1996 and has a calendar year end. It is
important to note that the Consolidated Statements of Operations includes the
revenues and expenses of Eastbrokers Vienna for the period from the date of
acquisition (August 1, 1996) through December 31, 1996 (a five month period) in
accordance with Note 1 to the financial statements. See "Financial Statements."
The overall increase in the volume of revenue and expenses is indicative of a
change from a one location, single operating unit to a multi-location, diverse
entity.
Pro forma results of operations as presented in Note 5 "Business
Acquisitions" reflect total revenues for the year ended March 31, 1997 as
$8,559,786. Comparing total revenues for the year ended March 31, 1998 (the
first full year of consolidated operations) of $10,342,976 to pro forma results
of operations for the year ended March 31, 1997, shows an increase of $1,783,190
USD.
The net tax benefit represents the cumulative effect of individual
subsidiaries' unique tax calculations. In some instances, certain revenue items
are non-taxable in accordance with statutory requirements in the country in
which the office is located. In others, net operating losses available for
carryforward created a tax benefit. As discussed in Note 13 - "Income Taxes",
the Eastbrokers Group has approximately $12,850,000 USD in net operating loss
carryforwards available in Austria and approximately $2,985,000 USD in net
operating loss carryforwards available for future use in the U.S. The
Eastbrokers Group has established a valuation allowance for the U.S. net
operating losses. The Eastbrokers Group also expects its Austrian operations to
return to profitability in the fiscal year ended December 31, 1998 as its
28
<PAGE>
efforts in various privatization activities are realized and such activities
should generate an increase in the value of certain Company holdings. Further,
the Austrian net operating losses are available for carryforward indefinitely.
Accordingly, the Eastbrokers Group believes it is more likely than not that
these benefits will be realized in the future. Regulations in the Slovak
Republic provide capital gain distribution income related to Slovak
privatization activities is non-taxable. Eastbrokers Vienna was actively
involved in such activities and received such income in the fiscal year ended
March 31, 1997. It is unlikely that Eastbrokers Vienna will have similar
transactions in the future. As noted in the following paragraph, other
activities occurred in the fourth quarter that contributed to the current year's
tax benefit. The U.S. net operating loss carryforwards will expire, if unused,
in varying amounts through the year 2013. The Eastbrokers Group does not
anticipate any significant changes in the effective tax rates.
In Europe, the expenses of the Eastbrokers Group generally increase in the
quarter ending December 31 as compared to the quarter ending September 30 due
primarily to a "seasonal" effect. July and August are typically "holiday"
(vacation) months in Europe. Revenues and expenses generally respond accordingly
to this seasonal effect. The quarter ending December 31 is typically a strong
quarter in Europe as people return from holiday and seek to complete pending
transactions by calendar year end. The Eastbrokers Group is also pursuing
several corporate finance opportunities and has found that outsourcing portions
of the work to industry experts is sound corporate policy to manage personnel
and overhead costs. Many of the projects began in late September/early October
1996 and 1997 and continued through year end. General and administrative
expenses, as well as other operational expenses, increased due to the
Eastbrokers Group's increased focus on privatization activities in countries
that are currently in the process of opening their markets to western investors.
Involvement in privatization activities generally involves much time and
patience as the investments begin to come to fruition. Prior experience in the
privatization process is one of the Eastbrokers Group's more important
abilities.
The costs associated with the Eastbrokers Group's involvement in
privatization activities, its pursuit of corporate finance opportunities, the
continued downturn of the economy of the Czech Republic and the effect this
downturn has had on the Eastbrokers Group's operations, the costs associated
with the acquisition of Eastbrokers Vienna and the establishment of Eastbrokers
NA and an overall increase in general and administrative expenses are the
primary factors contributing to the negative operating cash flows experienced in
the fiscal year ended March 31, 1998. The Eastbrokers Group anticipated to
offset many of these operating expenses with revenue generated from brokerage
commissions of Eastbrokers NA and ongoing privatization projects in Central and
Eastern Europe. With this unexpected decrease in revenue and increased cost, the
Eastbrokers Group's $3,676,607 operating loss was significantly larger than
anticipated. The Eastbrokers Group anticipates that preliminary work performed
related to corporate finance activities will begin generating operating cash
flows in the second quarter of the Eastbrokers Group's fiscal year ending March
31, 2000 and its efforts in the various privatization activities will begin
generating operating cash flows near the beginning of 1999. However, there is no
guarantee that such operating cash flows will materialize by the anticipated
dates or whether they will be sufficient to offset other operating expenses.
Significant items on the statements of cash flows are primarily related to
customers' receivables, payables, and the related underlying securities. The
Eastbrokers Group's policy is to close as many open positions as possible at
fiscal year end and re-evaluate its strategic focus as it moves into the first
quarter. Also, the regulatory bodies in several of the countries in which the
Eastbrokers Group operates prefer to see a strong, liquid balance sheet at year
end. The Eastbrokers Group strives to accommodate the needs of these regulatory
agencies.
As a broker/dealer in securities, the Eastbrokers Group will periodically
acquire positions in securities on behalf of its clients. As disclosed in Note 3
- - "Financial Instruments", the Eastbrokers Group has title to various financial
instruments in the countries in which it operates. Certain of these investments
may be characterized as relatively illiquid and potentially subject to rapid
fluctuations in liquidity. Those securities are classified as "available for
sale securities". As of March 31, 1997, the Eastbrokers Group's material
concentration in the securities portfolio was limited to its investment in Vodni
Stavby Praha a.s., a security traded on the Prague Stock Exchange Main Market
(Czech Republic). As of March 31, 1997, the market value of the Eastbrokers
29
<PAGE>
Group's ownership interest in this security was approximately $1,750,000. As of
March 31, 1998, the Eastbrokers Group had three significant concentrations in
the securities portfolio. A description of these securities and their respective
carrying amounts are as follows: a security of a Russian chemical producer
traded on the OTC market of the Vienna Stock Exchange -- $1,030,270, a security
of a Bulgarian pharmaceutical company traded on the Bulgarian Stock Exchange
- --$3,185,630, and a security of a Bulgarian oil refinery traded on the Bulgarian
Stock Exchange -- $1,354,830. All other securities are relatively liquid and the
carrying value approximates the market value as of the balance sheet date. The
Eastbrokers Group does not have any material concentrations to high yield
issuers or commitments to high-yield issuers as of the balance sheet date.
The Eastbrokers Group recognizes it has concentrated a significant amount
of its assets as advances to its affiliates and investments in affiliates. At
the present time, the bulk of these loans have been related to privatization
activities. Since the Eastbrokers Group's affiliates are generally accounted for
as equity investments, these advances do not eliminate on consolidation.
Receivables from affiliated companies and other receivables are due on demand.
The Eastbrokers Group expects to collect these receivables within the next 12
months. For the years ended March 31, 1997 and 1998, the Eastbrokers Group has
investments in affiliated companies of $8,272,240 and $156,800, respectively,
and receivables from affiliated companies of $1,511,917 and $2,286,277,
respectively. The concentration of investments in affiliates by country are as
follows: for 1997 - Austria -- $7,755,997, Bulgaria -- $332,584, Slovenia --
$114,529, Others -- $69,130; and for 1998 - Slovenia and Croatia -- $156,800.
The significant decline in the investments in affiliated companies is primarily
attributable to WMP and the conversion from the equity method to full
consolidation for this subsidiary. The concentration of receivables from
affiliates by country are as follows: for 1997 - Austria -- $675,456, Bulgaria
- -- $536,587, Slovenia -- $150,994, Czech Republic -- $72,994, Others -- $75,886;
and for 1998 - Austria -- $2,286,277. The cash investments noted in the
statements of cash flows consist of direct investments in affiliates and the
advances to affiliates. These cash investments in each affiliate for the year
ended March 31, 1997 were as follows: WMP (Austria) -- $2,455,880, Bulgaria --
$894,513, Slovenia -- $150,994, Czech Republic -- $72,994, and Others --
$44,756. These cash investments in each affiliate for the year ended March 31,
1998 were as follows: Eastbrokers NA -- $512,036. As noted elsewhere in this
Form SB-2, Eastbrokers Vienna owns 52 percent of WMP. During the year ended
March 31, 1997, Eastbrokers Vienna participated in a capital increase in WMP in
which it acquired additional shares sufficient to maintain its proportionate
ownership percentage.
The operating activities of the Eastbrokers Vienna are impacted by many
different factors. Some of the more important factors are security market
conditions, level and volatility of interest rates, competitive conditions,
economic and political conditions, inflation, availability of short-term or
long-term funding and capital, and the volume of securities transactions done by
the firm. These factors will be addressed on a country by country basis where
significant Eastbrokers Vienna's operations are located.
AUSTRIA. On July 1, 1996, the Vienna Stock Exchange ("VSE") introduced an
electronic trading system to its continuous trading section which has
significantly reduced the overall volume of institutional trades through
independent brokers. Until that point in time, independent brokers such as WMP
handled many of these types of trades. This change accounted for an
approximately 25 percent decline in WMP's 1996 revenues. In response to this
change by the VSE, WMP has applied for an expanded banking license which would
allow it to hold customer accounts and perform other banking functions and
develop new revenue streams. In addition, WMP has become a member of the
European Association of Securities Dealers ("EASD") and is expected to begin
market making activities on the EASDAQ within the next 12 months. There were no
significant changes in the overall competitive conditions between brokerage
companies except for the introduction of the electronic trading system to the
continuous trading section of the VSE. The total volume of transactions handled
by the Austrian offices increased in 1996 but the average profit per transaction
decreased in 1996 as compared with 1995. At 2.5 percent, Austria's real economic
growth in 1997 was higher than projected, mainly thanks to the solid expansion
of real goods exports of 14.9 percent. This favorable development is to the most
part attributable to stepped-up foreign trade activity and hefty gains recorded
by Austria's export markets. Austria's accession to the European Union and the
opening up of Eastern Europe have helped Austrian exports advance from 37
percent in 1994 to 44 percent in 1996. In addition, the stabilization of
30
<PAGE>
European exchange rates largely reversed the downtrend of the real effective
exchange rate in the past few years. Starting in 1993, the devaluations of the
weak currencies had gradually undermined Austria's competitiveness. This changed
for the better in 1996 and 1997, not least owing to the prospect of the
establishment of EMU, and resulted in a cumulative improvement of the real
effective exchange rate of 5.4 percent in 1996 and 1997. The confluence of this
development and wage moderation significantly shored up the competitiveness of
the Austrian economy in the past two years, pushing it back to the level it held
in the early 1990s. At 5.1 percent, the federal budget deficit posted its
highest level in 1995. By 1997 it had been trimmed to 2.5 percent through
subdued public consumption and tax hikes, so that Austria would meet the fiscal
convergence criteria of the Maastricht Treaty. In the opinion of management, the
outlook for the Austrian economy in 1999 is very positive. In its most recent
projections the Austrian Institute for Economic Research ("WIFO") projects
growth rates of 3.2 percent for 1999. Interest rates as measured by an average
commercial credit declined from 7.82 percent in 1995 to 6.96 percent in 1996 to
6.50 percent in 1997 and further to 6.39 percent in August 1998. The overall
economic and political situation in Austria has been very stable and the
government has worked diligently to reduce budgetary pressure. The annual
deficit, which peaked in 1995 at 112.7 billion ATS, decreased to 100.4 billion
ATS in 1996 and to 64.5 billion ATS 1997. Inflation peaked in 1992 with 4.1
percent annual increase and then continued to drop to 3.6 percent in 1993, 3.0
percent in 1994, 2.2 percent in 1995, 1.9 percent in 1996, 1.3 percent in 1997
and to 1.2 percent in the first half of 1998. There are no significant
restrictions on transfers of funds to the parent company.
CZECH REPUBLIC. Between 1995 and 1996, the second wave of the mass
privatization was ending and the "third wave" was beginning. During this time,
foreign competitors began entering the brokerage and investment banking
industry. In the fourth quarter of 1996, the Czech stock markets began showing
signs of instability and the overall market began a steep decline. The market
dropped because of the outflows of foreign capital due to profit taking and
institutional investors adjusting their portfolios to focus on other, more
regulated Eastern European markets. In addition, the Czech Republic has been
criticized for not establishing proper securities regulations. In response to
these criticisms, the Czech government recently adopted new securities
legislation and is in the process of establishing a Securities Commission based
upon the model provided by the U.S. Securities and Exchange Commission. Two of
the major goals of this legislation are to increase the transparency of the
market and to afford minority shareholders greater protection. Interest rates
have been relatively stable between 1995 and 1997 at approximately 13 percent on
an annualized basis. During 1997, the main index of the Prague Stock Exchange
saw a gradual decline from 550 to 460. The overall volume, although relatively
stable, was unusually low with an average turnover of approximately 100 million
Czech Korunas. During the first half of 1998, the market index hovered between
the 450 and 500 range before dropping approximately 30 percent in the first week
of October 1998. This decline represented a 41 percent drop from the levels of
the prior year and a historical low. Average daily turnover has shown some
improvement but it remains uncertain whether these levels will be sufficient to
maintain the market or if the market will be subject to additional corrections.
The overall economic and political situation in the Czech Republic has undergone
serious turmoil which has reduced the confidence of foreign investors in the
market. Additionally, foreign investors appear to be moving into Hungary and
Poland where the markets appear to be more transparent and have greater
protection for the minority investors. After remaining relatively stable for
most of 1995 and 1996 at approximately 8 percent per annum, inflation in the
Czech Republic declined slightly during 1997 followed by a dramatic increase in
the first quarter of 1998 before settling in at approximately 10.5 percent by
the end of the third quarter 1998. Much of the inflationary and overall market
turmoil was believed to have been brought about by the economic crises in Russia
and Asia. There has been no significant change in the availability or cost of
capital in the Czech Republic, although interest rates increased by
approximately 2.50 percent in 1997 to 13.00 percent. Interest rates have
remained relatively constant at this level through 1998. The result of the
decline in the overall market conditions has negatively affected the Czech
brokerage industry, including the Eastbrokers Group's Czech operations. The
total volume of securities transactions in the Czech Republic has decreased
substantially along with an overall reduction in average profit per transaction
due to increased competition. This has caused a decrease in revenue in the
Eastbrokers Group's Prague operations and a net operating loss from this unit.
In response to the unexpected downturn in the Czech Republic, the Eastbrokers
Group sold its operations in the Czech Republic on June 1998.
31
<PAGE>
In February 1999, Eastbrokers' Austrian subsidiary WMP Bank AG, purchased
a forty-nine (49%) percent equity interest in Stratego Invest a.s. Prague, a
Czech securities and investment firm. The purchase price was valued at
approximately $2.9 million USD at the then current exchange rates. The book
value of Stratego Invest at the time of purchase was approximately 190 million
Czech koruna, or approximately $6.1 million USD at the then current exchange
rates.
Stratego Invest is one of the leading Czech securities and investment
firms. The current management of Stratego Invest has a proven record of
profitability and they have well positioned the firm in order to expand into the
international securities marketplace. The partnership with Stratego Invest will
give Eastbrokers Group a strong partner in the Czech marketplace, and at the
same time, will provide Stratego Invest access to the international marketplace
through Eastbroker Group's operations in Europe and the US.
HUNGARY. The Budapest Stock Exchange ("BSE") became one of the pre-eminent
emerging market stock exchanges in 1996 thanks to overall market gains of over
170 percent for the year ended December 31, 1996 which led the Budapest Stock
Market Exchange Index ("BUX") to close the year at 4,134. During 1997, the BUX
reached a high of 8,107 before retreating to the 6,000 level in November 1997.
Positive developments helped the BUX recover to approximately 8,000 by the end
of 1997. During 1998, the BUX reached a record high of approximately 9,100 and
then dropped (due to global market turmoil) to approximately 3,600 before
recovering to approximately 5,100 as of October 1998. As the index grew, so did
overall market liquidity. Technology and regulations also continued to improve
which contributed to the overall market gains. In 1995, interest rates in
Hungary reached a high of 35-40 percent as inflation reached a high of 33
percent. In response to the high inflation and interest rates, Hungary initiated
a new fiscal policy which included economic austerity measures and creating a
crawling peg basket for the currency which tied the Hungarian Forint to leading
currencies. The effect of these measures stabilized the currency, interest rates
and overall inflation which served to generate increased investor interest in
Hungary. By the end of 1996, interest rates and inflation stabilized at levels
of 20-22 percent and 19 percent. Interest rates closed the 1997 year at
approximately 24 percent and declined during the first half of 1998 to
approximately 20 percent. Inflation was also curtailed and dropped to
approximately 16.5 percent during 1997. There has been no significant change in
the availability or cost of capital other than the interest rate fluctuations.
The total volume of transactions increased dramatically in 1996 (the last year
for which the Eastbrokers Group has data) with an overall reduction in the
average profit per transaction. In December 1998, Eastbrokers sold its
operations in Hungary.
POLAND. The Warsaw Stock Exchange ("WSE") is a highly regulated market
following the French model. The transparency of this market and the protection
afforded minority shareholders has generated both customer confidence and
foreign investor interest. In 1996, the main market index rose nearly 90 percent
while the index of the twenty most capitalized firms increased 82 percent. The
stock market continued to perform well in 1997 and continued to reach even
higher through May 1998. At that time, the Warsaw Stock Exchange Index ("WIG")
reached a record high of over 18,000. Unfortunately, this market was unable to
withstand the effects of the Asian and Russian economic crises. By mid-October
1998, the WIG had dropped over 40 percent to below 11,000. Interest rates
remained high at approximately 22 percent through 1997 and increasing to 24.5
percent during the first half of 1998. Economic growth seems to have continued
into 1998 with steady economic growth of approximately 7 percent. The brokerage
industry in Poland is highly competitive due to restrictions on commissions and
allowable spreads on securities transactions. As a result, many brokerage
companies have merged or have been acquired by well-financed competitors. This
political situation appears to have been stabilized in September 1997, when the
Solidarity Electoral Action ("AWS") won the elections and assumed control of the
government. Currently the country is in a period of economic stability with
interest rates and inflation heading lower and the currency appears to be
stabilizing against the major currencies. For 1996, inflation was approximately
18 percent, a drop of approximately 3 percent from 1995 levels but still higher
than in many transition economies. Inflation remained at approximately 18
percent for much of 1997 before dropping to approximately 14 percent by mid
1998. There are restrictions on transfers of funds to the parent company. In
certain instances, such transfers may need the permission of the national bank.
32
<PAGE>
SLOVAK REPUBLIC. Due to the unstable political and economic situation in
the Slovak Republic, investor interest remains very low when compared to other
countries in the region. However, the September 1998 election ousted the current
political party, which may result in a more favorable investment environment.
The overall trading volume in the market has been very low and the shares that
are listed are perceived to be fairly illiquid in part due to the dominance of
direct trades. Inflation appeared to be heading lower in 1996 and interest rates
followed. In 1997, the monetary policy was aimed at maintaining internal and
external stability. Inflation reached a rate of approximately 6.5 percent and
GDP grew at a similar pace. For 1998, GDP appears to be growing at approximately
6.5 percent with inflation increasing to approximately 7.25 percent. Due to the
restrictive monetary policy being followed by the government, credit is
generally not available or comes with a very high interest rate. There are no
significant restrictions on transfers of funds to the parent company.
Eastbrokers intends to liquidate its position in Eastbrokers Slovakia within the
next six months.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
The unexpected strength of the U.S. Dollar as compared to the Austrian
Schilling during the fiscal year ended March 31, 1997 had an adverse effect on
the Eastbrokers Group. The Eastbrokers Group had collateralized a short term
borrowing arrangement with approximately $1,500,000 in cash held in an Austrian
Schilling account just as the U.S. Dollar began to increase in strength relative
to the Austrian Schilling. During the term of this arrangement, the Austrian
Schilling lost approximately 10 percent of its value relative to the U.S.
Dollar. This single transaction makes up the majority of the loss on foreign
currency transactions for the year ended March 31, 1997. The Eastbrokers Group
is no longer collateralizing its short term borrowing on a "soft currency"
basis.
The U.S. Dollar and its unexpected strength coupled with the unexpected
weakness of the European currencies (including the German Deutchmarke) have
negatively impacted the Eastbrokers Group's overall earnings as well as the
cumulative translation adjustment. The primary functional currencies affecting
the Company are as follows: U.S. Dollar, Austrian Schilling, Czech Koruna,
Hungarian Forint, Slovak Koruna and the Polish Zloty. For the year ended March
31, 1997, the Eastbrokers Group reported a foreign currency translation
adjustment in its statement of cash flows of approximately $1.3 million. The
effect of the exchange rate changes on a country by country basis are
approximately as follows: Czech Republic -- $600,000, Austria -- $400,000,
Hungary -- $210,000, Poland -- $120,000.
Assets and liabilities of operations having foreign currencies are
translated at year-end rates of exchange, and the income statements are
translated at weighted average rates of exchange for the year. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," gains or losses resulting from translating foreign
currency financial statements, net of hedge gains or losses and their related
tax effects, are reflected in cumulative translation adjustments, a separate
component of stockholders' equity. Gains or losses resulting from foreign
currency transactions are included in net income. Foreign currency transactions
are generally completed transactions denominated in a currency other than the
functional currency or changes in exchange rates that impact monetary assets and
liabilities denominated in currencies other than the primary functional
currency.
CALCULATION OF EARNINGS PER SHARE
The calculation of earnings per share on the financial statements included
in this report is based on the weighted average number of shares outstanding, as
calculated.
VIABILITY OF OPERATING RESULTS
The 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
33
<PAGE>
investors in the local economies, and governmental regulations restricting the
repatriation of profits. In some of the countries where we have operations
(E.G., Slovakia, Kazakhstan, 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.
Currently, the Slovak Republic and Romanian markets are experiencing
extremely difficult economic conditions and market reforms may be necessary to
restore this economy to health. In light of these developments, it is the
Eastbrokers Group's intention to liquidate its position in Eastbrokers Slovakia
and Eastbrokers Romania within the next six months. The Eastbrokers Group
recognizes that in the interim period between now and any such liquidation it
may be necessary to support negative cash flow from these operations.
LIQUIDITY AND CAPITAL RESOURCES
The Eastbrokers Group's statements of financial position reflect a liquid
financial position as cash and cash equivalents convertible to cash represent 21
percent and 16 percent of total assets at March 31, 1997, and March 31, 1998,
respectively and 6 percent and 4 percent of total assets at December 31, 1997
and December 31, 1998, respectively.
The Eastbrokers Group is subject to net capital and liquidity requirements
in the local jurisdictions in which it operates. As of March 31, 1997 and 1998
and as of December 31, 1997 and 1998, the Eastbrokers Group was in excess of its
minimum net capital and liquidity requirements in all jurisdictions in which it
operates.
The Eastbrokers Group finances its operations primarily with existing
capital and funds generated from its diversified operations and financing
activities.
In the opinion of management, the Eastbrokers Group's existing capital and
cash flow from operations will be adequate to meet its capital needs for at
least the next 12 months in light of currently known and reasonably estimable
trends. The Eastbrokers Group is currently exploring its options with regards to
additional debt or equity financing and there can be no assurance such financing
will be available. However, the Eastbrokers Group recognizes that with increased
liquidity it may be better positioned to take advantage of potential
opportunities in the markets where it maintains its operations. No assurances
can be made as to the Eastbrokers Group's 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.
34
<PAGE>
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 42 million Austrian
Schillings of these bonds. The Eastbrokers Group intends 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 subisidary.
At March 31, 1997, Eastbrokers had $1,200,793 outstanding under repurchase
agreements. The weighted average interest rate on these repurchase agreements
was 12.91 percent. Securities listed on the Prague Stock Exchange Main Market
with a market value of approximately $1,700,000 were used to collateralize this
arrangement. During the fiscal year ending March 31, 1998, the underlying
securities were sold to a third party for an amount approximating Eastbrokers'
carrying basis. The repurchase agreements were transferred to the new owner at
the date of sale.
On November 25, 1998, Eastbrokers sold 10 newly issued units consisting in
the aggregate of $1,100,000 in 7% Convertible Debentures and Series C Warrants
to purchase 125,000 shares of common stock. The 7% Convertible Debentures were
redeemed in March 1999 from a portion of the proceeds related to the issuance of
the 10% 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, Eastbrokers issued the 10% Notes due 2003. Holders of the
10% Notes have the right to convert their 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% Convertible Debentures.
EFFECTS OF INFLATION
The Eastbrokers Group maintains operations in several economies that are
considered inflationary. To the extent that inflation results in rising interest
rates and devaluation of the local currencies in relation to the U.S. Dollar, or
has other adverse affects on securities markets and on the value of securities
held by the Eastbrokers Group in inventory, it may affect the Eastbrokers
Group's financial position and results of operations. The 1996 inflation rates
in the countries where Eastbrokers Vienna has significant operations are as
follows: Austria - 2 percent, Czech Republic - 8 percent, Hungary - 19 percent,
Poland - 18 percent, and Slovak Republic - 5 percent. The 1997 inflation rates
in the countries where Eastbrokers Vienna has significant operations are as
follows: Austria - 3 percent, Czech Republic - 10 percent, Hungary - 18 percent,
Poland - 13 percent, and Slovak Republic - 6 percent.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") SFAS
No. 128. The new standard replaces primary and fully diluted earnings per share
with basic and diluted earnings per share. SFAS No. 128 was adopted by the
Eastbrokers Group beginning with the interim reporting period ended December 31,
1997. The adoption did not impact previously reported earnings per share
amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
35
<PAGE>
in a full set of general-purpose financial statements. This statement was
adopted by the Eastbrokers Group beginning with the fiscal year ended March 31,
1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement will be effective for the Eastbrokers
Group's annual report for the fiscal year ended March 31, 1999. In the initial
year of application, comparative information for earlier years is to be
restated. At this time, the Eastbrokers Group does not believe that this
statement will have a significant impact on the Eastbrokers Group.
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 Eastbrokers Group does not believe that this statement will have a
significant impact on the Eastbrokers Group.
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.
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;
36
<PAGE>
(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 April 30, 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 June 1999 and will
continue through 1999. In addition, the Eastbrokers Group will identify the
major business relationships of the Eastbrokers Group by the end of the second
calendar quarter of 1999, and many of them will be tested as soon thereafter 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 April 30, 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.
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
37
<PAGE>
December 31, 1998, the Eastbrokers Group estimates that it has expended
approximately $400,000 on the Year 2000 project. These costs have been and will
continue to be funded through operating cash flow and are expensed in the period
in which they are incurred.
The 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
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.
38
<PAGE>
MANAGEMENT
A. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Eastbrokers, their ages and
positions are set forth below:
NAME AGE* POSITION
---- ---- --------
Martin A. Sumichrast 32 Chairman of the Board,
President and Chief Executive
Officer
Kevin D. McNeil 39 Executive Vice President,
Secretary, Treasurer and Chief
Financial Officer
Wolfgang Kossner 31 Vice Chairman of the Board
Dr. Lawrence Chimerine 58 Director
Jay R. Schifferli 38 Director
Michael Sumichrast, Ph.D. 78 Director
- -----------------
* 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 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.
Kossner served as the managing director of WMP Bank AG ("WMP") (formerly named
39
<PAGE>
WMP Borsenmakler AG), a subsidiary acquired by Eastbrokers in 1996. 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, 38, 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 meeetings. 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, 1998, no fees were paid. All
current directors waived such fees for the fiscal year ended March 31, 1998.
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, 1998, 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.
40
<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 April 30, 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
Name and Address (1) Position with Eastbrokers Number of Shares of Shares
- ---------------------------- ------------------------- ---------------- -----------
<S> <C> <C> <C>
Martin A. Sumichrast (2) Chairman of the Board, 390,000 7.31
President, Chief
Executive Officer and
Director
Kevin D. McNeil (3) Executive Vice 110,078 2.10
President, Secretary,
Treasurer and Chief
Financial Officer
Wolfgang Kossner (4) Vice Chairman 2,420,420 40.23
Dr. Lawrence Chimerine (5) Director 12,500 *
Jay R. Schifferli (5) Director 12,500 *
Michael Sumichrast, Ph.D.(5) Director 12,500 *
Peter Schmid (former 27,775 *
Chairman of the Board,
President and Chief
Executive Officer)
General Partners AG (6) 2,187,920 37.83
All Officers and
Directors as a
Group (6 persons) 2,957,998 47.24
</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
4.63%.
41
<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 31.26%.
(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) 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 25.78% of Eastbrokers, including 200,000
shares issuable upon exercise of options to acquire Common Stock at $10.00
per share held by GP.
42
<PAGE>
EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
SECURITIES
OTHER ANNUAL RESTRICTED STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS($) OPTIONS/SARS(#) PAYOUTS COMPENSATION
- --------------------------- ---- ------ ----- ------------ ---------------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Schmid(1) 1998 $138,305 $30,000 -- -- -- -- --
Chairman, President 1997* $129,988 -- -- -- -- -- --
and Chief Executive 1996* -- -- -- -- -- -- --
Officer 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Martin A. Sumichrast(2) 1998 $120,000 $20,000 -- -- -- -- --
Vice-Chairman of the 1997* $120,000 $11,000 -- -- -- -- --
Board and Secretary 1996** $ 30,000 -- -- -- -- -- --
1995 $107,500 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Petr Bednarik, Ing.(1) 1998 -- -- -- -- -- -- --
Former President and 1997* $ 49,000 -- $24,000*** -- -- -- --
Chief Executive Officer 1996** $ 10,000 -- -- -- -- -- --
1995 $107,500 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
August A. de Roode(1)(4) 1998 -- -- -- -- -- -- --
Former Chief Executive 1997* $ 72,094 -- -- -- -- -- --
Officer and Chief 1996** -- -- -- -- -- -- --
Operating Officer 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Michael Sumichrast,
Ph.D.(3) 1998 -- -- $65,980 -- -- -- --
Former Chairman of the 1997* $100,000 -- $75,000*** -- -- -- --
Board 1996** $ 24,999 -- -- -- -- -- --
1995 $100,000 -- -- -- -- -- --
1994 -- -- -- -- -- -- --
</TABLE>
- ------------------
*for the fiscal year ended March 31, 1997.
**for the three month transition period ended March 31, 1996.
***these amounts constitute severance pay.
(1) Mr. Schmid 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. Mr. Bednarik was President and Chief
Executive Officer from the time of Eastbrokers' inception in 1993 until August
1996. Mr. De Roode was Chief Executive Officer and Chief Operating Officer from
August 1996 to March 1997.
(2) Martin A. Sumichrast became 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.
43
<PAGE>
(3) Dr. Sumichrast was Chairman of the Board from the time of Eastbrokers'
inception in 1993 until March 1997.
(4) Dr. de Roode's compensation was paid through VCH Vermogensverwaltung
Und Holding GmbH at his direction.
EMPLOYMENT AGREEMENTS
Effective January 1995, Eastbrokers entered into employment agreements
("Employment Agreements") with Messrs. Michael Sumichrast, Ph.D., Petr Bednarik,
Ing., and Martin A. Sumichrast. Mr. Bednarik's employment was terminated
effective August 1, 1996 in connection with the acquisition of Eastbrokers
Vienna. Under the terms of Mr. Bednarik's Employment Agreement, Mr. Bednarik
received $24,000 in severance compensation in August 1996 as a result of such
termination of employment. Dr. Sumichrast's Employment Agreement was terminated
upon his resignation as Chairman effective March 20, 1997 and he was awarded a
sum of $75,000. Eastbrokers also entered into Employment Agreements with Messrs.
August de Roode and former Chairman of the Board, President, Chief Executive
Officer and Director of EII, Peter Schmid, effective as of August 1, 1996. Mr.
De Roode's agreement expired upon his resignation on March 15, 1997. Mr.
Schmid's agreement expired upon his resignation on December 15, 1998. Mr. Martin
Sumichrast entered into a new Employment Agreement which will expire in December
2004, and will renew for a period of five years following the expiration date,
unless contrary notice is given by either party. 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 percent of 1%, respectively, of total revenue of Eastbrokers in excess
of $6,000,000 per quarter. 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 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 Purchase Warrants and
32,583 Placement Agent Common Stock Purchase 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. 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.
44
<PAGE>
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 Schole
method at the time of grant. As additional compensation under the agreement, Mr.
Kossner will receive project success fees to be determined. The agreement may be
terminated by 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 $4.00 per share.
OPTION/SAR EXERCISES
There were no exercises of options during the fiscal year ended March 31,
1997. Options for 7,750 shares of Common Stock were exercised during the fiscal
year ended March 31, 1998.
FISCAL YEAR-END OPTION/SAR VALUES
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Number of Value of
Securities Unexercised
Underlying In-The-Money
Unexercised Options/SARs at
Shares Value Options/SARs at FY- FY-End($)
Acquired on Realized End (#) Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------
Peter Schmid 0 - 33,000/0 -
Wolfgang Kossner 0 - 100,000/0 -
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.
45
<PAGE>
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.
SELLING SECURITY HOLDERS
This Prospectus relates to the resale of 949,000 Common Stock Shares,
1,352,000 Warrants, 1,352,000 Warrant Shares, 1,237,222 Placement Agent Warrants
and 1,237,222 Placement Agent Warrant 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 April 30, 1999
Eastbrokers had 5,184,250 shares of Common Stock issued and outstanding.
<TABLE>
<CAPTION>
---------------------------- -----------------------------
Beneficial Ownership Beneficial Ownership After
Prior to the Offering the Offering (1)
---------------------------- -----------------------------
Number of
Number Shares to Number of
of shares be Sold Shares Percentage
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
COMMON STOCK:
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 *
Calvin Caldwell 5,000 5,000 0 *
Steve Caruso 72,502 72,502 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 8.2%
Bud Clarke 72,502 72,502 0 *
Peter Cohen 37,555 37,555 0 *
Michael P. Curtis 20,000 20,000 0 *
Daleford Way 200,000 00,000 0 *
Michael Finnan 2,000 2,000 0 *
General Partners Beteiligungs,
GmbH (3) 2,187,920 800,000 (4) 1,387,920 25.78% (4)
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 *
Interpacific Capital Corp. 80,000 80,000 0 *
Investor Resource Services, Inc. 125,000 125,000 0 *
JB Sutton Group 775,003 775,003 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 20,000 20,000 0 *
Kevin Loomis 5,516 5,516 0 *
Maccabee Investors II LLC 139,000 139,000 0 *
Kevin McNeil (5) 110,078 57,583 52,495 1.01%
Ralph Olsen 10,000 7,500 2,500 *
William Orzolek 20,000 20,000 0 *
Paul Savage 4,414 4,414 0 *
Richard Schmidt 40,000 40,000 0 *
Stephen Schoffman 145,490 145,490 0 *
Robert J. Sforza 15,000 15,000 0 *
Jonathan Siegal 145,490 145,490 0 *
Frank Skelley 26,482 26,482 0 *
Dale Sobek 30,000 30,000 0 *
Martin S. Sumichrast (6) 390,000 150,000 240,000 4.63%
Vincent Truglio 20,000 20,000 0 *
Hugo Tsai 120,000 120,000 0 *
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
---------------------------- ----------------------------
Beneficial Ownership Beneficial Ownership
Prior to the Offering After the Offering (1)
---------------------------- ----------------------------
Number of
Number of Warrants to Number of
Warrants Be Sold Warrants Percentage
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
CLASS C COMMON STOCK
PURCHASE WARRANTS: (7)
Allied International Fund Inc. 10,000 10,000 0 *
Robert Alloway 10,000 10,000 0 *
Ellis Belodoff 5,000 5,000 0 *
Castletownbere Associates, LLC 10,000 10,000 0 *
Michael P. Curtis 10,000 10,000 0 *
Daleford Way 100,000 100,000 0 *
General Partners Beteiligungs,
GmbH (3) 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 *
Interpacific Capital Corp. 40,000 40,000 0 *
JB Sutton Group 352,000 352,000 *
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 *
Richard Schmidt 20,000 20,000 0 *
Robert J. Sforza 10,000 10,000 0 *
Dale Sobek 20,000 20,000 0 *
Vincent Truglio 10,000 10,000 0 *
Hugo Tsai 60,000 60,000 0 *
PLACEMENT AGENT WARRANTS: (7)
Ted Burns 66,203 66,203 0 *
Steve Caruso 72,502 72,502 0 *
Barry Cassese 2,000 2,000 0 *
Bud Clarke 72,502 72,502 0 *
Peter Cohen 37,555 37,555 0 *
Michael Finnan 2,000 2,000 0 *
Craig Gross 26,482 26,482 0 *
JB Sutton Group 423,003 423,003 0 *
Kevin Loomis 5,516 5,516 0 *
Kevin McNeil (5) 57,583 57,583 0 *
Paul Savage 4,414 4,414 0 *
Stephen Schoffman 145,490 145,490 0 *
Jonathan Siegal 145,490 145,490 0 *
Frank Skelley 26,482 26,482 0 *
Martin A. Sumichrast (6) 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) 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 April 30, General Partners beneficially owns
37.83% 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.
47
<PAGE>
(4) 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 25.78% 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."
(5) 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. 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."
(6) 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."
(7) 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 April 30, 1999 5,184,250
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 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, 1,505,900 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.
48
<PAGE>
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 $10.00 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.
49
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the sale by Eastbrokers of the Hotel Fortuna a.s. (the "Hotel")
on October 1, 1996, Eastbrokers owned 50.2 percent of the Hotel. Stratego Invest
a.s., a broker-dealer and financial consulting company organized under the laws
of the Czech Republic, owned 20.6 percent of the Hotel. Stratego Invest a.s. was
at that time more than 50 percent owned by Stratego a.s., which was controlled
by Ing. Petr Bednarik. Mr. Bednarik was President and CEO of the Company until
August 1996. The sales transaction of the Hotel by Eastbrokers was arranged by
Stratego Invest a.s. For providing services related to the transaction, Stratego
Invest a.s. was to have received a commission fee of 1,000,000 CZK
(approximately $37,000 USD), however, Stratego Invest a.s. waived its commission
related to this transaction.
In September 1996, Mr. Peter Schmid, former Chairman of the Board,
President, Chief Executive Officer and Director of Eastbrokers, received from
Eastbrokers Vienna 3,511,422 Austrian Schillings (approximately $340,000 USD)
for his 49.95 percent ownership interest in Eastbrokers
Wertpapiervermittlungs-gesellschaft GmbH ("Eastbrokers GmbH"), an Austrian
Securities Brokerage Company with limited liability. The nominal value of these
shares was 500,000 Austrian Schillings.
In September 1996, Mr. Schmid received 376,275 Austrian Schillings
(approximately $36,500 USD) for his 5.60 percent ownership interest in
Eastbrokers Slovakia a.s., Bratislava ("Eastbrokers Slovakia"). Eastbrokers
Slovakia is Eastbrokers' subsidiary operating in the Slovak Republic. The
nominal value of these shares was 280,000 Slovak Koruna.
In September 1996, Mr. August de Roode received 1,110,250 Austrian
Schillings (approximately $107,500 USD) for his 24.40 percent ownership interest
in Eastbrokers Slovakia. The nominal value of these shares was 1,220,000 Slovak
Koruna. Mr. de Roode was Chief Executive Officer, Chief Operating Officer and
Director of Eastbrokers until March 1997 and he was also a Director of
Eastbrokers Slovakia at the date of this transaction.
Eastbrokers entered into various agreements with Randall F. Greene, a
former director of Eastbrokers. Mr. Greene provided consulting services pursuant
to an agreement dated July 26, 1996 in connection with Eastbrokers' acquisition
of Eastbrokers Vienna. Pursuant to this agreement, Mr. Green received $20,000 as
a non-accountable expense allowance and 10,000 shares of Eastbrokers' Common
Stock. In addition, during the 1997 fiscal year Mr. Greene was paid $37,000 for
consulting services provided to Eastbrokers in connection with potential mergers
and/or acquisitions. In connection with Mr. 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 Eastbrokers' 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.
50
<PAGE>
In March 1997, Eastbrokers Vienna purchased 30,000 shares of Schneiders
1895 AG for 3,618,000 Austrian Schillings (approximately $302,000 USD). Mr.
Peter Schmid is a Director of Schneiders 1895 AG and Mr. Schmid's father is an
officer and Director of Schneiders 1895 AG.
In December 1996, Eastbrokers Vienna loaned Dr. Muller-Tyl approximately
$72,000 USD. Interest on the outstanding balance of this obligation is computed
at 8 percent per annum until paid in full. Dr. Muller-Tyl was the Chief
Operating Officer of Eastbrokers until his resignation in January 1998.
The Eastbrokers Group 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 Eastbrokers Group is
subject to occupancy expenses no greater than the current market rates. GPI is a
subsidiary of General Partners Beteiligungs AG ("General Partners"), an Austrian
holding company and the beneficial owner of 1,477,139 shares of Common Stock.
Mr. Kossner, a Director of Eastbrokers and an officer of Eastbrokers from
August, 1996 until November, 1996, owns approximately 30 percent of the
outstanding shares of GP. He is a member of GP's Supervisory Board, WMP's
Supervisory Board, the Eastbrokers Vienna Supervisory Board, and is a Director
of Eastbrokers.
During 1996, Eastbrokers entered into a verbal agreement with RealWorld,
an internet software developer, to design and build an online stock exchange
game and online trading system. The initial deposit to begin development of the
game and system was 530,000 Austrian Schillings (approximately $50,000 USD).
Currently Eastbrokers has a liability to RealWorld of 208,000 Austrian
Schillings (approximately $20,000 USD) representing amounts due on progress
billings. The agreement states that costs will be charged on an hourly basis and
monthly progress billings will be made once the original deposit has been
depleted. Dr. Muller-Tyl is a member of the Supervisory Board for RealWorld.
Venture Capital Holdings Gmbh, an Austrian company owned and controlled by Mr.
De Roode and Mr. Muller-Tyl ("VCH") and Messrs. Schmid, Kossner, and Muller-Tyl
were at that time shareholders of RealWorld and represented a combined ownership
interest of 26 percent.
At December 31, 1996, Eastbrokers has a receivable related to share
transactions from Mr. Kossner in the amount of 2,269,198 Austrian Schillings
(approximately $209,000 USD).
At December 31, 1996, Eastbrokers has a receivable related to share
transactions from Z.E. Beteiligungs AG ("ZE") in the amount of 5,537,202
Austrian Schillings (approximately $511,000 USD). ZE is a subsidiary of General
Partners.
WMP is an Austrian broker-dealer, market maker, and member of the Vienna
Stock Exchange. WMP's common stock is publicly traded on the Main Market of the
Vienna Stock Exchange. From time to time, WMP will make a market in stock of
companies that have a direct relationship to Eastbrokers through its Directors.
In October 1997, WMP sold its interest in WMP GmbH, primarily an inactive
subsidiary to COR Industrieberatung GmbH, for 2.5 million Austrian Schillings
(approximately $200,000 USD). The sales price approximated the cost basis of WMP
GmbH at the date of disposition.
In December 1997, Eastbrokers Vienna sold its 51 percent interest SWIB to
Mr. Schmid for 13 million Austrian Schillings (approximately $1,025,000 USD).
The Company acquired its ownership interest in SWIB in mid-1997 for 510,000
Austrian Schillings (approximately $40,000 USD). At the time of acquisition, the
principal asset of SWIB was an investment in a company which was entering
bankruptcy proceedings and there was considerable uncertainty regarding the
future realizable value of this asset. By December 1997, bankruptcy proceedings
had progressed to a point where an estimate could be made on the net realizable
value of this asset. Based on the information available at that time, SWIB's
51
<PAGE>
value at the date of disposition was determined by the Board of Directors to be
in the range of 12 million to 14 million Austrian Schillings (approximately
$950,000 to $1,100,000 USD).
As of December 31, 1997, ZE, a 26.27 percent owned subsidiary of General
Partners, owned approximately 25 percent of UCP Beteiligungs AG ("UCP AG"), an
Austrian holding company. UCP AG, in turn, owns 27.7 percent of a Russian
chemical company, UCP AOOT. Shares of UCP AOOT are listed over-the-counter on
the Vienna Stock Exchange. WMP is a market maker in the shares of UCP AOOT on
the Vienna Stock Exchange. During 1997, WMP facilitated the purchase and sale of
several blocks of UCP AOOT shares. As of year end, the Company held
approximately 38,000 shares of UCP AOOT as an investment. As of March 31, 1998,
at this time, the estimated value of these shares was approximately $1,030,270.
Subsequent to year end, Eastbrokers sold approximately 8,000 shares in 6
separate transactions for approximately $400,000. As of October 26, 1998, the
current market price of UCP AOOT shares was approximately $54 per share on the
Vienna Stock Exchange. For the fiscal year ended March 31, 1998, Eastbrokers
recorded, as a charge to earnings, a market value adjustment of approximately
($610,000). Although the UCP AOOT shares are trading at a premium to the
original cost basis, the Company wrote down the carrying value of this item
based on an independent valuation of UCP AOOT and the uncertainty surrounding
the Russian economy.
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996, the Company
assumed a receivable in the amount of 7,387,697 ATS (approximately $704,000)
from Peter Schmid. As of December 31, 1997, the receivable increased due to cash
advances to 8,046,177 ATS (approximately $635,000) at the then current exchange
rates. These cash advances included the U.S. Dollar denominated amount
fluctuates based on the foreign currency exchange rate. On May 31, 1998, Mr.
Schmid entered into a Non-Negotiable Term Note in the amount of 8,046,177
Austrian Schillings. This Note bears interest at 8 percent per annum and matures
May 31, 2000. It was collateralized by 150,000 shares of the Common Stock. On
October 8, 1998, Mr. Schmid repaid 6,748,111 Austrian Schillings of the total
amount due. Mr. Schmid repaid the remaining outstanding balance in December
1998.
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. Prior to June 30,
1998, URBI had repaid all amounts due with respect to the transactions open at
December 31, 1997. As of June 30, 1998, Eastbrokers had a receivable from URBI
in the amount of 4,698,215 Austrian Schillings or approximately $370,000 related
to transactions occurring subsequent to December 31, 1997. In addition,
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. The ZE bonds earn a comparatively
higher interest rates (350 basis point above comparable Austrian governmental
rates).
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). Mr. Schmid was the Chairman of the Board of
C.R.F. a.s. from November 1995 through October 1997.
52
<PAGE>
In September 1997, Martin A. Sumichrast acquired 50,000 shares of Common
Stock at a price of $6.00 per share in exchange for a note payable in the amount
of $300,000 to the Company. This note bore interest at 8 percent per annum and
was due September 14, 1999. In February 1999, Mr. Sumichrast sold the 50,000
shares and proceeds from the sale were used to repay the note.
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 of total
revenue of the Company in excess of $6,000,000 per quarter, respectively. 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 Schole
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
legal fees in the amount of $216,707.70 during the calendar year ended December
31, 1998. 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.
PLAN OF DISTRIBUTION
The Common Stock Shares, the Warrants, the Warrant 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, 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 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
53
<PAGE>
prevailing market prices. The selling security holders reserve the right,
however, to offer and sell the Common Stock Shares, the Warrant 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 Placement Agent Warrants and the Placement Agent Warrant Shares. All
proceeds from the sale of the Common Stock Shares, the Warrant 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, Warrant 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 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Eastbrokers Group has changed its accountants from Deloitte & Touche
LLP to Spicer, Jefferies & 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 Eastbroker Group.
54
<PAGE>
In 1997, Eastbrokers 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
the related consolidated statements of operations, comprehensive income, changes
in shareholders' equity and cash flows for the year then ended included in this
prospectus have been audited by Spicer, Jefferies & Co., independent auditors,
as stated in their report appearing herein (which report expressed an
unqualified opinion and includes an explanatory paragraph referring to a gain of
$1,025,429 from a related party transaction), and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated statement of financial condition as of March 31, 1997 and
the related consolidated statements of operations, comprehensive income, changes
in shareholders' equity and cash flows for the year then ended included in this
prospectus have been audited by Pannell Kerr Forster PC, independent auditors,
as stated in their report, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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 on Eastbrokers' Common Stock as non-employee director
compensation.
* * * * *
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Historical Financial Statements for
Eastbrokers International Incorporated
PAGE
Independent Auditors' Report........................................... F-2
Independent Auditors' Report........................................... F-3
Consolidated Statements of Financial Condition at March 31, 1998 and
1997................................................................. F-4
Consolidated Statements of Operations for the years ended March 31,
1998 and 1997........................................................ F-5
Consolidated Statements of Comprehensive Income for the years ended
March 31, 1998 and 1997.............................................. F-6
Consolidated Statements of Changes in Shareholders' Equity for the years
ended March 31, 1998 and 1997........................................ F-7
Consolidated Statements of Cash Flows for the years ended March 31,
1998 and 1997........................................................ F-8
Notes to Consolidated Financial Statements............................. F-10
Historical Financial Statements for
Eastbrokers International Incorporated
For the Nine Months Ending
December 31, 1998 and 1997
Consolidated Statement of Financial Condition at
December 31, 1998.................................................... F-32
Consolidated Statements of Operations for the
Quarterly and Nine-month Periods ended December
31, 1998 and 1997.................................................... F-33
Consolidated Statements of Comprehensive Income for the
Quarterly and Nine-month Periods ended December 31, 1998 and
1997................................................................. F-34
Consolidated Statements of Cash Flows for the
Quarterly and Nine-month Periods ended December 31,
1998 and 1997........................................................ F-35
Notes to Consolidated Financial Statements for the
Quarterly and Nine-Month Periods ended December 31,
1998................................................................. F-37
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Eastbrokers International Incorporated
We have audited the accompanying consolidated statement of financial
condition of Eastbrokers International Incorporated and subsidiaries as of March
31, 1998, and the related consolidated statements of operations, comprehensive
income, changes in shareholders' equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Eastbrokers
International Incorporated and subsidiaries as of March 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 12, the accompanying 1998 financial statements
include a gain of $1,025,429 from a related party transaction.
SPICER, JEFFERIES & CO.
Denver, Colorado
April 30, 1999
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Eastbrokers International Incorporated
We have audited the accompanying consolidated statement of financial
condition of Eastbrokers International Incorporated and subsidiaries as of March
31, 1997, and the related consolidated statements of operations, comprehensive
income, changes in stockholders' equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Eastbrokers
International Incorporated and subsidiaries as of March 31, 1997, and the
results of their operations and their cash flows for the year ended, in
conformity with generally accepted accounting principles.
The financial statements as of March 31, 1997, have been restated.
PANNELL KERR FORSTER PC
June 23, 1997, except for
footnotes 2 and 6 as to
which the date is February
12, 1999
F-3
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, MARCH 31,
1998 1997
---- ----
(As Restated)
ASSETS
Cash and cash equivalents $7,156,702 $ 6,867,624
Cash and securities deposited with clearing
organizations or segregated under federal
and other regulations 986,233 119,274
Securities purchased under agreements to resell 887,170 408,865
Receivables
Customers 4,819,958 1,904,112
Brokers, dealers and clearing organizations 4,404,608 572,399
Affiliated companies 2,286,277 1,511,917
Related to disposition of entity 1,493,913 -
Financial institution 1,018,642 -
Receivable from executive officer 517,221 -
Other 3,384,125 2,043,306
Securities owned, at fair value
Corporate equities 7,985,484 3,349,684
Other sovereign government obligations 692,428 -
Net assets held for sale 868,960 -
Office facilities, furniture and equipment, at
cost (less accumulated depreciation and
amortization of $766,898 and $628,014,
respectively) 1,142,281 926,565
Deferred taxes 4,162,615 492,098
Available for sale securities - 2,378,054
Investments in affiliated companies 156,800 8,272,240
Goodwill, net 2,073,774 1,894,398
Other assets and deferred amounts 394,318 1,222,193
----------- -----------
Total Assets $44,431,509 $31,962,729
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ 2,570,499 $ 1,602,182
Affiliated companies 31,937 1,480,700
Securities sold under agreements to repurchase - 1,200,793
Bonds payable - 2,307,500
Payables
Customers 5,405,464 1,051,810
Brokers, dealers and clearing organizations 6,169,159 960,226
Accounts payable and accrued expenses 727,512 1,573,104
Other liabilities 1,118,179 1,502,803
----------- -----------
16,022,750 11,679,118
Deferred taxes 51,093 -
Long-term borrowings 2,020,087 934,374
----------- -----------
Total liabilities 18,093,930 12,613,492
----------- -----------
Minority interest in consolidated subsidiaries 7,173,873 1,549,386
----------- -----------
Commitments and contingencies
Shareholders' equity
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued and
outstanding at March 31, 1998 or March 31,
1997, respectively - -
Common stock; $.05 par value; 10,000,000
shares authorized; 4,297,750 and 2,923,000,
shares issued and outstanding at March 31,
1998 and March 31, 1997, respectively 214,888 146,150
Paid-in capital 25,614,348 19,314,883
Accumulated deficit (4,246,436) (569,829)
Note receivable - common stock (313,133) -
Treasury stock, at cost - (213,750)
Accumulated other comprehensive income (2,105,961) (877,603)
----------- -----------
Total shareholders' equity 19,163,706 17,799,851
----------- -----------
Total Liabilities and Shareholders' Equity $44,431,509 $31,962,729
=========== ===========
See notes to consolidated financial statements.
F-4
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
----------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
(AS RESTATED)
Revenues
Commissions $ 2,539,260 $ 439,531
Investment banking 807,803 1,149,195
Principal transactions
Trading 4,738,701 1,806,278
Investment (462,221) 1,872,767
Interest and dividends 401,107 557,188
Equity in losses of unconsolidated subsidiaries 32,076 (396,209)
Gain on sale of investment - related party 1,025,429 -
Other 1,260,821 312,725
----------- -----------
Total revenues 10,342,976 5,741,475
----------- -----------
Costs and expenses
Compensation and benefits 3,818,546 2,181,419
Consulting fees 2,233,543 743,397
Brokerage, clearing, exchange fees and other 1,163,171 -
Occupancy 997,814 333,096
Interest 746,821 236,235
Information processing and communications 698,688 177,473
Office supplies and expenses 435,173 240,448
Professional fees 213,913 123,905
Travel 622,722 209,977
General and administrative 3,505,413 806,056
Depreciation and amortization 604,395 274,573
(Gain)/loss on foreign currency transactions (29,384) 166,044
----------- -----------
Total costs and expenses 15,010,815 5,492,623
----------- -----------
Income (loss) from continuing operations before
Provision for income taxes and
minority interest in earnings of subsidiaries (4,667,839) 248,852
Income tax benefit 640,163 8,305
Minority interest in losses of subsidiaries 351,069 105,416
----------- -----------
Income (loss) from continuing operations (3,676,607) 362,573
Discontinued operations
Income from discontinued operations (net of
income taxes of $0 for the year ended March
31, 1997) - 41,899
Loss on sale of discontinued operations (1,323,083)
----------- -----------
Net loss $(3,676,607) $ (918,611)
=========== ===========
Earnings (loss) per common share from continuing
operations
Basic and diluted $ (1.17) $ 0.15
----------- -----------
Earnings (loss) per common share
Basic and diluted $ (1.17) $ (0.37)
----------- -----------
Average common shares outstanding
Basic and diluted 3,149,009 2,497,137
----------- -----------
See notes to consolidated financial statements.
F-5
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED
----------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
Net loss $(3,676,607) $ (918,611)
Other comprehensive income
Foreign currency translation adjustments (1,475,152) (1,188,899)
Unrealized holding gains (losses) 246,794 (246,794)
Less: reclassification adjustment for gains
included in net loss (246,794) -
----------- -----------
Comprehensive loss $(5,151,759) $(2,354,304)
============ ===========
See notes to consolidated financial statements.
F-6
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
Retained
Earnings
Paid-in (Accumulated)
Shares Par Value Capital (Deficit)
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balances, April 1, 1996 1,781,000 $ 89,050 $13,693,733 $ 348,782
Issuance of common stock in
Eastbrokers AG acquisition 1,080,000 54,000 5,346,000 -
Issuance of common stock in
Eastbrokers NA acquisition 25,000 1,250 98,750 -
Issuance of common stock in
compensation for services 37,000 1,850 176,400 -
Acquisition of
treasury stock - - - -
Net unrealized loss
on investments - - - -
Net loss - - - (918,611)
Cumulative translation
adjustment - - - -
--------- -------- ----------- -----------
Balances at March 31,
1997 (as restated) 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 - - - -
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)
========= ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
TREASURY LOSS ON ACCUMULATED
STOCK & AVAILABLE FOR CUMULATIVE OTHER
NOTE SALE TRANSLATION COMPREHENSIVE
RECEIVABLE INVESTMENTS ADJUSTMENT INCOME TOTAL
---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, April 1, 1996 - - $ 558,090 $ 558,090 $14,689,655
Issuance of common stock in
Eastbrokers AG acquisition - - - - 5,400,000
Issuance of common stock in
Eastbrokers NA acquisition - - - - 100,000
Issuance of common stock in
compensation for services - - - - 178,250
Acquisition of
treasury stock $(213,750) - - - (213,750)
Net unrealized loss
on investments - $(246,794) - $ (246,794) (246,794)
Net loss - - - - (918,611)
Cumulative translation
adjustment - - (1,188,899) (1,188,899) (1,188,899)
---------- --------- ----------- ----------- -----------
Balances at March 31,
1997 (as restated) (213,750) $(246,794) $ (630,809) $ (877,603) $17,799,851
Issuance of common stock
in private placement - - - - 723,195
Retirement of
treasury stock 213,750 - - - -
Issuance of common stock in
compensation for services - - - - 65,980
Issuance of common stock to
officer for note receivable (300,000) - - - -
Net unrealized gain
on investments - 246,794 - 246,794 246,794
Issuance of common stock in
private placement - - - - 5,415,969
Exercise of stock options - - - - 50,375
Sale of Subsidiary Stock 26,434
Net loss - - - - (3,676,607)
Accrued interest on
note receivable (13,133) - - - (13,133)
Cumulative translation
adjustment - - (1,475,152) (1,475,152) (1,475,152)
---------- --------- ----------- ----------- -----------
Balances at March 31, 1998 $(313,133) $ - $(2,105,961) $(2,105,961) $19,163,706
========== ========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
-------------------------
March 31, March 31,
1998 1997
---- ----
(As Restated)
Cash flows from operating activities
Net loss $(3,676,607) $ (918,611)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest in losses of subsidiaries (351,069) (105,416)
Gain on the sale of investment - (884,530)
Loss on sale of discontinued operations - 1,323,083
Depreciation and amortization 604,395 274,573
Deferred taxes (3,331,091) (69,377)
Other 104,368 396,209
Changes in operating assets and liabilities
Cash and securities segregated for regulatory
purposes or deposited with regulatory
agencies 82,415 (85,696)
Securities purchased under agreements to
resell (478,305) 6,278,371
Receivables (3,744,971) 2,041,221
Securities owned, at value (6,443,982) (3,233,293)
Other assets and deferred amounts 827,875 (214,931)
Payables
Customers 4,353,654 (8,529,846)
Brokers, dealers and others 5,208,933 77,726
Accounts payable and accrued expenses (879,123) 1,374,879
----------- -----------
Net cash used in operating activities (7,723,508) (2,275,638)
----------- -----------
Cash flows from investing activities
Net proceeds from (payments for)
Acquisition of net assets of Eastbrokers
Beteiligungs AG, net of cash acquired - (1,389,577)
Investments in affiliates (264,036) (3,619,137)
Available for sale securities 2,378,054 6,277,191
Capital expenditures (289,070) (503,336)
----------- ------------
Net cash provided by investing activities 1,824,948 765,141
----------- ------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placements 6,139,164 -
Capital contributions by minority interests - 304,166
Short-term borrowings (1,339,183) 568,303
Securities sold under agreements to repurchase (1,200,793) 1,200,793
Proceeds from long-term debt 1,085,713 -
Repurchase of common stock - (213,750)
Other 102,575 -
----------- -----------
Net cash provided by financing activities 4,787,476 1,859,512
----------- -----------
Foreign currency translation adjustment 1,400,162 1,328,023
----------- -----------
See notes to consolidated financial statements.
F-8
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
March 31, March 31,
1998 1997
---------- ----------
Increase in cash and cash equivalents 289,078 1,677,038
Cash and cash equivalents, beginning of period 6,867,624 5,190,586
---------- ----------
Cash and cash equivalents, end of period $7,156,702 $6,867,624
========== ==========
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 261,633 $ 371,534
========== ==========
Cash paid for interest $ 679,265 $ 87,795
========== ==========
Non-cash transactions
Retirement of treasury stock $ 213,750 $ -
========== ==========
Common shares of CEZ and Vodni Stavby,
Praha received in the disposition
of the Hotel Fortuna $ - $7,957,012
========== ==========
Common shares of CEZ and Vodni Stavby,
Praha transferred in lieu of cash
payment for debt and accrued interest $ - $1,550,508
========== ==========
Eastbrokers International shares issued
for acquisition of net assets of
Eastbrokers Beteiligungs AG $ - $5,400,000
========== ==========
Eastbrokers International shares issued in
compensation for services $ 65,980 $ 178,250
========== ==========
Eastbrokers International shares issued
for acquisition of net assets of
Eastbrokers North America, Inc. $ - $ 90,000
========== ==========
See notes to consolidated financial statements.
F-9
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated (formerly Czech Industries, Inc.) and its U.S. and international
subsidiaries (collectively, "Eastbrokers" or the "Company"). The shareholders of
the Company approved the name change on December 10, 1996 at its Annual Meeting
of Shareholders.
These consolidated financial statements reflect all adjustments necessary
for a fair presentation of the consolidated financial position and the results
of the operations of the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes that the estimates utilized in the
preparation of the consolidated financial statements are prudent and reasonable.
Actual results could differ from these estimates. See Note 18 -"Significant
Estimates."
The Company, through its subsidiaries, provides a wide range of financial
services primarily in the United States, Central Europe, and Eastern Europe. Its
businesses include securities underwriting, distribution and trading; merger,
acquisition, restructuring, and other corporate finance advisory activities;
asset management; merchant banking and other principal investment activities;
brokerage and research services; and securities clearance services. These
services are provided to a diversified group of clients and customers, including
corporations, governments, financial institutions, and individuals.
Substantially all of the Company's revenues and expenses are generated through
its European subsidiaries and affiliates.
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its U.S.
subsidiaries other than EBI Securities is March 31. At the time of the Company's
acquisition of EBI Securities in May 1998 the fiscal year of EBI Securities
ended September 30. The Company intends to change the fiscal year of EBI
Securities to March 31 effective as of March 31, 1999.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European Subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede the
Company's closing date by three months.
F-10
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities and
the Company's trading positions are carried at market or fair values or are
carried at amounts which approximate fair value because of their short-term
nature. Estimates of fair value are made at a specific point in time, based on
relevant market information and information about the financial instrument,
specifically, the value of the underlying financial instrument. These estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial instrument.
The Company has no investments in derivatives.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried at their original costs.
The carrying value of such equity securities is adjusted when changes in the
underlying fair values are readily ascertainable, generally as evidenced by
listed market prices or transactions which directly affect the value of such
equity securities. Downward adjustments relating to such equity securities are
made in the event that the Company determines that the eventual realizable value
is less than the carrying value.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Realized gains and losses on these securities are determined on a
specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities purchased under agreements to resell are treated as financing
arrangements and are carried at contract amounts reflecting the amounts at which
the securities will be subsequently resold as specified in the respective
agreements. The Company takes possession of the underlying securities purchased
under agreements to resell and obtains additional collateral when the market
value falls below the contract value. The maximum term of these agreements is
generally less than ninety-one days.
OTHER RECEIVABLES
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities. These receivables are
due on demand.
UNDERWRITINGS
Underwritings include gains, losses, and fees, net of syndicate expenses
arising from securities offerings in which the Company acts as an underwriter or
agent. Underwriting fees are recorded at the time the underwriting is completed
and the income is reasonably determinable. The Company reflects this income in
its investment banking revenue.
FEES
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered into
by the Company. The Company reflects this income in its investment banking
revenue.
F-11
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are made to
a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade-date
basis as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations in foreign currencies are translated
at year-end rates of exchange, and the income statements are translated at
weighted average rates of exchange for the year. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
gains or losses resulting from translating foreign currency financial
statements, net of hedge gains or losses and their related tax effects, are
reflected in cumulative translation adjustments, a separate component of
stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in net income.
OFFICE FACILITIES, FURNITURE, AND EQUIPMENT
Office facilities and equipment are carried at cost and are depreciated on
a straight-line basis over the estimated useful life of the related assets
ranging from three to ten years.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. The outstanding warrants and stock options
are currently excluded from the earnings per share calculation as their effect
would be antidilutive.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation expense for stock-based employee compensation plans at fair
value. The Company has elected to account for its stock-based compensation plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Under
the provisions of APB No. 25, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's common stock at
the date of grant over the amount an employee must pay to acquire the stock.
F-12
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED INCOME TAXES
Deferred income taxes in the accompanying financial statements reflect
temporary differences in reporting results of operations for income tax and
financial accounting purposes. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all demand deposits held in banks and certain highly liquid
investments with maturities of 90 days or less other than those held for sale in
the ordinary course of business to be cash equivalents.
GOODWILL
Goodwill is amortized on a straight line basis over periods from five to
25 years and is periodically evaluated for impairment on an undiscounted cash
flow basis. The accumulated amortization was $132,015 and $46,987 for the
periods ended March 31, 1998 and 1997, respectively.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
RESTATEMENT OF 1997 FINANCIAL STATEMENT
During fiscal 1998, management determined that the Austrian net operating
losses available for carryforward had been underreported on the consolidated
statement of financial condition as of March 31, 1997. In addition, management
determined that it had inappropriately recognized an unrealized gain and had
incorrectly classified a portion of its investment in WMP. Accordingly, the
accompanying 1997 financial statements have been restated.
Following is a summary of the effects of the restatement:
AS PREVIOUSLY
REPORTED AS RESTATED
-------- -----------
Corporate equities $4,253,164 $3,349,684
Deferred tax asset 289,938 492,098
Investments in affiliated
companies 7,064,064 8,272,240
Goodwill 2,453,454 1,894,398
Trading revenues 1,886,478 1,806,278
Net loss (866,411) (918,611)
Basic and Diluted earnings per
share (0.35) (0.37)
NOTE 2. CASH AND SECURITIES SEGREGATED UNDER FEDERAL AND OTHER REGULATIONS
Cash and securities segregated for regulatory purposes or as deposits with
clearing organizations was $119,274 and $986,233 as of March 31, 1997 and 1998,
respectively.
F-13
<PAGE>
NOTE 3. FINANCIAL INSTRUMENTS
Financial instruments owned consist of the Company's proprietary trading
and investment accounts, securities purchased under agreements to resell, and
investments held for resale. The Company's financial instruments, at estimated
fair market value, are as follows:
March 31, March 31,
1998 1997
------------- ------------
(As Restated)
Securities purchased under agreements to
resell
Sovereign government debt - Austria $ 887,170 $ --
Sovereign government debt - Hungary -- 228,965
Corporate equities - Hungary -- 179,900
------------- ------------
$ 887,170 $ 408,865
------------- ------------
Securities owned at fair value
Corporate equities - Austria $ 6,587,220* $ 1,305,143
Corporate equities - Hungary 410,244 --
Corporate equities - Czech Republic -- 871,638
Corporate equities - Slovak Republic 84,074 485,141
Corporate equities - Poland 760,552 687,762
Corporate equities - Other 143,394 --
------------- ------------
$ 7,985,484 $ 3,349,684
------------- ------------
Sovereign government debt
Austria $ 621,353 $ --
Hungary 71,075 --
------------- ------------
$ 692,428 $ --
------------- ------------
Available for sale securities
Corporate equities - Austria $ -- $ 40,321
Corporate equities - Czech Republic -- 1,893,115
Corporate equities - Hungary -- 189,610
Corporate equities - Slovak Republic -- 255,008
------------- ------------
$ -- $ 2,378,054
------------- ------------
*As of March 31, 1998, the Company has 3 significant concentrations in the
securities portfolio. A description of these securities and their respective
carrying amounts are as follows: a security of a Russian chemical producer
traded on the OTC market of the Vienna Stock Exchange -- $1,030,270, a security
of a Bulgarian pharmaceutical company traded on the Bulgarian Stock Exchange
- --$3,185,630, and a security of a Bulgarian oil refinery traded on the Bulgarian
Stock Exchange -- $1,354,830. All other securities are relatively liquid and the
carrying value approximates the market value as of the balance sheet date. The
Company does not have any material concentrations to high yield issuers or
commitments to high-yield issuers as of the balance sheet date.
F-14
<PAGE>
NOTE 4. OFFICE FACILITIES, FURNITURE AND EQUIPMENT
Office facilities, furniture and equipment are summarized below:
March 31, March 31,
1998 1997
----------- -------------
Furniture and equipment $1,909,179 $1,554,579
Less accumulated depreciation (766,898) (628,014)
----------- -----------
$1,142,281 $ 926,565
----------- -----------
Depreciation expense for the years ended March 31, 1997 and 1998, was
$108,915 and $418,804, respectively.
NOTE 5. BUSINESS ACQUISITIONS
EASTBROKERS BETEILIGUNGS AKTIENGESELLSCHAFT
Eastbrokers Vienna is an Austrian based holding company that has
established a presence in 12 Central and Eastern European countries through its
network of subsidiaries and affiliate offices. On August, 1, 1996, the Company
acquired 80 percent of the outstanding stock of Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers Vienna") through the issuance of 1,080,000
shares of the Company's common stock valued at $5,400,000. As a participant in
Eastbrokers Vienna's capital increase in the fiscal year ended March 31, 1997,
the Company later acquired an additional 245,320 (out of a total issue of
270,000 shares) for cash, increasing its ownership percentage to 83.62 percent.
In three separate transactions in November and December 1996 and March 1997, the
Company purchased 81,550 additional shares, increasing its ownership percentage
to approximately 94 percent.
The fair value of the net assets acquired under these transactions
approximated $8,200,000. The acquisition has been accounted for under the
purchase method of accounting. The excess of the purchase price over the fair
value of the net assets acquired resulted in the Company recording approximately
$1,950,000 in goodwill, which is being amortized over 25 years on a
straight-line basis. The 1997 consolidated financial statements include the
consolidated results of operations of Eastbrokers Vienna from the date of
acquisition through December 31, 1996 in accordance with Note 1. The purchase
agreement contains certain provisions whereby the selling shareholders may be
eligible to receive an additional 120,000 shares of the Company's common stock
in the event certain earnings targets are achieved by December 31, 1998. No such
shares have been earned to date.
In a capital increase for Eastbrokers Vienna in the fiscal year ended
March 31, 1998, the Company purchased 389,925 (out of a total issue of 390,000)
for cash, increasing its ownership to 96 percent.
Eastbrokers Vienna completed the acquisition of its subsidiary,
Eastbrokers Warsaw, in September 1996. This acquisition has been accounted for
under the purchase method of accounting. The fair value of the net assets
acquired under this transaction approximated $1,124,000 as of the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired by Eastbrokers Vienna approximated $173,000 which has been
recorded as goodwill and is being amortized over 25 years on a straight-line
basis.
F-15
<PAGE>
NOTE 5. BUSINESS ACQUISITIONS (CONTINUED)
In September 1996, Eastbrokers Vienna acquired additional shares of
Eastbrokers Wertpapiervermittlungs-gesellschaft GmbH ("Eastbrokers GmbH") and
Eastbrokers Slovakia a.s. from related parties (see Note 12). These acquisitions
have been accounted for under the purchase method of accounting. The fair value
of the net assets acquired under this transaction approximated $46,000 as of the
date of acquisition. The excess of the purchase price over the fair value of the
net assets acquired by Eastbrokers Vienna approximated $438,000 which has been
recorded as goodwill and is being amortized over 25 years on a straight-line
basis.
EASTBROKERS NORTH AMERICA, INC.
On March 6, 1997, the Company issued 22,500 shares of Common Stock valued
at $4.00 per share relating to the acquisition of Eastbrokers North America,
Inc. ("Eastbrokers NA"). In a separate but related transaction to the
Eastbrokers NA acquisition, the Company sold 2,500 shares of Common Stock at
$4.00 per share to an officer of the Company in exchange for a promissory note.
These shares were transferred to the selling shareholder of Eastbrokers NA as
part of the acquisition. The net assets acquired under this transaction
approximated $90,000 and the acquisition has been accounted for under the
purchase method of accounting. There was no excess of the purchase price over
the fair value of the net assets received at the date of acquisition.
PRO FORMA RESULTS OF OPERATIONS
The following summarized, unaudited, pro forma results of operations for
the year ended March 31, 1997 assumes the above listed acquisitions occurred at
the beginning of fiscal 1997.
Year Ended
March 31, 1997
---------------
Revenues from continuing operations
$8,559,786
Net loss from continuing operations
(14,097)
Net income per share from continuing
operations (0.01)
NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES
INVESTMENT IN WMP BANK AKTIENGESELLSCHAFT
Through its subsidiary, Eastbrokers Vienna, the Company acquired a 48.1
percent interest in the outstanding capital stock of WMP on August 1, 1996. WMP
is a stock broker-dealer and market maker in Vienna, Austria and is licensed as
a class B bank under Austrian law. A Class B bank may, at its discretion,
conduct any of the normal activities associated with a bank with one major
exception; it cannot accept customer deposits. From time to time Eastbrokers
Vienna has carried shares of WMP. Accordingly, since August 1996, the Company's
ownership of WMP has exceeded 50 percent including WMP shares in its trading
portfolio. At December 31, 1996, the Company's aggregate ownership percentage in
WMP, including its trading position, was 55 percent. This investment was
accounted for using the equity method in the March 31, 1997 financial statements
as the Company believed that its control of WMP may likely have been lost as the
result of the probable occurrence of certain events that lay outside of its
control. In September, 1997 circumstances surrounding these events were resolved
such that these events were no longer considered probable of occurrence and the
Company deemed its control of WMP was no longer temporary. Accordingly, the
Company began consolidating its investment in WMP effective with its third
quarter of fiscal 1998 financial statements. For the fiscal year ended March 31,
1998, WMP has been consolidated for the entire year. At December 31, 1997, the
Company's aggregate ownership interest in WMP was 52 percent.
F-16
<PAGE>
NOTE 6. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
The following unaudited pro forma information for the Company has been
prepared as though WMP was acquired at the beginning of fiscal year 1997 and
consolidated from that date:
1997
----
Total revenues $10,138,350
Total assets 44,405,383
INVESTMENTS IN OTHER UNCONSOLIDATED AFFILIATES
The Company also has other investments in unconsolidated affiliates
through Eastbrokers Vienna. These affiliates are accounted for using the equity
method of accounting. These investments are predominantly start-up operations.
At December 31, 1996, these unconsolidated affiliate investments included the
following offices: Zagreb, Croatia; Ljubljana, Slovenia; Almaty, Kazakhstan;
Moscow, Russia; Sofia, Bulgaria; and NIF TRUD Investment Fund. At December 31,
1997, these unconsolidated affiliate investments included the following offices:
Zagreb, Croatia; Ljubljana, Slovenia; Moscow, Russia; Sofia, Bulgaria; and NIF
TRUD Investment Fund. The combined carrying amounts of these investments as of
December 31, 1996 and 1997 was $516,243 and $156,800, respectively. Losses from
these operations totaled approximately $145,000 USD in the period from August 1,
1996 through December 31, 1996. Income from these operations totaled
approximately $122,000 USD for the year ended December 31, 1997.
RECEIVABLES FROM AFFILIATED COMPANIES
Periodically, the Company provides operating advances to its
unconsolidated affiliates. These advances are generally due on demand and are
not subject to interest charges.
NOTE 7. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of credit
with financial institutions, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
LINES OF CREDIT
The Company had outstanding advances on its lines of credit totaling
$1,602,182 and $2,570,499 as of March 31, 1997 and 1998, respectively. As of
March 31, 1998, the Company had unsecured credit lines available of
approximately $3.5 million. These lines of credit carry interest rates between
7.00 percent and 12.00 percent and between 6.500 percent and 9.125 percent for
the years ended March 31, 1997 and 1998, respectively, as computed on an annual
basis.
ADVANCES FROM AFFILIATED COMPANIES
Periodically, the Company's subsidiaries and affiliates will provide
operating advances to other members in the affiliated group. These advances are
generally due on demand and are not subject to interest charges.
F-17
<PAGE>
NOTE 7. SHORT-TERM BORROWINGS (CONTINUED)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At March 31, 1997, the Company had $1,200,793 outstanding under repurchase
agreements. The weighted average interest rate on these repurchase agreements
was 12.91 percent. Securities listed on the Prague Stock Exchange Main Market
with a market value of approximately $1,700,000 were used to collateralize this
arrangement. During the fiscal year ending March 31, 1998, the underlying
securities were sold to a third party for an amount approximating the Company's
cost basis. The repurchase agreements were transferred to the new owner at the
date of sale.
UNSECURED BONDS PAYABLE
The Company had unsecured bonds with a face value of 25 million Austrian
Schillings requiring annual interest payments at 10 percent per annum which
matured on July 31, 1997. At March 31, 1997, the amount due under these
obligations was $2,307,500. These unsecured bonds were redeemed by the Company
on July 31, 1997.
NOTE 8. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
March 31, March 31,
1998 1997
------------ -----------
Long-term borrowing arrangement with a $ 948,000 $ --
financial institution 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
Notes payable to a financial institution 804,308 934,374
requiring quarterly interest payments
computed at 6.50 percent on a 360 day year,
collateralized by 157,061 shares of
WMP (representing approximately 24 percent
of the Company's WMP shares as of March 31,
1998), principal of 10,000,000 Austrian
Schillings and accrued interest payable
in full on November 30, 2001
Notes payable to financial institutions 267,779 --
requiring quarterly interest payments
computed at varying percentages on a 360
day year, with varying maturity dates but
all due in 1999
------------ -----------
$ 2,020,087 $ 934,374
------------ -----------
The scheduled maturities of long-term debt outstanding at March 31, 1998
are summarized as follows: $267,779 in 1999, $0 in 2000, $0 in 2001, $1,752,308
in 2002 and $0 thereafter.
F-18
<PAGE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASES AND RELATED COMMITMENTS
The Company occupies office space under leases which expire at various
dates through 2003. The various leases contain provisions for periodic
escalations to the extent of increases in certain operating and other costs. The
Company incurred rent expense under non-cancelable operating leases in the
approximate amounts of $35,000 and $131,000 for the periods ended March 31,
1997, and March 31, 1998, respectively.
Minimum future rentals under these non-cancelable leases for the fiscal
years ending 1999 through 2003 are approximately as follows: 1999 -- $164,000;
2000 -- $164,000; 2001 -- $104,000; 2002 -- $84,000; and 2003 -- $42,000 and in
the aggregate $558,000.
The Company's subsidiaries occupy office space under various operating
leases which contain cancellation clauses whereby the Company may cancel the
lease with thirty to ninety days written notice.
HOTEL FORTUNA LEASES
During the year ended March 31, 1997, the Hotel was subject to land and
equipment leases. Under the terms of these leases, the Hotel incurred rent
expense in the approximate amounts of $310,000 during fiscal year 1997. These
leases terminated with the disposition of the Hotel. See Note 15.
NOTE 10. SHAREHOLDERS' EQUITY
STOCK REPURCHASE
On December 10, 1996, the Board of Directors approved a plan whereby the
Company was authorized to begin a buy-back program of its Common Stock. Under
the terms of this plan, the Company is authorized to repurchase up to $1,000,000
of Common Stock at a price not to exceed $5.00 per share beginning in January
1997. On January 23, 1997, the Company repurchased 45,000 of its outstanding
shares at $4.75 per share. Currently, no additional buy-backs are anticipated.
This treasury stock was retired during the fiscal year ended March 31, 1998.
STOCK TRANSACTIONS
On August 1, 1996, the Company issued 1,080,000 shares of its Common Stock
to the selling security holders of Eastbrokers Vienna in a transaction valued at
$5,400,000. During the period surrounding the acquisition, the Company's common
stock was trading approximately between $6.25 and $8.00 per share for its fully
registered and unrestricted shares. Due to the nature of restricted shares and
the various covenants restricting the transfer of these shares, the Board of
Directors assigned a value of $5,400,000 to this transaction.
On March 6, 1997, the Company issued 22,500 shares of Common Stock value
relating to the acquisition of Eastbrokers NA, valued at $4.00 per share. In a
separate but related transaction to the Eastbrokers NA acquisition, the Company
sold 2,500 shares of the Company's stock to an officer of the Company in
exchange for a promissory note. These shares were transferred to the selling
shareholder of Eastbrokers NA as part of the acquisition. The shares were also
valued at $4.00 per share.
During the year ended March 31, 1997, the Company issued a total of 37,000
shares of Common Stock at a per share price approximating the then current
market price for services rendered to the Company.
F-19
<PAGE>
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
In April 1997, the Company sold 125,000 shares of Common Stock to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,000 or $6.00 per share. The net proceeds to the Company
were $723,195. There were no underwriting discounts or commissions.
In September 1997, the Company issued 10,000 shares of Common Stock to Dr.
Michael Sumichrast in compensation for services performed on behalf of the
Company during the previous six months. The average price per share assigned to
this transaction was $6.598 per share based on the average closing price for the
period April 1, 1997 through September 30, 1997.
In September 1997, Martin A. Sumichrast acquired 50,000 shares of Common
Stock at a price of $6.00 per share in exchange for a note payable bearing an
interest rate of 8 percent in the amount of $300,000 to the Company.
On February 20, 1998, the Company sold 1,227,000 newly issued units
consisting of one share of Common Stock and one Class C Warrant in a private
placement for $6,135,000 in cash, for a price of $5.00 per unit (approximately
40 percent below the then current market price as of February 19, 1998.) After
deducting offering expenses of $899,031, the Company netted $5,415,969. These
units were offered and sold to various accredited investors.
Each of the foregoing issuances was made by the Company without
registration under the Securities Act of 1933, as amended (the "Securities
Act"). In each such case the Company relied upon the exemption from registration
provided by Section 4(2) under the Securities Act and Regulation D promulgated
under the Securities Act.
CLASS A WARRANTS
In connection with its June 1995 public offering, the Company issued
5,505,000 Class A Warrants. The Class A Warrants became exercisable on June 7,
1996. By reason of the Company's September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class A Warrants represented
the right to acquire one (1) share of Common Stock for $20. The Class A Warrants
include redemption provisions at the option of the Company and, upon thirty (30)
days' written notice to all holders of Class A Warrants, the Company has the
right to reduce the exercise price and/or extend the term of the Class A
Warrants, subject to compliance with the requirements of certain SEC rules and
regulations to the extent applicable. The Class A Warrant Holders are also
entitled to certain antidilution privileges. In April 1998, the Company
announced an amendment relating to the number of warrants outstanding and the
exercise price. The adjustment to the number of warrants reflected the September
1996 reverse stock split and reduced the number of outstanding warrants by
four-fifths (4/5's), such that one warrant again represents the right to
purchase one share of Common Stock. An adjustment to the exercise price of the
Class A Warrants to $18.00 per share resulted in connection with the February
1998 private placement. Subsequent to this adjustment, there are 1,101,000 Class
A Warrants outstanding. The Class A Warrants expire in June 2000.
F-20
<PAGE>
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
CLASS B WARRANTS
In connection with the aforementioned public offering whereby the Class A
warrants were issued, the Company issued 1,250,000 Class B Warrants to certain
bridge lenders. By reason of the September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class B Warrants represented
the right to acquire one (1) share of Common Stock for $21. The other terms of
the Class B Warrants are identical to the Class A Warrants, including the
antidilution provisions. In April 1998, the Company announced an amendment
relating to the number of warrants outstanding and the exercise price. The
adjustment to the number of warrants reflected the September 1996 reverse stock
split and reduced the number of outstanding warrants by four-fifths (4/5's),
such that one warrant again represents the right to purchase one share of Common
Stock. An adjustment to the exercise price of the Class B Warrants to $19.00 per
share resulted in connection with the February 1998 private placement.
Subsequent to this adjustment, there are 250,000 Class B Warrants outstanding.
The Class B Warrants have not been registered. These warrants expire in June
2000.
CLASS C WARRANTS
In connection with the private placement in February 1998, the Company
issued 1,227,000 units, each unit consisting of one share of common stock and
one Class C Warrant. Each Class C Warrant entitles the holder to purchase one
share of Common Stock during the period commencing February 20, 1999 and ending
February 20, 2002 at an exercise price of $7.00 per share, subject to certain
adjustments. Commencing February 20, 1999 these warrants will be redeemable at a
price of $.10 per warrant at any time after the closing price of the Common
Stock is above $10.00 for 20 consecutive trading days. The shares underlying
these warrants are subject to a "demand registration" right upon receipt of a
demand for registration from a majority of the holders of the common stock and
the warrants issued in this private placement. In connection with the private
placement, 1,237,222 Class C Warrants were issued to the placement agents,
including 312,583 Class C Warrants issued to Eastbrokers NA as one of the
placement agents.
OTHER
Certain U.S. and non-U.S. subsidiaries are subject to various securities,
commodities and banking regulations, and capital adequacy requirements
promulgated by the regulatory and exchange authorities of the countries in which
they operate. These subsidiaries have consistently operated in excess of their
local capital adequacy requirements.
Cumulative translation adjustments include gains or losses resulting from
translating foreign currency financial statements from their respective
currencies to USD. Increases or decreases in the value of the Company's net
foreign investments generally are tax-deferred for U.S. purposes. Certain of the
markets in which the Company operates (i.e., Russia, Kazakhstan and Bulgaria)
are generally reliant on the "soft" or "exotic" currencies. The Company
generally elects not to hedge its net monetary investments in these markets due
to the lack of availability of various currency contracts at acceptable costs.
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.
F-21
<PAGE>
NOTE 11. STOCK OPTION PLAN (CONTINUED)
Under the terms of the plan, stock options granted will have an exercise
price not less than the fair value of the Company's Common Stock on the date of
grant. Such options generally become exercisable over a three-year period and
expire 5 years from the date of grant.
A total of 35,000 options at a weighted average exercise price of $6.64
per share were granted under this plan during the fiscal year ended March 31,
1997. The fair value of the options at the date of grant was estimated using the
Black-Scholes option pricing model utilizing the following weighted average
assumptions: risk-free interest rate - 5 percent; expected option life in years
- - 5 years; expected stock price volatility - 97.7 percent; and expected dividend
yield - 0.0 percent.
Had compensation cost been determined based on the fair value at the grant
dates consistent with the method of FASB Statement 123, the Company's earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1998 1997
---- ----
(As Restated)
Net loss
- as reported $(3,676,607) $ (918,611)
- pro forma (3,728,043) (1,606,135)
Primary and fully diluted earnings per share
- as reported $ (1.17) $ (.37)
- pro forma (1.18) (.64)
During the fiscal year ended March 31, 1997, an additional 200,000 options
were granted outside of the plan at a weighted average exercise price of $10.00
per share and with an expiration date of August 1, 1999. At March 31, 1998 all
235,000 options outstanding were exercisable. The weighted average fair value of
the options at the various grant dates was $5.24.
NOTE 12. RELATED PARTY TRANSACTIONS
Prior to the sale by the Company of the Hotel Fortuna a.s. (the "Hotel")
on October 1, 1996, the Company owned 50.2 percent of the Hotel. Stratego Invest
a.s., a broker-dealer and financial consulting company organized under the laws
of the Czech Republic, owned 20.6 percent of the Hotel. Stratego Invest a.s. was
at that time more than 50 percent owned by Stratego a.s., which was controlled
by Ing. Petr Bednarik. Mr. Bednarik was President and CEO of the Company until
August 1996. The sales transaction of the Hotel by the Company was arranged by
Stratego Invest a.s. For providing services related to the transaction, Stratego
Invest a.s. was to have received a commission fee of 1,000,000 CZK
(approximately $37,000 USD), however, Stratego Invest a.s. waived its commission
related to this transaction.
In September 1996, Mr. Peter Schmid received from Eastbrokers Vienna
3,511,422 Austrian Schillings (approximately $340,000 USD) for his 49.95 percent
ownership interest in Eastbrokers Wertpapiervermittlungs-gesellschaft GmbH
("Eastbrokers GmbH"), an Austrian Securities Brokerage Company with limited
liability. The nominal value of these shares was 500,000 Austrian Schillings.
Mr. Schmid, former Chairman, President, Chief Executive Officer, and Director of
the Company, was also a Director of Eastbrokers GmbH.
In September 1996, Mr. Schmid received 376,275 Austrian Schillings
(approximately $36,500 USD) for his 5.60 percent ownership interest in
Eastbrokers Slovakia a.s., Bratislava ("Eastbrokers Slovakia"). Eastbrokers
Slovakia is the Company's subsidiary operating in the Slovak Republic. The
nominal value of these shares was 280,000 Slovak Koruna.
F-22
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
In September 1996, Mr. August de Roode received 1,110,250 Austrian
Schillings (approximately $107,500 USD) for his 24.40 percent ownership interest
in Eastbrokers Slovakia. The nominal value of these shares was 1,220,000 Slovak
Koruna. Mr. de Roode was Chief Executive Officer, Chief Operating Officer and
Director of the Company until March 1997 and he was also a Director of
Eastbrokers Slovakia at the date of this transaction.
The Company entered into various agreements with Randall F. Greene, a
former director of the Company. Mr. Greene provided consulting services pursuant
to an agreement dated July 26, 1996 in connection with the Company's acquisition
of Eastbrokers Vienna. Pursuant to this agreement, Mr. Green received $20,000 as
a non-accountable expense allowance and 10,000 shares of the Company's Common
Stock. In addition, during the 1997 fiscal year Mr. Greene was paid $37,000 for
consulting services provided to the Company in connection with potential mergers
and/or acquisitions. In connection with Mr. Greene's resignation from the Board
of Directors of the Company, the Company entered into a six month consulting
agreement dated March 27, 1997 pursuant to which Mr. Greene was paid $24,000 and
granted options to purchase 7,750 shares of the Company's Common Stock at $6.50
per share. A related letter agreement was entered into with Mr. Green on March
27, 1997, as amended by a letter dated April 29, 1997. Under the related letter
agreement, Mr. Greene was paid $13,750 and granted 12,500 shares of the
Company's Common Stock in full satisfaction for consulting services rendered
during the period August 1, 1996 through March 31, 1997. Also pursuant to this
agreement, the Company agreed to indemnify Mr. Greene against certain
liabilities, the parties exchanged mutual releases and Mr. Greene agreed to sell
his shares of the Company's common stock to the Company's primary market maker
subject to certain conditions.
The Company entered into a one year consulting agreement dated March 31,
1997 with Dr. Sumichrast, a Director of the Company, pursuant to which Dr.
Sumichrast was granted 20,000 shares of the Company's Common Stock to vest
ratably over the term of the agreement. Dr. Sumichrast provided services to the
Company during the period April 1, 1997 through September 30, 1997 and received
10,000 shares at an average price of $6.598 per share as compensation for these
services.
In March 1997, Eastbrokers Vienna purchased 30,000 shares of Schneiders
1895 AG for 3,618,000 Austrian Schillings (approximately $302,000 USD). Mr.
Peter Schmid is a Director of Schneiders 1895 AG and Mr. Schmid's father is an
officer and Director of Schneiders 1895 AG.
In December 1996, Eastbrokers Vienna loaned Dr. Muller-Tyl approximately
$72,000 USD. Interest on the outstanding balance of this obligation is computed
at 8 percent per annum until paid in full. Dr. Muller-Tyl was the Chief
Operating Officer of the Company until his resignation in January 1998.
The Company leases office space from General Partners Immobilenz
("GPI")(formerly Residenz Realbesitz AG ("Residenz")) for its Vienna operations
pursuant to a month-to-month lease. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $95,000 USD) in the fiscal years ended March 31, 1997 and 1998.
The terms of this lease were negotiated such that the Company is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners Beteiligungs AG ("General Partners"), an Austrian holding
company and the beneficial owner of 1,477,139 shares of Common Stock. Mr.
Kossner, a Director of the Company and an officer of the Company from August,
1996 until November, 1996, owns approximately 30 percent of the outstanding
shares of GP. He is a member of GP's Supervisory Board, WMP's Supervisory Board,
the Eastbrokers AG Supervisory Board, and is a Director of the Company.
F-23
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1996, the Company entered into a verbal agreement with RealWorld,
an internet software developer, to design and build an online stock exchange
game and online trading system. The initial deposit to begin development of the
game and system was 530,000 Austrian Schillings (approximately $50,000 USD).
Currently the Company has a liability to RealWorld of 208,000 Austrian
Schillings (approximately $20,000 USD) representing amounts due on progress
billings. The agreement states that costs will be charged on an hourly basis and
monthly progress billings will be made once the original deposit has been
depleted. Dr. Muller-Tyl is a member of the Supervisory Board for RealWorld.
Venture Capital Holdings Gmbh, an Austrian company owned and controlled by Mr.
De Roode and Mr. Muller-Tyl ("VCH") and Messrs. Schmid, Kossner, and Muller-Tyl
were at that time shareholders of RealWorld and represented a combined ownership
interest of 26 percent.
At December 31, 1996, the Company has a receivable related to securities
transactions from Mr. Kossner in the amount of 2,269,198 Austrian Schillings
(approximately $209,000 USD).
At December 31, 1996, the Company has a receivable related to share
transactions from Z.E. Beteiligungs AG ("ZE") in the amount of 5,537,202
Austrian Schillings (approximately $511,000 USD). ZE is a subsidiary of General
Partners.
WMP is an Austrian broker-dealer, market maker, and member of the Vienna
Stock Exchange. WMP's common stock is publicly traded on the Main Market of the
Vienna Stock Exchange. From time to time, WMP will make a market in stock of
companies that have a direct relationship to the Company through its Directors.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH"), primarily an inactive subsidiary to COR Industrieberatung GmbH,
for 2.5 million Austrian Schillings (approximately $200,000 USD). The sales
price approximated the cost basis of WMP GmbH at the date of disposition.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Mr. Schmid for 13 million
Austrian Schillings (approximately $1,025,000 USD). The Company acquired its
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD). At the time of acquisition, the principal asset of
SWIB was an investment in a company which was entering bankruptcy proceedings
and there was considerable uncertainty regarding the future realizable value of
this asset. By December 1997, bankruptcy proceedings had progressed to a point
where an estimate could be made on the net realizable value of this asset. Based
on the information available at that time, SWIB's value at the date of
disposition was determined by the Board of Directors to be in the range of 12
million to 14 million Austrian Schillings (approximately $950,000 to $1,100,000
USD). The sale of SWIB resulted in a gain of approximately $1.0 million USD and
is included in the accompanying consolidated statement of operations.
F-24
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1997, ZE, a 26.27 percent owned subsidiary of General
Partners, owned approximately 25 percent of UCP Beteiligungs AG ("UCP AG"), an
Austrian holding company. UCP AG, in turn, owns 27.7 percent of a Russian
chemical company, UCP AOOT. Shares of UCP AOOT are listed over-the-counter on
the Vienna Stock Exchange. WMP is a market maker in the shares of UCP AOOT on
the Vienna Stock Exchange. During 1997, WMP facilitated the purchase and sale of
several blocks of UCP AOOT shares. As of year end, the Company held
approximately 38,000 shares of UCP AOOT as an investment. At this time, the
estimated value of these shares was approximately $1,030,270. This amount is
reported in the Securities owned at value, Corporate equities section of the
financial statements. Subsequent to year end, the Company sold approximately
8,000 shares in 6 separate transactions for approximately $400,000. As of
October 26, 1998, the current market price of UCP AOOT shares was approximately
$54 per share on the Vienna Stock Exchange. For the fiscal year ended March 31,
1998, the Company recorded, as a charge to earnings, a market value adjustment
of approximately ($610,000). Although the UCP AOOT shares are trading at a
premium to the original cost basis, the Company wrote down the carrying value of
this item based on an independent valuation of UCP AOOT and the uncertainty
surrounding the Russian economy.
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996, the Company
assumed a receivable in the amount of 7,387,697 ATS (approximately $704,000 USD,
at the then current exchange rates) from Peter Schmid. As of December 31, 1997,
the receivable increased due to cash advances to 8,046,177 ATS (approximately
$635,000 USD, at the then current exchange rates). On May 31, 1998, Mr. Schmid
entered into a Non-Negotiable Term Note in the amount of 8,046,177 Austrian
Schillings. This amount is reported in the Receivable from executive officer in
the consolidated statement of financial condition. This Note bears interest at 8
percent per annum and matures May 31, 2000. It was collateralized by 150,000
shares of Common Stock. On October 8, 1998, Mr. Schmid repaid 6,748,111 Austrian
Schillings of the total amount due. Mr. Schmid has informed the Company that he
intends to repay the remaining outstanding balance by December 31, 1998.
Periodically, the Company engages in securities transactions with URBI
S.A., ("URBI"), a Spanish investment company. Mr. Kossner was a member of URBI's
Supervisory Board from November 1996 through June 1998 and Mr. Schmid was a
member until May 1997. All transactions between URBI and the Company were
consummated at the then current market prices. At December 31, 1997, the amount
due from URBI was 7,023,576 Austrian Schillings or approximately $555,000,
arising exclusively from various securities transactions. This amount is
reported under the caption "Receivables from affiliates companies" in the
consolidated statement of financial condition. Prior to June 30, 1998, URBI had
repaid all amounts due with respect to the transactions open at December 31,
1997. As of June 30, 1998, the Company had a receivable from URBI in the amount
of 4,698,215 Austrian Schillings or approximately $370,000 related to
transactions occurring subsequent to December 31, 1997. In addition, the Company
entered into a repurchase agreement with URBI in June 1997. This repurchase
agreement and the related shares of Vodni Stavby a.s., a Czech construction
company, were sold to a non-affiliated Czech Republic company in October 1997.
During October 1997, WMP entered into a stock loan transaction with VCH in
the amount of 4,065,000 Austrian Schillings (approximately $325,000). In August,
1998, VCH repaid the Company in full for this stock loan transaction. WMP
periodically engages in stock loan transactions as a portion of its normal
business operations.
In December 1997, WMP purchased 7,200,000 ATS (approximately $576,000) of
8 percent bonds due April 1, 2000 of ZE. This amount is reported in the
Securities owned at value, Corporate equities in the consolidated statement of
financial condition. The ZE bonds earn a comparatively higher interest rate (350
basis points above comparable Austrian governmental rates).
F-25
<PAGE>
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1997, the Company had a receivable from C.R.F. a.s., a
Slovak privatization company, related to a stock sale transaction and consulting
fees. The total amount due from these transactions was 7,078,500 Austrian
Schillings (approximately $559,000). This amount is reported in the Receivable
from affiliated companies in the consolidated statement of financial condition.
Mr. Schmid was the Chairman of the Board of C.R.F. a.s. from November 1995
through October 1997.
In September 1997, Martin A. Sumichrast acquired 50,000 shares of Common
Stock at a price of $6.00 per share in exchange for a note payable in the amount
of $300,000 to the Company. This amount is recorded in the Note
receivable-common stock in the consolidated statement of financial condition.
This note bears interest at 8 percent per annum and is due September 15, 1999.
NOTE 13. INCOME TAXES
The tax benefit recorded of $640,163 for the year ended March 31, 1998
results primarily from foreign net operating loss carryforwards which have no
expiration date.
The differences between the tax provision (benefit) calculated at the
statutory federal income tax rate and the actual tax provision (benefit) for
each period is shown in the table below:
Year Ended Year ended
March 31, March 31,
1998 1997
------------ -----------
Tax provision (benefit) at federal statutory rate $(1,587,065) $ 84,678
State income taxes, net of federal benefit (224,991) 14,402
Foreign taxes 266,411 --
Unrecognized benefit of net operating losses 897,153 697,301
Discontinued operations -- (510,975)
Non-taxable income from Slovak Republic -- (191,515)
Other 8,329 (102,196)
----------- ----------
$ (640,163) $ (8,305)
----------- ----------
The significant components of the Company's deferred tax asset and
liability are as follows:
Year Ended Year ended
March 31, March 31,
1998 1997
------------ -----------
Unrecognized gain from marketable securities $ 142,633 $ (105,385)
Capital loss carryforward 45,445 -
Foreign tax credit carryforward 32,652 -
Other 19,428 (5,405)
Net operating loss carryforwards 5,202,856 1,112,193
----------- ----------
5,443,014 1,001,403
Valuation allowance (1,331,492) (697,301)
----------- ----------
4,111,522 304,102
Eastbrokers AG deferred taxes acquired -- 187,996
----------- ----------
$ 4,111,522 $ 492,098
----------- ----------
F-26
<PAGE>
NOTE 13. INCOME TAXES (CONTINUED)
At March 31, 1998, the Company has a U.S. federal net operating loss
carryforward of approximately $3,018,000 that may be used against future U.S.
taxable income until it expires between the years March 31, 2012 and March 31,
2013. The Company also has a U.S. capital loss carryforward of approximately
$118,000 USD that expires March 31, 2002 and a U.S. foreign tax credit
carryforward of approximately $33,000 USD that expires between the years March
31, 2010 and March 31, 2013. At December 31, 1997, the Company has an Austrian
federal net operating loss carryforward of approximately $11,000,000 USD that
has no expiration period.
The non-taxable income from the Slovak Republic is from privatization
activities in which Eastbrokers Vienna was actively involved. This income was
received in the fourth quarter of the fiscal year ended December 31, 1996.
Distributions of this nature are non-taxable under Slovak Republic regulations.
The undistributed earnings of the foreign subsidiaries are intended to be
permanent in duration.
NOTE 14. SEGMENT INFORMATION
Segment information is as follows for the year ended March 31, 1998:
SHARE OF
(LOSS) OF
UNCONSOLIDATED IDENTIFIABLE NET
REVENUES ENTITIES ASSETS (LOSS)
-------- -------------- ------------ ------------
Austria $ 4,152,076 $ 32,076 $22,354,754 $ (493,359)
Czech Republic 1,304,552 - 868,961 (279,568)
Hungary 2,108,992 - 7,533,072 214,017
Poland 1,372,325 - 2,529,672 33,585
Slovak Republic 9,842 - 1,945,028 (428,439)
United States 218,199 - 8,062,958 (2,746,065)
Other 1,176,990 - 1,137,064 23,222
----------- -------- ----------- -----------
Total $10,342,976 $ 32,076 $44,431,509 $(3,676,607)
----------- -------- ----------- -----------
Segment information is as follows for the year ended March 31, 1997 (As
Restated):
SHARE OF
(LOSS) OF
UNCONSOLIDATED IDENTIFIABLE NET
REVENUES ENTITIES ASSETS (LOSS)
-------- -------------- ------------ ------------
Austria $1,433,897 $ (396,209) $13,023,750 $ 165,188
Czech Republic 656,079 - 2,202,134 (130,214)
Hungary 387,519 - 2,117,066 56,166
Poland 921,856 - 2,341,507 (20,705)
Slovak Republic 1,124,339 - 3,071,805 596,560
United States 1,161,940 - 9,136,486 (1,606,814)
Other 55,845 - 69,981 21,208
---------- ---------- ----------- -----------
Total $5,741,475 $ (396,209) $31,962,729 $ (918,611)
--------- ----------- ----------- ----------
F-27
<PAGE>
NOTE 15. DISCONTINUED OPERATIONS
In October 1996, the Company agreed to sell its interest in the Hotel for
100,000 shares of Ceske energeticke zavody a.s. and 86,570 shares of Vodni
stavby Praha a.s., based on the then current market prices for each stock. In
November 1996, the sales transaction was completed. As of the sale date, the
Company revised its estimate of the net realizable value of the shares received
based on the then current market prices for each stock. As a result, the Company
recognized a loss on the sale of discontinued operations of ($1,323,083 USD).
Income from discontinued operations was $41,899 through the sale date.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
In May 1998, a date subsequent to the fiscal year end date of March 31,
1998, the Company acquired all of the outstanding common stock of EBI
Securities, a Denver, Colorado based investment banking and brokerage firm, in
exchange for 445,000 unregistered shares of the Company's Common Stock and an
agreement to advance $1,500,000 in additional working capital to EBI Securities.
EBI Securities is subject to the following legal proceedings.
USCAN FREE TRADE ZONES V. COHIG & ASSOCIATES, INC. (EBI SECURITIES), ET
AL., United States District Court for the Western District of Washington. In
March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint against EBI
Securities and Steve Signer, an employee of EBI Securities, alleging that EBI
Securities misled USCAN about the credit worthiness of a third party in
connection with an introduction made by Mr. Signer. EBI Securities categorically
denies this allegation. USCAN informed EBI Securities that it would be working
with a certain third party to secure certain loans on behalf of USCAN which
USCAN would then use to open a trading account with EBI Securities. Once EBI
Securities learned of the relationship to this third party, it refused to enter
into any business arrangements with USCAN as long as the third party was
involved due to regulatory problems encountered in prior business dealings with
this certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that might
have resulted. Mr. Signer was dismissed as a defendant is this case due to lack
of personal jurisdiction and has received an award of fees. Plaintiff originally
sought a judgment of approximately $86,000,000 in compensatory and punitive
damages. However, USCAN recently stated in a pleading and during a court
deposition taken in October 1998 that its damage claim had been reduced to
$332,000. EBI Securities has filed counterclaims for defamation based upon
certain false and defamatory representations regarding EBI Securities. The trial
had been scheduled to start in January 1999 but the Court removed the case from
its docket after USCAN filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code. In the event 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.
F-28
<PAGE>
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
FLORIDA DEPARTMENT OF INSURANCE AS RECEIVER FOR UNITED STATES EMPLOYER
INSURANCE CONSUMER SELF-INSURANCE FUND OF FLORIDA ("USEC") V. DEBENTURE GUARANTY
CORPORATION, ET. AL., United States District Court for the Middle District of
Florida. In November, 1995, the plaintiff, USEC, commenced the above entitled
action against Debenture Guaranty Corporation ("Debenture") and certain other
defendants, including EBI Securities and Steve Signer, an employee of EBI
Securities. In 1994, USEC entered into an arrangement whereby USEC lent money to
Debenture, and Debenture opened an account in Debenture's name to trade U.S.
Treasuries. The note to USEC was in the amount by which the treasuries could be
margined. This transaction was allegedly part of a scheme whereby USEC was
attempting to inflate its assets for regulatory purposes. Debenture allegedly
misappropriated the funds for its own benefit and USEC subsequently failed.
Plaintiffs alleged that EBI Securities and Signer aided, abetted and conspired
with Debenture to defraud USEC and claimed damages of $11,000,000. After a six
week trial held from September 8, 1998, to October 14, 1998, a jury returned a
verdict in favor of EBI Securities. Plaintiffs motion for a new trial was
denied. EBI Securities has 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
case is related to the USEC litigation, described above, which also involves a
claim of fraud against Debenture. EBI Securities believes it has meritorious
defenses and intends to vigorously defend against NFC's claims. The case is
presently scheduled for trial in October 1999.
EBI Securities also is involved in an arbitration proceeding related to
the NFC Litigation entitled NATIONAL FAMILY CARE LIFE INSURANCE CO. V. PAULI
COMPANY, INC., ET AL., NASDR Case No. 96-02673 (the "Arbitration"). The
Arbitration panel entered an award against EBI Securities in July 1998 in favor
of third-party plaintiff Pauli & Company, Inc. ("Pauli") of approximately
$370,000, which was significantly below the initial award sought by Pauli of
approximately $1,100,000. EBI Securities has filed a motion to vacate and plans
to vigorously contest this award on appeal.
JACK G. LARSEN, AS RECEIVER FOR SOUTHWEST INCOME, TRUST ADVANTAGE INCOME
TRUST AND INVESTORS TRADING TRUST V. COHIG AND ASSOCIATES, INC. ET AL., Maricopa
County Superior Court, Arizona, Case No. CV 98-20281. Plaintiff commenced this
action against EBI Securities and one of its brokers in December 1998 (and
process was served on EBI Securities in January 1999) seeking damages in excess
of $8 million dollars against EBI Securities as well as an accounting of funds
allegedly in possession of EBI Securities. Plaintiff, who apparently has been
appointed receiver for three trusts, alleges that customer accounts established
at EBI Securities by third parties contained funds that actually belonged to the
Trusts, and that EBI Securities negligently failed to supervise its employees,
in failing to determine that the third parties' trading activities, which
allegedly resulted in significant trading losses, were in violation of the terms
of agreements between the third parties and the Trusts. Plaintiff also contends
that EBI Securities has in its possession and has wrongfully refused to return
approximately $270,000 belonging to the Trusts. EBI Securities has filed a
Motion to Compel Arbitration and a Motion to Dismiss for Lack of Subject Matter
Jurisdiction. A court hearing on these two motions is presently scheduled for
May 20, 1999. EBI Securities believes that it has meritorious defenses and
intends to vigorously defend against Plaintiff's claims.
In addition to the litigation described above, the Company, through its
subsidiaries, is involved in various legal actions and claims arising in the
ordinary course of business. Management believes that each of such matters will
be resolved without material adverse effect on the Company's financial condition
or operating results.
In June 1998, subsequent to the date of this report, the Company's largest
European subsidiary, WMP, successfully raised 60 million Austrian Schillings
(approximately $4,800,000 USD) in a bond offering. The Company intends to
utilize these proceeds to enhance and further develop its European trading
activities. The bonds were issued in denominations of 10,000 Austrian Schillings
(approximately $800 USD at the then current exchange rates), bear an annual
interest rate of 7.5 percent, payable at maturity, and mature in June 2002.
F-29
<PAGE>
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
In June 1998, the Company sold a 73.55 percent interest in Eastbrokers
Prague a.s. for 15 million Austrian Schillings (approximately $1,200,000 USD at
the then current exchange rate). The net assets related to this transaction are
presented in the accompanying balance sheet as "Net assets held for sale."
In November 1998, the Company sold 10 newly issued units consisting in the
aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock.
In January 1999, the Company sold 125,000 shares of Common Stock for a
total offering price of $500,000 or $4.00 per share.
Also in December 1998, the Company sold its subsidiary, Eastbrokers
Budapest Rt. for HUF 217,000,000 (approximately $1,000,000 USD). The Company
continues to have a working relationship with the buyer and maintains a presence
in Budapest through its relationship with the buyer.
In February 1999, Martin A. Sumichrast sold 50,000 shares of Common Stock
acquired in September 1997 with a promissory note. Proceeds from such sale were
used to repay the note.
In March 1999, Eastbrokers issued the 10% Notes due 2003. Holders of the
10% Notes have the right to convert their Notes into shares of Common Stock at
$5.75 per share. Proceeds of the Notes were used to redeem the 7% Convertible
Debentures.
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. The new standard
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 was adopted by the Company beginning with the
interim reporting period ended December 31, 1997. The adoption did not affect
previously reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by the Company beginning with the fiscal year ended March 31, 1999. The
financial statements for the years ended March 31, 1997 and 1998 have been
restated for comparative purposes to reflect the application of SFAS 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement will be effective for the Company's
annual report for the fiscal year ended March 31, 1999. In the initial year of
application, comparative information for earlier years is to be restated. At
this time, the Company does not believe that this statement will have a
significant impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. At this time,
the Company does not believe that this statement will have a significant impact
on the Company.
F-30
<PAGE>
NOTE 18. SIGNIFICANT ESTIMATES
As part of the preparation of its fiscal 1998 financial statements, the
Company has made several valuation estimates. Such estimates could be impacted
by changes in facts and circumstances in the near term. Such changes, if they
occur, could have a significant effect on the Company's financial position and
results of operations. The net amounts recorded related to these estimates are
summarized as follows:
. An approximate $1 million receivable from a Serbian financial
institution related to the Company selling its creditor position with
a bankrupt company. This amount is included in financial institution
receivable in the accompanying 1998 balance sheet.
. An approximate $1 million investment in the shares of UCP AOOT (See
Note 12), a Russian chemical company. This amount is included in
securities owned - corporate equities in the accompanying 1998 balance
sheet.
. An approximate $724,000 receivable related to a repurchase agreement
and the related shares of Vodni Stavby, a.s. This amount is included
in other receivables in the accompanying 1998 balance sheet.
F-31
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31,
1998
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 2,553,876
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 98,252
Securities purchased under agreements to resell 1,539,042
Receivables
Customers 192,214
Broker dealers and other 7,665,155
Affiliated companies 1,743,204
Other 15,534,169
Securities owned, at value
Government and agencies 5,737,766
Equities and other 16,795,918
Buildings, furniture and equipment, at cost
(net of Accumulated depreciation and amortization
of $1,039,936) 1,619,618
Deferred taxes 4,393,088
Investments held for resale 175,787
Investments in affiliated companies 210,807
Goodwill 2,777,169
Other assets and deferred amounts 480,467
-----------
Total Assets $61,516,532
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ 2,907,010
Affiliated companies 1,419,569
Other 1,738,647
Bonds payable 368,076
Securities loaned 4,187,159
Payables
Customers 4,307,010
Broker-dealers and other 7,236,720
Accounts payable and accrued expenses 1,659,545
Other liabilities and deferred amounts 926,064
----------
24,739,800
Long-term borrowings 9,387,714
----------
Total liabilities 34,127,514
Minority interest in consolidated subsidiaries 7,884,482
----------
Commitments and contingencies
Shareholder' equity
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued and
outstanding at December 31, 1998 -
Common stock; $.05 par value; 10,000,000
shares authorized; 4,767,750 shares issued
and outstanding at December 31, 1998 238,388
Paid-in capital 27,940,848
Retained earnings (accumulated deficit) (7,257,711)
Note receivable - common stock (331,704)
Accumulated other income (1,085,285)
-----------
Total shareholders' equity 19,504,536
-----------
Total Liabilities and Shareholders' Equity $61,516,532
===========
See notes to consolidated financial statements.
F-32
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTERLY PERIOD FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------------- ------------------------
1998 1997 1998 1997
------------ ------------- ------------ ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Commission $3,625,667 $ 631,131 $ 8,237,084 $ 1,615,510
Fees 1,443,299 45,685 2,146,639 380,951
Interest and dividends 444,175 166,479 846,381 394,675
Principal transactions, net
Trading 268,008 371,766 2,657,607 2,042,612
Investment 88,077 (259,555) 231,440 380,717
Gain on sale of interest in
subsidiary - - 1,312,057 -
Other 749,653 397,876 1,542,668 779,410
Equity in earnings of
unconsolidated affiliates 54,988 21,441 54,988 (117,832)
---------- ---------- ----------- -----------
Total revenues 6,683,867 1,374,823 17,028,864 5,476,043
---------- ---------- ----------- -----------
Costs and expenses
Compensation and benefits 4,323,418 467,355 10,687,266 1,803,672
Interest 230,854 35,724 335,116 173,560
Brokerage, clearing, exchange fees
and other 84,308 57,648 1,324,647 575,661
Occupancy 499,012 209,067 1,302,584 621,601
Office supplies and expenses 326,626 151,000 1,001,600 364,378
Communications 537,555 92,726 1,314,265 340,290
Legal fees 196,618 46,323 818,009 122,441
Consulting fees 277,626 192,782 887,787 1,020,189
Travel 154,985 125,656 472,013 400,454
General and administrative 218,744 154,811 1,088,917 1,207,957
Depreciation and amortization 166,736 171,939 355,774 375,099
---------- ---------- ----------- -----------
Total costs and expenses 7,016,482 1,705,031 19,587,978 7,005,302
---------- ---------- ----------- -----------
Loss before provision for income
taxes and minority interest in
earnings of subsidiaries (332,615) (330,208) (2,559,114) (1,529,259)
Provision (benefit) for income taxes 446,676 120,533 (218,757) 93,614
Minority interest in earnings of
subsidiaries (60,422) 108,415 (233,402) 237,138
---------- ---------- ----------- -----------
Net income (loss) $ 53,639 $ (101,260) $(3,011,273) $(1,198,507)
========== ========== =========== ===========
Weighted average number of shares
outstanding 4,767,750 3,063,000 4,595,202 3,063,000
========== ========== =========== ===========
Basic and diluted earnings per share $0.01 $(0.03) $(0.66) $(0.39)
========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
F-33
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE QUARTERLY PERIOD FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------------- ------------------------
1998 1997 1998 1997
------------ ------------- ------------ ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $ 53,639 $(101,260) $(3,011,273) $(1,198,507)
Other comprehensive income (loss)
Foreign currency translation
adjustments 1,118,997 (239,875) 1,020,676 (1,493,874)
Unrealized holding losses - 954,110 - 246,794
Less: recovery of unrealized
holding losses - (954,110) - (246,794)
---------- --------- ----------- -----------
Comprehensive income (loss) $1,172,636 $(341,135) $(1,990,597) $(2,692,381)
========== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements
F-34
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED DECEMBER 31,
------------------------------
1998 1997
------------- -------------
(UNAUDITED)
Cash flows from operating activities
Net income (loss) $ (3,011,273) $(1,198,507)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Minority interest in earnings of
subsidiaries 233,402 (237,138)
Depreciation and amortization 355,774 528,751
Deferred taxes 384,470 (49,423)
Gain on sale of interest in subsidiary (1,312,057) -
Equity in earnings (loss) of
unconsolidated affiliates (54,988) 117,832
Changes in operating assets and liabilities
Cash and securities segregated for
regulatory purposes or deposited with
regulatory agencies 887,981 (29,425)
Securities purchased under agreements to
resell (651,872) (1,527,970)
Receivables
Customers 4,627,744 5,877,718
Brokers, dealers and others (3,260,547) (1,001,262)
Affiliated companies 543,073 (2,005,968)
Other (9,120,268) (4,073,651)
Securities owned, at value (13,855,772) 676,602
Other assets (86,149) (323,700)
Payables
Customers (1,098,454) 365,189
Brokers, dealers and others 1,067,561 5,151,384
Accounts payable and accrued expenses 594,443 (2,957,979)
------------ -----------
Net cash used in operating activities (23,756,932) (687,547)
------------ -----------
Cash flows from investing activities
Net proceeds from (payments for)
Net cash acquired - EBI Securities 970,056 -
Investments in affiliates - (896,688)
Sale of interest in subsidiary 1,180,500
Investments held for resale 693,173 -
Purchases of furniture and equipment (689,446) (280,855)
------------ -----------
Net cash provided by (used in) investing
activities 2,154,283 877,364
------------ -----------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement - 725,000
Securities loaned 4,187,159 -
Short-term financings 2,092,219 (1,795,888)
Short-term borrowings from affiliated
companies 1,738,647 (823,113)
Other long-term debt 7,367,627 (3,467,854)
------------ -----------
Net cash provided by financing activities 15,385,652 (3,467,854)
------------ -----------
Foreign currency translation adjustment 1,614,171 (1,351,177)
------------ -----------
Increase (decrease) in cash and cash equivalents (4,602,826) (4,629,214)
Cash and cash equivalents, beginning of period 7,156,702 7,255,793
------------ -----------
Cash and cash equivalents, end of period $ 2,553,876 $ 2,626,579
============ ===========
F-35
<PAGE>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
------------------------------
1998 1997
------------- -------------
(UNAUDITED)
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
=========== ===========
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 $ -
=========== ===========
F-36
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated (the
"Company") for the quarterly and nine month periods ended December 31, 1998
have been prepared by the Company, are unaudited, and are subject to
year-end adjustments. These unaudited financial statements reflect all known
adjustments (which included only normal, recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods
presented in accordance with generally accepted accounting principles. The
results presented herein for the interim periods are not necessarily
indicative of the actual results to be expected for the fiscal year.
The notes accompanying the consolidated financial statements in the
Company's Annual Report on Form 10-KSB as amended for the year ended March
31, 1998 include accounting policies and additional information pertinent to
an understanding of these interim financial statements.
For the quarterly period ended December 31, 1998, the accompanying
consolidated financial statements include the financial position, results of
operations, comprehensive income and cash flows of Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers AG") for the quarterly period ended
September 30, 1998, of EBI Securities Corporation ("EBI Securities")
(formerly Cohig & Associates) for the quarterly period ended December 31,
1998, and the Company for the quarterly period ended December 31, 1998.
For the nine month period ended December 31, 1998, the accompanying
consolidated financial statements include the financial position, results of
operations, comprehensive income, and cash flows of Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers AG") for the nine month period ended
September 30, 1998, of EBI Securities Corporation ("EBI Securities") from
the date of acquisition (May 14, 1998) through December 31, 1998, and the
Company for the nine month period ended December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated and its U.S. and international subsidiaries (collectively,
"Eastbrokers" or the "Company").
These consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position and the results of the operations of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes that the estimates utilized in the
preparation of the consolidated financial statements are prudent and
reasonable. Actual results could differ from these estimates. See Note 18
-"Significant Estimates" in the Company's Annual Report on Form 10-KSB as
amended for the year ended March 31, 1998.
F-37
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its U.S.
subsidiaries other than EBI Securities is March 31. At the time of the
Company's acquisition of EBI Securities in May 1998, the fiscal year end of
EBI Securities was September 30. The Company intends to change the fiscal
year of EBI Securities to match the year-end of the parent company effective
March 31, 1999.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European Subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede
the Company's closing date by three months.
FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities and the
Company's trading positions are carried at market or fair values or are
carried at amounts which approximate fair value because of their short-term
nature. Estimates of fair value are made at a specific point in time, based
on relevant market information and information about the financial
instrument, specifically, the value of the underlying financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. The Company has no investments in
derivatives.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried at their original
costs. The carrying value of such equity securities is adjusted when changes
in the underlying fair values are readily ascertainable, generally as
evidenced by listed market prices or transactions which directly affect the
value of such equity securities. Downward adjustments relating to such
equity securities are made in the event that the Company determines that the
eventual realizable value is less than the carrying value.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses on these securities are
determined on a specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities purchased under agreements to resell are treated as financing
arrangements and are carried at contract amounts reflecting the amounts at
which the securities will be subsequently resold as specified in the
respective agreements. The Company takes possession of the underlying
securities purchased under agreements to resell and obtains additional
collateral when the market value falls below the contract value. The maximum
term of these agreements is generally less than ninety-one days.
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.
F-38
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNDERWRITINGS
Underwritings include gains, losses, and fees, net of syndicate expenses
arising from securities offerings in which the Company acts as an
underwriter or agent. Underwriting fees are recorded at the time the
underwriting is completed and the income is reasonably determinable. The
Company reflects this income in its investment banking revenue.
FEES
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered
into by the Company. The Company reflects this income in its investment
banking revenue.
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade date basis
as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations in foreign currencies are translated at
year-end rates of exchange, and the income statements are translated at
weighted average rates of exchange for the year. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," gains or losses resulting from translating foreign
currency financial statements, net of hedge gains or losses and their
related tax effects, are reflected in cumulative translation adjustments, a
separate component of stockholders' equity. Gains or losses resulting from
foreign currency transactions are included in net income.
OFFICE FACILITIES, FURNITURE, AND EQUIPMENT
Office facilities and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets
ranging from three to ten years.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. The outstanding warrants and stock
options are currently excluded from the earnings per share calculation as
their effect would be antidilutive.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (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.
F-39
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED INCOME TAXES
Deferred income taxes in the accompanying financial statements reflect
temporary differences in reporting results of operations for income tax and
financial accounting purposes. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company considers
all demand deposits held in banks and certain highly liquid investments with
maturities of 90 days or less other than those held for sale in the ordinary
course of business to be cash equivalents.
GOODWILL
Goodwill is amortized on a straight-line basis over periods from 5 to 25
years and is periodically evaluated for impairment on an undiscounted cash
flow basis.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
3. ACQUISITION OF EBI SECURITIES CORPORATION
In May 1998, the Company acquired all of the outstanding common stock of
Cohig & Associates, Inc., a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the Company's
common stock and an agreement to advance $1,500,000 in additional working
capital. Following the acquisition, the Company changed the name of Cohig &
Associates, Inc. to EBI Securities Corporation ("EBI Securities"). The
Company intends to develop EBI Securities as the foundation to expand its
U.S. based investment banking and brokerage presence and anticipates that
EBI Securities will be the first in a series of possible acquisitions
targeting other successful medium size investment banking and brokerage
firms both domestically and internationally. Eastbrokers International
believes that its current organizational structure as an entrepreneurial,
well-capitalized, and international publicly traded company will be
particularly appealing to potential acquisition candidates.
EBI Securities is a full service brokerage firm specializing in providing
investment advice and counsel to individuals and small to middle market
institutions. At the present time, EBI Securities has approximately 180
licensed representatives. EBI Securities provides its brokerage clients with
a broad range of traditional investment products and services. EBI
Securities also strives to differentiate itself in the minds of investors
and corporate finance clients through its commitment to a professional but
personalized service, which not only sets it apart from the large firms, but
also serves to develop long-term client relationships. Its trading
department makes a market in approximately 150 securities which include its
investment banking clients and those securities that its research department
has identified as promising, small to middle-market, potentially high growth
companies. EBI Securities' investment banking department operates with a
single goal in mind: to enhance and develop the capital structures of small
to middle market emerging growth companies through private placements,
bridge financing, and public offerings which serves to enable the firm's
corporate finance clients to capitalize on promising business opportunities,
favorable market conditions, and/or late stage product development.
EBI Securities is registered as a broker-dealer with the SEC and is licensed
in 50 states and the District of Columbia. It is also a member of the
National Association of Securities Dealers ("NASD") and the Securities
Investor Protection Corporation ("SIPC"). Customer accounts are insured to
$25 million under the SIPC excess insurance program. EBI Securities operates
pursuant to the exemptive provisions of SEC Rule 15c3-3 (k)(2)(ii) and
clears all transactions with and for customers on a fully disclosed basis.
F-40
<PAGE>
3. ACQUISITION OF EBI SECURITIES CORPORATION (CONTINUED)
EBI Securities maintains its clearing arrangement with Fiserv Correspondent
Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ: FISV).
Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement
enables EBI Securities to offer its clients a broad range of products and
services that is typically only offered by firms that are larger and/or have
a larger capital base.
4. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of credit
with financial institutions, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
On November 25, 1998, in order to increase its working capital, the Company
sold 10 newly issued units in a private placement consisting in the
aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock. The Company has the
right to redeem the Convertible Debentures on or before March 24, 1999, at
115% of the aggregate price or $1,265,000. The Company intends to redeem the
Convertible Debentures in full.
LINES OF CREDIT
These lines of credit carry interest rates between 7.00 percent and 12.00
percent as computed on an annual basis.
ADVANCES FROM AFFILIATED COMPANIES
Periodically, the Company's subsidiaries and affiliates will provide
operating advances to other members in the affiliated group. These advances
are generally due on demand and are not subject to interest charges.
5. SALE OF 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 in Eastbrokers Prague a.s. before taxes of
approximately $1,312,000, at the then current exchange rates. This amount is
reflected in the revenue section under the caption, "Gain on sale of
interest in subsidiary".
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 sale of Eastbrokers Budapest is not
reflected in the December 31, 1998, financial statements, since these
financial statements reflect the European operations for the quarter and
nine months ended September 30, 1998. The sale of Eastbrokers Budapest will
be reflected in the Company's March 31, 1999 financial statements. As of the
date of this filing, the Company has not yet determined the effect of this
transaction to the financial statements.
6. COMMITMENTS AND CONTINGENCIES
LEASES AND RELATED COMMITMENTS
The Company occupies office space under leases which expire at various dates
through 2003. These leases contain provisions for periodic escalations to
the extent of increases in certain operating and other costs. The Company's
subsidiaries occupy office space under various operating leases which
generally contain cancellation clauses whereby the Company may cancel the
lease with thirty to ninety days written notice.
F-41
<PAGE>
7. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
statement was adopted by the Company beginning with the fiscal year ended
March 31, 1999 and the appropriate prior periods have been restated.
Due to the nature of the items reflected in the Statement of Comprehensive
Operations, no effect for income taxes has been recognized. Foreign currency
translation adjustments are primarily related to the investment in the
Company's foreign operations. Unrealized holding losses are related to
securities received in the sale of the Hotel Fortuna. As noted in the
consolidated financial statements for the year ended March 31, 1998 included
herein, the Company has substantial net operating loss carryforwards which
it may or may not be able to utilize prior to their expiration. Accordingly,
no tax effect for these additional projected losses has been reflected in
these financial statements.
8. SUBSEQUENT EVENTS
In December 1998, the Company sold its subsidiary, Eastbrokers Budapest Rt.
for HUF 217,000,000 (approximately $1,000,000 USD at the then current
exchange rates). The sale of Eastbrokers Budapest is not reflected in the
December 31, 1998, financial statements, since these financial statements
reflect the European operations for the quarter and nine months ended
September 30, 1998. The sale of Eastbrokers Budapest will be reflected in
the Company's March 31, 1999, financial statements. The Company continues to
have a working relationship with the buyer and maintains a presence in
Budapest through its relationship with the buyer.
In December 1998, the Company entered into a non-binding letter agreement
pursuant to which it intended to acquire Lloyd Wade Securities, Inc. ("Lloyd
Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd Wade is
a full service securities firm. The acquisition was contingent upon, among
other things, receipt of any necessary corporate and stockholder approvals,
all necessary governmental approvals, completion of business, legal and
financial due diligence and other customary conditions. Since the signing of
the non-binding letter of intent, the Company has been unable to come to
terms with Financial Services, Inc. On February 12, 1999, the Company
abandoned its effort to acquire Lloyd Wade.
In January 1999, the Company sold 125,000 restricted shares of its common
stock in a private placement to a private investor for $4.00 per share. The
Company 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 a subsequent event, in February 1999, the Company's Austrian subsidiary
WMP Bank AG, purchased a forty-nine (49%) percent equity interest in
Stratego Invest a.s. Prague, a Czech securities and investment firm. The
purchase price was valued at approximately $2.9 million USD at the then
current exchange rates. The book value of Stratego Invest at the time of
purchase was approximately 190 million Czech koruna, or approximately $6.1
million USD at the then current exchange rates.
Stratego Invest is one of the leading Czech securities and investment firms.
The current management of Stratego Invest has a proven record of
profitability and they have well positioned the firm in order to expand into
the international securities marketplace. The partnership with Stratego
Invest will give the Company a strong partner in the Czech marketplace, and
at the same time, will provide Stratego Invest access to the international
marketplace through the Company's operations in Europe and the US.
In February, 1999, Martin A. Sumichrast sold 50,000 shares of Common Stock
acquired from the Company in September 1997 with a promissory note. Proceeds
from the sale were used to repay the note.
In March 1999, the Company issued 10% Convertible Promissory Notes due 2003
in an aggregate principal amount of $1,350,000.
F-42
<PAGE>
8. SUBSEQUENT EVENTS (CONTINUED)
In April 1999, the Company signed a joint venture agreement with CyberRealm,
Inc., a website development firm, to jointly own and develop
EBonlineinc.com, a newly established subsidiary. EBonlineinc.com is owned is
owned seventy percent by the Company and thirty percent by CyberRealm, Inc.
Under the terms of the joint venture agreement, the Company will provide
$300,000 in initial funding and CyberRealm will provide $200,000 in
developmental costs.
EBonlineinc.com is an internet based service (www.EBonline.com) that will
allow domestic and internationally based companies to post their businesses,
match with buyer and sellers and have access to the Company's investment
banking and securities network. The Company believes that EBonlineinc.com
will have potentially three revenue streams: monthly membership fees,
consulting income and banner advertising income. The Company intends to
begin marketing the Website in May, 1999 in international print media and
major search engines on the internet.
F-43
<PAGE>
NO DEALER, SALES PERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO EASTBROKERS INTERNATIONAL
MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO 3,538,222
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE SHARES OF
INFORMATION CONTAINED HEREIN IS COMMON STOCK
CORRECT AS OF ANY TIME SUBSEQUENT TO ($.05 PAR VALUE)
ITS DATE.
----------------
TABLE OF CONTENTS 1,352,000
PAGE
CLASS C COMMON STOCK
Where You Can Find More Information.... 2 PURCHASE WARRANTS
Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities................. 2 1,237,222
Special Note Regarding Forward Looking
Statements.......................... 2 PLACEMENT AGENT CLASS C COMMON
Summary................................ 3 STOCK PURCHASE WARRANTS
Important Terms........................ 4
Risk Factors........................... 7
Use of Proceeds........................ 15
Market for Common Equity and Related _______________
Stockholder Matters.............. 15
Business............................... 16 PROSPECTUS
Management Discussion and Analysis
or Plan of Operation................. 24 ______________
Management............................. 39
Security Ownership of Certain
Beneficial Owners and Management....... 41
Executive Compensation................. 43
Selling Security Holders............... 46
Description of Securities.............. 48
Certain Relationships and Related
Transactions......................... 50
Plan of Distribution................... 53
Changes and Disagreements with
Accountants on Accounting and
Financial Disclosure................. 54
Experts................................ 55
Legal Matters.......................... 55
Index to Financial Statements.......... F-1
Independent Auditors' Report........... F-2
Independent Auditors' Report........... F-3
<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 the Company aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
Article Eighth of the Company's Certificate of Incorporation provides for
indemnification of all persons whom, and to the fullest extent permitted by, the
Company may indemnify as permitted by Delaware General Corporation Law.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
AMOUNT TO
TYPE OR NATURE OF EXPENSE BE PAID
SEC registration fee........................ $ 5,811.15
Accounting fees and expenses................ 10,000.00
Legal fees and expenses..................... 20,000.00
Miscellaneous............................... 4,188.85
-----------
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 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.
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.
II-3
<PAGE>
(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.
(4.6)* Subscription Agreement for the Private Placement of
Eastbrokers' Common Stock.
(4.7)* Placement Agents' Warrant Certificate dated February 20, 1998.
(4.8)* Warrant Certificate between the Company and Martin A.
Sumichrast in respect of the sale of 70,000 Class C Warrants.
(4.9)* Warrant Certificate between the Company and Kevin D. McNeil in
respect of the sale of 32,583 Class C Warrants.
(5)** Opinion on Legality.
(10.1) Employment Agreement between 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.
II-4
<PAGE>
(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.
(10.11)* Employment Agreement between Eastbrokers and Kevin D. McNeil
dated December 31, 1998.
(10.12)* Consulting Agreement between Eastbrokers and Wolfgang Kossner
dated December 1, 1998.
(10.13)** $700,000 Non-Negotiable Term Note dated December 31, 1998
issued by Martin A. Sumichrast in favor of Eastbrokers.
(10.14)* $150,000 Non-Negotiable Term Note dated December 31, 1998
issued by Kevin D. McNeil in favor of Eastbrokers.
(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, Jefferies & Co., dated May 3, 1999.
(23.2)** Consent of Pannell Kerr Forster PC, dated May 4, 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 previously.
**Filed herewith.
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.
II-5
<PAGE>
(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-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorizes this
amendment to registration statement to be signed on its behalf by the
undersigned, in the City of Rockville, State of Maryland, on May 5, 1999.
EASTBROKERS INTERNATIONAL INCORPORATED
By: /s/ Martin A. Sumichrast
-------------------------------------
Martin A. Sumichrast
Chairman, President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed by the following persons in
the capacities and on the date indicated.
SIGNATURES TITLE OR CAPACITIES DATE
- ---------- ------------------- ----
/s/ Martin A. Sumichrast Chairman of the Board,
Martin A. Sumichrast President and May 5, 1999
Chief Executive Officer and
Director
/s/ Kevin D. McNeil Vice President, Secretary,
Kevin D. McNeil Treasurer and Chief May 5, 1999
Financial Officer (Principal
Financial and Accounting
Officer)
* Director May __, 1999
- ------------------------
Michael Sumichrast, Ph.D.
* Director May __, 1999
- ------------------------
Wolfgang Kossner
/s/ Lawrence Chimerine Director
Lawrence Chimerine May 1, 1999
/s/ Jay Schifferli Director May 5, 1999
Jay Schifferli
* /s/ Martin A. Sumichrast
- ------------------------
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT/INDEX
EXHIBIT NO. DESCRIPTION
(5) Opinion on Legality.
(10.13) $7,000,000 Non-Negotiable Term Note dated December 31, 1998
issued by Martin A. Sumichrast in favor of Eastbrokers.
(23.1) Consent of Spicer, Jefferies & Co., dated May 3, 1999.
(23.2) Consent of Pannell Kerr Forster PC, dated May 4, 1999.
(23.3) Consent of Kelley Drye & Warren LLP (contained in Exhibit 5).
(27) Financial Data Schedule (Electronic Filing Only).
<PAGE>
[LETTERHEAD OF KELLEY DRYE & WARREN]
May 5, 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 949,000 shares (the "Common Stock Shares") of common stock,
$.05 par value per share ("Common Stock), 1,352,000 Class C Common Stock
Purchase Warrants (the "Class C Warrants"), 1,352,000 shares of Common Stock
(the "Class C Warrant Shares") underlying the Class C Warrants, 1,237,222
Placement Agent Class C Common Stock Purchase Warrants (the "Placement Agent
Warrants," and together with the Class C Warrants, the "Warrants"), and
1,237,222 shares of Common Stock (the "Placement Agent Warrant Shares," and
together with the Common Stock Shares and Class C Warrant Shares, the "Shares")
underlying the Placement Agent Warrants 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 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 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.
<PAGE>
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 Class C Warrant Shares and the Placement Agent
Shares, upon exercise of the Class C Warrants and the Placement Agent Warrants,
respectively, pursuant to the terms of the Class C Warrants and the Placement
Agent Warrants, 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
NON-NEGOTIABLE
TERM NOTE
$700,000.00
Rockville, Maryland
January 1, 1999
FOR VALUE RECEIVED, the undersigned, Martin A. Sumichrast, 109
Church Gate Lane, Gaithersburg, Maryland 20878 (hereinafter referred to as the
"Maker"), hereby promises to pay to EASTBROKERS INTERNATIONAL INCORPORATED,
Delaware corporation, at its principal place of business at 15245 Shady Grove
Road, Suite 350, Rockville, Maryland 20850 (hereinafter referred to as the
"Holder") or at such place or places and to such account or accounts as Holder
may direct from time to time by notice to Maker, the principal amount of SEVEN
HUNDRED THOUSAND DOLLARS ($700,000.00) in lawful money of the United States in
immediately available funds, payable on January 1, 2004.
Interest shall accrue on the outstanding principal amount at
an annual rate of 7.00%, payable at maturity.
This Note has reference to and is secured by a pledge of
property under a pledge Agreement of even date between Maker and Holder.
As security for payment of this Note, the undersigned has
pledged or deposited with the Holder, and grants it a security interest in the
following property:
200,000 shares of Eastbrokers International Incorporated
Common Stock, par value $.05 per share.
and will forthwith deliver to the Holder any and all securities issued in lieu
of, or by way of stock dividends, or otherwise received because of ownership of
any securities herein pledged; and does agree on demand to deposit with Holder
such additional securities or other collateral as it may, from time to time,
require. It is further agreed that the collateral hereby pledged, together with
any that may be pledged hereafter, shall be applicable in like manner to secure
the payment of any past or any future obligations of the undersigned arising
under or out of this Note; and all such collateral in its hand shall stand as
one general continuing collateral security for the whole of said obligations, so
that the deficiency on any one shall be made good from the collateral for the
rest, hereby remaining responsible for any deficiency in payment, and waiving
any benefit, exemption or privilege under any law or hereafter to be force. In
the event of default, Holder, at its option, may sell, assign, or otherwise
dispose of the collateral.
Notwithstanding anything in this Note to the contrary, the
then outstanding principal amount and accrued but unpaid interest shall, at
Holder's option, be payable on demand in the event that an event of default
occurs as set forth below.
Maker shall be in default hereunder, at the option of Holder,
upon the occurrence of any of the following events: (i) the failure by Maker to
make any payments of principal or interest when due hereunder, and such failure
shall have continued for a period of more than ten (10) days after notice and a
reasonable opportunity to cure; (ii) the entering into of a decree or order by a
court of competent jurisdiction adjudicating Maker a bankrupt or the appoint of
a receiver or trustee of Maker upon the application of any creditor in an
insolvency or bankruptcy proceeding or other creditor's suit; (iii) a court of
<PAGE>
competent jurisdiction approving, as properly filed, a petition for
reorganization or arrangement filed against Maker under the Federal bankruptcy
law and such decree or order not being vacated within thirty (30) days; (iv) the
pendency of any bankruptcy or other creditors' suit against Maker; (v) a
petition or answer seeking reorganization or arrangement under the Federal
bankruptcy laws with respect to Maker; (vi) an assignment for the benefit of
creditors by Maker; (vii) Maker consents to the appointment of a receiver or
trustee in an insolvency or bankruptcy proceeding or other creditors' suit;
(viii) the existence of any material judgment against, or any material
attachment of property of Maker; or (ix) any other condition which, in the
reasonable determination of Holder, would materially impair the timely repayment
of this Note (individually and collectively, "Event(s) of Default").
If this Note is not paid when due, whether at maturity or by
acceleration, Maker agrees to pay all reasonable costs of collection and such
costs shall include without limitation all costs, attorneys' fees and expenses
incurred by Holder hereof in connection with any insolvency, bankruptcy,
reorganization, arrangement or similar proceedings involving Holder, or
involving any endorser or guarantor hereof, which in any way affects the
exercise by Holder of its rights and remedies under this Note.
Maker reserves the right prepay this Note, in whole or in
part, prior to the due date with no prepayment penalty.
None of the rights or remedies of Holder hereunder is to be
deemed waived or affected by failure or delay on the part of Holder to exercise
the same.
Maker hereby waives presentment, demand for payment, protest
and notice of protest, notice of dishonor, and except as expressly provided by
this Note, all other notices in connection with this Note.
The terms "Maker" and "Holder" shall be construed to include
their respective heirs, personal representatives, successors, subsequent holder
and assigns; provided; however, that the Note shall not be assignable,
negotiable or transferable by the Holder.
Regardless of the place of execution or performance, this Note
shall be governed by, and construed with the laws of the State of Delaware
without giving effect to such state's conflicts of laws provisions.
WITNESS the hand of Maker.
/s/ Martin A. Sumichrast
State of Maryland
County of Montgomery
On this 1st day of January 1999, the aforementioned, Martin A. Sumichrast,
personally known to me to be the person whose name is subscribed to within the
instrument and acknowledged that he executed the same for the purposes therein
contained.
/s/ Susan McAvoy
<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 April 30, 1999 (which
report expresses an unqualified opinion and includes an explanatory paragraph
referring to a gain of $1,025,429 from a related party transaction), appearing
in this Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Spicer, Jefferies & Co.
SPICER, JEFFERIES & CO.
Denver, Colorado
May 3, 1999
<PAGE>
Exhibit 23.2
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in the Registration Statement on Form SB-2 of
Eastbrokers International Incorporated (the "Company"), of our report dated June
23, 1997, except for footnote numbers 2 and 6 as to which the date is February
12, 1999 on the Company's consolidated financial statements as of March 31, 1997
and for the year then ended, and to the reference of our firm as experts.
/s/ Pannell Kerr Forster PC
PANNELL KERR FORSTER PC
Fairfax, Virginia
May 4, 1999
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR THE FISCAL YEAR ENDED MARCH 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 7,156,702
<SECURITIES> 8,677,912
<RECEIVABLES> 17,924,744
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,632,761
<PP&E> 1,909,179
<DEPRECIATION> 766,898
<TOTAL-ASSETS> 44,431,509
<CURRENT-LIABILITIES> 16,022,750
<BONDS> 2,020,087
0
0
<COMMON> 214,888
<OTHER-SE> 18,948,818
<TOTAL-LIABILITY-AND-EQUITY> 44,431,509
<SALES> 0
<TOTAL-REVENUES> 10,342,976
<CGS> 0
<TOTAL-COSTS> 15,010,815
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 746,821
<INCOME-PRETAX> (4,667,839)
<INCOME-TAX> (640,163)
<INCOME-CONTINUING> (3,676,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,676,607)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
