<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the
Commission
|X| Definitive Proxy Statement Only (as permitted by Rule
14a-6(e)(2))
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
EASTBROKERS INTERNATIONAL INCORPORATED
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
|_| Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
- --------------------------------------------------------------------------------
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
Notice of Special Meeting of Stockholders
to be held on January 31, 2000 and Proxy Statement
January 10, 2000
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
6000 FAIRVIEW ROAD, SUITE 1410
CHARLOTTE, NORTH CAROLINA 28210
January 10, 2000
Dear Stockholders:
You are cordially invited to attend a special meeting of stockholders of
Eastbrokers International Incorporated. The meeting will be held on January 31,
2000, at 10:00 a.m., at 6000 Fairview Road, Suite 1410, Charlotte, North
Carolina 28210.
In the following pages, you will find the formal notice of this special
meeting and our proxy statement. After reading the proxy statement, please mark,
sign and promptly return the enclosed proxy card to ensure that your shares are
represented at the meeting.
We hope that many of you will be able to attend this special meeting in
person. It is important that your shares be represented and voted at the Special
Meeting regardless of the size of your holdings. If your shares are registered
in your name and you plan to attend the Special Meeting, please mark the
appropriate box on the enclosed proxy card and you will be registered for the
meeting. We urge you to attend the meeting but if you cannot, you may instead
vote by proxy.
We appreciate the continuing interest of our stockholders in our business,
and we look forward to seeing you at the meeting.
Sincerely,
Martin A. Sumichrast
Chairman & Chief Executive Officer
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
6000 FAIRVIEW ROAD, SUITE 1410
CHARLOTTE, NORTH CAROLINA 28210
--------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
JANUARY 31, 2000
--------------------
A special meeting of stockholders of Eastbrokers International
Incorporated (the "Company") will be held at 10:00 a.m. on January 31, 2000 at
6000 Fairview Road, Suite 1410, Charlotte, North Carolina 28210, for the
following purposes:
1. To approve a change of the Company's corporate name from Eastbrokers
International Incorporated to International Capital Markets Group,
Inc.; and
2. To approve an increase in the voting power of the Company's
preferred stock and certain issuances of common stock and warrants;
To ensure that your shares are represented at the special meeting in the
event that you do not attend, please mark and sign the enclosed proxy card and
return it in the enclosed envelope.
By Order of the Board of Directors
Kevin D. McNeil
Executive Vice President, Chief
Financial Officer, Treasurer and Secretary
Date: January 10, 2000
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD JANUARY 31, 2000
TABLE OF CONTENTS
PAGE
General Information for Stockholders
Purpose of Proxy............................................... 1
How to Vote.................................................... 1
Matters to be Submitted to a Vote.............................. 1
Revoking Proxies............................................... 2
Naming Other Proxies........................................... 2
Who May Vote................................................... 2
Matters to be Submitted to a Vote
Item 1.
Approval of Change of the Corporate Name.................... 2
Item 2.
Approval of Increase in the Voting Power of the Preferred Stock
and certain Issuances of Common Stock and Warrants........ 3
Director Compensation................................................ 6
Executive Officer Compensation....................................... 6
Security Ownership of Management and Certain Beneficial Owners....... 10
Stockholder Proposals for the Annual Meeting of Stockholders for 2000 11
Other Information
Quorum......................................................... 12
Required Vote.................................................. 12
Solicitation of Proxies Generally.............................. 12
Costs of Solicitation.......................................... 12
List of Stockholders Entitled to Vote.......................... 12
Additional Materials........................................... 12
i
<PAGE>
GENERAL INFORMATION FOR STOCKHOLDERS
PURPOSE OF PROXY. This proxy statement and the enclosed proxy card relate
to a special meeting (the "Special Meeting") of stockholders of Eastbrokers
International Incorporated, a Delaware corporation (the "Company" and, together
with the Company's subsidiaries, "we" or "us"), called for January 31, 2000. The
Company's Board of Directors is soliciting proxies from stockholders in order to
provide every stockholder an opportunity to vote on all matters submitted to a
vote of stockholders at the Special Meeting, whether or not he or she attends in
person. This proxy statement and the enclosed proxy card are being mailed to
stockholders beginning on or about January 10, 2000.
The Common Stock is quoted on the Nasdaq SmallCap Market. In order to
comply with Nasdaq's rules, we are seeking stockholder approval of:
o an increase in voting power of the 10% Convertible Preferred Stock,
Series A, of the Company (the "Preferred Stock") to four (4) votes per
share,
o the issuance of 660,000 shares of Common Stock in connection with the
acquisition of The JB Sutton Group, LLC,
o the issuance of 250,000 shares of Common Stock in connection with the
acquisition of Suttononline, LLC and
o the issuance of warrants to General Partners AG for consulting
services.
We require stockholder approval because the number of shares we are committing
to issue will exceed 20% of our currently outstanding Common Stock and because
the Preferred Stock will have the right to cast a significant portion, and
possibly a majority, of the votes on matters generally presented to stockholder
for vote. If the proposals to increase the voting power of the Preferred Stock
and issuances of Common Stock and warrants is not approved by stockholders, then
no increase will be made in the voting power of the Preferred Stock, and our
obligations with respect to the acquisition of the JB Sutton Group LLC and
Sutton Online LLC and the consulting services of General Partners AG will be
payable in cash instead of Common Stock and Warrants.
HOW TO VOTE. You may vote on each matter to be submitted to a vote of
stockholders at the Special Meeting by marking the appropriate box on the proxy
card, signing it and returning it in the enclosed envelope. When the proxy card
is properly signed and returned by you, your shares will be voted at the Special
Meeting by the proxyholders named on the proxy card in accordance with your
directions. If you return the proxy card without marking a box for a specified
matter, your shares will be voted on that matter as recommended by the Company's
Board of Directors.
<PAGE>
MATTERS TO BE SUBMITTED TO A VOTE. The following items, explained in
detail on pages 2 through 6, are the only matters known to management to be
submitted to a vote of stockholders at the Special Meeting:
(1) approval of a change in corporate name from Eastbrokers
International Incorporated to International Capital Markets Group, Inc.; and
(2) approval of an increase in the voting power of the Preferred
Stock, the issuance of 660,000 shares of Common Stock in connection with
acquiring membership interests in The JB Sutton Group, LLC, the issuance of
250,000 shares of Common Stock in connection with acquiring membership interests
in Sutton Online, LLC, and the issuance to General Partners AG of warrants to
purchase 200,000 shares of Common Stock.
When you sign and return a proxy card, with respect to any other matters
that may come before the Special Meeting, the proxy card gives the proxyholders
the discretionary authority to vote your shares in accordance with their best
judgment on any other business that may come before the Special Meeting. Unless
you specify otherwise, your shares will be voted on any other business as
recommended by the Company's Board of Directors.
REVOKING PROXIES. If you sign and return a proxy card, you may revoke it
or submit a revised proxy card at any time before the vote to which the proxy
card relates. You may also vote by ballot at the Special Meeting. If you vote by
ballot, you will thereby cancel any proxy which you previously returned as to
any matter on which you vote by ballot.
NAMING OTHER PROXIES. You may designate as your proxy someone other than
those named on the enclosed proxy card by crossing out those names and inserting
the name(s) of the person(s) you wish to have act as your proxy. No more than
three persons should be so designated. In such a case, you must deliver the
proxy card to the person(s) designated by you and such person(s) must be present
and vote at the Special Meeting. Proxy cards on which other proxyholders have
been designated should not be mailed or delivered to us.
WHO MAY VOTE. The Company's Board of Directors has set the close of
business on December 3, 1999 as the "record date" for determining the holders of
shares of the Company's stock who are entitled to notice of the Special Meeting
and to vote at the Special meeting. Holders of the Company's common stock are
entitled to one vote for each share of common stock held. As of December 3,
1999, 5,246,750 shares of Common Stock were outstanding and were held by 85
holders of record, and 1,000,000 shares of the Preferred Stock were outstanding
and were held by one holder of record.
MATTERS TO BE SUBMITTED TO A VOTE
ITEM 1. APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO CHANGE THE
CORPORATE NAME
We believe that changing the Company's corporate name to
"International Capital Markets Group, Inc." is justified and appropriate for the
following reasons:
2
<PAGE>
o International Capital Markets Group, Inc. more suitably reflects our
business strategy. Over the past few years, we have divested our
Eastern European and the Middle Eastern holdings in response to
changing domestic and international market conditions, and the
descriptive term "Eastern" is no longer appropriate. Also, our
business is broader than brokerage, so the descriptive term "Brokers"
is no longer appropriate.
o International Capital Markets Group, Inc. prevents confusion
concerning our current and past core business and geographical focus.
o International Capital Markets Group, Inc. identifies us to the general
public and positively distinguishes us from our competitors.
The name change would be effected upon the filing of a Certificate of Amendment
to the Company's Certificate of Incorporation, the form of which is attached
hereto as EXHIBIT A.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR CHANGING THE
CORPORATE NAME TO INTERNATIONAL CAPITAL MARKETS GROUP, INC.
ITEM 2. APPROVAL OF AN INCREASE IN THE VOTING POWER OF THE PREFERRED STOCK AND
CERTAIN ISSUANCES OF COMMON STOCK AND WARRANTS
AN INCREASE IN THE VOTING POWER OF THE PREFERRED STOCK
BACKGROUND. Pursuant to a Stock Purchase Agreement (the "Purchase
Agreement"), dated as of November 9, 1999, by and between the Company and Belle
Holdings, Inc., a Nevada corporation ("Belle Holdings"), Belle Holdings acquired
from the Company 1,000,000 shares of Preferred Stock of the Company for an
aggregate purchase price of $2,000,000. In addition, we sold to Belle Holdings
700,000 Warrants, at a purchase price of $.15 per Warrant, to acquire Common
Stock at an exercise price of $2.85 per share. The purpose of the sale of
Preferred Stock was to fund, in part, our acquisition of The JB Sutton Group,
LLC, as described below. Currently, each share of Preferred Stock is entitled to
one (1) vote on all matters submitted to the stockholders for approval. As an
inducement to Belle Holdings to invest in the Company under the Purchase
Agreement, we agreed that to seek stockholder approval to increase the voting
power of the Preferred Stock from one (1) vote per share to four (4) votes per
share.
GENERAL RIGHTS OF PREFERRED STOCK. Holders of the Preferred Stock are
entitled to receive cumulative dividends at an annual rate of 10% per share,
payable quarterly before or contemporaneously with the payment of dividends on
any other class or series of stock of the Company ranking on par with or junior
to the Preferred Stock. Holders of the Preferred Stock are entitled to receive a
liquidation preference of $2.00 per share of Preferred Stock before any payment
or distribution of the Company's assets is made to holders of Common Stock or
any other class or series of stock of the Company ranking junior to the
Preferred Stock. The Preferred Stock is not redeemable but is voluntarily
convertible at any time, and automatically convertible on January 1, 2005, into
shares of Common Stock at the then-effective Conversion Price. The Conversion
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<PAGE>
Price is equal to the rate of one share of Common Stock for each share of
Preferred Stock, subject to certain anti-dilution adjustments.
PROPOSED INCREASE IN VOTING RIGHTS. As of December 3, 1999, there are
5,246,750 shares of Common Stock outstanding and 1,000,000 shares of Preferred
Stock outstanding. If the increase to four votes per share of Preferred Stock is
approved, the holders of Preferred Stock, will control approximately 39% of the
votes on all matters submitted to stockholders for approval, as compared to
approximately 14% of the votes on all matters submitted to stockholders for
approval if the increase is not approved. Pursuant to the Purchase Agreement,
Belle Holdings received warrants to purchase 700,000 shares of Common Stock and
also has the right to purchase an additional 1,000,000 shares of Preferred Stock
at $2.00 per share. If all of these shares are issued and the increased vote of
the Preferred Stock is approved, the holders of Preferred Stock will control a
majority of the votes on all matters submitted to stockholders for approval.
MANAGEMENT RELATIONSHIP. Martin A. Sumichrast, the Chairman, Chief
Executive Officer and President of the Company, is the sole stockholder and
director and an officer of Belle Holdings. In addition to the Preferred Stock,
as of December 3, 1999, Mr. Sumichrast beneficially owned 600,000 shares of
Common Stock. Corona Corp. is the beneficial owner of 700,000 shares of the
Preferred Stock by virtue of a convertible note (the "Belle Note") issued by
Belle Holdings and 490,000 of the Warrants purchased by it from Belle Holdings.
The proceeds of the Belle Note were used to purchase the Preferred Stock and the
Warrants. Members of the management of Corona Corp. requested that Mr.
Sumichrast participate in Belle Holdings because they wanted our current
management to have a larger equity ownership in the Company as a condition to
their funding the transaction.
The increase in voting power would be effected upon the filing of a
Certificate of Amendment to the Certificate of Designations of the Preferred
Stock, the form of which is attached hereto as EXHIBIT B.
APPROVAL OF ISSUANCE OF 660,000 SHARES OF COMMON STOCK FOR THE JB SUTTON GROUP
ACQUISITION
Pursuant to an LLC Interest Purchase Agreement (the "JB Sutton Purchase
Agreement"), dated as of November 22, 1999, by and among the Company, The JB
Sutton Group, LLC ("JB Sutton"), each of the members and special members of JB
Sutton and Peter Cohen (a former member of JB Sutton), the Company acquired (the
"JB Sutton Acquisition") 100% of the outstanding membership interests in JB
Sutton, a brokerage firm located in Syosset, New York. In partial consideration
for the JB Sutton Acquisition, the Company executed, in favor of the members and
special members (the "Payees") from whom it purchased the membership interests,
two promissory notes (the "JB Sutton Notes") in aggregate principal amount of
$660,000 and bearing interest at an annual rate of 7%. The JB Sutton Notes
mature on March 31, 2000 and are convertible at the Company's sole discretion at
or prior to their maturity into an aggregate 660,000 shares (the "JB Sutton
Conversion Shares") of Common Stock. Such conversion of the JB Sutton Notes
shall satisfy in full all obligations of the Company under the JB Sutton Notes.
The JB Sutton Notes, any interest paid thereon, and/or the JB Sutton Conversion
4
<PAGE>
Shares shall be held in escrow until November 22, 2001, subject to the following
release terms.
Upon such conversion, 35,000 JB Sutton Conversion Shares shall be
released from escrow and issued to the Payees. 625,000 JB Sutton Conversion
Shares shall remain in escrow until the end of the escrow period; provided,
however, that the release at the end of the escrow period to the registered
owners of the escrowed JB Sutton Conversion Shares shall be subject to return to
the Company of (i) up to 75,000 of the JB Sutton Conversion Shares as
compensation for certain litigation liabilities against either the Company or JB
Sutton that may arise during the escrow period in connection with JB Sutton or
its business, and (ii) certain of the remaining 550,000 escrowed JB Sutton
Conversion Shares proportionate to a correlative staggered pre-tax earnings
target, to be met by JB Sutton during the escrow period, as set forth in the JB
Sutton Purchase Agreement. The escrowed shares may be voted by the registered
owners during the escrow period.
In the event that either JB Sutton Note is not converted into Common
Stock by its maturity date, the JB Sutton Purchase Agreement provides that the
Company shall be liable to the payees thereof for liquidated damages in an
aggregate amount equal to $5.00 per share, or the then-current market value per
share, whichever is higher, for each share into which such unconverted JB Sutton
Note would have been converted.
If the obligations under the JB Sutton Notes were to become payable in
cash, the Company would need to obtain financing to satisfy the obligations.
There can be no assurance that the Company would be able to obtain such
financing on commercially acceptable terms or at all.
APPROVAL OF THE ISSUANCE OF 250,000 SHARES OF COMMON STOCK FOR THE SUTTON
ONLINE ACQUISITION
Pursuant to an LLC Interest Purchase Agreement (the "Sutton Online
Purchase Agreement"), dated as of November 22, 1999, by and among the Company,
Sutton Online, LLC ("Sutton Online"), SOL Partners and Gregory C. Frank (each a
member of Sutton Online), the Company acquired (the "Sutton Online Acquisition")
55% of the outstanding membership interests in Sutton Online, a company that
provides customers of JB Sutton direct access trading capability over the
Internet via Sutton Online's website, WWW.SUTTONONLINE.COM. In partial
consideration for the Sutton Online Acquisition, the Company executed, in favor
of each of SOL Partners and Mr. Frank, from whom it purchased the Sutton Online
membership interests, promissory notes (the "Sutton Online Notes") in aggregate
principal amount of $250,000 and bearing interest at an annual rate of 7%. The
Sutton Online Notes mature on March 31, 2000 and are convertible at the
Company's sole discretion at or prior to their maturity into an aggregate
250,000 shares (the "Sutton Online Conversion Shares") of Common Stock. Such
conversion of the Sutton Online Notes shall satisfy in full all obligations of
the Company under the Sutton Online Notes.
The Sutton Online Purchase Agreement provides that if either Sutton
Online Note is not converted into Common Stock by their maturity, the Company
shall be liable to SOL Partners and/or Mr. Frank for liquidated damages in an
aggregate amount equal to $5.00 per share, or the then-current market value per
5
<PAGE>
share, whichever is higher, for each share into which the unconverted Sutton
Online Note would have been converted.
If the obligations under the Sutton Online Notes were to become payable
in cash, the Company would need to obtain financing to satisfy the obligations.
There can be no assurance that the Company would be able to obtain such
financing on commercially acceptable terms or at all.
APPROVAL OF THE ISSUANCE OF WARRANTS TO GENERAL PARTNERS AG
In connection with various consulting services rendered to the Company by
General Partners AG, on November 9, 1999 the Company sold to General Partners
AG, for a purchase price of $0.15 per warrant, warrants to purchase 200,000
shares of Common Stock at an exercise price of $2.85 per share, which exceeded
the market price of the Common Stock on that day. Such warrants are immediately
exercisable and will expire on January 5, 2005. Wolfgang Kossner, a director of
the Company and the beneficial owner, as of December 3, 1999, of 2,420,420
shares of Common Stock, is also a principal of General Partners AG. The
consulting services were outside the scope of Mr. Kossner's responsibilities as
a director of the Company. The issuance of the Warrants was made subject to
stockholder approval, and if stockholder approval is not obtained we will pay
General Partners AG a cash amount to be negotiated.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE INCREASE
IN THE VOTING POWER OF THE PREFERRED STOCK AND THE ISSUANCES OF COMMON
STOCK AND WARRANTS.
DIRECTOR COMPENSATION
In April 1999, the Board adopted a company policy that eliminated all cash
payments for services on the Board and attendance at Board meetings. Instead,
each non-officer director of Eastbrokers will be awarded 7,500 shares of
restricted stock at the time he or she join the Board and an annual award of
5,000 options pursuant to Eastbrokers' 1996 Stock Option Plan, as amended.
Provisions of the Plan are described under "Executive Officer Compensation -
1996 Stock Option Plan." The restricted stock and options were granted to each
of Dr. Chimerine, Dr. Sumichrast and Mr. Schifferli at the time the policy was
adopted in April 1999.
During the fiscal year ended March 31, 1999, no fees were paid to
directors. All current directors waived such fees for the fiscal year ended
March 31, 1999.
EXECUTIVE OFFICER COMPENSATION
The following Summary Compensation Table sets forth the compensation for
Eastbrokers' named executives for the years ended March 31, 1999, 1998 and 1997.
No other executive officer had total annual salary and bonus during any such
period equal to or greater than $100,000. Effective December 15, 1998, Peter
Schmid resigned as Chairman of the Board, President and Chief Executive Officer
of Eastbrokers.
6
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
SECURITIES
OTHER ANNUAL RESTRICTED STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS($) OPTIONS/SARS(#) PAYOUTS COMPENSATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Martin A. Sumichrast(1) 1999 $175,000 $ -- -- -- 75,000 -- --
Chairman, President 1998 $120,000 $20,000 -- -- -- -- --
and Chief Executive 1997 $120,000 $11,000 -- -- -- -- --
Officer
Kevin D. McNeil(2) 1999 $ 75,000 $25,000 -- -- 50,000 -- --
Chief Financial Officer, 1998 $ 57,500 $17,250 -- -- -- -- --
Executive Vice President 1997 $ -- -- -- -- -- -- --
of Finance, Treasurer,
and Secretary
Peter Schmid(3) 1999 -- -- -- -- -- -- --
Former Chairman, 1998 $138,305 $30,000 -- -- -- -- --
President and Chief 1997 $129,988 -- -- -- -- -- --
Executive Officer
</TABLE>
- ------------------
(1) Martin A. Sumichrast became Chairman of the Board, President and Chief
Executive Officer of Eastbrokers in December 1998, and was Vice Chairman
of the Board since March 1997. Prior to that, he was Executive Vice
President and Chief Financial Officer.
(2) Kevin D. McNeil became Executive Vice President and Secretary of
Eastbrokers in December 1998. He continues to serve as Chief Financial
Officer and Treasurer.
(3) Mr. Schmid was the Chairman of the Board and Chief Executive Officer from
March 1997 through December 15, 1998 and President of Eastbrokers from
August 1996 through December 1998.
EMPLOYMENT AGREEMENTS
Effective January 1995, Eastbrokers entered into an employment agreement
with Mr. Martin A. Sumichrast. Effective as of December 31, 1998, Mr. Sumichrast
entered into a new Employment Agreement which will expire in December 2004, and
will renew for a period of five years following the expiration date, unless
contrary notice is given by either party. Eastbrokers also entered into an
Employment Agreement, effective as of December 31, 1998 with Kevin D. McNeil,
which agreement will expire in December 2002, unless contrary notice is given by
either party. The annual salaries for Martin A. Sumichrast and Mr. McNeil have
been initially fixed at $240,000 and $120,000, respectively, with such
subsequent increases in salary during the term of the agreements as may be
determined by the Board of Directors. Messrs. Martin A. Sumichrast and McNeil
are each eligible to receive a quarterly performance bonus of up to 1 percent
and 1/4 of 1 percent, respectively, of total revenue of Eastbrokers in excess of
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<PAGE>
$6,000,000 per quarter. Mr. Sumichrast and Mr. McNeil have forgiven any bonuses
owed to them through the period ending March 31, 1999. As an inducement for
entering into each of their respective agreements, Eastbrokers has agreed to
sell 200,000 shares and 50,000 shares at $3.50 and $3.00 per share of Common
Stock, respectively, to Mr. Martin A. Sumichrast and Mr. McNeil, in exchange for
each of Messrs. Sumichrast and McNeil issuing to Eastbrokers a promissory note
in the amount of $700,000 and $150,000, respectively. On January 1, 1999, Martin
A. Sumichrast and Kevin D. McNeil purchased 70,000 Placement Agent Common Stock
Warrants and 32,583 Placement Agent Common Stock Warrants from Eastbrokers NA,
respectively, in each case for an amount equal to $0.25 per warrant. Each
warrant will entitle Mr. Sumichrast and Mr. McNeil, each, to purchase one (1)
share of Eastbrokers' Common Stock at a price of $7.00 per share. Payment for
the warrants will be in the form of unsecured promissory notes, with one-year
terms and interest accruing at 8 percent. The agreements provide, among other
things, for participation in an equitable manner in any profit-sharing or
retirement plan for employees or executives and for participation in employee
benefits applicable to employees and executives of Eastbrokers. The agreements
further provide for the use of an automobile and other fringe benefits
commensurate with their duties and responsibilities and 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 his 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 would
receive an amount equal to the premiums it paid under the policy and the
remaining proceeds will go to the employee's designated beneficiary. Eastbrokers
has a one million dollar key man life insurance policy on Martin A. Sumichrast
and a $500,000 key man life insurance policy on Mr. McNeil, in each case with
the Company as the beneficiary.
Effective January 1, 1999, Wolfgang Kossner, Vice Chairman of the Board,
entered into a one-year Consulting Agreement with Eastbrokers. Mr. Kossner
receives compensation for his services as a consultant to the Company of 200,000
Class C Warrants, payable in equal installments on March 31, 1999, June 30,
1999, September 30, 1999 and December 31, 1999. The value of the Class C
Warrants will be determined for compensation purposes using the Black Scholes
method at the time of grant. As additional compensation under the agreement, Mr.
Kossner will receive project success fees to be determined. The agreement may be
terminated by Eastbrokers for cause and in the event that Eastbrokers terminates
the agreement for any reason other than "for cause," Mr. Kossner shall be
entitled to the remaining payments that would have otherwise been payable had
his services not been terminated. The agreement also provides for full
compensation and reimbursement of expenses in the event of disability.
8
<PAGE>
OPTION/SAR GRANTS
There were no grants to any of the named executive officers or Directors
of options, stock appreciation rights or similar instruments during the fiscal
year ended March 31, 1998. On December 23, 1998, the Board of Directors of
Eastbrokers granted stock options to Martin A. Sumichrast, Wolfgang Kossner and
Kevin D. McNeil. Pursuant to these grants, Martin A. Sumichrast and Wolfgang
Kossner are each entitled for 10 years to purchase 75,000 shares of Eastbrokers'
Common Stock at $4.00 per share and Kevin D. McNeil is entitled for 7 years to
purchase 50,000 shares of Eastbrokers' Common Stock at $4.00 per share.
OPTION/SAR EXERCISES
Options for 7,750 shares of Common Stock were exercised during the fiscal
year ended March 31, 1998. Options for 10,000 shares of Common Stock were
exercised during the fiscal year ending March 31, 1999.
FISCAL YEAR-END OPTION/SAR VALUES
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs at Options/SARs at
on Value FY-End (#) FY-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------
Martin A. Sumichrast 0 - 0/75,000 -
Kevin D. McNeil 0 - 0/50,000 -
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 (as defined in the Plan). The Plan is administered by the Stock
Award Committee, or, in the absence of such a committee by the entire Board,
which has the plenary authority to grant Awards including Stock Options, Stock
Appreciation Rights, Restricted Stock, or any combination of the foregoing, and
to determine the terms and conditions of the Awards.
The total number of shares of Common Stock reserved and available for
distribution as Awards under the Plan was 400,000. In October 1997, the Plan was
initially amended to provide an additional 200,000 shares available for
issuance. In 1999, the Plan was amended to provide an additional 250,000 shares
for issuance. Currently, the total number of shares of Common Stock available
under the Plan is 850,000.
9
<PAGE>
In the fiscal year ended March 31, 1997, an aggregate of 25,000 shares of
Common Stock and options to purchase 35,000 shares were awarded pursuant to the
Plan.
During the fiscal year ended March 31, 1997, an additional 12,000 shares
of Common Stock were issued outside of the Plan as compensation for services to
the Company. During the fiscal year ended March 31, 1998, an additional 10,000
shares were issued outside of the Plan as compensation for services to the
Company.
During the year ended March 31, 1999, 220,000 options to purchase shares
of Common Stock were granted under this plan.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information about shares of Common Stock
owned as of December 3, 1999 by:
o each person who we know owns beneficially more than five percent of
the Common Stock;
o each of the Company's officers and directors; and
o all officers and directors of the Company as a group.
Except as otherwise noted, the persons named in the table below did not own any
other capital stock of the Company at December 3, 1999 and have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
As of December 3, 1999, 6,246,750 shares of voting stock were outstanding,
consisting of 5,246,750 shares of Common Stock and 1,000,000 shares of Preferred
Stock.
Percentage
Position with Number of of
Name and Address (1) Eastbrokers Shares Shares
---------------------- ------------------------- --------------- -----------
Martin A. Sumichrast Chairman of the Board,
(2) President, Chief
Executive Officer and
Director 1,600,000 24.78
Kevin D. McNeil (3) Executive Vice
President, Secretary,
Treasurer and Chief
Financial Officer 110,078 1.76
Wolfgang Kossner (4) Vice Chairman 2,420,420 33.40
Dr. Lawrence
Chimerine (5) Director 12,500 *
Jay R. Schifferli
(5) Director 12,500 *
Michael Sumichrast, Director 12,500 *
Ph.D. (5)
10
<PAGE>
Percentage
Position with Number of of
Name and Address (1) Eastbrokers Shares Shares
---------------------- ------------------------- --------------- -----------
Belle Holdings, - 1,210,000 18.74
Inc.(6)
Cherry Creek - 445,000 7.12
Investments, Ltd.(7)
Corona Corp.(8) - 1,190,000 18.49
General Partners AG
(9) - 2,187,920 30.19
Punta Investors LLC
(10) - 930,000 14.88
All Officers and 4,167,998 62.61
Directors as a Group
(6 persons)
- ----------------------
* Less than 1 percent
(1) Except as otherwise noted, c/o Eastbrokers International
Incorporated, 6000 Fairview Road, Suite 1410, Charlotte, North
Carolina 28210.
(2) Includes 240,000 shares owned directly by Martin A. Sumichrast and
150,000 shares issuable upon exercise of certain placement agent
warrants to acquire Common Stock at $7.00 per share. Also includes
1,000,000 shares into which 1,000,000 shares of Preferred Stock are
convertible on a 1-for-1 basis and 210,000 shares issuable upon the
exercise of warrants to acquire Common Stock at $2.85 per share
owned by Belle Holdings, of which Mr. Sumichrast is the sole
stockholder and director and an officer.
(3) Includes 57,583 shares issuable upon exercise of certain placement
agent warrants to acquire Common Stock at $7.00 per share.
(4) Includes 1,587,920 shares 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. Also includes 400,000 shares
issuable upon the exercise of warrants to acquire Common Stock at
$7.00 per share held by GP and 200,000 shares issuable upon the
exercise of warrants to acquire Common Stock at $2.85 per share held
by GP.
(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 1,000,000 shares of Preferred Stock which is convertible
into shares of Common Stock on a 1-for-1 basis and 210,000 shares
issuable upon the exercise of warrants to acquire Common Stock at
$2.85 per share.
(7) Cherry Creek Investments, Ltd.'s address is c/o EBI Securities
Corp., 6300 South Syracuse Way, Suite 645, Englewood, Colorado
80111.
(8) Corona Corp.'s address is 3172 Abington Drive, Beverly Hills,
California 90210. Includes 490,000 shares issuable upon the exercise
of warrants to acquire Common Stock at $2.85 per share and 700,000
shares of Common Stock issuable upon the conversion of 700,000
shares of Preferred Stock to which Corona Corp. would be entitled
upon conversion of the Belle Note.
(9) Includes 400,000 shares issuable upon the exercise of warrants to
acquire Common Stock at $7.00 per share and 200,000 shares issuable
upon the exercise of warrants to acquire Common Stock at $2.85 per
share.
11
<PAGE>
(10) Punta Investors LLC's address is c/o West End Capital LLC, One World
Trade Center, Suite 4563, New York, New York 10048. Includes 890,000
shares of Common Stock underlying the 5 percent Convertible
Debentures due 2002 (the "5 percent Debentures") (of which only
445,000 are currently issuable upon conversion of the 5 percent
Debentures) and 40,000 shares of Common Stock underlying 40,000
Class C Common Stock Purchase Warrants. Under certain circumstances,
pursuant to an agreement between Eastbrokers and the holders of the
5 percent Convertible Debentures due 2002, Eastbrokers is required
to issue to the holders the additional 445,000 shares of Common
Stock underlying the 5 percent Debentures.
STOCKHOLDER PROPOSALS FOR THE ANNUAL MEETING OF STOCKHOLDERS FOR 2000
Proposals which stockholders wish to have considered for inclusion in the
proxy statement for the annual meeting of stockholders for 2000 must be received
at Eastbrokers' principal executive office, Eastbrokers International
Incorporated, 6000 Fairview Road, Suite 1410, Charlotte, North Carolina 28210,
on or before July 1, 2000.
OTHER INFORMATION
QUORUM. The presence in person or as represented by proxy of stockholders
holding a majority of the outstanding shares of Common Stock and Voting
Preferred Stock on a combined basis entitled to vote at the Special Meeting is
necessary to constitute a quorum for the transaction of business at the Special
Meeting. Abstentions and broker non-votes are each included for purposes of
determining the presence or absence of a sufficient number of shares to
constitute a quorum.
REQUIRED VOTE. The affirmative vote of the majority of shares present in
person or represented by proxy at the Special Meeting and entitled to vote on
the matters listed herein shall be the act of the stockholders approving such
matters.
Regarding the approval of any particular proposal, only those votes cast
for or against a proposal are used in determining the results of a vote for such
proposal. Abstentions are considered present at the Special Meeting, but since
they are not affirmative votes for a proposal they will have the same effect as
votes against such proposal. Broker non-votes, on the other hand, are not
considered present at the Special Meeting for the particular proposal for which
the broker withheld authority to vote.
SOLICITATION OF PROXIES GENERALLY. In addition to the solicitation of
proxies by mail, officers or other employees without extra remuneration may
solicit proxies by telephone or personal contact. We will request brokerage
houses, nominees, custodians and fiduciaries to forward soliciting material to
beneficial owners of shares of Common Stock and will pay such persons for
forwarding such material.
COSTS. All costs for the solicitation of proxies by the Company's Board of
Directors, anticipated to be approximately $10,000, will be borne by us.
LIST OF STOCKHOLDERS ENTITLED TO VOTE. A list of stockholders entitled to
vote at the Special Meeting will be available for examination by stockholders
during ordinary business hours during the 10 days prior to the Special Meeting
12
<PAGE>
at the Company's principal executive offices at 6000 Fairview Road, Suite 1410,
Charlotte, North Carolina 28210.
ADDITIONAL MATERIALS. Copies of the Company's Annual Report on Form
10-KSB, containing audited financial statements for the fiscal year ended March
31, 1999, and the Company's Quarterly Report on Form 10-QSB, containing
unaudited financial statements for the quarter ended September 30, 1999, are
attached hereto at EXHIBIT C and EXHIBIT D, respectively. No representative of
Spicer, Jeffries & Co., the Company's independent public accountants, is
expected to be present at the Special Meeting.
13
<PAGE>
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THIS PROXY
WILL BE VOTED AS DIRECTED. IN THE ABSENCE OF DIRECTION,
THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1 AND 2.
The undersigned hereby appoints Martin A. Sumichrast and Kevin D. McNeil
as Proxies, with the full power of substitution, and hereby authorizes them to
represent and vote, as designated on the reverse hereof, all shares of common
stock and/or all shares of voting preferred stock, as the case may be, of
Eastbrokers International Incorporated (the "Company") held of record by the
undersigned on December 3, 1999, at the special meeting of Stockholders to be
held on January 31, 2000, or any adjournment thereof, upon all such matters as
may properly come before such meeting.
|X| Please mark your If you plan to attend the |_|
votes as in this Special Meeting, place an X
example. in this box.
1. PROPOSAL TO APPROVE A CHANGE OF THE CORPORATE NAME
FOR AGAINST ABSTAIN
|_| |_| |_|
2. PROPOSAL TO APPROVE AN INCREASE IN THE VOTING POWER OF THE PREFERRED STOCK
AND CERTAIN ISSUANCES OF COMMON STOCK AND WARRANTS
FOR AGAINST ABSTAIN
|_| |_| |_|
(THE PROXY MUST BE SIGNED ON THE REVERSE SIDE)
14
<PAGE>
SIGNATURE:------------------------------------- DATE:--------------------
SIGNATURE:------------------------------------- DATE:--------------------
(SIGNATURE IF HELD JOINTLY)
NOTE: Please sign exactly as the name or names appear on the stock
certificate(s) as indicated hereon. Joint owners should each sign.
When signing as attorney, executor, administrator or guardian,
please give full title as such.
- --------------------------------------------------------------------------------
STOCKHOLDERS ARE URGED TO DATE, MARK, SIGN AND RETURN THIS PROXY STATEMENT
PROMPTLY IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED WITHIN
THE UNITED STATES.
- --------------------------------------------------------------------------------
15
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
EASTBROKERS INTERNATIONAL INCORPORATED
IT IS HEREBY CERTIFIED THAT:
1. The Certificate of Incorporation of Eastbrokers International Incorporated
(the "Corporation") is hereby amended by striking out Article "FIRST" thereof
and by substituting in its place the following new Article:
"FIRST: The name of the Corporation is:
International Capital Markets Group, Inc."
2. That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware by the
affirmative vote of the holders of a majority of the stock entitled to vote
thereon at the Special Meeting of stockholders of the Corporation held on
January 31, 2000.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Martin A. Sumichrast, its Chairman and Chief Executive Officer, and
attested to by Kevin D. McNeil, its Secretary, this 31st day of January, 2000.
------------------------------------
Martin A. Sumichrast
Chairman and Chief Executive Officer
Attest:
- ------------------------
Kevin D. McNeil
Secretary
<PAGE>
EXHIBIT B
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATIONS
OF
10% CONVERTIBLE PREFERRED STOCK, SERIES A
OF
EASTBROKERS INTERNATIONAL INCORPORATED
IT IS HEREBY CERTIFIED THAT:
1. The Certificate of Designations of 10% Convertible Preferred Stock, Series A
of Eastbrokers International Incorporated (the "Corporation") is hereby amended
by striking out Section 10 thereof and by substituting in its place the
following new Section:
"10. VOTING.
10.1. VOTING RIGHTS WITH COMMON STOCK. The holders of series A Preferred
Stock shall be entitled to notice of any stockholders' meeting in accordance
with the By-Laws of the Company and shall be entitled to four votes for each
share of Series A Preferred Stock on all matters submitted to the stockholders
for approval. With respect to matters affecting only the Series A Preferred
Stock, each outstanding share of Preferred Stock will be entitled to one vote.
In either case described in this Section 10, shares held by the Company or any
entity controlled by the Company shall be excluded and shall have no voting
rights."
2. That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware by the
affirmative vote of the holders of a majority of the stock entitled to vote
thereon at the Special Meeting of stockholders of the Corporation held on
January 31, 2000.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Martin A. Sumichrast, its Chairman and Chief Executive Officer, and
attested to by Kevin D. McNeil, its Secretary, this 31st day of January, 2000.
------------------------------------
Martin A. Sumichrast
Chairman and Chief Executive Officer
Attest:
- ------------------------
Kevin D. McNeil
Secretary
<PAGE>
EXHIBIT C
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-KSB
----------------------------------
MARK ONE
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------------------------
Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
----------------------------------
DELAWARE 52-1807562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15245 SHADY GROVE ROAD, SUITE 340, ROCKVILLE, MARYLAND 20850
(Address of principal executive offices) (Zip Code)
(301) 527-1110
(Issuer's telephone number, including area code)
----------------------------------
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, $.05 par value
Class A Warrants
Class C Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |_| No |X|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year: $32,951,480.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average of the bid and ask price of
such common equity on June 28, 1999 was approximately $9,430,000.
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on June 28, 1999 was 5,206,750.
Transitional Small Business Disclosure Format: Yes |_| No |X|
================================================================================
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
INDEX TO FORM 10-KSB
PAGE
PART I
Item 1. Description of Business................................... 3
Item 2. Description of Property................................... 12
Item 3. Legal Proceedings......................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....... 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......... 13
Item 6. Management's Discussion and Analysis or Plan of Operation........ 15
Item 7. Financial Statements
Historical Financial Statements
Independent Auditors' Report................................... 21
Consolidated Statements of Financial Condition................. 22
Consolidated Statements of Operations.......................... 23
Consolidated Statements of Comprehensive Income................ 23
Consolidated Statements of Changes in Shareholders' Equity..... 24
Consolidated Statements of Cash Flows.......................... 25
Notes to Consolidated Financial Statements..................... 27
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 40
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act....... 41
Item 10. Executive Compensation........................................... 43
Item 11. Security Ownership of Certain Beneficial Owners and Management... 46
Item 12. Certain Relationships and Related Transactions................... 47
Item 13. Exhibits, List and Reports on Form 8-K.......................... 49
Signatures.................................................................. 50
-2-
<PAGE>
PART I
DESCRIPTION OF BUSINESS
GENERAL
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements. These include
statements about anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products, anticipated market
performance and similar matters. The words "budgeted," "anticipate," "project,"
"estimate," "expect," "may," "believe," "potential" and similar statements are
intended to be among the statements that are forward looking statements. Because
such statements reflect the reality of risk and uncertainty that is inherent in
our business, actual results may differ materially from those expressed or
implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward looking statements, which are made as of the
date 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:
o transaction volume in the securities markets;
o the volatility of the securities markets, fluctuations in interest rates;
o changes in regulatory requirements which could affect the cost of doing
business, fluctuations in currency rates;
o general economic conditions, both domestic and international;
o changes in the rate of inflation and related impact on securities markets;
o competition from existing financial institutions and other new participants
in the securities markets;
o significant and rapid changes in technology which could negatively affect
our internet related projects;
o legal developments affecting the litigation experience of the securities
industry;
o changes in federal and state tax laws which could affect the popularity of
products sold by Eastbrokers; and
o those risks and uncertainties set forth under the caption "Risk Factors" on
page 10 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.
-3-
<PAGE>
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.
EASTBROKERS VIENNA refers to Eastbrokers Beteiligungs AG and its European
subsidiaries.
BACKGROUND
Eastbrokers International Incorporated ("Eastbrokers") was incorporated in
the State of Delaware on January 20, 1993, as the Czech Fund. Eastbrokers'
initial goal was to take advantage of the rapid growth in business opportunities
arising from the privatization of the newly-democratized Czech Republic by
merging with or acquiring Czech businesses. From 1993 through 1996, Eastbrokers
held an interest in a Czech hotel and an interest in a Czech department store.
In 1996, we re-evaluated our business strategy and, after considering a
variety of investment opportunities, acquired Eastbrokers Vienna. Eastbrokers
Vienna is an Austrian brokerage company with offices throughout Central and
Eastern Europe. This transaction enhanced our prospects by both providing us
with a vehicle to implement our acquisition strategy and extend our
opportunities beyond the Czech Republic to the entirety of Central and Eastern
Europe. Thereafter, our name was changed to Eastbrokers International
Incorporated, our present name.
Eastbrokers is primarily a holding company for thirteen subsidiaries and
affiliates which are directly and indirectly owned. Nine of Eastbrokers'
subsidiaries and affiliates are incorporated and located in Central and Eastern
Europe. Eastbrokers also owns 100 percent of EBI Securities Corporation ("EBI
Securities"), 100 percent of EBI Leasing Corporation, 92 percent of Eastbrokers
North America Inc. ("Eastbrokers NA") and 70 percent of EBonlineinc.com. Most of
Eastbrokers' subsidiaries and affiliates are engaged in the investment banking,
broker-dealer, consulting, advisory and securities business. The principal
strategic objective of the Eastbrokers Group has been to establish controlling
ownership of independent broker-dealers located primarily in Central and Eastern
Europe and to create a network that provides access to emerging market
investment opportunities in Central and Eastern Europe. In fiscal year 1998,
this objective was expanded to include establishing controlling ownership of
independent broker-dealers in the United States.
CURRENT OPERATIONS
Through Eastbrokers Vienna, the Eastbrokers Group provides financial
services in Central and Eastern Europe. Eastbrokers Vienna's primary business is
to provide its customers with stock brokering and investment banking services.
Eastbrokers Vienna conducts business through its head office in Vienna, Austria
and in its subsidiary and affiliate offices located in (a) Klagenfurt, Austria,
(b) Almaty, Kazakhstan, (c) Prague, Czech Republic, (d) Ljubljana, Slovenia, (e)
Zagreb, Croatia, (f) Warsaw, Poland and (g) Baku, Azerbaijan. Although the
Eastbrokers Group sold its operations in Budapest, Hungary, the Eastbrokers
Group continues to have a working relationship with the buyer. Through its
subsidiaries and affiliate offices, the Eastbrokers Group is a member of the
Vienna Stock Exchange, the Budapest Stock Exchange, the Zagreb Stock Exchange,
the Ljubljana Stock Exchange, the Central Asian Stock Exchange, and the Warsaw
Stock Exchange. Eastbrokers Vienna also owns 51 percent of WMP Bank AG (formerly
WMP Borsenmakler AG) ("WMP"), a publicly-held Austrian investment banking and
brokerage firm. Due to the continued decline in the Czech Republic markets and
recurring operating losses generated through its subsidiary office located in
Prague, Czech Republic, the Eastbrokers Group determined that it was in the best
interest of the Eastbrokers Group and shareholders to dispose of this operation.
73.55 percent of the Eastbrokers Group interest in this subsidiary was sold in
June 1998.
-4-
<PAGE>
Eastbrokers Vienna's brokerage, trading and market making business
generated approximately 10 percent of all the Eastbrokers Group revenues for
fiscal year ended March 31, 1999 and 41 percent of all of the Eastbrokers Group
revenues for the fiscal year ended March 31, 1998. The percentage decline in
fiscal 1999 was largely due to the added revenue generated from EBI Securities.
Eastbrokers Vienna conducts its sales activities as principal and agent on
behalf of its clients. Eastbrokers Vienna primarily distributes and trades
Central and Eastern European equity securities and to a lesser degree, debt
securities. Eastbrokers Vienna, through WMP, actively makes a market in more
than 800 debt and equity securities on the Vienna Stock Exchange. For the fiscal
year ended March 31, 1999, EBI Securities generated approximately 48 percent of
the Eastbrokers Group consolidated revenue.
Eastbrokers Vienna is also a Central and Eastern European investment
banking firm which provides advice to, and raises capital for, Central and
Eastern European companies. Eastbrokers Vienna provides advisory services on key
strategic matters such as mergers, acquisitions, privatizations, joint ventures
as well as long range financial planning. Eastbrokers Vienna seeks to raise
capital for its investment banking clients from institutional and commercial
investors in Western Europe. Since 1993, Eastbrokers Vienna has assisted with
over twenty-five investment banking transactions.
The Eastbrokers Group acquired 90 percent of Eastbrokers NA in March 1997.
On January 4, 1999, Eastbrokers NA request to withdraw its registration as a
broker-dealer with the SEC and a member of the National Association of
Securities Dealers ("NASD") was approved. The office space previously occupied
by Eastbrokers NA has been converted into a branch office of EBI Securities.
In October 1997, we announced our intention to establish a full service
brokerage operation in Kiev, Ukraine subject to obtaining the required
regulatory approvals. Due to the overall instability in the region caused by the
economic crisis in Asia and potential currency problems in Russia, we decided to
continue our evaluation of this market and will delay this expansion until such
time as we feel the expansion is economically viable.
On February 20, 1998, we consummated a private placement. Under the terms
of this private placement, we sold 1,227,000 units at $5.00 per unit, with each
unit consisting of one share of Eastbrokers' Common Stock, and one Class C
Common Stock purchase warrant with an exercise price of $7.00 per share. After
expenses related to this private placement, Eastbrokers received approximately
$5,400,000. As provided by the terms of the Class A and Class B warrants
outstanding at the time of this private placement, we also announced certain
adjustments relating to the pricing of its Class A and Class B warrants. In
conjunction with this private placement, we 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.
-5-
<PAGE>
In May 1998, Eastbrokers acquired all of the outstanding common stock of
Cohig & Associates, Inc., a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the Common Stock
and an agreement to advance $1,500,000 in additional working capital to Cohig &
Associates. Following the acquisition, Eastbrokers changed the name of Cohig &
Associates, Inc. to EBI Securities Corporation ("EBI Securities"). Eastbrokers
anticipates that EBI Securities will be the first in a series of acquisitions
targeting other successful medium size investment banking and brokerage firms
both domestically and internationally. Eastbrokers believes that its current
organizational structure as an entrepreneurial and international publicly-traded
company will be particularly appealing to potential acquisition candidates.
EBI Securities is a full service brokerage firm specializing in providing
investment advice and counsel to individuals and small to middle market
institutions. At the present time, EBI Securities has approximately 180 licensed
representatives. EBI Securities provides its brokerage clients with a broad
range of traditional investment products and services. EBI Securities also
strives to establish itself with investors and corporate finance clients through
its commitment to a professional and personalized service. Its trading
department makes a market in approximately 100 securities which include its
investment banking clients and those securities that its research department has
identified as promising, small to middle-market and potentially high growth
companies. The investment banking department's mission is to enhance and develop
the capital structures of small to middle market emerging growth companies
through private placements, bridge financing, and public offerings in order to
enable the firm's corporate finance clients to capitalize on promising business
opportunities, favorable market conditions, and/or late stage product
development.
EBI Securities is registered as a broker-dealer with the SEC and is
licensed in 50 states and the District of Columbia. It is also a member of the
NASD and the Securities Investor Protection Corporation ("SIPC"). Customer
accounts are insured to $25 million under the SIPC excess insurance program. EBI
Securities operates pursuant to the exemptive provisions of SEC Rule 15c3-3
(k)(2)(ii) and clears all transactions with and for customers on a fully
disclosed basis.
EBI Securities maintains its clearing arrangement with Fiserv
Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ:
FISV). Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement enables
EBI Securities to offer its clients a broad range of products and services that
is typically only offered by firms that are larger and/or have a larger capital
base. Fiserv has advised the Eastbrokers Group that it is aware of the year 2000
computer issue and is working to mitigate the effect of the year 2000 issue on
its operations. SEE "Management's Discussion and Analysis or Plan of Operation -
Impact of the Year 2000".
In June 1998, the Eastbrokers Group largest European subsidiary, WMP,
successfully raised 60 million Austrian Schillings (approximately $4,800,000
USD) in a bond offering. The Eastbrokers Group originally intended to utilize
these proceeds to enhance and further develop its European trading activities.
The bonds were issued in denominations of 10,000 Austrian Schillings
(approximately $800 USD at the then current exchange rates), bear an annual
interest rate of 7.5 percent, payable at maturity, and mature in June 2002. In
December 1998, the Eastbrokers Group redeemed approximately 45 million Austrian
Schillings of these bonds. The Eastbrokers Group intends to redeem the remaining
bonds in the future.
In June 1998, the Eastbrokers Group sold 73.55 percent of its interest in
Eastbrokers Prague a.s. See "Acquisitions and Dispositions During the Fiscal
Year" below.
On November 25, 1998, Eastbrokers sold 10 newly issued units in a private
placement consisting in the aggregate of $1,100,000 in 7 percent Convertible
Debentures (the "7 percent Convertible Debentures") and Class C Common Stock
Purchase Warrants to purchase 125,000 shares of Common Stock. The 7 percent
Convertible Debentures were redeemed in March 1999 from a portion of the
proceeds of the offering related to the issuance of the 10 percent Notes (as
defined below).
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In December 1998, Eastbrokers sold its subsidiary, Eastbrokers Budapest
Rt. for HUF 217,000,000 (approximately $1,000,000 USD at the then current
exchange rates). The Eastbrokers Group continues to have a working relationship
with the buyer and maintains a presence in Budapest through its relationship
with the buyer.
In January 1999, Eastbrokers sold 125,000 restricted shares of Common
Stock in a private placement to a private investor for $4.00 per share.
Eastbrokers also issued 7,500 shares of its Common Stock to a broker of EBI
Securities as a commission in connection with this transaction.
In March 1999, Eastbrokers issued 10 percent Convertible Promissory Notes
due 2003 (the "10 percent Notes") in an aggregate principal amount of
$1,350,000. Holders of the 10 percent Notes have the right to convert their 10
percent Notes into shares of Common Stock at $5.75 per share. A portion of the
proceeds of the Notes was used to redeem the 7 percent Convertible Debentures.
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
markets help explain the increasing number of acquisition opportunities being
introduced to the Company. The Eastbrokers Group is currently focused on
maximizing the profitability of the acquisitions that have been consummated to
date, and it is continuing to selectively seek additional complementary
acquisition and/or merger candidates.
In February 1998, Eastbrokers participated in a capital increase for its
subsidiary, Eastbrokers Vienna. In this capital increase, Eastbrokers acquired
389,925 shares of the available 390,000 shares for approximately $4,000,000 USD.
The shares were offered at a price of 130 Austrian Schillings per share
(approximately $10.40 USD per share) and raised Eastbrokers' ownership interest
in Eastbrokers Vienna from approximately 94 percent to approximately 96 percent.
Through its subsidiary, Eastbrokers Vienna, Eastbrokers acquired a 48.1
percent interest in the outstanding capital stock of WMP on August 1, 1996. WMP
is a stock broker-dealer and market maker in Vienna, Austria and is licensed as
a class B bank under Austrian law. A Class B bank may, at its discretion,
conduct any of the normal activities associated with a bank with one major
exception: it cannot accept customer deposits. From time to time Eastbrokers
Vienna has carried shares of WMP. Accordingly, since August 1996, Eastbrokers'
ownership of WMP has exceeded 50 percent when including WMP shares in its
trading portfolio. At December 31, 1996, Eastbrokers' aggregate ownership
percentage in WMP, including its trading position, was approximately 55 percent.
This investment was accounted for using the equity method in the March 31, 1997
financial statements as Eastbrokers believed that its control of WMP may likely
have been lost as the result of the probable occurrence of certain events that
lay outside of its control. In September, 1997 circumstances surrounding these
events were resolved such that these events were no longer considered probable
of occurrence and Eastbrokers deemed its control of WMP was no longer temporary.
For the fiscal year ended March 31, 1998, WMP was consolidated for the entire
year. At December 31, 1998, Eastbrokers' aggregate ownership interest in WMP was
51 percent.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH") for 2.5 million Austrian Schillings (approximately $200,000 USD at
the then current exchange rates). The sales price approximated the cost basis of
WMP GmbH at the date of disposition. At the date of disposition, WMP GmbH was
primarily an inactive subsidiary.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Peter Schmid, the former
Chairman of the Board, President, Chief Executive Officer and a former Director
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of Eastbrokers, for 13 million Austrian Schillings (approximately $1,025,000 USD
at the then current exchange rates). The Eastbrokers Group acquired its
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD at the then current exchange rates). At the time of
acquisition, the principal asset of SWIB was an investment in a company which
was entering bankruptcy proceedings and there was considerable uncertainty
regarding the future realizable value of this asset. By December 1997,
bankruptcy proceedings had progressed to a point where an estimate could be made
on the net realizable value of this primary asset. Based on the information
available at that time SWIB's value at the date of disposition was determined by
the Board of Directors of Eastbrokers to be in the range of 12 million to 14
million Austrian Schillings (approximately $950,000 to $1,100,000 USD at the
then current exchange rates).
In December 1997, Eastbrokers Budapest Rt. sold its wholly owned
subsidiary, 1001 Pengo Kft., to three directors of Eastbrokers Budapest Rt. for
100 million Hungarian Forints (approximately $500,000 USD at the then current
exchange rates). As of the date of disposition, the sales price approximated the
cost basis of 1001 Pengo Kft.
ACQUISITIONS AND DISPOSITIONS DURING THE FISCAL YEAR
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 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
through its relationship with the buyer.
In December 1998, Eastbrokers also liquidated two of its underperforming
subsidiaries: Eastbrokers Romania and Eastbrokers Slovakia.
ACQUISITIONS AND DISPOSITIONS SUBSEQUENT TO THE FISCAL YEAR END
In April 1999, Eastbrokers signed a joint venture agreement with A1
Internet.com, Inc. ("A1"), a website development firm, to jointly own and
develop EBonlineinc.com, Inc. ("EBonline"), a newly established subsidiary.
EBonline is owned seventy percent by Eastbrokers and thirty percent by A1. Under
the terms of the joint venture agreement, Eastbrokers will provide $300,000 in
initial funding and A1 will provide $200,000 in developmental costs. EBonline is
also in the process of merging into a publicly traded entity which we believe
will enhance EBonline's ability to raise capital, make acquisitions and hire
personnel, through the use of stock incentive plans.
EBonline is an internet based service (www.Ebonlineinc.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 EBonline
will have potentially three revenue streams: monthly membership fees, consulting
income and banner advertising income. Eastbrokers is currently in the process of
revising the website and we intend to begin marketing the website in the Summer
of 1999 in international print media and major search engines on the internet.
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GOVERNMENT REGULATION
The Eastbrokers Group has operations based in the United States and 7
foreign countries. The Eastbrokers Group's business is, and the securities
industry generally is, subject to extensive regulation in each of these
jurisdictions at both the federal and state level, as well as by industry
self-regulatory organizations ("SROs"). The Eastbrokers Group is also subject to
regulation by various foreign financial regulatory authorities in the
jurisdictions outside of the United States, Austria and Central and Eastern
Europe where it does business, including, for example, by the Securities and
Futures Authority of the United Kingdom.
In the United States, the Eastbrokers Group's business, and the securities
industry generally, are subject to extensive regulation at both the federal and
state levels. The SEC is the agency primarily responsible for administration of
federal securities laws. Much of the regulation of broker-dealers, however, has
been delegated by the SEC to SROs, primarily the NASD. The NASD has the
authority to adopt rules (which are subject to approval by the SEC) for
governing the industry and the NASD conducts periodic examinations to ensure
compliance. The scope of EBI Securities' broker-dealer operations are subject to
the terms of their respective Restriction Agreements with the NASD. In the event
that EBI Securities violates the terms of its Restriction Agreement or NASD
rules, its NASD membership can be suspended or revoked and the NASD may impose
fines upon it or censure it. Broker-dealers are also subject to regulation by
state securities commissions in the states in which they are registered. EBI
Securities is registered in all 50 states. EBI Securities is subject to the
SEC's net capital rules, which require them to maintain prescribed levels of
capital in order to conduct business. EBI Securities has capital in excess of
the required minimums.
The Eastbrokers Group's non-U.S. business is also subject to extensive
regulation by various non-U.S. governments, securities exchanges, central banks
and regulatory bodies, especially in Austria where Eastbrokers owns WMP, an
Austrian bank that engages in the securities business, including on the Vienna
Stock Exchange. Each of these authorities impose regulation on the Eastbrokers
Group's activities within the scope of their respective jurisdictions. These
regulations are generally intended to protect the integrity of the stock
exchange, bank or financial market subject to regulation and to protect
customers of the regulated agency, and not primarily to protect investors in the
regulated entity. The Eastbrokers Group is currently in compliance with the net
capital requirements in each of the Central and Eastern European jurisdictions
in which the Eastbrokers Group operates.
The SEC, the Austrian Ministry of Finance, other governmental authorities
and SROs have the authority to institute administrative or judicial proceedings
against any entity subject to their jurisdiction, and the officers and employees
of any such entity. These proceedings may result in censure, fine, civil
penalties (including treble damages in the case of insider trading violations),
the issuance of cease-and-desist orders, the de-registration or suspension of a
broker-dealer, investment adviser or futures commission merchant, the statutory
disqualification of its officers or employees or other adverse consequences,
and, even if none of such actions is taken, could have a material adverse effect
on the Eastbrokers Group's perceived creditworthiness, reputation and
competitiveness. Customers of the Eastbrokers Group or others who allege that
they have been damaged by the Eastbrokers Group's violation of applicable
regulations also may seek to obtain compensation from the Company, including the
unwinding of any transactions with the Eastbrokers Group.
In addition to the existing laws and regulations affecting the Eastbrokers
Group, additional legislation and regulations, amendments to existing laws and
regulations may be adopted in the future, or changes in interpretations or
enforcement of existing laws and regulations may be adopted in the future. Any
such event could directly affect the manner and operation and profitability of
the Eastbrokers Group.
COMPETITION
The Eastbrokers Group is engaged in a highly competitive business. With
respect to one or more aspects of its business, Eastbrokers Group encounters
substantial competition from both foreign and domestic businesses in the United
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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
As of June 25, 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.
RISK FACTORS
WE FACE A VARIETY OF RISKS IN THE CONDUCT OF OUR BUSINESS, ANY OF WHICH
COULD MATERIALLY AND ADVERSELY AFFECT US, OUR BUSINESS AND OUR FINANCIAL
PERFORMANCE. SOME OF THESE RISKS ARE SUMMARIZED BELOW. THIS SUMMARY IS NOT
INTENDED TO BE A COMPLETE LIST OF ALL MATTERS THAT COULD ADVERSELY AFFECT US,
AND THERE ARE MANY FACTORS BEYOND OUR CONTROL THAT AFFECT US, OUR BUSINESS AND
OUR FINANCIAL PERFORMANCE.
THE VOLATILE NATURE OF THE SECURITIES BUSINESS COULD ADVERSELY AFFECT OUR
FINANCIAL PERFORMANCE AS WELL AS OUR STOCK PRICE. The securities business is
naturally subject to various risks, particularly in volatile or illiquid
markets. Among the risks are potential losses resulting from the following
activities:
o underwriting or owning securities,
o trading, arbitrage and merchant banking activities,
o failure by the other party to meet commitments,
o customer fraud and employee fraud,
o misconduct and errors,
o failures in connection with processing securities transactions and
o litigation
Various factors affect a securities firm's business and profitability.
These factors include the firm's credit capacity or perceived creditworthiness
and competitive factors, including the ability to attract and retain highly
skilled employees. These and other factors may contribute to reduced levels of
new issuances of securities or merger, acquisition, restructuring, and leveraged
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capital activities, including leveraged buyouts and high-yield financing. Such
factors may also help reduce the level of participation in financing and
investment related to these activities. This generally results in lower revenues
from investment and merchant banking fees and from underwriting and corporate
development investments. Reduced volume of securities transactions and reduced
market liquidity generally result in lower revenues from dealer and trading
activities and commissions.
Lower price levels of securities may result in a reduced volume of
transactions and in losses from declines in the market value of securities held
in trading, investment and underwriting positions. Sudden sharp declines in
market values of securities and the failure of companies issuing securities and
parties on the other side of a transaction to perform their obligations can
result in illiquid markets. In such markets, we may not be able to sell
securities and may have difficulty covering our securities positions. Such
markets, if prolonged, may also lower our revenues from investment banking,
merchant banking and other investments, and could have a material adverse effect
on our results of operations, financial condition and cash flows.
Our principal business activities (investment banking, securities sales
and trading and correspondent brokerage services) are naturally highly
competitive and subject to various risks, volatile trading markets and
fluctuations in the volume of market activity. Consequently, our net income and
revenues, as well as our stock price, have been, and may continue to be, subject
to wide fluctuations. This, of course, reflects the impact of many factors that
are beyond our control. These factors include:
o securities market conditions,
o the level and volatility of interest rates,
o competitive conditions, and
o the size and timing of transactions.
Numerous other national and international factors affect the securities business
and the profitability of securities firms. These include:
o economic and political conditions,
o broad trends in business and finance,
o legislation and regulation affecting the national and international
business and financial communities,
o currency values,
o inflation,
o market conditions,
o the availability of short-term or long-term funding and capital,
o the credit capacity or perceived creditworthiness of the securities
industry in the marketplace, and
o the level and volatility of interest rates.
WE COULD BE ADVERSELY AFFECTED BY THE SIGNIFICANT COMPETITION WITHIN THE
SECURITIES INDUSTRY. We encounter significant competition in all aspects of the
securities business and compete worldwide directly with other domestic and
foreign securities firms. Many of these competitors have greater capital,
financial and other resources than we have. In addition to competition from
firms currently in the securities business, there has been increasing
competition from other sources, such as commercial banks and investment
boutiques.
We anticipate legislative and regulatory initiatives in the U.S. to remove
or relieve certain restrictions on commercial banks. Thus, it is possible that
competition in some markets currently dominated by investment banks may increase
in the near future.
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Such competition could also affect our ability to attract and retain
highly skilled individuals to conduct our various businesses, which may have an
adverse effect on our business. The principal competitive factors influencing
our business are:
o our professional staff,
o our reputation in the marketplace,
o our existing client relationships,
o the ability to commit capital to client transactions, and
o our mix of market capabilities.
The adequacy of our capital levels will also influence our ability to
compete effectively in securities brokerage and investment banking activities.
In addition, our ability to expand our business may depend on our ability to
raise additional capital. SEE "Description of Business - Competition."
OUR FAILURE TO COMPLY WITH THE EXTENSIVE FEDERAL, STATE AND FOREIGN
REGULATION OF OUR BUSINESS COULD HAVE POSSIBLE MATERIAL ADVERSE EFFECTS UPON US.
Our business (and the securities industry generally) is subject to extensive
regulation. First, we are subject to regulation in the United States, Austria
and all other Central and Eastern European states where our subsidiaries operate
at the state level. Second, we are subject to regulation by various foreign
financial regulatory authorities in the jurisdictions outside of the United
States, Austria and Central and Eastern Europe where we do business, including
regulation by the Securities and Futures Authority of the United Kingdom.
Finally, we are subject to regulation by industry self regulatory organizations
(known as "SROs"). SEE "Description of Business - Governmental Regulation."
SROs such as the NASD require strict compliance with their rules and
regulations. Our failure to comply with any of these laws, rules or regulations
could result in fines, suspension or expulsion, with which could have possible
material adverse effects upon us and may affect our stock price accordingly.
The scope of EBI Securities' broker-dealer operations is subject to the
terms of its Restriction Agreements with the NASD. In the event that EBI
Securities violates the terms of its Restriction Agreements, the NASD can
suspend or revoke its membership and may impose fines upon or censure EBI
Securities.
Compliance with many of the regulations that apply to us involves a number
of risks, particularly in areas where applicable regulations may be unclear. The
SEC, the Austrian Ministry of Finance (the "Ministry"), other governmental
regulatory authorities, including state securities regulators, and SROs,
including the Vienna Stock Exchange Chamber, may institute administrative or
judicial proceedings or arbitrations. These proceedings or arbitrations may
result in censure, fine, civil penalties (including treble damages in the case
of insider trading violations), issuance of cease-and-desist orders,
de-registration of or suspension of a broker-dealer, investment adviser or
futures commission merchant, statutory disqualification of our officers or
employees or other adverse consequences. Moreover, even if no such actions are
taken, there could be a material adverse effect on our perceived
creditworthiness, reputation and competitiveness. Customers of ours or others
who allege that our violation of applicable regulations have damaged them also
may seek to obtain compensation from us, including unwinding any transactions
with us. Such unwinding could have an adverse impact on our business.
Other changes may adversely affect our manner of operation and profitability.
These include:
o additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers,
o changes in rules promulgated by the SEC, the Ministry or other Austrian
or foreign governmental regulatory authorities and SROs, and
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o changes in the interpretation or enforcement of existing laws and rules.
Regulations may materially affect our business in two ways. First,
regulations may directly apply to us in the conduct of our business. Second,
laws, rules and regulations that apply generally to the industry or the market
as a whole may materially affect the market for our products and services. Some
examples of factors that could affect the volume of our underwriting, merger and
acquisition and merchant banking business in any year are:
o existing and proposed tax legislation,
o antitrust policy and other governmental regulations and policies
(including the interest rate policies), and
o changes in interpretation or enforcement of existing laws and rules that
affect the business and financial communities.
From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high-yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and investment
banking business, which in turn could adversely affect our related underwriting,
advisory and trading revenues.
THERE ARE MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH OUR
UNDERWRITING AND TRADING ACTIVITIES WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON US. We conduct our underwriting, securities trading, market-making and
arbitrage activities as principal and in doing so subject our capital to
significant risks, including market, credit (including counterparty) and
liquidity risks.
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
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or short sale of securities as principal and may involve certain risks which may
limit our ability to resell securities we purchased or to repurchase securities
sold in such transactions. These risks include change in the market price of
such securities and a decrease in the liquidity of markets. Principal and
underwriting transactions also involve economic, political, credit, currency,
interest rate and other related risks, any of which could result in an adverse
change in the market price of the relevant securities. SEE "Management's
Discussion and Analysis or Plan of Operation."
OUR MERCHANT BANKING ACTIVITIES ARE VERY CAPITAL INTENSIVE AND HAVE A
POTENTIAL FOR LOSS WHICH COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS.
Securities firms, such as ourselves, increasingly promote major client
transactions and transactions sponsored by the clients' own pools of capital by
using their capital in a variety of investment activities that have been broadly
described as merchant banking.
Such activities include, among other things, purchasing equity or debt
securities or making commitments to purchase such securities in various
transactions. These include mergers, acquisitions, and restructuring and
leveraged capital transactions, including leveraged buyouts and high-yield
financing. Such positions and commitments may involve substantial amounts of
capital and significant exposure to any one issuer or business, as well as
market, credit and liquidity risks. Purchasers of equity securities in these
transactions generally hold them for appreciation, and the securities are not
readily marketable and typically do not provide dividend income. Debt securities
purchased in such transactions typically rank subordinate to bank debt of the
issuer and may rank subordinate to other debt of the issuer. We also provide and
arrange bridge financing. Bridge financing assures funding for major
transactions, with the expectation that refinancing will be obtained through the
placement of high-yield debt or other securities. Such activities may also
involve substantial amounts of capital and significant exposure to any one
issuer as well as various risks associated with credit conditions and
vulnerability to general economic conditions.
There can be no assurance that we will not experience significant losses
as a result of such activities. Such losses may have an adverse effect on our
business. SEE "Management's Discussion and Analysis or Plan of Operation."
ALTHOUGH WE DO NOT CURRENTLY USE DERIVATIVE FINANCIAL INSTRUMENTS, OUR
INABILITY TO ENGAGE IN CURRENCY HEDGING ACTIVITIES MAY RESULT IN OUR EARNINGS
BEING SUBJECT TO GREATER VOLATILITY DUE TO EXCHANGE RATE FLUCTUATIONS. At the
present time, we do not engage in the use of derivative financial instruments.
In some of the countries where we have operations (E.G., Kazakhstan, Czech
Republic, Slovenia, Croatia, Poland and Azerbaijan), the local currencies are
referred to as "soft" or "exotic". Soft currency is the currency of a nation
where a person can exchange the currency only with difficulty. Soft currency
countries typically have minimal amounts of currency reserved for exchange
purposes. As such, there are very few, if any, cost effective hedging strategies
available to us or potential investors. Our inability engage in currency hedging
activities may result in our earnings being subject to greater volatility due to
exchange rate fluctuations.
OUR INABILITY TO RAISE ADDITIONAL REQUIRED CAPITAL COULD HAVE A MATERIAL
ADVERSE EFFECT ON US. We may need to raise additional funds to provide working
capital or to respond to unforeseen needs or to take advantage of unanticipated
opportunities. Over the longer term, it is likely that we will require
substantial additional monies to continue to fund our working capital needs.
There can be no assurance that any such funds will be available at the time or
times needed, or available on terms acceptable to us. If adequate funds are not
available on acceptable terms, we may not be able to take advantage of market
opportunities, to develop new services or products or otherwise respond to
competitive pressures. Such inability could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
INADEQUATE FINANCING TO SUPPORT OUR BUSINESSES COULD HAVE A MATERIAL
ADVERSE EFFECT ON US. A substantial portion of our total assets consists of
highly liquid marketable securities and short-term receivables arising from
securities transactions. The highly liquid nature of these assets provides us
with flexibility in financing and managing our business. However, certain of our
activities, such as merchant banking, frequently involve substantial capital
commitments in securities which are often illiquid. Such funds and capital
include equity, long-term debt and short-term borrowings which consist of
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securities sold under agreements to repurchase ("repurchase agreements"), master
notes and committed and uncommitted lines of credit.
All repurchase transactions and a portion of our bank borrowings are made
on a collateralized basis. This means that we have to pledge assets of ours in
order to secure the funds involved in the repurchase transactions or borrowings.
Liquidity management includes monitoring assets available to pledge against
short-term borrowing. We maintain borrowing relationships with a broad range of
banks, financial institutions, counterparties and others. The volume of our
borrowings generally fluctuates in response to changes in the amount of resale
transactions outstanding, the level of our securities inventories and overall
market conditions. Availability of financing can vary depending upon market
conditions, the volume of certain trading activities, credit ratings, credit
capacity and the overall availability of credit to the securities industry.
There can be no assurance that adequate financing to support our businesses will
continue to be available in the future. SEE "Management's Discussion and
Analysis or Plan of Operation."
OUR ABILITY TO PAY DIVIDENDS, REPAY DEBT AND REDEEM OR REPURCHASE SHARES
OF OUR OUTSTANDING CAPITAL STOCK COULD BE ADVERSELY AFFECTED BY POTENTIAL
RESTRICTIONS RESULTING FROM NET CAPITAL REQUIREMENTS ON THE BUSINESS OF
REGULATED SUBSIDIARIES AND ON THE WITHDRAWAL OF CAPITAL. As a registered
broker-dealer and member of numerous stock exchanges throughout the United
States and Central and Eastern Europe, we are required to comply with each of
the countries' regulatory authorities and net capital rules of the stock
exchanges. These rules specify minimum net capital requirements for registered
broker-dealers and stock exchange members. They attempt to ensure that
broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business. Accordingly, the rules
require that at least a substantial portion of assets be kept in cash or highly
liquid investments. Compliance with such net capital requirements could limit
operations that require the intensive use of capital, such as underwriting and
trading activities. These rules also could restrict our ability to withdraw
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
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that the proceeds from such policy will be adequate to offset the loss of his
services. We do not have key-man life insurance policies in effect with respect
to Mr. Kossner.
WE HAVE SUFFERED OPERATING LOSSES AND WE CANNOT PREDICT WHETHER OUR FUTURE
OPERATIONS WILL BE PROFITABLE OR THAT WE WILL HAVE AVAILABLE FUNDS ADEQUATE TO
FUND OUR OPERATIONS. Since the Company's formation, we have suffered substantial
cash flow deficits and operating losses. The net loss for the fiscal year ended
March 31, 1999 was $5,911,848 and the net loss for the fiscal year ended March
31, 1998 was $3,676,607. Cash and cash equivalents were $2,215,000 as of March
31, 1999 and $7,157,000 as of March 31, 1998. There can be no assurance that our
future operations will be profitable or that we will have available funds
adequate to fund our operations. Should our operations be profitable, it is
likely that we would retain much or all of our earnings to finance future growth
and expansion.
IF OUR COMMON STOCK WERE DELISTED, STOCKHOLDERS MAY HAVE A MORE DIFFICULT
TIME SELLING THEIR SECURITIES. In the event that the Common Stock were no longer
to meet applicable Nasdaq SmallCap requirements including timely reporting and
were delisted from Nasdaq SmallCap, we would attempt to have our securities
traded in the over-the-counter market via the Electronic Bulletin Board or the
"pink sheets." In such event, holders of our securities would likely encounter
greater difficulty in disposing of these securities and/or obtaining accurate
quotations as to the prices of our securities.
IF AT ANY TIME REGULATORS DELIST THE COMMON STOCK FROM THE NASDAQ
SMALLCAP, TRANSACTIONS INVOLVING THE SECURITIES MAY BECOME SUBJECT TO PENNY
STOCK RULES THAT IMPOSE ADDITIONAL SALES PRACTICE REQUIREMENTS ON BROKER-DEALERS
WHO SELL SUCH SECURITIES TO PERSONS OTHER THAN ESTABLISHED CUSTOMERS AND
ACCREDITED INVESTORS. The SEC has adopted regulations which generally define
"penny stock" to be any equity security that has a market price (as defined) of
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. Since our Common Stock is currently listed on the
Nasdaq SmallCap we are exempt from the definition of penny stock at this time .
If at any time regulators delist the Common Stock from the Nasdaq SmallCap,
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
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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 Eastbrokers Group. Future
issuances of preferred stock may provide for dividends, certain preferences in
liquidation and conversion rights. Such preferred stock issuance could make the
possible takeover of the Eastbrokers Group, or the removal of management of the
Eastbrokers Group, more difficult. The issuance of such preferred stock could
discourage hostile bids for control of the Eastbrokers Group in which
shareholders could receive premiums for their Common Stock or warrants, could
adversely affect the voting and other rights of the holders of the Common Stock,
or could depress the market price of the Common Stock or warrants.
THERE ARE SPECIFIC RISKS OF THE GEOGRAPHIC AREAS COVERED BY US OUTSIDE THE
UNITED STATES WHICH COULD, IF REALIZED, RESULT IN A MATERIAL ADVERSE EFFECT ON
US. Our investments will include securities of issuers resident in areas
currently in a state of flux - Central and Eastern Europe and Central Asia.
These regions' political institutions and economic policies now face the
challenges of rapid change. Their populations are ethnically diverse and
cultural and religious tensions abound. Memories of conflicts, past injustices
and the legacy of the denial of justice and the expropriation of property will
continue to create tension for years to come. These problems will compound the
difficulties of the change from a centrally planned economy to a market economy.
For these reasons our investments will be subject to risks of a nature and
degree not normally encountered in more developed economies and additional to
those inherent in any equity investment. Specific examples of some of these
risks are described below:
o LIQUIDITY OF OUR INVESTMENTS: The nature of our investments in these
geographic areas limits their potential secondary market. Accordingly, we may
not be able to achieve the full value of our investments on disposal.
Although we anticipate that liquidity will improve once local stock markets
are operational, there is no guarantee that the markets will be as liquid as
those of developed countries.
o POLITICAL AND ECONOMIC FACTORS: The countries in which some of our
operations are concentrated had centrally-planned, socialist economies for
many years. Attempts at political and economic reform have been made with
limited success and it is impossible to foresee whether such reforms will
achieve their intended aims. Countries may impose restrictions on investing
in specific companies or industries which they consider to be important or
sensitive to national interests, but which also may be the best investment
opportunities available there. Additionally, changes in government policy may
result in countries expropriating investments.
o VALUATION RISK: Accounting and financial reporting standards in selected
countries are not equivalent to International Accounting Standards or U.S.
Generally Accepted Accounting Standards. Consequently, less information is
available to investors in the selected countries than in more developed
capital markets. Nevertheless, we will use valuations and financial reports
of international auditing firms and will apply all other means to monitor
unlisted investments.
o PROBLEMS OF TRANSITION AND BUSINESS FAILURE: Until very recently, virtually
all industrial output within the Comecon and Warsaw Pact countries was
generated from state-owned industry. As a result, few individuals understand
basic capitalistic management skills and techniques. Privatization of much of
the region's industry and the transition to a more market-orientated economy
will be difficult. Industry in the region is considerably less developed and
less efficient than industry in Western Europe and the United States. In
addition to doubts as to the continuing viability of much of the region's
industry, those businesses which survive are likely to require considerable
capital investment and restructuring. The failure of one or more businesses
in which we have invested may have a significant adverse effect on our
performance as a whole.
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o CHANGES IN LAW AND ENFORCEMENT OF RIGHTS: In cases where competing claims
arise or in cases of re-nationalization, it may be difficult to enforce our
rights in several of the countries where we operate. There are several
reasons for this. First, legislation relating to securities, stock markets
and property rights may not exist. Second, these countries may only very
recently have introduced such legislation, and may introduce significant new
legislation at any time. Finally, existing legislation is likely to be
subject to extensive amendment.
o INVESTMENT AND REPATRIATION RESTRICTIONS: We may require governmental
registration and/or approval in order to repatriate investment income,
capital and the proceeds of sales by foreign investors. A number of countries
in which we may invest do not have freely convertible currencies or their
currencies may only be convertible at rates determined by their governments.
Countries may also impose repatriation restrictions at any time. Changes in
the value of currencies in which our investments are denominated will result
in a corresponding change in the value of our assets which are generally
denominated in the local functional currencies. Investors should note that
the local currencies involved may be subject to rapid devaluation against the
major "hard" currencies, with the corresponding result that delays in
currency conversion may cause significant losses.
o TAXATION: Taxation of dividends and capital gains received by non-residents
varies among the selected countries. In addition, the selected countries
generally have less well defined tax laws and procedures, and such laws may
permit retroactive taxation. As a result, we could, in the future, become
subject to local tax liabilities that had not been anticipated in conducting
our investment activities or valuing our assets.
A SUBSTANTIAL PORTION OF OUR ASSETS ARE LOCATED OUTSIDE THE UNITED STATES
WHICH COULD MAKE IT DIFFICULT TO ENFORCE CIVIL JUDGMENTS OBTAINED AGAINST US IN
THE U.S. A substantial portion of our assets are located outside the United
States. It may be difficult for investors to enforce outside of the United
States judgments against the Eastbrokers Group obtained in the United States in
any actions, including actions based on the civil liability provisions of the
securities laws of the United States. In addition, certain of our officers and
directors are not citizens or residents of the United States and all or a
substantial portion of their assets are or may be located outside the United
States. As a result, it may be difficult for investors to affect service of
process within the United States against them or to enforce judgments obtained
in the United States, including judgments based on the civil liability
provisions of the securities laws of the United States.
SIGNIFICANT AND RAPID CHANGES IN TECHNOLOGY COULD NEGATIVELY AFFECT OUR
INTERNET-RELATED PROJECTS. The market for internet products and services has
only recently begun to develop and is rapidly evolving. Significant
technological changes could render our existing internet-related products and
services obsolete. To be successful, we must adapt to this rapidly changing
market by continually improving the responsiveness, functionality and features
of our products and services to meet our customers' needs. If we are unable to
respond to technological advances and conform to emerging industry standards in
a cost-effective and timely basis, certain portions of our business could be
materially adversely affected.
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 March 31, 1999, it leased office space in the
following locations: (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; (xvi) Spokane, Washington; (xvii) New York,
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New York; (xviii) Vienna, Austria; (xix) Klagenfurt, Austria; (xx) Zagreb,
Croatia; (xxi) Almaty, Kazakhstan; (xxii) Warsaw, Poland; (xxiii) Ljubljana,
Slovenia and (xxiv) Baku, Azerbaijan. The Eastbrokers Group maintains a presence
in Budapest, Hungary due to its relationship with the buyer of its operations
previously located there.
LEGAL PROCEEDINGS
Through its recently acquired subsidiary, EBI Securities, Eastbrokers is
subject to several legal proceedings in various jurisdictions throughout the
United States.
USCAN FREE TRADE ZONES V. COHIG & ASSOCIATES, INC. (EBI SECURITIES), ET
AL., United States District Court for the Western District of Washington. In
March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint against EBI
Securities and Steve Signer, an employee of EBI Securities, alleging that EBI
Securities misled USCAN about the creditworthiness of a third party in
connection with an introduction made by Mr. Signer. EBI Securities categorically
denies this allegation. USCAN informed EBI Securities that it would be working
with a certain third party to secure certain loans on behalf of USCAN which
USCAN would then use to open a trading account with EBI Securities. Once EBI
Securities learned of the relationship to this third party, it refused to enter
into any business arrangements with USCAN as long as the third party was
involved due to regulatory problems encountered in prior business dealings with
this certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that might
have resulted. Mr. Signer was dismissed as a defendant in this case due to lack
of personal jurisdiction and has received an award of fees. Plaintiff originally
sought a judgment of approximately $86,000,000 in compensatory and punitive
damages. However, USCAN recently stated in pleadings and during a court
deposition taken in October 1998 that its damage claim had been reduced to
$332,000 and that it would dismiss its RICO claims. EBI Securities has filed
counterclaims for defamation based upon certain false and defamatory
representations regarding EBI Securities. The trial had been scheduled to start
in January 1999 but the Court removed the case from its docket after USCAN filed
a petition for relief under Chapter 11 of the United States Bankruptcy Code. In
the event the case should ever be restored to the active court docket for trial,
EBI Securities believes it has meritorious defenses and intends to vigorously
defend against USCAN's claims as well as aggressively pursue claims against
USCAN and two of its officers for defamation, abuse of process, and civil
conspiracy.
FLORIDA DEPARTMENT OF INSURANCE AS RECEIVER FOR UNITED STATES EMPLOYER
INSURANCE CONSUMER SELF-INSURANCE FUND OF FLORIDA ("USEC") V. DEBENTURE GUARANTY
CORPORATION, ET. AL., United States District Court for the Middle District of
Florida. In November, 1995, the plaintiff, USEC, commenced the above entitled
action against Debenture Guaranty Corporation ("Debenture") and certain other
defendants, including EBI Securities and Steve Signer, an employee of EBI
Securities. In 1994, USEC entered into an arrangement whereby USEC lent money to
Debenture, and Debenture opened an account in Debenture's name to trade U.S.
Treasuries. The note to USEC was in the amount by which the treasuries could be
margined. This transaction was allegedly part of a scheme whereby USEC was
attempting to inflate its assets for regulatory purposes. Debenture allegedly
misappropriated the funds for its own benefit and USEC subsequently failed.
Plaintiffs alleged that EBI Securities and Signer aided, abetted and conspired
with Debenture to defraud USEC and claimed damages of $11,000,000. After a six
week trial held from September 8, 1998, to October 14, 1998, a jury returned a
verdict in favor of EBI Securities. Plaintiffs' motion for a new trial was
denied. EBI Securities filed a motion seeking recovery of its costs and
attorney's fees incurred in connection with defending this action. The court
awarded EBI Securities $12,500 in costs but denied its motion for attorney's
fees. Plaintiffs have filed an appeal 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
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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.
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
the fall of 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.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Eastbrokers' Common Stock is traded on the Nasdaq SmallCap under the
symbol "EAST" (previously, the symbol was "CZCH"). The following table sets
forth the reported high and low bid quotations on a calendar year basis (as
adjusted for the one-for-five reverse split of Eastbrokers' Common Stock, which
occurred in September 1996) of the Common Stock for the periods indicated. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
COMMON STOCK
-------------------------------
HIGH LOW
-------------------------------
FISCAL 1997
First Quarter $ 7.5000 $4.2500
Second Quarter $ 7.2500 $6.0625
Third Quarter $11.1250 $6.3750
Fourth Quarter $11.0000 $8.3750
FISCAL 1998
First Quarter $10.5000 $4.0000
Second Quarter $14.0000 $4.0000
Third Quarter $ 5.7500 $2.0313
Fourth Quarter $13.0000 $3.7500
FISCAL 1999
First Quarter (through $ 9.3750 $3.5625
June 28, 1999)
On June 28, 1999, the closing bid price for Eastbrokers' Common Stock as
reported on the Nasdaq SmallCap was $3.625 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.
In April 1997, the Company issued 125,002 shares of common stock, par
value $.05, of the Company ("Common Stock"). The securities were sold to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,012 or $6.00 per share. The net proceeds to the Company
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were $725,012. There were no underwriting discounts or commissions. The Offering
was made pursuant to an exemption from registration under Rule 506 of the
Securities Act of 1933, as amended (the "Securities Act"). The Offering was made
only to selected "accredited investors" as that term is defined in Rule 501(a)
of the Securities Act.
Eastbrokers has relied upon Section 4(2) of the Securities Act of 1933, as
amended, for its private placement exemption, such that the sales of the
securities were transactions by an issuer not involving any public offering. In
each transaction, the purchasers were sophisticated and had access to
information about 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.) These
units were offered and sold to various accredited investors. With regard to this
sale, Eastbrokers relied upon the exemption from registration under the
Securities Act of 1933, as amended (the "Act") provided by Regulation D as
promulgated under the Act.
In connection with the private placement, 1,227,000 Class C Warrants were
issued to the Placement Agents.
In connection with the acquisition of Cohig & Associates, Inc.,
Eastbrokers issued 445,000 shares of common stock, par value $.05, of the
Company to the selling corporation, Cherry Creek Investments, Ltd. During the
five days before the effective date of the acquisition, the average closing
price of Eastbrokers' 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 Cohig & Associates, Inc.,
Eastbrokers incurred an obligation to deliver 25,000 shares of common stock to
J.B. Sutton, LLC as an investment banking advisory fee. To maintain consistency
with the assigned valuation on the acquisition of Cohig & Associates, Inc., 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 in a private
placement consisting in the aggregate of $1,100,000 in 7 percent Convertible
Debentures (the "7 percent Convertible Debentures") and Class C Common Stock
Purchase Warrants to purchase 125,000 shares of Common Stock. The 7 percent
Convertible Debentures were redeemed in March 1999 from a portion of the
proceeds of the offering related to the issuance of the 10 percent Notes (as
defined below).
In 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 compensation for services rendered in connection with this
transaction.
In March 1999, Eastbrokers issued 10 percent Convertible Promissory Notes
due 2003 (the "10 percent Notes") in an aggregate principal amount of
$1,350,000. Holders of the 10 percent Notes have the right to convert their 10
percent Notes into shares of Common Stock at $5.75 per share. A portion of the
proceeds of the Notes was used to redeem the 7 percent Convertible Debentures.
In May 1999, we issued 5 percent Convertible Debentures due 2002 (the "5
percent Debentures") in an aggregate principal amount of $2,000,000. Holders of
the 5 percent Debentures have the right to convert their 5 percent Notes into
shares of Common Stock at the lesser of $5.50 per share or 90% of the average of
the three lowest closing bid prices for the 20 trading days ending five days
before the date of delivery of the notice of conversion. A portion of the
proceeds of the Debentures will be used to expand our operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
GENERAL OVERVIEW
Prior to August 1996, we engaged in the purchase and sale of newly
privatized businesses in the Czech Republic. In August 1996, we entered the
Central and Eastern European investment banking and securities business through
our acquisition of Eastbrokers Beteiligungs AG ("Eastbrokers AG"), an Austrian
holding company providing financial services in Eastern and Central Europe
through its network of subsidiaries. The acquisition of Eastbrokers AG was
intended to not only provide an earnings stream from brokerage activities, but
also position us to provide investment banking and corporate finance services
throughout Central and Eastern Europe.
In March 1997, we expanded our brokerage operations in the United States
through the acquisition of an existing New York-based broker dealer. In May
1998, we continued the expansion of our U.S. operations through the acquisition
of Cohig & Associates ("EBI Securities"), a Denver, Colorado based investment
banking and brokerage firm. Currently, we operate a highly diversified
investment banking and securities network, with 20 US offices and 8
international branches and affiliates located in the following countries:
Austria; Czech Republic; Poland; Kazakhstan; Croatia; Slovenia and Azerbaijan.
Overall, 1998, was a very challenging year. First, we had to contend with
the global financial crisis, which resulted in the collapse in the Asian and
Russian markets and caused enormous turmoil throughout the emerging markets of
Central and Eastern Europe. Second, the we had to contend with the correction in
the US equities market, which devastated an already depressed small and
micro-cap market. These two factors directly accounted for 77 percent of our
year-end loss.
Despite these unprecedented market conditions, we have continued to grow
our assets under management, our commission revenue, underwriting fees and
distribution capabilities. We have streamlined our operations in Europe and
under-performing assets were sold or liquidated. We have also launched a new
subsidiary, EBonline. We remain committed to our mission of building, through a
acquisitions and strategic alliances, a highly successful, global, middle
market, investment banking and securities firm.
EUROPEAN OPERATIONS
Since the acquisition of Eastbrokers AG, in August, 1996, our business
strategy for European operations was to utilize its emerging market expertise in
the areas of merchant banking, corporate finance, privatization and trading, in
order to expand throughout Central and Eastern Europe. However, during 1998, we
modified our business strategy for Europe, in response to an overall economic
downturn that covered much of Central and Eastern Europe. This market downturn,
which peaked in the Summer of 1998, led to sharp decreases in stock markets
worldwide, particularly in Central and Eastern Europe. In addition, to falling
prices, the overall liquidity throughout much of the region was significantly
reduced. In order to minimize the negative effects on our financial operations,
we reduced our work force in Austria and closed our operations in Slovakia,
Romania, Turkey, Russia and Bulgaria. In Austria, Poland and Croatia, we made
significant changes in our management and cost structures. In the Czech Republic
and Hungary, we sold our operations. See "Business-Acquisitions and Dispositions
During the Fiscal Year." However, we maintain an affiliate relationship with the
management in Hungary. We have also re-entered the Czech Republic through the
purchase of a minority interest in Stratego Invest a.s. Prague. We have also
organized an office in Baku, Azerbaijan. At the time of this filing, this office
was in its development stage.
Despite the negative sentiment in emerging markets during 1998, we believe
that Central and Eastern Europe's ultimate unification into the European
Economic and Monetary Union, will lead to a significant increase in investor
interest in the region. This potential increase in the emerging market interest
will benefit those firms that have had existing operations in the region. We
also intend to maintain our solid long-term involvement in the region and to
continue to providing our clients with quality brokerage and investment banking
services. We also intend to expand its operations into other markets of Western
Europe through possible acquisitions, mergers, joint ventures or strategic
relationships.
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Since our acquisition of EBI Securities in May 1998, our European
subsidiaries have had direct access to the US securities marketplace. We expect
that during 1999, our two main subsidiaries, EBI Securities and WMP Bank AG
("WMP"), will cross market, to their respective retail and institutional
clientele, their research, corporate finance and trading opportunities. We
believe that it is possible to significantly increase the overall revenues if
EBI Securities, through WMP, is successful in marketing US securities to Western
European institutional clientele, and vice-versa.
AUSTRIA
Austria's real economic growth was 2.5 percent in 1997, which was higher
than projected mainly due to the solid expansion of real goods exports of 15.3
percent. This favorable development was mainly attributable to an increase in
foreign trade activity and gains in Austria's export markets. Austria's exports
continued to be strong in 1998, with 8.5 percent annual growth, while imports
declined slightly from 9.2 percent in 1997, to 8.3 percent in 1998. Currently,
the 1999, year is estimated to have approximately the same export growth.
Austria's 1998, Gross Domestic Product ("GDP") increased 3.3 percent,
substantially above the 2.5 percent in 1997. During 1999, GDP is expected to
increase at a 2.8 percent rate. Most forecasts for the year 2000, show
approximately the same rate of growth. Austria's accession into the European
Union and the opening-up of Eastern Europe has helped Austrian exports advance
from 37 percent in 1994, to 44 percent in 1996. In addition, the stabilization
of European exchange rates largely reversed the downward trend of the real
effective exchange rate in the prior years. Real effective exchange rate dropped
2.6 percent in 1997, and narrowed to minus 0.5 percent in 1998 and an expected
minus 0.3 percent or break even in 1999.
Beginning in 1993, the devaluation of the weak currencies had gradually
undermined Austria's competitiveness. This changed in 1996 and 1997, due to the
establishment of the EMU, and a cumulative improvement of the real effective
exchange rate of 5.4 percent in 1996, and 1997. The confluence of this
development and wage moderation significantly increased the competitiveness of
the Austrian economy during the past three years, returning it to the level it
held in the early 1990s.
At 5.1 percent of GDP, the federal budget deficit was at its highest level
since 1995. By 1997, it had been reduced to 2.7 percent, then to 2.6 percent in
1998, and is projected to remain at about the same level this year. This was
done through public spending and tax increases, in order so that Austria could
meet the fiscal convergence criteria determined by the Maastricht Treaty. In the
opinion of management, the outlook for the Austrian economy in 1999 and 2000, is
very positive. In its most recent projections, the Austrian Institute for
Economic Research projects growth rates of 2.8 percent and 3.0 percent for 1999,
and 2000, respectively. Interest rates, as measured by an average commercial
credit, declined from 7.82 percent in 1995, to 6.96 percent in 1996, 6.50
percent in 1997, and 6.39 percent by August 1998. The overall economic and
political situation in Austria has been very stable and the government has
worked diligently to reduce budgetary pressure. The annual budget deficit was
82.3 billion ATS in 1998, 107.l billion ATS in 1996, and 65.7 billion ATS in
1997. Inflation increased in 1992 by 4.1 percent then continued to drop to 3.6
percent in 1993, 3.0 percent in 1994, 2.2 percent in 1995, 1.9 percent in 1996,
and 1.3 percent in 1997 and 1.2 percent in the first half of 1998.
We operate two subsidiaries in Austria, Eastbrokers AG, the holding
company for its European operations, and WMP, the Company's Austrian
broker-dealer. During 1998, we significantly streamlined the operations of
Eastbrokers AG, reducing its overall expenditures by approximately 75 percent.
As the holding company for all European operations, Eastbrokers AG divested
itself of its Hungarian, Slovakian, Romanian, Turkish, Russian and Bulgarian
operations.
WMP has historically generated revenue from sales and trading of Central
and Eastern European securities and also market making on the Austrian Equos
(electronic quotation order) system for equities and the PATS (partly assisted
traded) system for options and warrants. During 1999, WMP's plans include the
broadening of its business into three areas. First, WMP has hired an asset
management team and portfolio management director in order to increase WMP's
assets under management. WMP also intends to broaden its client base to include
not only Austrian clients, but also clients located in Italy, Switzerland and
other Western European countries. Second, due to the expansion of the Xetra
system (the German electronic system), we expect that all Austrian stocks
currently quoted on the Equos system will cease trading on Equos and resume
trading on the Xetra. Since WMP is expected to be able to qualify as a market
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maker on the Xetra, we will continue to make markets in the Austrian stocks as
well as have access to market making in German stocks. Third, WMP intends to
develop online trading for US equities in the Austrian market and is reviewing
the possible expansion of online trading for Austrian and German stocks.
In order to facilitate these developments mentioned above, WMP intends to
raise additional equity capital in 1999. In order for us to maintain our
majority equity position in WMP, we will have to increase our equity interest
prior to any financing, so that dilution will not reduce our ownership below 51
percent. In order to accomplish this, we intend to combine Eastbrokers AG and
WMP into a single entity. This will also result in the elimination of
Eastbrokers AG's overhead costs. If successfully completed, WMP would own
Eastbrokers operations in Poland, Czech Republic, Slovenia, Croatia, Kazakhstan
and Azerbaijan.
POLAND
Poland has the fastest growing economy in the region and its reforms
helped minimize the turmoil caused by the Russian crisis and the Balkan war.
Poland is expected to grow by 4.0 percent in 1999 and 5.5 percent in 2000, as
compared to 4.8 percent in 1998. The government is continuing to privatize the
largest companies and the stock market has helped a great deal in this
privatization process.
The Warsaw Stock Exchange is highly regulated and follows the French
model. The transparency of this market and the protection afforded minority
shareholders has generated both customer confidence and foreign investor
interest. In 1996, the main market index rose nearly 90 percent while the index
of the twenty most capitalized firms increased 82 percent. The stock market
continued to perform well in 1997, and continued to increase through May, 1998.
At that time, the Warsaw Stock Exchange Index reached a record high of over
18,000. Unfortunately, this market was affected by the Asian and Russian
economic crises. By mid-October 1998, the Warsaw Stock Exchange Index had
dropped by over 40 percent to below 11,000. However, as of mid 1999, the Warsaw
Stock Exchange Index has recovered to almost 16,000.
Poland's current GDP growth of 4.8 percent is the highest in the former
Soviet block. Poland was able to reduce its inflation rate by more than one half
from 13.7 percent to 6.3 percent. This gave the Polish central bank the platform
to lower the discount rate from 24.5 percent to 15.5 percent. However, Poland's
unemployment rate increased from 10.4 percent in 1998, to the current rate of
12.1 percent.
Currently, the country is in a period of economic stability with interest
rates and inflation heading lower and its currency, the Polish Zloty, appears to
be stabilizing against the major currencies. The Zloty was 3.9115 per U.S.
dollar as of June 21, 1999, slightly weaker than the 3.4 per U.S. dollar the
previous year. For 1996, inflation was approximately 18 percent, a drop of
approximately 3 percent from 1995 levels but still higher than in many
transition economies. Inflation remained at approximately 18 percent for much of
1997 before dropping to 13.7 percent in 1998. In 1999, inflation has dropped
substantially, to only 6.3 percent annual rate or over one half of the 1998
rate.
Eastbrokers WDM SA is a Polish broker-dealer and specialist on the Warsaw
Stock Exchange. Eastbrokers WDM SA generates revenue from four main sources:
commissions from retail clients, investment banking fees from initial public
offerings, sponsorship fees on the Warsaw Stock Exchange, and principal trading
and specialist fees. During 1998, Eastbrokers WDM SA was affected by the
downturn in the Polish market. Revenue was reduced in all categories and the
number of underwritings declined. In October 1998, a new management team was
hired and costs were lowered through reductions in personnel, office
expenditures, and the sales staff was changed from a salary-based to a
commission-based compensation plan. These changes, together with the increased
strength in the Polish market resulted in an increase in performance at the end
of 1998. In 1999, Eastbrokers WDM SA expects to further increase its revenue and
market share. Eastbrokers WDM SA also expects to launch a similar online trading
system as other Eastbrokers subsidiaries.
CZECH REPUBLIC
The Czech Republic's GDP dropped to only a 1 percent in 1998, and is
currently at a minus 2.7 percent rate for 1999. Industrial production, after an
exceptionally strong 10.5 percent in 1998, dropped to 6.5 percent in April 1999,
and for the first four months of 1999, dropped another 8.5 percent compared to
the same period in 1998. GDP per capita dropped from $11,566 in 1998, to $10,787
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in 1999. The largest drop came in mining, which was down 19 percent from a year
ago. The largest production increases were in woodworking products, paper, the
publishing industry and transportation. Work productivity dropped 1.5 percent on
a year to year basis, while real wages grew 3.5 percent and nominal wages 6.1
percent.
The budget deficit decreased from a minus 1 percent in 1998, to a minus
1.6 percent. The unemployment rate increased from 5.4 percent in 1998 to 8.2
percent to date. The number of unemployed as of May 1999, reached 421,574 or
146,223 more that at the same time a year ago. This has had an impact on
inflation and interest rates. The Consumer Price Index fell 0.l percent in May
1999, as compared to an increase of 0.l percent a year before. Year-on-year
growth of the Consumer Price Index was 2.4 percent in 1999, versus 13 percent in
May 1998. As the result, the Central Bank decreased the discount rate from 13
percent to 6 percent.
Despite a recession, the Czech economy is still attracting significant
foreign investments which amounted to $6.2 billion in 1998, and $8.7 billion
rate in the first quarter of 1999. Direct foreign investment doubled in 1998,
with services accounting for 29 percent, the financials sector 19 percent,
transportation 12 percent, machinery 10 percent and others 22 percent. Domestic
demand, after dropping from 8 percent in 1996, to minus 3 percent in 1998, is
running now at a plus 1 percent and is expected to recover to 2 percent by 2000.
Between 1995 and 1996, the "second wave" of the mass privatization was
ending and the "third wave" was beginning. During this time, foreign competitors
began entering the brokerage and investment banking industry. In the fourth
quarter of 1996, the Czech stock markets began showing signs of instability and
the overall market began a steep decline. The market drop was a partial result
of the outflows of foreign capital due to profit taking and institutional
investors adjusting their portfolios to focus on other more regulated Eastern
European markets.
During 1998, the Czech stock market was also severely impacted by the
global financial crisis. In addition, the Czech Republic was criticized for not
establishing proper securities regulations. In response to these criticisms, the
Czech government recently adopted new securities legislation and is in the
process of establishing a Securities Commission based upon the model provided by
the U.S. Securities and Exchange Commission. Two of the major goals of this
legislation are to increase the transparency of the market and to afford
minority shareholders greater protection. In June 1998, we sold our operations
in the Czech Republic. However, we were able to re-enter the market on favorable
terms and conditions through our purchase, by WMP, of 49 percent of Stratego
Invest.
In 1998, Stratego Invest was one of the more stable brokerage firms in the
Czech Republic. Even in the difficult year of 1998, Stratego Invest accounted
for a significant amount of the volume on the Prague Stock Exchange. Stratego
Invest's volume of executed transactions continued to increase and in 1998, it
was CZK 53 billion ($1.5 billion USD), which represents an annual increase of
more than 30 percent.
Stratego Invest generates its revenue from trading, corporate finance and
asset management. In trading, Stratego Invest continued to enlarge its
international business activities by securing a foreign currency license,
primarily for US, Germany and Great Britain currencies. In connection with the
substantial interest of clients in transactions in these markets, the Company
strengthened its team by hiring brokers who have had many years of experience in
foreign trading. This international expansion is also leading Stratego Invest to
develop an online trading system for US equities in conjunction with EBI
Securities. Stratego Invest believes that this system will be functional during
the summer of 1999. In corporate finance, due to depressed economic conditions,
corporations sought corporate finance alternatives. In order to best manage this
opportunity, Stratego Invest invested into a dedicated subsidiary, which it
named SI Corporate Finance, a.s. In asset management, the average yield of
Stratego Invest's asset managers were above the most advantageous interest rates
of time deposits, despite the official index of the Prague Stock Exchange, which
decreased by more than 20 percent in 1998. This exceptional performance has lead
to the increase in assets under management.
Stratego Invest attaches great importance to public relations. Stratego
Invest provides a bulletin for its clients which is an important source of
information both for the investors and the general public. Stratego Invest
publishes its investment recommendations, which are widely quoted in major
newspapers and economic magazines, and its statistics serve as background
material for Czech television news. An important source of information on events
in the Czech capital market can be found on Stratego Invest's internet home page
(HTTP://WWW.STRATEGO.CZ.).
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SLOVENIA AND CROATIA
Sloevenia's current annual inflation rate is 6.5 percent, which is the
lowest rate since 1991. A long period of subdued wage growth, a fall in import
prices, the real appreciation of the Slovenian Tolar ("SIT") against the German
Mark and stronger competition in the domestic market contributed to the
stabilization of prices. After two years, the SIT appreciated significantly in
1998. It increased by 4 percent in real terms against a basket of currencies
measured by relative consumer prices. The high rate of SIT appreciation through
June 1998, was followed by the SIT's depreciation in the second half of 1998,
mainly triggered by interventions on the part of the Bank of Slovenia. After
improving substantially in the first quarter of 1998, GDP decreased throughout
the end of the year. Annual economic growth of 3.9 percent was slightly behind
expectations of 4 percent. Unlike in 1997, when export demand was the driving
force behind economic growth, domestic demand played a major role in 1998. The
main reason for the fall in Slovenia's exports was the deterioration of the
economic situation in its trading partners, resulting from the impact of the
Asian and Russian financial crises. Total exports of goods rose by 8.4 percent,
and the Russian share in total exports dropped from 3.9 percent to 2.6 percent.
The rise in total imports of goods (10.4 percent in real terms) exceeded the
rise in exports. Net foreign capital inflows dropped considerably compared to
1997, due to the lower inflow of foreign direct investment, decreased foreign
investments in securities and the decreased borrowing of domestic companies
abroad. The registered unemployment rate in 1998, was 14.5 percent, compared to
14.4 percent in 1997. The surveyed unemployment rate in 1998, was 7.9 percent
compared to 7.4 percent in 1997. In 1998, the budget deficit amounted to 0.9
percent of estimated GDP, general government revenues rose by 6.5 percent in
real terms while general government expenditures increased by 5.2 percent in
real terms.
Slovenia was confirmed as an EU Associate Member on February 1, 1999, with
full membership expected in the year 2002. The current EU members are still
preoccupied with the EURO integration and potential Y2K problems, therefore,
corporate takeover activity has been deferred. Starting in the first quarter of
2000, it is anticipated that foreign takeovers of two Slovenian pharmaceuticals
will begin, while closed-end investment funds that hold these shares will be
possible takeover candidates themselves.
In 1998, Eastbrokers Slovenia improved its financial situation and
increased its annual turnover on the Ljubljana Stock Exchange by 390 percent and
its assets under management by 274 percent. In 1999, the emphasis of Eastbrokers
Slovenia will be fee-based, recognizing that 1999 will be a transition year that
management believes will provide significant returns on investment in the year
2000. Partial pension reform has been passed by Parliament, which has already
encourage retail clients to invest in stocks. When a more complete pension
reform is passed, it is anticipated that trading and portfolio management volume
will increase dramatically. Revenues will be generated from increased
transaction commissions due to an enhanced trading facility, the establishment
of an internet site which will offer research reports for a fee, the management
of clients' portfolios, retainers from major European companies seeking
information on local legislative conditions, and advisory fees on takeovers. The
target for assets under management by year end 1999 is 4 billion SIT($25
million) or more than double the 1998 year end number.
During 1998, our operations in Croatia were significantly reduced in
reaction to the Yugoslavian crisis. We intend to maintain a presence in this
market on a limited basis during 1999.
KAZAKHSTAN AND AZERBAIJAN
Kazakhstan is located in mid Asia, between China and Russia and is
geographically as large as Western Europe and one third as large as the United
States, but has only 17 million people. Kazakhstan has the second largest oil
reserve in the world, after Saudi Arabia. It has vast resources of natural gas
and one quarter of the world's uranium, as well as significant reserves of gold.
Since its independence, Kazakhstan has suffered economically with high inflation
and declining industrial output. However, over the past two years, the country
is starting to resurrect its faltering economy. After a major GDP drop of nearly
14% in 1994, the GDP increased 1% in 1996, 2% in 1997 and in 1998. Inflation was
reduced from 17% in 1997 to 10% in 1998. Money raised from privatization will
largely offset the budged deficit. Foreign investment is significant at a rate
of $1.6 billion in 1997 and nearly $2 billion in 1998. Almost every major
international petroleum company has a presence in this market. The Kazakh
economy has seen extensive privatization with 21 energy businesses and 34 mining
companies privatized in 1997.
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During 1998, Eastbrokers Kazakhstan Securities House, Ltd. was one of the
largest market makers on the Kazakhstan Stock Exchange. A significant part of
our revenue was generated through principal trading activities. Our decision to
focus on generating this type of revenue was due in part to the elimination of
the capital gains tax in Kazakhstan. In 1999, we intend to expand our revenue
base to include mergers and acquisition fees, advisory fees and corporate
finance fees. We also intend to market our services to the country pension
funds.
We have also organized an office in Baku, Azerbaijan. At the time of this
filing, this office was in its development stage.
UNITED STATES OPERATIONS
EBI SECURITIES CORPORATION
Subsequent to the acquisition of Eastbrokers AG, we commenced expansion of
our brokerage operations in the United States. Our goal was to build a strong US
brokerage presence that would enable it to distribute European middle market,
corporate finance product in the US and also to provide its European operations
access to US corporate finance product, trading and research capabilities. In
the Spring of 1997, the we purchased our first U.S. based broker-dealer,
Eastbrokers North America, Inc. During the process of establishing Eastbrokers
North America, we were approached by numerous U.S. based broker-dealers
interested in being acquired by us. We believe that consolidation within the
securities industry, particularly in the United States, is inevitable. This
consolidation can be attributed to the current volatility prevailing in the
financial markets, the higher degree of capital needed to maintain solid
brokerage functions and the increased regulatory environment. We have decided
that as a well-capitalized, entrepreneurially managed, international,
publicly-traded, investment banking firm, we would be particularly appealing to
the sellers of medium size brokerage firms. In addition, we believe that the
purchase and roll-up of complementary securities businesses both in the United
States and in Europe, can be financed by the issuance of our Common Stock.
In May 1998, we made a significant step in our roll-up strategy in the
United States. We acquired all of the outstanding common stock of Cohig &
Associates, Inc., a Denver, Colorado based investment banking and brokerage
firm. Following the acquisition, we changed the name of Cohig & Associates, Inc.
to EBI Securities Corporation. The office space previously occupied by
Eastbrokers North America, has been converted into a branch office of EBI
Securities. We believe that EBI Securities will be the first in a series of
acquisitions targeting other successful medium size investment banking and
brokerage firms.
EBI Securities operates 20 retail brokerage offices in 16 cities across
the United States. These offices include 10 company owned branches, and 10
franchise branches employing over 200 people, of which 190 are registered
representatives. EBI Securities is registered as a broker-dealer with the SEC
and is licensed in 50 states and the District of Columbia. It is also a member
of the NASD and the Securities Investor Protection Corporation ("SIPC").
Customer accounts are insured to $25 million under the SIPC excess insurance
program. EBI Securities operates pursuant to the exemptive provisions of SEC
Rule 15c3-3 (k)(2)(ii) and clears all transactions with and for customers on a
fully disclosed basis. Since its inception Cohig/EBI has participated in the
underwriting and/or co-underwriting of over $400 million in initial and
secondary equity and debt offerings for over 30 public U.S. companies.
EBI Securities maintains its clearing arrangement with Fiserv
Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ:
FISV). Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement enables
EBI Securities to offer its clients a broad range of products and services that
is typically only offered by firms that are larger and/or have a larger capital
base. Fiserv has advised the Company that it is aware of the year 2000 computer
issue and is working to mitigate the effect of the year 2000 issue on its
operations. See Item 2 "Management's Discussion and Analysis or Plan of
Operation - Impact of the Year 2000".
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EBI Securities has primarily operated as a retail brokerage firm focusing
on individual investors with a full service approach which the company augmented
with corporate finance, proprietary research and trading activities. EBI
Securities provides its brokerage clients with a broad range of traditional
investment products and services. EBI Securities also strives to establish
itself with investors and corporate finance clients through its commitment to a
professional but personalized service. Its trading department makes markets in
approximately 100 securities which include its investment banking clients and
those securities that its research department has identified as promising, small
to middle-market, potentially high growth companies. The investment banking
departments' mission is to enhance and develop the capital structures of small
to middle market emerging growth companies through private placements, bridge
financing, and public offerings in order to enable the firm's corporate finance
clients to capitalize on promising business opportunities, favorable market
conditions, and/or late stage product development.
EBI Securities is actively realigning itself in order to create additional
revenue growth that leverages existing resources and creates a more stable base
of revenue. The potential result is increased growth internally, which
compliments external growth through acquisitions. Several initiatives that EBI
Securities has undertaken in this regard are as follows:
1. Fixed Income. In December 1998, EBI Securities added a fixed income
department. This group is responsible for the underwriting, trading, retail
distribution and research of government, municipal and corporate bonds. This
group adds an additional profit center to the three existing divisions of
retail, corporate finance and equity trading and also creates synergies with the
other departments. As EBI Securities works to broaden the product base of its
retail brokers and their customers, the fixed income department creates new
product through underwritings or independent research ideas. Additionally, the
fixed income department allows EBI Securities corporate finance to capture
business that would not have been previously available.
2. Asset Allocation. EBI Securities has developed an in-house asset
allocation program to augment the breadth of the sales force's efforts. This in
house system was developed utilizing industry software which, along with
additional marketing materials, is customized for the firm. This approach
represents an investment strategy which is based on a Noble Prize winning study
called "Modem Portfolio Theory" (MPT). MPT's basis is that people can create
"optimal" risk vs. return portfolios by mixing varying amounts of different
asset classes according to their correlation to one another. Many market studies
suggest that asset allocation rather than individual investment selection
accounts for over 90 percent of a typical portfolio's returns. EBI Securities
concurs with this notion, and as a result, is educating the sales force to
utilize the program. The results have been very favorable and effective tool for
gathering assets. EBI Securities believes that the new communication systems
that are being implemented and which will be available at the desk top level to
all brokers, will also enhance the sales forces ability utilize the asset
allocation model.
3. Managed Money. In keeping with the changes in the retail brokerage
business, EBI Securities is actively entering the field of managed money and
wrap fee compensation arrangements in place of the more traditional fee per
transaction approaches. In short, the managed money approach charges the client
a flat annual percentage of the money managed rather than a fee for each
transaction. Many people believe that this approach better aligns the investment
advisor's goals with that of the client. This approach requires some additional
accounting and registration procedures, both of which have been set in motion by
the firm and its applicable business partners. EBI Securities intends to hire
additional salespeople with managed money experience in addition to actively
re-educating the existing sales force.
4. Premier Customer Accounts. The formation of an account for the firm's
biggest customers may allow better utilization of several of the initiatives
mentioned above. In addition, this sort of account may also give a customer a
good introduction into several other parts of the business. The most obvious of
these is online trading. Others include joint ventures and cross selling
opportunities with local community banks, mortgage companies, investment sites
and others.
5. Retail Expansion. Currently, EBI Securities is focusing on filling its
existing retail space in order to improve efficiencies. EBI Securities also
believes that retail expansion through additional offices will be most effective
if it occurs in and around the corporate headquarters in Denver, Colorado. EBI
Securities believes that creating a more visible sales force around the
corporate headquarters will create a number of efficiencies on several fronts.
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These locations make it easier and less expensive to manage from a corporate
perspective. In addition, economies of scale are created in terms of advertising
and community development, which can help to enhance the EBI Securities name and
make it a more recognizable entity amongst retail clients, corporate finance
clients and additional salespeople.
EBONLINEINC.COM, INC.
In April 1999, we organized a new subsidiary, EBonlineinc.com, Inc. in
conjunction with A1 Internet.com, Inc. A1 provides comprehensive, cost-effective
Internet technology solutions to businesses and organizations with a total
turnkey approach. Services are designed to enable companies to operate more
efficiently by outsourcing their Internet work, communications, e-commerce, and
database needs. A1 offers web development, design, connectivity, database
applications, distance learning, and information integration programs. Services
include web programming, e-commerce, web-site hosting, national leased line
connections, dial-up, xDSL, and e-mail access. A1 Internet.com Inc.'s ISP
website is: HTTP://WWW.A1IS.COM
EBonline is a Web-based business consisting of a website globally
accessible via the Internet, designed to facilitate merger, acquisition and
corporate finance activity. The site attracts businesses looking to sell, make
an acquisition, seek a merger or joint venture partner, obtain debt or equity
capital or simply gain exposure within the international investment banking
community. In addition, the site attracts accredited investors looking for
investment opportunities.
EBonline will derive its revenue from three initial sources: monthly
membership fees, banner advertising income and consulting fees from syndicate
members. Syndicate members will be made up of recognized financial services
firms that have been selected from around the world. They have met EBbonline's
standards for professionalism and integrity and they have agreed to provide
financial advisory services, write research and expose the qualifying companies
to the investment community. The broad exposure provided to these companies may
attract institutional investors and public interest. The syndicate members will
also be able to electronically make available to all accredited investors of the
site any offering memoranda. We believe that EBonline's approach to connecting
businessmen and investors to a group of recognized financial professionals is
truly unique, cost effective and efficient.
We believe that the combination of finance and the internet will
differentiate EBonline from its competition. Other similarly focused sites offer
business listings and matching services, but none are backed by an international
group of emerging growth financial specialists such as EBonline.
In April 1999, EBonline launched the initial version of its website, at
URL address HTTP://WWW.EBONLINEINC.COM. In early July 1999, EBonline intends to
launch version 2.0 of its website (same address). EBonline has retained EBI
Securities as its investment banker for the purposes of raising capital in the
Company's second quarter. EBonline is also in the process of merging into a
publicly traded entity which the Company believes will enhance EBonline's
ability to raise capital, make acquisitions and hire personnel, through the use
of stock incentive plans.
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RESULTS OF OPERATIONS
See Note 1 of the Notes to Consolidated Financial Statements for the
twelve months ended March 31, 1999, for an explanation of the basis of
presentation of the financial statements.
For the twelve months ended March 31, 1999, we generated consolidated
revenues in the amount of $32,951,480, compared to $10,342,976, for the previous
twelve months ended March 31, 1998. Total revenues were significantly higher
than the previous periods due to the acquisition of EBI Securities, which
contributed approximately $15,877,822, from May 14, 1998, (the date of
acquisition of EBI Securities - see Note 3 to the Consolidated Financial
Statements).
We incurred total consolidated costs and expenses of $39,332,732, for the
twelve months ended March 31, 1999, compared to $15,010,815, for the previous
twelve months ended March 31, 1998. Total costs and expenses for the twelve
months ended March 31, 1999, are significantly higher than the previous periods
due to the acquisition of EBI Securities, which contributed approximately
$18,763,724, from May 14, 1998, (the date of acquisition of EBI Securities (see
Note 3 to the Financial Statements).
Our loss before provision for income taxes and minority interest in
earnings of subsidiaries was $6,381,252, for the previous twelve months ended
March 31, 1999, compared to a loss of $4,667,839, for the twelve months ended
March 31, 1998. Our provision for income taxes and minority interest in earnings
of subsidiaries for the twelve month periods are attributed solely to our
European operations, and are primarily related to WMP and Eastbrokers Budapest
Rt.
We reported a consolidated net loss of $5,911,848, for the twelve months
ended March 31, 1999, compared to a consolidated net loss of $3,676,607 for the
twelve months ended March 31, 1998. Of the $5,911,848, consolidated net loss for
1999, approximately $1,335,518 was from operations and approximately $4,576,330,
was from the following one time items: $2,650,000 for trading losses due to
inventory adjustments incurred in August, September and December 1998;
$1,426,330 was for the disposition and liquidation of three of our European
operations (Romania, $158,248, Hungary, $491,886 and Slovakia, $776,197) and
approximately $500,000 was a reserve against an outstanding receivable.
For the twelve months ending March 31, 1999, our operations were impacted
by the global financial crisis that occurred during the Summer of 1998.
Specifically, during this period, our European operations experienced a slowdown
in its commission, trading and corporate finance business. Second, our European
operations incurred costs related to the reduction of the workforce in several
of its European offices. Third, in the US, EBI Securities incurred higher costs
associated with the expansion of its operations in New York, California and
Colorado. In addition, EBI Securities experienced a continued slowdown in its
gross commission revenue through October. However, revenue at EBI Securities
increased significantly in November through the end of March, 1999. And fourth,
we continued to incur higher than expected legal and consulting fees through
October, mainly due to costs associated with the completion of its audit for the
fiscal year ended March 31, 1998, which was completed on October 30, 1998.
On March 31, 1999, we had total assets of $48,880,039, and total
liabilities of $23,614,002, compared to $44,431,509, and $18,093,930,
respectively, on March 31, 1998. As of the date of this filing, we believe that
we have adequate liquidity to meet our current obligations. However, no
assurances can be made as to our ability to meet our cash requirements in
connection with any expansion of our operations or any possible business
combinations.
On November 25, 1998, in order to increase its working capital,
Eastbrokers sold 10 newly issued units in a private placement consisting in the
aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock. Eastbrokers has the right
to redeem the Convertible Debentures on or before March 24, 1999, at 115 percent
of the aggregate price or $1,265,000. In March 1999, Eastbrokers redeemed the
debenture in full. Eastbrokers paid an additional 14,000 shares of its common
stock for interest.
In January, 1999, Eastbrokers sold 125,000 restricted shares of its common
stock in a private placement to a private investor for $4.00 per share.
Eastbrokers also issued 7,500 shares of its common stock to a broker at EBI
Securities Corporation as a commission in connection with this transaction.
In March 1999, we issued 10 percent Convertible Promissory Notes due 2003
(the "10 percent Notes") in an aggregate principal amount of $1,350,000. Holders
of the 10 percent Notes have the right to convert their 10 percent Notes into
shares of Common Stock at $5.75 per share. A portion of the proceeds of the
Notes was used to redeem the 7 percent Convertible Debentures.
In May 1999, we issued 5 percent Convertible Debentures due 2002 (the "5
percent Debentures") in an aggregate principal amount of $2,000,000. Holders of
the 5 percent Debentures have the right to convert their 5 percent Notes into
shares of Common Stock at the lesser of $5.50 per share or 90% of the average of
the three lowest closing bid prices for the 20 trading days ending five days
before the date of delivery of the notice of conversion. A portion of the
proceeds of the Debentures will be used to expand our operations.
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The cash flows for nine month period ended March 31, 1999, reflect the
volatile nature of the securities industry and the reallocation of our assets
indicative of a growing organization. The change in the foreign currency
translation adjustment is primarily related to the fluctuations in our
functional currencies to the U.S. dollar. The U.S. dollar and its unexpected
strength coupled with the unexpected weakness of the European currencies
(including the German Deutsche mark) have negatively impacted our overall
earnings as well as the cumulative translation adjustment. The primary
functional currencies affecting the Company are as follows: U.S. Dollar,
Austrian Schilling, Czech Koruna, Hungarian Forint, Slovak Koruna and the Polish
Zloty.
As a broker/dealer in securities, we will periodically acquire positions
in securities on behalf of our clients. As disclosed in "Note 2 - Financial
Instruments", we have title to various financial instruments in the countries in
which we operate. Certain of these investments may be characterized as
relatively illiquid and potentially subject to rapid fluctuations in liquidity.
Those securities are classified as "available for sale securities".
While investing in the emerging markets of Central and Eastern Europe
involves risk considerations not typically associated with investing in
securities of U.S. issuers, we believe that such considerations are outweighed
by the benefits of diversification and potentially superior returns.
Among the considerations involved in investing in emerging markets such as
Central and Eastern Europe is that less information may be available about
foreign companies than about domestic companies. Foreign companies are also not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. In addition, unlike investing in U.S.
companies, securities of non-U.S. companies are generally denominated in foreign
currencies, thereby subjecting each security to changes in value when the
underlying foreign currency strengthens or weakens against the U.S. Dollar.
Currency exchange rates can also be affected unpredictably by intervention of
U.S. or foreign governments or central banks or by currency controls or
political developments in the U.S.
and abroad.
The value of international fixed income products also responds to interest
rate changes in the U.S. and abroad. In general, the value of such products will
rise when interest rates fall, and fall when interest rates rise. However,
interest rates in each foreign country and the U.S. may change independently of
each other.
Debt and equity securities in emerging markets such as Central and Eastern
Europe may also not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater risk than securities of
U.S companies. Investing in Central and Eastern European securities may further
result in higher expenses than investing in domestic securities because of costs
associated with converting foreign currencies to U.S. Dollars and expenses
related to foreign custody procedures. Investment in Central and Eastern
European securities may also be subject to local economic or political risks,
including instability of some foreign governments, inadequate market controls,
the possibility of currency blockage or the imposition of withholding taxes on
dividend or interest payments and the potential for expropriation,
re-nationalization or confiscatory taxation and limitations on the use or
repatriation of funds or other assets.
Our earnings are subject to wide fluctuations since there are many factors
over which we have little or no control. In particular, the overall volume of
trading, the volatility and general level of market prices, and fluctuations in
foreign currency exchange rates are important variables which may significantly
affect its operations.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
The U.S. Dollar and its unexpected strength coupled with the unexpected
weakness of the European currencies (including the German Deutchmarke) have
negatively impacted the Eastbrokers Group's overall earnings as well as the
cumulative translation adjustment. The primary functional currencies affecting
us are as follows: U.S. Dollar, Austrian Schilling, Czech Koruna, and the Polish
Zloty.
Assets and liabilities of operations having foreign currencies are
translated at year-end rates of exchange, and the income statements are
translated at weighted average rates of exchange for the year. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," gains or losses resulting from translating foreign
currency financial statements, net of hedge gains or losses and their related
tax effects, are reflected in cumulative translation adjustments, a separate
component of stockholders' equity. Gains or losses resulting from foreign
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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
investors in the local economies, and governmental regulations restricting the
repatriation of profits. In some of the countries where we have operations
(E.G., Kazakhstan, Czech Republic, Slovenia, Croatia, Poland and Azerbaijan),
the local currencies are referred to as "soft" or "exotic". Soft currency is the
currency of a nation where a person can exchange the currency only with
difficulty. Soft currency countries typically have minimal amounts of currency
reserved for exchange purposes. As such, there are very few, if any, cost
effective hedging strategies available to us or potential investors.
All of these factors have an impact on the Eastbrokers Group's net gain
from securities transactions, underwriting, and commissions revenues. In periods
of reduced market activity, profitability is adversely affected because certain
expenses, consisting primarily of non-officer compensation and benefits,
communications, occupancy, and general and administrative expenses remain
relatively constant.
LIQUIDITY AND CAPITAL RESOURCES
The Eastbrokers Group's statements of financial position reflect a liquid
financial position as cash and cash equivalents convertible to cash represent 5
percent and 16 percent of total assets at March 31, 1999, and March 31, 1998.
The Eastbrokers Group is subject to net capital and liquidity requirements
in the local jurisdictions in which it operates. As of March 31, 1999 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.
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On February 20, 1998, Eastbrokers sold 1,227,000 newly issued units for
$6,135,000 in cash, or $5.00 per unit, with each consisting of one share of
Common Stock and one Class C Warrant. This price was approximately 40 percent
below the then current market price. These units were offered and sold to
various accredited investors. With regard to this sale, Eastbrokers relied upon
the exemption from registration pursuant to Rule 506 under the Securities Act.
In June 1998, the Eastbrokers Group largest European subsidiary, WMP,
successfully raised 60 million Austrian Schillings (approximately $4,800,000
USD) in a bond offering. The Eastbrokers Group originally intended to utilize
these proceeds to enhance and further develop its European trading activities.
The bonds were issued in denominations of 10,000 Austrian Schillings
(approximately $800 USD at the then current exchange rates), bear an annual
interest rate of 7.5 percent, payable at maturity, and mature in June 2002. In
December 1998, the Eastbrokers Group redeemed approximately 45 million Austrian
Schillings of these bonds. The Eastbrokers Group intends to redeem the remaining
bonds in the future.
In June 1998, Eastbrokers sold 73.55 percent of its interest in
Eastbrokers Prague a.s. for 15 million Austrian Schillings. Eastbrokers
recognized a profit from the sale of Prague of approximately $1,312,000, at the
then current exchange rates. This amount is reflected in the revenue section
under gain on sale of interest in subsidiary.
On November 25, 1998, Eastbrokers sold 10 newly issued units consisting in
the aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of common stock. The 7 percent Convertible
Debentures were redeemed in March 1999 from a portion of the proceeds related to
the issuance of the 10 percent Notes.
In January 1999, Eastbrokers sold 125,000 shares of Common Stock for
$500,000. With regard to this sale, the Company relied upon the exemption from
registration pursuant to Rule 506 under the Securities Act.
In March 1999, we issued 10 percent Convertible Promissory Notes due 2003
(the "10 percent Notes") in an aggregate principal amount of $1,350,000. Holders
of the 10 percent Notes have the right to convert their 10 percent Notes into
shares of Common Stock at $5.75 per share. A portion of the proceeds of the
Notes was used to redeem the 7 percent Convertible Debentures.
In May 1999, we issued 5 percent Convertible Debentures due 2002 (the "5
percent Debentures") in an aggregate principal amount of $2,000,000. Holders of
the 5 percent Debentures have the right to convert their 5 percent Notes into
shares of Common Stock at the lesser of $5.50 per share or 90% of the average of
the three lowest closing bid prices for the 20 trading days ending five days
before the date of delivery of the notice of conversion. A portion of the
proceeds of the Debentures will be used to expand our operations.
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.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. The new standard
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 was adopted by us 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
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comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by us beginning with the fiscal year ended March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement was adopted by us for the fiscal year
ended March 31, 1999. In the initial year of application, comparative
information for earlier years is to be restated.
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. At this time,
we do not believe that this statement will have a significant impact on us.
IMPACT OF THE YEAR 2000
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally (the "Year 2000" issue). The potential costs and
uncertainties associated with the Year 2000 issue will depend on a number of
factors, including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other entities
with which they electronically interact.
The Eastbrokers Group is currently in the process of a systems upgrade
unrelated to the Year 2000 issue. In conjunction with this upgrade, the
Eastbrokers Group is in the process of establishing a program to address issues
associated with the Year 2000. To ensure that the Eastbrokers Group's computer
systems are Year 2000 compliant, the Eastbrokers Group has been reviewing its
systems and programs to identify those that contain two-digit year codes, and
the Eastbrokers Group intends to replace them in conjunction with the systems
upgrade provided by the Baan Corporate Office Solutions. In addition, the
Eastbrokers Group is in the process of contacting its major external
counterparties and suppliers to assess their compliance and remediation efforts
and the Company's exposure to them.
In addressing the Year 2000 issue, the Eastbrokers Group has divided its
program into six phases:
(1) the Inventory phase, involving the identification of items
that may be affected by Year 2000 compliance issues, including
facilities and related non-information technology systems
(embedded technology), computer systems, hardware, and
services and products provided by third parties;
(2) the Assessment phase, involving the evaluation of items
identified in the Inventory phase to determine which will
function properly with the change to the new century, and the
prioritizing of items which will need remediation based on
their potential impact to the Eastbrokers Group;
(3) the Remediation phase, involving the analysis of the items
that are affected by Year 2000, the identification of problem
areas and the replacement of non-compliant items;
(4) the Testing phase involving the testing of all proposed
repairs, including forward date testing which simulates dates
in the Year 2000;
(5) the Implementation phase consists of placing all items that
have been remediated and successfully tested into operation;
and
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(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 June 25, 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 July 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
June 25, 1999, the Eastbrokers Group estimates that it has expended
approximately $600,000 on the Year 2000 project. These costs have been and will
continue to be funded through operating cash flow and are expensed in the period
in which they are incurred.
The Eastbrokers Group's expectations about future costs and the timely
completion of its Year 2000 modifications are subject to uncertainties that
could cause actual results to differ materially from what has been discussed
above. Factors that could influence the amount of future costs and the effective
timing of remediation efforts include the success of the Eastbrokers Group in
identifying computer programs and non-information technology systems that
contain two-digit year codes, the nature and amount of programming and testing
required to upgrade or replace each of the affected programs and systems, the
nature and amount of testing, verification and reporting required by the
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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.
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SELECTED FINANCIAL DATA
The historical selected financial data set forth below for the respective
periods are derived from our financial statements included elsewhere in this
Form 10-KSB and should be read in conjunction with those financial statements
and notes thereto. Those financial statements have been audited by Spicer,
Jeffries & Co., independent certified public accountants. Spicer, Jeffries &
Co.'s report with respect thereto appears elsewhere in this Form 10-KSB.
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ -----------
BALANCE SHEET DATA
<S> <C> <C>
Assets $48,880,039 $44,431,509
Liabilities 23,614,002 18,093,930
Minority interest in consolidated subsidiaries 7,619,233 7,173,873
Stockholders' equity 17,646,804 19,163,706
STATEMENT OF OPERATIONS DATA
REVENUES
Operating revenues, net $29,770,618 $ 8,884,364
Interest, dividends & other revenues 1,908,288 401,107
Equity in earnings of unconsolidated affiliates (39,483) 32,076
----------- -----------
31,639,423 9,317,547
EXPENSES
Operating expenses 37,906,402 15,010,815
Net loss $(5,911,847) $(3,676,607)
Net loss per share $ (1.23) $ (1.17)
</TABLE>
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LIL
ITEM 7. FINANCIAL STATEMENTS
Historical Financial Statements
Independent Auditor's Report............................................ 40
Consolidated Statements of Financial Condition.......................... 41
Consolidated Statements of Operations................................... 42
Consolidated Statements of Comprehensive Income......................... 43
Consolidated Statements of Changes in Shareholders' Equity.............. 44
Consolidated Statements of Cash Flows................................... 45
Notes to Consolidated Financial Statements.............................. 46
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Eastbrokers International Incorporated
We have audited the accompanying consolidated statements of financial condition
of Eastbrokers International Incorporated and subsidiaries as of March 31, 1999
and 1998, and the related consolidated statements of operations, comprehensive
income, changes in shareholders' equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eastbrokers
International Incorporated and subsidiaries as of March 31, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/S/ Spicer, Jeffries & Co.
SPICER, JEFFRIES & CO.
Denver, Colorado
June 29, 1999
-40-
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,214,705 $ 7,156,702
Cash and securities segregated for regulatory
purposes or deposited with clearing
organizations 50,431 986,233
Securities purchased under agreements to resell - 887,170
Securities borrowed 1,653,742 -
Receivables
Customers 4,140,016 4,819,958
Broker dealers and other 2,356,965 4,404,608
Affiliated companies 2,103,929 2,286,277
Related to disposition of subsidiary 1,782,814 1,493,913
Financial institutions 549,938 1,018,642
Receivable from shareholders and
executive officers 3,787,339 517,221
Other 3,414,674 1,890,212
Securities owned, at value
Government and agencies - 692,428
Corporate debt 1,876,229 -
Equities and other 11,665,327 7,985,484
Net assets held for resale 1,836,442 2,362,873
Furniture and equipment, at cost (net of
accumulated depreciation and amortization
of $xxx,xxx and $766,898, respectively) 2,061,612 1,142,281
Deferred taxes 5,499,245 4,162,615
Goodwill, net 2,215,910 2,073,774
Other assets and deferred amounts 1,670,721 551,118
------------ ------------
Total Assets $ 48,880,039 $ 44,431,509
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 2,408,354 $ 2,570,499
Advances from affiliated companies 4,699,821 31,937
Payables
Customers 2,684,343 5,405,464
Broker dealers and other 2,833,028 6,169,159
Securities sold not yet purchased, at value
Government and agencies 1,036,428 -
Equities and other 1,567,290 -
Accounts payable and accrued expenses 1,185,551 727,512
Other liabilities and deferred amounts 1,994,925 1,118,179
------------ ------------
18,409,740 16,022,750
Deferred tax - 51093
Long-term borrowings 5,204,262 2,020,087
------------ ------------
Total liabilities 23,614,002 18,093,930
------------ ------------
Minority interest in consolidated subsidiaries 7,619,233 7,173,873
------------ ------------
Commitments and contingencies
Shareholders' equity
Preferred stock; $.01 par value;
10,000,000 shares authorized; no shares
issued and outstanding at March 31, 1999
and 1998, respectively - -
Common stock; $.05 par value; 10,000,000 shares
authorized; 5,160,250 and 4,297,750
shares issued and outstanding at
March 31, 1999 and 1998, respectively 258,013 214,888
Paid-in capital 29,650,450 25,614,348
Accumulated deficit (10,158,283) (4,246,436)
Notes receivable - common stock
and warrants (893,214) (313,133)
Accumulated other comprehensive income (1,210,162) (2,105,961)
------------ ------------
Total shareholders' equity 17,646,804 19,163,706
------------ ------------
Total Liabilities and Shareholders' Equity $ 48,880,039 $ 44,431,509
============ ============
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MARCH 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues
Commissions $ 14,246,465 $ 2,539,260
Investment banking 2,165,753 807,803
Interest and dividends 1,908,288 401,107
Principal transactions, net
Trading 2,370,734 4,738,701
Investment 7,671,982 (462,221)
Gain on sale of interest in subsidiary 1,312,057 -
Gain on sale of investment - related party 1,025,429
Other 3,315,684 1,260,821
Equity in earnings of unconsolidated affiliates (39,483) 32,076
------------ ------------
Total revenues 32,951,480 10,342,976
------------ ------------
Costs and expenses
Compensation and benefits 15,830,533 3,818,549
Brokerage, clearing, exchange fees and other 9,195,493 1,163,171
General and administrative 2,608,037 3,476,026
Occupancy 2,389,741 997,814
Communications 1,962,495 698,688
Consulting fees 1,446,669 2,233,543
Interest 1,340,421 746,821
Professional Fees 1,075,393 213,913
Travel 792,163 622,722
Office supplies and expense 738,223 435,173
Loss on disposition of subsidiary 491,886 -
Loss on liquidation of subsidiaries 934,444 -
Depreciation and amortization 527,233 604,395
------------ ------------
Total costs and expenses 39,332,731 15,010,815
------------ ------------
Loss before provision for income taxes and
minority interest in earnings of
subsidiaries (6,381,251) (4,667,839)
Benefit for income taxes 789,315 640,163
Minority interest in earnings of subsidiaries (319,911) 351,069
------------ ------------
Net loss $(5,911,847) $(3,676,607)
------------ ------------
Weighted average number of common shares outstanding
Basic and diluted 4,800,551 3,149,009
------------ ------------
Loss per common share
Basic and diluted $(1.23) $(1.17)
------------ ------------
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED
MARCH 31,
---------------------------
1999 1998
------------ ------------
Net loss $(5,911,847) $(3,676,607)
Other comprehensive income (loss)
Foreign currency translation adjustments 895,799 (1,475,152)
Unrealized holding gains - 246,794
Less: recovery of unrealized holding losses - (246,794)
----------- -----------
Comprehensive income (loss) $(5,016,048) $(5,151,759)
----------- -----------
See notes to consolidated financial statements.
43
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK TREASURY LOSS ON ACCUMULATED
---------------------- STOCK & AVAILABLE CUMULATIVE OTHER
PAR PAID-IN ACCUMULATED NOTE FOR SALE TRANSLATION COMPREHENSIVE
SHARES VALUE CAPITAL DEFICIT RECEIVABLE INVESTMENTS ADJUSTMENT INCOME TOTAL
----------- --------- ------------ ------------ --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March
31, 1997 2,923,000 146,150 19,314,883 (569,829) (213,750) (246,794) (630,809) (877,603) 17,799,851
Issuance of
common stock
in private
placement 125,000 6,250 716,945 - - - - - 723,195
Retirement of
treasury stock (45,000) (2,250) (211,500) - 213,750 - - - -
Issuance of
common stock
in compensation
for services 10,000 500 65,480 - - - - - 65,980
Issuance of
common stock
to officer for
note receivable 50,000 2,500 297,500 - (300,000) - - - -
Net unrealized
gain on
investments - - - - - 246,794 - 246,794 246,794
Issuance of
common stock
in private
placement 1,227,000 61,350 5,354,619 - - - - - 5,415,969
Exercise of
stock options 7,750 388 49,987 - - - - - 50,375
Sale of
subsidiary
stock - - 26,434 - - - - - 26,434
Net loss - - - (3,676,607) - - - - (3,676,607)
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 $ 4,297,750 $ 214,888 $ 25,614,348 $ (4,246,436) $(313,133) $ - $(2,105,961) $(2,105,961) $ 19,163,706
Issuance of
common stock
in Cohig &
Assoc.
acquisition 470,000 23,500 2,326,500 - - - - - 2,350,000
Redemption
of note
receivable - - - - 335,304 - - - 335,304
Issuance of
common stock
to officer
for note
receivable 200,000 10,000 690,000 - (700,000) - - - -
Issuance of
common stock
to officer
for note
receivable 50,000 2,500 147,500 - (150,000) - - - -
Issuance of
common stock
in private
placement 125,000 6,250 463,750 - - - - - 470,000
Exercise of
stock options 10,000 500 69,500 - - - - - 70,000
Issuance of
common stock
in compensation
for services 7,500 375 29,625 - - - - - 30,000
Issuance of
warrants in
connection with
debt offerings - - 283,581 - - - - - 283,581
Issuance of
warrants to
officers for
note receivables - - 25,646 - (25,646) - - - -
Net loss - - - (5,911,847) - - - - (5,911,847)
Accrued interest
on notes
receivable - - - - (39,739) - - - (39,739)
Cumulative
translation
adjustment - - - - - - 895,799 895,799 895,799
----------- --------- ------------ ------------ --------- --------- ----------- ----------- ------------
Balances at
March 31, 1999 $ 5,160,250 $ 258,013 $ 29,650,450 $(10,158,283) $(893,214) $ - $(1,210,162) $(1,210,162) $ 17,646,804
----------- --------- ------------ ------------ --------- --------- ----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,911,847) $ (3,676,607)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 319,911 (351,069)
Losses on dispositions of subsidiaries 1,426,330 -
Gain on sale of subsidiary (1,312,057) (1,025,429)
Allowance for doubtful accounts 549,938 -
Depreciation and amortization 527,233 604,395
Deferred taxes (919,768) (2,305,662)
Other (410,572) 104,368
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies 914,625 82,415
Securities purchased under agreements to resell 887,170 (478,305)
Securities borrowed (1,653,742) -
Receivables (3,851,453) (3,744,971)
Securities owned, at value (2,239,065) (6,443,982)
Other assets (696,035) 827,875
Payables
Customers 1,366,143 4,353,654
Brokers, dealers and others (2,988,422) 5,208,933
Accounts payable and accrued expenses (77,837) (879,123)
----------------- ----------------
Net cash provided by (used in) operating activities (14,069,448) (7,723,508)
----------------- ----------------
Cash flows from investing activities
Net proceeds from (payments for)
Net cash acquired on acquisition of EBI Securities 970,056 -
Investments in affiliates (386,345) (264,036)
Sales of interests in subsidiaries 2,159,204 -
Investments held for resale (526,431) 2,378,054
Capital expenditures (1,384,072) (289,070)
----------------- ----------------
Net cash provided by (used in) investing activities 832,412 1,824,948
----------------- ----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement 500,000 6,139,164
Short-term financings - (1,339,183)
Advances from affiliates 4,850,232 -
Securities sold under agreements to repurchase - (1,200,793)
Proceeds from long term debt 3,284,426 1,085,713
Dividends paid to minority interests on subsidiary's stock (190,277) -
Other 104,702 102,575
----------------- ----------------
Net cash provided by (used in) financing activities 8,549,083 4,787,476
----------------- ----------------
Foreign currency translation adjustment (254,044) 1,400,162
----------------- ----------------
Increase (decrease) in cash and cash equivalents (4,941,997) 289,078
Cash and cash equivalents, beginning of year 7,156,702 6,867,624
----------------- ----------------
Cash and cash equivalents, end of year $ 2,214,705 $ 7,156,702
----------------- ----------------
</TABLE>
-46-
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ 130,789 $ 261,633
----------------- ----------------
Cash paid for interest $ 335,116 $ 173,560
----------------- ----------------
Non-cash transactions
Eastbrokers International shares issued as part of
EBI Securities Corporation acquisition $ 2,350,000 $ -
----------------- ----------------
Retirement of treasury stock $ - $ 213,750
----------------- ----------------
Eastbrokers International shares issued in compensation for services $ 30,000 $ 65,980
----------------- ----------------
Issuance of Eastbrokers International Class C warrants
in connection with debt offerings $ 283,581 $ -
----------------- ----------------
</TABLE>
-47-
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated (formerly Czech Industries, Inc.) and its U.S. and international
subsidiaries (collectively, "Eastbrokers" or the "Company"). The shareholders of
the Company approved the name change on December 10, 1996 at its Annual Meeting
of Shareholders. All significant intercompany balances and transactions have
been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management believes that the estimates utilized in the
preparation of the consolidated financial statements are prudent and reasonable.
Actual results could differ from these estimates. See Note 19 -"Significant
Estimates."
The Company, through its subsidiaries, provides a wide range of financial
services primarily in the United States, Central Europe, and Eastern Europe. Its
businesses include securities underwriting, distribution and trading; merger,
acquisition, restructuring, and other corporate finance advisory activities;
asset management; merchant banking and other principal investment activities;
brokerage and research services; and securities clearance services. These
services are provided to a diversified group of clients and customers, including
corporations, governments, financial institutions, and individuals.
Substantially all of the Company's revenues and expenses are generated through
its European subsidiaries and affiliates.
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its U.S.
subsidiaries is March 31.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European Subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede the
Company's closing date by three months.
FINANCIAL INSTRUMENTS
Proprietary securities transactions, commission revenues and related
expenses are recorded on a trade date basis. Securities owned and securities
sold, but not yet purchased are recorded at fair value with resulting net
unrealized gains and losses reflected in earnings. Fair value is generally based
on quoted market prices. If quoted market prices are not available, fair value
is estimated based on other relevant factors, including dealer price quotations
and recent price activity. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular security. The Company has no investments in
derivatives.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried at their original costs.
The carrying value of such equity securities is adjusted when changes in the
underlying fair values are readily ascertainable, generally as evidenced by
listed market prices or transactions which directly affect the value of such
equity securities. Downward adjustments relating to such equity securities are
made in the event that the Company determines that the eventual realizable value
is less than the carrying value.
-48-
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Realized gains and losses on these securities are determined on a
specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities purchased under agreements to resell are treated as financing
arrangements and are carried at contract amounts reflecting the amounts at which
the securities will be subsequently resold as specified in the respective
agreements. The Company takes possession of the underlying securities purchased
under agreements to resell and obtains additional collateral when the market
value falls below the contract value. The maximum term of these agreements is
generally less than ninety-one days.
Securities borrowed transactions facilitate the settlement process and may
require the Company to deposit cash or other collateral with the lender.
OTHER RECEIVABLES
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities. These receivables are
due on demand.
UNDERWRITINGS
Underwritings include gains, losses, and fees, net of syndication expenses
arising from securities offerings in which the Company acts as an underwriter or
agent. Underwriting fees are recorded at the time the underwriting is completed
and the income is reasonably determinable. The Company reflects this income in
its investment banking revenue.
FEES
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered into
by the Company. The Company reflects this income in its investment banking
revenue.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments,"
requires the Company to report the fair value of financial instruments, as
defined. Substantially all of the Company's assets and liabilities are carried
at fair value or contracted amounts which approximate fair value. Estimates of
fair value are made at a specific point in time, based on relative market
information and information about the financial instrument, specifically, the
value of the underlying financial instrument.
Securities owned and securities sold, but not yet purchased are carried at
fair value. Assets which are recorded at fair value consist largely of
short-term receivables and include reverse repurchase agreements,
-49-
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
securities borrowed and certain other receivables. Similarly, the Company's
short-term liabilities are recorded at contracted amounts approximating fair
value. The estimated fair value of the Company's long-term borrowings, based on
market rates of interest and similar maturities, approximates their carrying
value or contracted amounts.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations in foreign currencies are translated
at year-end rates of exchange, and the income statements are translated at
weighted average rates of exchange for the year. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation,"
gains or losses resulting from translating foreign currency financial
statements, net of hedge gains or losses and their related tax effects, are
reflected in cumulative translation adjustments, a separate component of
stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in earnings.
FURNITURE, AND EQUIPMENT
Furniture and equipment are carried at cost and are depreciated on
a straight-line basis over the estimated useful life of the related assets
ranging from three to ten years.
COMMON STOCK DATA
Loss per share is based on the weighted average number of common stock and
stock equivalents outstanding. The outstanding warrants and stock options are
currently excluded from the earnings per share calculation as their effect would
be antidilutive.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation expense for stock-based employee compensation plans at fair
value. The Company has elected to account for its stock-based compensation plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Under
the provisions of APB No. 25, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's common stock at
the date of grant over the amount an employee must pay to acquire the stock.
DEFERRED INCOME TAXES
Deferred income taxes in the accompanying financial statements reflect
temporary differences in reporting results of operations for income tax and
financial accounting purposes. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
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. NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-50-
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is amortized on a straight-line basis over periods from 5 to 25
years and is periodically evaluated for impairment on an undiscounted cash flow
basis. The accumulated amortization was $62,492 and $132,015 for the years ended
March 31, 1999 and 1998, respectively.
RECLASSIFICATIONS
Certain amounts in the prior year have been reclassified to conform to the
current year's presentation.
NOTE 2. CASH AND SECURITIES SEGREGATED UNDER FEDERAL AND OTHER REGULATIONS
Cash and securities segregated for regulatory purposes or as deposits with
clearing organizations was $50,431 and $986,233 as of March 31, 1999 and 1998,
respectively.
NOTE 3. FINANCIAL INSTRUMENTS
Financial instruments owned consist of the Company's proprietary trading
and investment accounts, securities purchased under agreements to resell, and
investments held for resale. The Company's financial instruments, at estimated
fair market value, are as follows:
March 31, March 31,
1999 1998
------------- ------------
Securities purchased under agreements to
resell
Sovereign government debt - Austria $ -- $ 887,170
------------- ------------
Securities borrowed
Sovereign government debt - Austria $ 1,036,430 $ --
Corporate equities - Austria 617,312 --
------------- ------------
$ 1,653,742 $ --
------------- ------------
Securities owned at fair value
Corporate debt - Austria $ 1,876,229 $ --
------------- ------------
Corporate equities - United States $ 2,972,800 $ --
Corporate equities - Austria 8,009,235(1) 6,587,220(2)
Corporate equities - Hungary -- 410,244
Corporate equities - Czech Republic -- --
Corporate equities - Slovak Republic -- 84,074
Corporate equities - Poland 145,725 760,552
Corporate equities - Other 537,567 143,394
------------- ------------
$11,665,327 $7,985,484
------------- ------------
Sovereign government debt
Austria $ -- $ 621,353
Hungary -- 71,075
------------- ------------
$ -- $ 692,428
------------- ------------
-51-
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 3. FINANCIAL INSTRUMENTS (CONTINUED)
(1) As of March 31, 1999, the Company has significant concentrations in the
securities portfolio. A description of these securities and their respective
carrying amounts are as follows: a security of a Russian chemical producer
traded on the OTC market of the Vienna Stock Exchange -- $1,420,095 and
securities (both debt and equity) of a significant shareholder of the Company
traded on the Vienna Stock Exchange -- $6,011,048. The Company does not have any
material concentrations to high yield issuers or commitments to high-yield
issuers as of the balance sheet date.
(2) As of March 31, 1998, the Company has 3 significant concentrations in the
securities portfolio. A description of these securities and their respective
carrying amounts are as follows: a security of a Russian chemical producer
traded on the OTC market of the Vienna Stock Exchange -- $1,030,270, a security
of a Bulgarian pharmaceutical company traded on the Bulgarian Stock Exchange
- --$3,185,630, and a security of a Bulgarian oil refinery traded on the Bulgarian
Stock Exchange -- $1,354,830. All other securities are relatively liquid and the
carrying value approximates the market value as of the balance sheet date. The
Company does not have any material concentrations to high yield issuers or
commitments to high-yield issuers as of the balance sheet date.
NOTE 4. INVESTMENTS IN SUBSIDIARIES
EASTBROKERS BETEILIGUNGS AKTIENGESELLSCHAFT
Eastbrokers Vienna is an Austrian based holding company that originally
had established a presence in 12 Central and Eastern European countries through
its network of subsidiaries and affiliate offices. On August, 1, 1996, the
Company acquired 80 percent of the outstanding stock of Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers Vienna") through the issuance of 1,080,000
shares of the Company's common stock valued at $5,400,000. As a participant in
Eastbrokers Vienna's capital increase in the fiscal year ended March 31, 1997,
the Company later acquired an additional 245,320 (out of a total issue of
270,000 shares) for cash, increasing its ownership percentage to 83.62 percent.
In three separate transactions in November and December 1996 and March 1997, the
Company purchased 81,550 additional shares, increasing its ownership percentage
to approximately 94 percent.
The fair value of the net assets acquired under these transactions
approximated $8,200,000. The acquisition has been accounted for under the
purchase method of accounting. The excess of the purchase price over the fair
value of the net assets acquired resulted in the Company recording approximately
$1,950,000 in goodwill, which is being amortized over 25 years on a
straight-line basis. The 1997 consolidated financial statements include the
consolidated results of operations of Eastbrokers Vienna from the date of
acquisition through December 31, 1996 in accordance with Note 1. The purchase
agreement contains certain provisions whereby the selling shareholders may be
eligible to receive an additional 120,000 shares of the Company's 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.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 4. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
WMP BANK AKTIENGESELLSCHAFT
Through its subsidiary, Eastbrokers Vienna, the Company acquired a 48.1
percent interest in the outstanding capital stock of WMP on August 1, 1996. WMP
is a stock broker-dealer and market maker in Vienna, Austria and is licensed as
a class B bank under Austrian law. A Class B bank may, at its discretion,
conduct any of the normal activities associated with a bank with one major
exception; it cannot accept customer deposits. From time to time Eastbrokers
Vienna has carried shares of WMP. Accordingly, since August 1996, the Company's
ownership of WMP has exceeded 50 percent including WMP shares in its trading
portfolio. At December 31, 1996, the Company's aggregate ownership percentage in
WMP, including its trading position, was 55 percent. This investment was
accounted for using the equity method in the March 31, 1997 financial statements
as the Company believed that its control of WMP may likely have been lost as the
result of the probable occurrence of certain events that lay outside of its
control. In September, 1997 circumstances surrounding these events were resolved
such that these events were no longer considered probable of occurrence and the
Company deemed its control of WMP was no longer temporary. Accordingly, the
Company began consolidating its investment in WMP effective with its third
quarter of fiscal 1998 financial statements.
EBI SECURITIES CORPORATION
In May 1998, the Company acquired all of the outstanding common stock of
Cohig & Associates, Inc. a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the Company's
common stock and an agreement to advance $1,500,000 in additional working
capital. Following the acquisition, the name was changed to EBI Securities
Corporation ("EBI Securities"). The fair value of the net assets acquired under
this transaction approximated $1,700,000 as of the date of acquisition. The
excess of the purchase price over the fair value of the net assets acquired
approximated $750,000 and has been recorded as goodwill and is being amortized
over 25 years on the straight-line method. EBI Securities operates pursuant to
the exemptive provisions of SEC Rule 15c3-3(k)(2)(ii) and clears all
transactions with and for customers on a fully disclosed basis.
PRO FORMA RESULTS OF OPERATIONS
The following summarized, unaudited, pro forma results of operations for
the year ended March 31, 1999 and 1998 assumes the above listed acquisition
occurred at the beginning of fiscal 1998.
Year Ended Year Ended
March 31, March 31,
1999 1998
------------- ------------
Revenues from continuing operations $37,507,686 $28,071,825
Net loss from continuing operations (5,835,951) (4,290,719)
Net loss per share from continuing (1.22) (1.36)
operations
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 4. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
SALES OF INTERESTS IN SUBSIDIARIES
In June 1998, the Company sold 73.55 percent of its interest in
Eastbrokers Prague a.s for 15 million Austrian schillings (approximately
$1,180,000 USD at the then current exchange rates). The Company recognized a
gain on the sale of this interest before taxes of approximately $1,312,000 USD,
at the then current exchange rates.
In December 1998, the Company sold its entire interest in its subsidiary,
Eastbrokers Budapest RT. for 217,000,000 HUF (approximately $1,000,000 USD at
the then current exchange rates). The Company recognized a loss on this sale of
approximately $490,000 USD, at the then current exchange rates.
LIQUIDATION OF INTERESTS IN SUBSIDIARIES
The Company also has liquidated its investments Eastbrokers Romania and
Eastbrokers Slovakia as of December 31, 1998. The effects are a net loss of
$776,197 on the liquidation of Eastbrokers Slovakia and a net loss on the
liquidation of Eastbrokers Romania of $158,247 for a total loss on liquidations
of $934,444.
NOTE 5. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company also has other investments in unconsolidated affiliates
through Eastbrokers Vienna. These affiliates are accounted for using the equity
method of accounting. These investments are predominantly start-up operations.
As of December 31, 1997, these unconsolidated affiliate investments included the
following offices: Zagreb, Croatia; Ljubljana, Slovenia; Moscow, Russia; Sofia,
Bulgaria; and NIF TRUD Investment Fund. As of December 31, 1998, these
unconsolidated affiliate investments included the following offices: Zagreb,
Croatia and Ljubljana, Slovenia. The combined carrying amounts of these
investments as of December 31, 1999 and 1998 was $460,900 and $156,800,
respectively.
RECEIVABLES FROM AFFILIATED COMPANIES
Periodically, the Company provides operating advances to its
unconsolidated affiliates. These advances are generally due on demand and are
not subject to interest charges.
NOTE 6. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of credit
with financial institutions, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
LINES OF CREDIT
The Company had outstanding advances on its lines of credit totaling
$1,182,719 and $2,570,499 as of March 31, 1999 and 1998, respectively. As of
March 31, 1999, the Company had unsecured credit lines available of
approximately $3.5 million. These lines of credit carry interest rates between
7.00 percent and 12.00 percent.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 6. SHORT-TERM BORROWINGS (CONTINUED)
ADVANCES FROM AFFILIATED COMPANIES
Periodically, the Company's subsidiaries and affiliates will provide
operating advances to other members in the affiliated group. These advances are
generally due on demand and are not subject to interest charges.
UNSECURED BONDS PAYABLE
The Company had unsecured bonds with a face value of 25 million Austrian
Schillings requiring annual interest payments at 10 percent per annum which
matured on July 31, 1997. These unsecured bonds were redeemed by the Company on
July 31, 1997.
In June 1998, the Company's largest Austrian subsidiary, raised 60 million
Austrian schillings (approximately $4,800,000 USD) in a bond offering. The bonds
bear interest at 7.5 percent, payable at maturity, and are scheduled to mature
in June 2002. As of March 31, 1999, the Company has redeemed bonds equal to
44,850,000 Austrian schillings and is attempting to redeem the remaining amount
outstanding.
UNSECURED DEBENTURES
On November 25, 1998, the Company sold 10 newly issued units in a private
placement consisting in the aggregate of $1,100,000 in 7 percent convertible
debentures and Class C series warrants to purchase 125,000 shares of common
stock. The Company redeemed the debentures prior to its fiscal year end.
NOTE 8. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
March 31, March 31,
1999 1998
------------ ------------
Long-term borrowing arrangement with a
financial institution requiring Note
payable to a finance company, requiring
annual interest payments which cannot
exceed the 10 year government bond rate
plus 2 percent (approximately 10.00
percent), principal of 12,000,000 Austrian
Schillings, principal due at maturity on
December 31, 2001 $ 1,023,601 $ 948,000
Notes payable to a financial institution
requiring quarterly interest payments
computed at 6.50 percent on a 360 day
year, collateralized by 157,061 shares of
WMP (representing approximately 24 percent
of the Company's WMP shares as of March
31, 1999), principal of 10,000,000
Austrian Schillings and accrued interest
payable in full on November 30, 2001 430,912 804,308
Notes payable to financial institutions
requiring quarterly interest payments
computed at varying percentages on a 360
day year, with varying maturity dates but
all due in 1999 -- 267,779
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 8. LONG-TERM BORROWINGS (CONTINUED)
March 31, March 31,
Convertible promissory notes, convertible at 1999 1998
$5.75 per share of common stock, secured ------------ ------------
by the common stock of EBI Securities and
certain securities with a fair value of
$400,000 bearing interest at 10 percent
and due March 25, 2002 1,249,749 --
Subordinated note payable to clearing
organization, bearing interest at 10
percent and maturing on June 30, 2000 2,500,000 --
------------ ------------
$5,204,262 $2,020,087
------------ ------------
The scheduled maturities of long-term debt outstanding at March 31, 1999
are summarized as follows: $225,697 in 2000, $2,986,829 in 2001, $1,991,736 in
2002.
NOTE 9. COMMITMENTS AND CONTINGENCIES
LEASES AND RELATED COMMITMENTS
The Company occupies office space under leases which expire at various
dates through 2003. The various leases contain provisions for periodic
escalations to the extent of increases in certain operating and other costs. The
Company incurred rent expense under non-cancelable operating leases in the
approximate amounts of $202,000 and $131,000 for the periods ended March 31,
1999, and March 31, 1998, respectively.
Minimum future rentals under these non-cancelable leases for the fiscal
years ending 1999 through 2003 are approximately as follows: 2000 -- $1,168,000;
2001 -- $1,076,000; 2002 -- $1,063,000; and 2003 -- $896,000; 2004 -- $514,000;
thereafter $71,000 and in the aggregate $4,788,000.
The Company's subsidiaries occupy office space under various operating
leases which contain cancellation clauses whereby the Company may cancel the
lease with thirty to ninety days written notice.
NOTE 10. SHAREHOLDERS' EQUITY
STOCK REPURCHASE
On January 23, 1997, the Company repurchased 45,000 of its outstanding
shares at $4.75 per share under a Board of Director's approved plan. Currently,
no additional buy-backs are anticipated. This treasury stock was retired during
the fiscal year ended March 31, 1998.
STOCK TRANSACTIONS
In April 1997, the Company sold 125,000 shares of Common Stock to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,000 or $6.00 per share. The net proceeds to the Company
were $723,195. There were no underwriting discounts or commissions.
In September 1997, the Company issued 10,000 shares of Common Stock to Dr.
Michael Sumichrast in compensation for services performed on behalf of the
Company during the previous six months. The average price per share assigned to
this transaction was $6.598 per share based on the average closing price for the
period April 1, 1997 through September 30, 1997.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK TRANSACTIONS (CONTINUED)
In September 1997, an officer acquired 50,000 shares of Common Stock at a
price of $6.00 per share in exchange for a note receivable bearing an interest
rate of 8 percent in the amount of $300,000. This note was paid in full, with
accrued interest in February 1999.
On February 20, 1998, the Company sold 1,227,000 newly issued units
consisting of one share of Common Stock and one Class C Warrant in a private
placement for $6,135,000 in cash, or a price of $5.00 per unit (approximately 40
percent below the then current market price as of February 19, 1998.) After
deducting offering expenses of approximately $899,000, the Company netted
approximately $5,416,000. These units were offered and sold to various
accredited investors.
In January 1999, an officer acquired 200,000 shares of Common Stock at a
price of $3.50 per share in exchange for a note receivable bearing an interest
rate of 7 percent in the amount of $700,000.
In January 1999, another officer acquired 50,000 shares of Common Stock at
a price of $3.00 per share in exchange for a note receivable bearing an interest
rate of 7 percent in the amount of $150,000.
In January 1999, the Company sold 125,000 restricted shares of its common
stock in a private placement to an individual investor for $4.00 per share. The
Company also issued 7,500 shares of its common stock to a broker of EBI
Securities as compensation for services provided in connection with this
transaction.
Each of the foregoing issuances was made by the Company without
registration under the Securities Act of 1933, as amended (the "Securities
Act"). In each such case the Company relied upon the exemption from registration
provided by Section 4(2) under the Securities Act and Regulation D promulgated
under the Securities Act.
CLASS A WARRANTS
In connection with its June 1995 public offering, the Company issued
5,505,000 Class A Warrants. The Class A Warrants became exercisable on June 7,
1996. By reason of the Company's September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class A Warrants represented
the right to acquire one (1) share of Common Stock for $20. The Class A Warrants
include redemption provisions at the option of the Company and, upon thirty (30)
days' written notice to all holders of Class A Warrants, the Company has the
right to reduce the exercise price and/or extend the term of the Class A
Warrants, subject to compliance with the requirements of certain SEC rules and
regulations to the extent applicable. The Class A Warrant Holders are also
entitled to certain antidilution privileges. In April 1998, the Company
announced an amendment relating to the number of warrants outstanding and the
exercise price. The adjustment to the number of warrants reflected the September
1996 reverse stock split and reduced the number of outstanding warrants by
four-fifths (4/5's), such that one warrant again represents the right to
purchase one share of Common Stock. An adjustment to the exercise price of the
Class A Warrants to $18.00 per share resulted in connection with the February
1998 private placement. Subsequent to this adjustment, there are 1,101,000 Class
A Warrants outstanding. The Class A Warrants expire in June 2000.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED)
CLASS B WARRANTS
In connection with the aforementioned public offering whereby the Class A
warrants were issued, the Company issued 1,250,000 Class B Warrants to certain
bridge lenders. By reason of the September 1996 1-for-5 reverse stock split,
immediately after that stock split each five (5) Class B Warrants represented
the right to acquire one (1) share of Common Stock for $21. The other terms of
the Class B Warrants are identical to the Class A Warrants, including the
antidilution provisions. In April 1998, the Company announced an amendment
relating to the number of warrants outstanding and the exercise price. The
adjustment to the number of warrants reflected the September 1996 reverse stock
split and reduced the number of outstanding warrants by four-fifths (4/5's),
such that one warrant again represents the right to purchase one share of Common
Stock. An adjustment to the exercise price of the Class B Warrants to $19.00 per
share resulted in connection with the February 1998 private placement.
Subsequent to this adjustment, there are 250,000 Class B Warrants outstanding.
The Class B Warrants have not been registered. These warrants expire in June
2000.
CLASS C WARRANTS
In connection with various common stock and debt offerings, the Company
has issued a total of 1,505,900 Class C warrants through March 31, 1999. Each
Class C Warrant entitles the holder to purchase one share of Common Stock during
the period commencing February 20, 1999 and expiring February 20, 2002 at an
exercise price of $7.00 per share, subject to certain adjustments. Commencing
February 20, 1999 these warrants will be redeemable at a price of $.10 per
warrant at any time after the closing price of the Common Stock is above $10.00
for 20 consecutive trading days. The shares underlying these warrants are
subject to a "demand registration" right upon receipt of a demand for
registration from a majority of the holders of the common stock and the warrants
issued in this private placement. In connection with the private placement,
1,237,222 Class C 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., Kazakhstan and Azerbaijan) are
generally reliant on the "soft" or "exotic" currencies. The Company generally
elects not to hedge its net monetary investments in these markets due to the
lack of availability of various currency contracts at acceptable costs.
NOTE 11. STOCK OPTION PLAN
During 1996, the Company adopted a non-qualified stock option plan (the
"plan") as part of an overall compensation strategy designed to facilitate a
pay-for-performance policy and promote internal ownership in order to align the
interests of employees with the long-term interests of the Company's
shareholders.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 11. STOCK OPTION PLAN (CONTINUED)
Under the terms of the plan, stock options granted will have an exercise
price not less than the fair value of the Company's Common Stock on the date of
grant. Such options generally become exercisable over a three-year period and
expire 5 years from the date of grant.
A total of 35,000 options at a weighted average exercise price of $6.64
per share with exercise prices ranging from $6.50 to $7.00 per share were
granted under this plan during the fiscal year ended March 31, 1997. No options
were granted under this plan during the year ended March 31, 1998. As of March
31, 1999, 25,000 of these options were still outstanding. During the year ended
March 31, 1999, 220,000 options were issued under this plan at a weighted
average exercise price of $4.18 per share with the exercise prices ranging from
$4.00 to $6.00 per share. The fair value of the options at the date of grant was
estimated using the Black-Scholes option pricing model utilizing the following
weighted average assumptions: risk-free interest rate - 4 percent; expected
option life in years - 3 years; expected stock price volatility - 126.8 percent;
and expected dividend yield - 0.0 percent.
Had compensation cost been determined based on the fair value at the grant
dates consistent with the method of FASB Statement 123, the Company's loss and
loss per share would have been increased to the pro forma amounts indicated
below:
March 31, March 31,
1999 1998
---------------------------------------
Net loss
- as reported $(5,911,847) $(3,676,607)
- pro forma (5,991,620) (3,728,043)
Basic and fully diluted
earnings per share
- as reported $ (1.23) $ (1.17)
- pro forma (1.25) (1.18)
During the fiscal year ended March 31, 1997, an additional 200,000 options
were granted outside of the plan at a weighted average exercise price of $10.00
per share and with an expiration date of August 1, 1999. At March 31, 1999,
there were 445,000 options outstanding. Of this amount, 225,000 of the options
outstanding were exercisable with 220,000 options subject to various vesting
requirements. The weighted average fair value of the options at the various
grant dates was $6.93.
NOTE 12. RELATED PARTY TRANSACTIONS
In connection with Mr. Greene's resignation from the Board of Directors of
the Company, the Company entered into a six month consulting agreement dated
March 27, 1997 pursuant to which Mr. Greene was paid $24,000 and granted options
to purchase 7,750 shares of the Company's Common Stock at $6.50 per share. A
related letter agreement was entered into with Mr. Green on March 27, 1997, as
amended by a letter dated April 29, 1997. Under the related letter agreement,
Mr. Greene was paid $13,750 and granted 12,500 shares of the Company's Common
Stock in full satisfaction for consulting services rendered during the period
August 1, 1996 through March 31, 1997. Also pursuant to this agreement, the
Company agreed to indemnify Mr. Greene against certain liabilities, the parties
exchanged mutual releases and Mr. Greene agreed to sell his shares of the
Company's common stock to the Company's primary market maker subject to certain
conditions.
The Company entered into a one year consulting agreement dated March 31,
1997 with Dr. Sumichrast, a Director of the Company, pursuant to which Dr.
Sumichrast was granted 20,000 shares of the Company's Common Stock to vest
ratably over the term of the agreement. Dr. Sumichrast provided services to the
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
Comany during the period April 1, 1997 through September 30, 1997 and received
10,000 shares at an average price of $6.598 per share as compensation for these
services.
In December 1996, Eastbrokers Vienna loaned Dr. Muller-Tyl approximately
$72,000 USD. Interest on the outstanding balance of this obligation is computed
at 8 percent per annum until paid in full. Dr. Muller-Tyl was the Chief
Operating Officer of the Company until his resignation in January 1998.
The Company leases office space from General Partners Immobilenz
("GPI")(formerly Residenz Realbesitz AG ("Residenz")) for its Vienna operations
pursuant to a month-to-month lease. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $95,000 USD) in the fiscal years ended March 31, 1997 and 1998.
The terms of this lease were negotiated such that the Company is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners Beteiligungs AG ("General Partners"), an Austrian holding
company and the beneficial owner of 2,420,530 shares of Common Stock. Mr.
Kossner, a Director of the Company and an officer of the Company from August,
1996 until November, 1996, owns approximately 30 percent of the outstanding
shares of GP. He is a member of GP's Supervisory Board, WMP's Supervisory Board,
the Eastbrokers AG Supervisory Board, and is a Director of the Company.
At December 31, 1998, the Company has a receivable related to securities
transactions from Mr. Kossner in the amount of 1,132,776 Austrian Schillings
(approximately $97,000 USD).
At December 31, 1998, the Company has a receivable related to share
transactions from Z.E. Beteiligungs AG ("ZE") in the amount of 7,745,600
Austrian Schillings (approximately $661,000 USD). ZE is a subsidiary of General
Partners.
WMP is an Austrian broker-dealer, market maker, and member of the Vienna
Stock Exchange. WMP's common stock is publicly traded on the Main Market of the
Vienna Stock Exchange. From time to time, WMP will make a market in stock of
companies that have a direct relationship to the Company through its Directors
or Shareholders. For the year ended March 31, 1999, the Company generated
profits of approximately $1,190,000 USD related to the trading of shares of
these companies.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH"), primarily an inactive subsidiary to COR Industrieberatung GmbH,
for 2.5 million Austrian Schillings (approximately $200,000 USD). The sales
price approximated the cost basis of WMP GmbH at the date of disposition.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Mr. Schmid for 13 million
Austrian Schillings (approximately $1,025,000 USD). The Company acquired its
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD). At the time of acquisition, the principal asset of
SWIB was an investment in a company which was entering bankruptcy proceedings
and there was considerable uncertainty regarding the future realizable value of
this asset. By December 1997, bankruptcy proceedings had progressed to a point
where an estimate could be made on the net realizable value of this asset. Based
on the information available at that time, SWIB's value at the date of
disposition was determined by the Board of Directors to be in the range of 12
million to 14 million Austrian Schillings (approximately $950,000 to $1,100,000
USD). The sale of SWIB resulted in a gain of approximately $1.0 million USD and
is included in the accompanying consolidated statement of operations.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1998, ZE, a 26.27 percent owned subsidiary of General
Partners, owned approximately 25 percent of UCP Beteiligungs AG ("UCP AG"), an
Austrian holding company. UCP AG, in turn, owns 27.7 percent of a Russian
chemical company, UCP AOOT. Shares of UCP AOOT are listed over-the-counter on
the Vienna Stock Exchange. WMP is a market maker in the shares of UCP AOOT on
the Vienna Stock Exchange.
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996, the Company
assumed a receivable in the amount of 7,387,697 ATS (approximately $704,000 USD,
at the then current exchange rates) from Peter Schmid. As of December 31, 1997,
the receivable increased due to cash advances to 8,046,177 ATS (approximately
$635,000 USD, at the then current exchange rates). The U.S. Dollar denominated
amount fluctuates based on the foreign currency exchange rate. On May 31, 1998,
Mr. Schmid entered into a Non-Negotiable Term Note in the amount of 8,046,177
Austrian Schillings. This amount is reported in the Receivable from executive
officer in the consolidated statement of financial condition. This Note bears
interest at 8 percent per annum and matures May 31, 2000. It was collateralized
by 150,000 shares of the Common Stock. On October 8, 1998, Mr. Schmid repaid
6,748,111 Austrian Schillings of the total amount due. As of March 31, 1999, Mr.
Schmid did not owe any remaining balance under these arrangements.
Periodically, the Company engages in securities transactions with URBI
S.A., ("URBI"), a Spanish investment company. Mr. Kossner was a member of URBI's
Supervisory Board from November 1996 through June 1998 and Mr. Schmid was a
member until May 1997. All transactions between URBI and the Company were
consummated at the then current market prices. At December 31, 1997, the amount
due from URBI was 7,023,576 Austrian Schillings or approximately $555,000,
arising exclusively from various securities transactions. This amount is
reported in the Receivable from affiliated companies in the consolidated
statement of financial condition. Prior to June 30, 1998, URBI had repaid all
amounts due with respect to the transactions open at December 31, 1997. As of
December 31, 1998, the Company had a receivable from URBI in the amount of
2,780,030 Austrian Schillings or approximately $236,000 related to transactions
occurring subsequent to December 31, 1997. In addition, the Company entered into
a repurchase agreement with URBI in June 1997. This repurchase agreement and the
related shares of Vodni Stavby a.s., a Czech construction company, were sold to
a non-affiliated Czech Republic company in October 1997.
During October 1997, WMP entered into a stock loan transaction with VCH in
the amount of 4,065,000 Austrian Schillings (approximately $325,000). In August,
1998, VCH repaid the Company in full for this stock loan transaction. WMP
periodically engages in stock loan transactions as a portion of its normal
business operations.
In December 1997, WMP purchased 7,200,000 ATS (approximately $576,000) of
8 percent bonds due April 1, 2000 of ZE. This amount is reported in the
Securities owned at value, Corporate equities in the consolidated statement of
financial condition. The ZE bonds earn a comparatively higher interest rates
(350 basis point above comparable Austrian governmental rates).
The Company conducts various business transactions with General Partners
throughout the year. As of December 31, 1998, the Company was owed $3,787,339
relating to these transactions.
As of December 31, 1997, the Company had a receivable from C.R.F. a.s., a
Slovak privatization company, related to a stock sale transaction and consulting
fees. The total amount due from these transactions was 7,078,500 Austrian
Schillings (approximately $559,000). This amount is reported in the Receivable
from affiliated companies in the consolidated statement of financial condition.
Mr. Schmid was the Chairman of the Board of C.R.F. a.s. from November 1995
through October 1997.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 12. RELATED PARTY TRANSACTIONS (CONTINUED)
In September 1997, Martin A. Sumichrast acquired 50,000 shares of Common
Stock at a price of $6.00 per share in exchange for a note receivable in the
amount of $300,000. This amount is recorded in the Note receivable-common stock
in the consolidated statement of financial condition. This note bears interest
at 8 percent per annum and is due September 15, 1999. This note was paid in
full, with accrued interest in February 1999.
NOTE 13. INCOME TAXES
The tax benefit of $789,315 and $640,163 for the years ended March 31,
1999 and 1998 result primarily from foreign net operating loss carryforwards of
the Company's subsidiaries.
The differences between the tax benefit calculated at the statutory
federal income tax rate and the actual tax benefit for each period is shown in
the table below:
Year Ended Year Ended
March 31, March 31,
1999 1998
------------ ------------
Tax benefit at federal statutory rate $ 2,079,242 $ 1,587,065
State income taxes, net of federal benefit 294,794 224,991
Foreign taxes 130,789 (266,411)
Unrecognized benefit of net operating losses (2,183,465) (897,153)
Foreign currency fluctuations in deferred taxes 467,955 --
Other -- (8,329)
------------ ------------
$ 789,315 $ 640,163
------------ ------------
The significant components of the Company's deferred tax asset and
liability are as follows:
Year Ended Year Ended
March 31, March 31,
1999 1998
------------ ------------
Unrecognized gain from marketable $ 28,553 $ 142,633
Adjustments to loan portfolios 93,548 --
Capital loss carryforward 45,445 45,445
Foreign tax credit carryforward 32,652 32,652
Other 155,701 19,428
Net operating loss carryforward 8,327,402 5,202,856
------------ ------------
8,683,301 5,443,014
Valuation allowance (3,184,056) (1,331,492)
------------ ------------
$ 5,499,245 $ 4,111,522
------------ ------------
The valuation allowance for deferred tax assets was increased by
$1,852,564 and $634,191 during the years ended March 31, 1999 and 1998,
respectively.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 13. INCOME TAXES (CONTINUED)
At March 31, 1999, the Company has a U.S. federal net operating loss
carryforward of approximately $8,042,000 that may be used against future U.S.
taxable income until it expires between the years March 31, 2012 and March 31,
2019. The Company also has a U.S. capital loss carryforward of approximately
$118,000 USD that expires March 31, 2002 and a U.S. foreign tax credit
carryforward of approximately $33,000 USD that expires between the years March
31, 1999 and March 31, 2003. At December 31, 1998, the Company has an Austrian
federal net operating loss carryforward of approximately $14,500,000 USD that
has no expiration date and a Polish net operating loss carryforward of
approximately $825,000.
NOTE 14. SEGMENT INFORMATION
SEGMENT AND GEOGRAPHIC AREA DATA
The Company is primarily engaged in a single line of business as a
securities broker and dealer, which comprises several classes of services, such
as principal transactions, agency transactions, and underwriting and investment
banking. Information regarding the Company's operations for the fiscal years
ended March 31, 1999 and 1998 is as follows:
Segment information is as follows for the year ended March 31, 1999:
Share of
Loss of
Unconsolidated Identifiable Net
Revenues Entities Assets Loss
----------- --------------- -------------- -----------
Austria $ 5,851,025 $ (39,483) $ 34,119,145 $ (864,163)
Hungary 1,795,804 - - 251,624
Kazakhstan 7,862,783 - 698,584 122,643
Poland 484,807 - 1,846,888 (409,260)
Slovak Republic 595,985 - - 145,345
United States 16,236,483 - 12,215,422 (5,069,249)
Other 124,593 - - (88,787)
---------- ---------- ------------- ------------
Total $32,951,480 $ (39,483) $ 48,880,039 $(5,911,847)
----------- ---------- ------------ -----------
Segment information is as follows for the year ended March 31, 1998:
Share of
Loss of
Unconsolidated Identifiable Net
Revenues Entities Assets Loss
----------- --------------- -------------- -----------
Austria $ 4,168,674 $ 32,076 $ 22,354,754 $(1,259,891)
Czech Republic 1,287,954 - 868,961 (279,568)
Hungary 2,108,992 - 7,533,072 214,017
Kazakhstan 950,136 - 993,690 247,285
Poland 1,372,325 - 2,529,672 33,585
Slovak Republic 9,842 - 1,945,028 (428,439)
United States 218,199 - 8,062,958 (1,981,618)
Other 226,854 - 143,374 (221,978)
----------- ----------- ------------- -----------
Total $10,342,976 $ 32,076 $ 44,431,509 $(3,676,607)
----------- ----------- ------------- ------------
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 15. REGULATORY REQUIREMENTS
EBI Securities is a registered broker-dealer and, accordingly, is subject
to Rule 15c3-1 of the Securities Exchange Act of 1934 (the "net capital rule").
Pursuant to the net capital provisions, EBI Securities is required to maintain a
minimum net capital, as defined under such provisions. At March 31, 1999, the
net capital of EBI Securities of $1,207,528 exceeded the minimum requirement by
$957,528.
Other non-U.S. subsidiaries are subject to various securities, commodities
and banking regulations, and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the countries in which they operate.
These subsidiaries have consistently operated in excess of their local capital
adequacy requirements.
The regulatory rules referred to above may restrict the Company's ability
to withdraw capital from its regulated subsidiaries, which in turn could limit
the Company's ability to pay dividends.
NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's customer activities, through its clearing agencies, involve
the execution, settlement and financing of various customer securities
transactions. These transactions may expose the Company to off-balance sheet
risk in the event that customers are unable to fulfill their contractual
obligations. In the event the customers fail to satisfy their obligations, the
Company may be required to purchase or sell financial instruments at prevailing
market prices in order to fulfill the customers' obligations.
The Company has sold securities that it does not own and it will,
therefore, be obligated to purchase such securities at a future date. The
Company has recorded this obligation in the financial statements at the market
value or fair value of such securities. The Company may incur a loss if the
market value of the securities increases subsequent to March 31, 1999.
The Company bears the risk of financial failure by its clearing agencies.
If the clearing agencies should cease doing business, the Company's receivable
from these agencies could be subject to forfeiture.
NOTE 17. CONTINGENCIES
EBI Securities is subject to the following legal proceedings.
USCAN FREE TRADE ZONES V. COHIG & ASSOCIATES, INC. (EBI SECURITIES), ET
AL., United States District Court for the Western District of Washington. In
March 1997, USCAN Free Trade Zones, Inc. ("USCAN") filed a complaint against EBI
Securities and Steve Signer, an employee of EBI Securities, alleging that EBI
Securities misled USCAN about the credit worthiness of a third party in
connection with an introduction made by Mr. Signer. EBI Securities categorically
denies this allegation. USCAN informed EBI Securities that it would be working
with a certain third party to secure certain loans on behalf of USCAN which
USCAN would then use to open a trading account with EBI Securities. Once EBI
Securities learned of the relationship to this third party, it refused to enter
into any business arrangements with USCAN as long as the third party was
involved due to regulatory problems encountered in prior business dealings with
this certain third party. Plaintiff alleges that as a result of Mr. Signer's
referral, it lost the ability to obtain a loan and all lost profits that might
have resulted. Mr. Signer was dismissed as a defendant is this case due to lack
of personal jurisdiction and has received an award of fees. Plaintiff originally
sought a judgment of approximately $86,000,000 in compensatory and punitive
damages. However, USCAN recently stated in a pleading and during a court
deposition taken in October 1998 that its damage claim had been reduced to
$332,000. EBI Securities has filed counterclaims for defamation based upon
certain false and defamatory representations regarding EBI Securities. The trial
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 17. CONTINGENCIES (CONTINUED)
had been scheduled to start in January 1999 but the court removed the case from
its docket after USCAN filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code. In the event that that the case should ever be
restored to the active docket for trial, EBI Securities believes it has
meritorious defenses and intends to vigorously defend against USCAN's claims as
well as aggressively pursue claims against USCAN and two of its officers for
defamation, abuse of process, and civil conspiracy.
FLORIDA DEPARTMENT OF INSURANCE AS RECEIVER FOR UNITED STATES EMPLOYER
INSURANCE CONSUMER SELF-INSURANCE FUND OF FLORIDA ("USEC") V. DEBENTURE GUARANTY
CORPORATION, ET. AL., United States District Court for the Middle District of
Florida. In November, 1995, the plaintiff, USEC, commenced the above entitled
action against Debenture Guaranty Corporation ("Debenture") and certain other
defendants, including EBI Securities and Steve Signer, an employee of EBI
Securities. In 1994, USEC entered into an arrangement whereby USEC lent money to
Debenture, and Debenture opened an account in Debenture's name to trade U.S.
Treasuries. The note to USEC was in the amount by which the treasuries could be
margined. This transaction was allegedly part of a scheme whereby USEC was
attempting to inflate its assets for regulatory purposes. Debenture allegedly
misappropriated the funds for its own benefit and USEC subsequently failed.
Plaintiffs alleged that EBI Securities and Signer aided, abetted and conspired
with Debenture to defraud USEC and claimed damages of $11,000,000. After a six
week trial held from September 8, 1998, to October 14, 1998, a jury returned a
verdict in favor of EBI Securities. Plaintiffs' motion for a new trial was
denied. EBI Securities filed a motion seeking recovery of its costs and
attorney's fees incurred in connection with defending this action. The Court
awarded EBI Securities $12,500 in costs but denied its motion for attorney's
fees. Plaintiffs have filed an appeal to the judgment and EBI Securities has
cross-appealed the denial of its motion for attorney's fees.
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
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 17. CONTINGENCIES (CONTINUED)
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.
YEAR 2000
The Company has established a program to address the issues associated
with the Year 2000. To ensure that the Company's computer systems are Year 2000
compliant, the Company has been reviewing its systems and programs to identify
those that contain two-digit year codes, and the Company intends to replace
them. In addition, a material portion of the Company's transactions are
processed by its clearing agencies who are external counterparties. The Company
has contacted these clearing agencies, as well as other suppliers, to assess
their compliance and remediation efforts with respect to the Year 2000 problem
and the Company's exposure to them. The ultimate success or failure of the
corrective plan and the extent of such success or failure cannot presently be
determined.
NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. The new standard
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 was adopted by the Company beginning with the
interim reporting period ended December 31, 1997. The adoption did not affect
previously reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by the Company beginning with the fiscal year ended March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement was adopted by the Company's for the
fiscal year ended March 31, 1999. In the initial year of application,
comparative information for earlier years is to be restated.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. At this time,
the Company does not believe that this statement will have a significant impact
on the Company.
NOTE 19. SIGNIFICANT ESTIMATES
As part of the preparation of its fiscal 1998 financial statements, the
Company has made several valuation estimates. Such estimates could be impacted
by changes in facts and circumstances in the near term. Such changes, if they
occur, could have a significant effect on the Company's financial position and
results of operations. The net amounts recorded related to these estimates are
summarized as follows:
o An approximate $550,000 receivable from a Yugoslavian financial institution
related to the Company selling its creditor position with a bankrupt company.
This amount is included in financial institution receivable in the
accompanying balance sheet.
o An approximate $1.4 million investment in the shares of UCP AOOT (See Note
12), a Russian chemical company. This amount is included in securities owned
- corporate equities in the accompanying balance sheet.
o An approximate $724,000 receivable related to a repurchase agreement and the
related shares of Vodni Stavby, a.s. This amount is included in other
receivables in the accompanying balance sheet.
NOTE 20. SUBSEQUENT EVENTS
In February 1999, the Company's Austrian subsidiary WMP Bank AG, purchased
a forty-nine (49 percent) percent equity interest in Stratego Invest a.s.
Prague, a Czech securities and investment firm. The purchase price was valued at
approximately $2.9 million USD at the then current exchange rates. The book
value of Stratego Invest at the time of purchase was approximately 190 million
Czech koruna, or approximately $6.1 million USD at the then current exchange
rates.
Stratego Invest is one of the leading Czech securities and investment
firms. The current management of Stratego Invest has a proven record of
profitability and they have well positioned the firm in order to expand into the
international securities marketplace. The partnership with Stratego Invest will
give the Company a strong partner in the Czech marketplace, and at the same
time, will provide Stratego Invest access to the international marketplace
through the Company's operations in Europe and the US.
In April 1999, Eastbrokers signed a joint venture agreement with
CyberRealm, Inc., a website development firm, to jointly own and develop
EBonlineinc.com, a newly established subsidiary. EBonlineinc.com is owned
seventy percent by Eastbrokers and thirty percent by CyberRealm, Inc. Under the
terms of the joint venture agreement, Eastbrokers will provide $300,000 in
initial funding and CyberRealm will provide $200,000 in developmental costs.
EBonlineinc.com is an internet based service (www.Ebonline.com) that will
allow domestic and internationally based companies to post their businesses,
match with buyers and sellers and have access to the investment banking and
securities network of the Company. Eastbrokers believes that EBonlineinc.com
will have potentially three revenue streams: monthly membership fees, consulting
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
NOTE 20. SUBSEQUENT EVENTS (CONTINUED)
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.
In May 1999, the Company issued 5 percent Convertible Debentures due 2002
(the "5 percent Debentures") in an aggregate principal amount of $2,000,000.
Holders of the 5 percent Debentures have the right to convert their 5 percent
Notes into shares of Common Stock at the lesser of $5.50 per share or 90% of the
average of the three lowest closing bid prices for the 20 trading days ending
five days before the date of delivery of the notice of conversion. A portion of
the proceeds of the Debentures will be used to expand our operations.
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<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has changed its accountants from Deloitte & Touche LLP to
Spicer, Jeffries & Co. This change was reported in the Company's Current Reports
on Form 8-K dated February 17, 1998 and March 15, 1999. The decision to change
was approved by the Board of Directors. The Company did not have any
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.
In 1997, the Company 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 Company's financial statements for the fiscal year ended March
31, 1997, the transition period ended March 31, 1996 and the fiscal year ended
December 31, 1995 contained no adverse opinion or disclaimer of opinion and were
not modified as to uncertainty, audit scope or accounting principles. The
Company has had no disagreements with Pannell Kerr Forster PC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of Pannell Kerr
Forster PC, would have caused it to make reference thereto in their report on
the financial statements.
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<PAGE>
PART III
DIRECTORS AND EXECUTIVE OFFICERS
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 59 Director
Jay R. Schifferli 39 Director
Michael Sumichrast, Ph.D. 78 Director
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 2002. 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
Eastbrokers, 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, Chairman of
EBonline.com, Inc. and Eastbrokers North America, Inc., two subsidiaries of
Eastbrokers.
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 Internal 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
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.
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<PAGE>
DR. LAWRENCE CHIMERINE, 59, Director of the Company since February 1999,
is a Managing Director and Chief Economist at the Economic Strategy Institute, a
position he has held since 1993. Since 1991, he also has served as President of
Radnor International Consulting, Inc., an international consulting firm. Dr.
Chimerine is also a director of Bank United Corp. and Bank United, Outsource
International, Inc. and Sanchez Computer Associates, Inc.
MICHAEL SUMICHRAST, Ph.D., 78, Director of Eastbrokers since 1993, was
Chairman of the Board of Eastbrokers since its inception in 1993 until March
1997. From 1990 to 1994, Dr. Sumichrast served as Chairman of the Board of
Sumichrast Publications, Inc., a real estate publication located in Rockville,
Maryland. During this time, he also served as an economic adviser and
representative of various international American companies. From 1963 to 1990,
Dr. Sumichrast was the senior vice president and chief economist of the National
Association of Home Builders (NAHB), a home builders' professional association.
JAY R. SCHIFFERLI, 39, Director of Eastbrokers since January 1, 1999, is a
Partner at the law firm of Kelley Drye & Warren LLP, an international law firm
with offices in the United States, Europe and Asia. Mr. Schifferli joined Kelley
Drye & Warren LLP in 1986, and concentrates his practice in securities and
corporate law. Kelley Drye & Warren LLP is counsel to the Eastbrokers Group.
COMPENSATION OF DIRECTORS
DIRECTOR COMPENSATION. In April 1999, the Board adopted a company policy
that eliminated all cash payments for services on the Board and attendance at
Board meetings. Instead, each non-officer director of Eastbrokers will be
awarded 7,500 shares of restricted stock at the time they join the Board and an
annual award of 5,000 options pursuant to Eastbrokers' 1996 Stock Option Plan,
as amended. Provisions of the Plan are described under "Executive Officer
Compensation--1996 Stock Option Plan." The restricted stock and options were
granted to each of Dr. Chimerine, Dr. Sumichrast and Mr. Schifferli at the time
the policy was adopted in April 1999.
During the fiscal year ended March 31, 1999, no fees were paid. All
current directors waived such fees for the fiscal year ended March 31, 1999.
B. COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act requires Eastbrokers' officers and
directors, and persons who own more than 10 percent of a registered class of
Eastbrokers' equity securities, to file reports of ownership of equity
securities of Eastbrokers with the SEC. Officers, directors and greater-than-ten
percent shareholders are required by SEC regulation to furnish Eastbrokers with
copies of all Section 16(a) forms that they file.
Based solely on a review of the copies of Forms 3, 4 and 5 and amendments
thereto furnished to Eastbrokers, or written representations from certain
reporting persons that such persons have filed on a timely basis all reports
required by Section 16(a), and without researching or making any inquiry
regarding delinquent Section 16(a) filings, Eastbrokers believes that, during
the fiscal year ended March 31, 1999, its directors and officers and holders of
more than 10 percent 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.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<PAGE>
<TABLE>
<CAPTION>
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 C0MPENSATION AWARDS($) OPTIONS/SARS(#) PAYOUTS COMPENSATION
- --------------------------- ---- ------ ----- ------------ ---------------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Martin A. Sumichrast(1) 1999 $175,000 $ -- -- -- 75,000 -- --
Chairman, President 1998 $120,000 $20,000 -- -- -- -- --
and Chief Executive 1997 $120,000 $11,000 -- -- -- -- --
Officer
Kevin D. McNeil(2) 1999 $ 75,000 $25,000 -- -- 50,000 -- --
Chief Financial Officer, 1998 $ 57,500 $17,250 -- -- -- -- --
Executive Vice President 1997 -- -- -- -- -- -- --
President of Finance,
Treasurer, and
Secretary
Peter Schmid(3) 1999 -- -- -- -- -- -- --
Former Chairman, 1998 $138,305 $30,000 -- -- -- -- --
President and Chief 1997 $129,988 -- -- -- -- -- --
Executive Officer
</TABLE>
- ------------------
(1) Martin A. Sumichrast became Chairman of the Board, President and Chief
Executive Officer of Eastbrokers in December 1998, and was Vice Chairman
of the Board since March 1997. Prior to that, he was Executive Vice
President and Chief Financial Officer.
(2) Kevin D. McNeil became Executive Vice President and Secretary of
Eastbrokers in December 1998. Prior to that, he was Chief Financial
Officer and Treasurer.
(3) Mr. Schmid was the Chairman of the Board and Chief Executive Officer from
March 1997 through December 15, 1998 and President of Eastbrokers from
August 1996 through December 1998.
EMPLOYMENT AGREEMENTS
Effective January 1995, Eastbrokers entered into an employment agreement
with Mr. Martin A. Sumichrast. Effective as of December 31, 1998, Mr. Sumichrast
entered into a new Employment Agreement which will expire in December 2004, and
will renew for a period of five years following the expiration date, unless
contrary notice is given by either party. Eastbrokers also entered into an
Employment Agreement, effective as of December 31, 1998 with Kevin D. McNeil,
which agreement will expire in December 2002, unless contrary notice is given by
either party. The annual salaries for Martin A. Sumichrast and Mr. McNeil have
been initially fixed at $240,000 and $120,000, respectively, with such
subsequent increases in salary during the term of the agreements as may be
determined by the Board of Directors. Messrs. Martin A. Sumichrast and McNeil
are each eligible to receive a quarterly performance bonus of up to 1 percent
and 1/4 percent of 1 percent, respectively, of total revenue of Eastbrokers in
excess of $6,000,000 per quarter. Mr. Sumichrast and Mr. McNeil have forgiven
any bonuses owed to them through the period ending March 31, 1999. As an
inducement for entering into each of their respective agreements, Eastbrokers
has agreed to sell 200,000 shares and 50,000 shares at $3.50 and $3.00 per share
of Common 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
-72-
<PAGE>
Agent Common Stock Warrants and 32,583 Placement Agent Common Stock 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. 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 $4.00 per share.
OPTION/SAR EXERCISES
There were no exercises of options during the fiscal year ended March 31,
1997. Options for 7,750 shares of Common Stock were exercised during the fiscal
year ended March 31, 1998.
-73-
<PAGE>
FISCAL YEAR-END OPTION/SAR VALUES
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs at Options/SARs at
Shares Value FY-End (#) FY-End($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------
Martin A. Sumichrast 0 - 0/75,000 -
Kevin D. McNeil 0 - 0/50,000 -
1996 STOCK OPTION PLAN
At the Annual Meeting held on December 10, 1996, the stockholders approved
the 1996 Stock Option Plan (the "Plan") pursuant to which officers, employees,
directors and consultants of the Company and its Affiliates are eligible to be
granted Awards. The Plan is administered by the Stock Award Committee, or, in
the absence of such a committee by the entire Board, which has the plenary
authority to grant Awards including Stock Options, Stock Appreciation Rights,
Restricted Stock, or any combination of the foregoing, and to determine the
terms and conditions of the Awards.
The total number of shares of Common Stock reserved and available for
distribution as Awards under the Plan was 400,000. In October 1997, the Plan was
initially amended to provide an additional 200,000 shares available for
distribution. In 1999, the Plan was amended to provide an additional 250,000
shares for distribution. Currently, the total number of shares of Common Stock
available under the Plan is 850,000.
In the fiscal year ended March 31, 1997, an aggregate of 25,000 shares of
Common Stock and options to purchase 35,000 shares were awarded pursuant to the
Plan.
During the fiscal year ended March 31, 1997, an additional 12,000 shares
of Common Stock were issued outside of the Plan as compensation for services to
the Company. During the fiscal year ended March 31, 1998, an additional 10,000
shares were issued outside of the Plan as compensation for services to the
Company.
During the year ended March 31, 1999, 220,000 options to purchase shares
of Common Stock were granted under this plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Eastbrokers' Common
Stock owned as of June 25, 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.
-74-
<PAGE>
Percentage
Position with Number of of
Name and Address (1) Eastbrokers Shares Shares
------------------------ ------------------------- --------------- -----------
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 Director 12,500 *
(5)
Jay R. Schifferli (5) Director 12,500 *
Michael Sumichrast, Director 12,500 *
Ph.D. (5)
Peter Schmid (former
Chairman of the Board,
President and Chief
Executive Officer) 27,775 *
General Partners AG (6) 2,187,920 37.83
All Officers and
Directors as a Group
(6 persons) 2,957,998 47.24
- ----------------------
* Less than 1 percent
(1) Except as otherwise noted, c/o Eastbrokers International Incorporated,
15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850.
75
<PAGE>
(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.
(3) Includes 57,583 shares issuable upon exercise of Placement Agent Warrants
to acquire Common Stock at $7.00 per share.
(4) 1,587,920 shares are owned indirectly through General Partners Beteiligungs
AG, formerly KHS Beteiligungs AG ("General Partners" or "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.
(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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with Mr. Randall F. Greene's resignation from the Board of
Directors of Eastbrokers, Eastbrokers entered into a six month consulting
agreement dated March 27, 1997 pursuant to which Mr. Greene was paid $24,000 and
granted options to purchase 7,750 shares of Eastbrokers' Common Stock at $6.50
per share. A related letter agreement was entered into with Mr. Green on March
27, 1997, as amended by a letter dated April 29, 1997. Under the related letter
agreement, Mr. Greene was paid $13,750 and granted 12,500 shares of Eastbrokers'
Common Stock in full satisfaction for consulting services rendered during the
period August 1, 1996 through March 31, 1997. Also pursuant to this agreement,
Eastbrokers agreed to indemnify Mr. Greene against certain liabilities, the
parties exchanged mutual releases and Mr. Greene agreed to sell his shares of
Eastbrokers' Common Stock to the Company's primary market maker subject to
certain conditions.
Eastbrokers entered into a one year consulting agreement dated March 31,
1997 with Dr. Sumichrast, a Director of Eastbrokers, pursuant to which Dr.
Sumichrast was granted 20,000 shares of Eastbrokers' Common Stock to vest
ratably over the term of the agreement. Dr. Sumichrast provided services to
Eastbrokers during the period April 1, 1997 through September 30, 1997 and
received 10,000 shares at an average price of $6.598 per share as compensation
for these services.
In December 1996, Eastbrokers Vienna loaned Dr. Muller-Tyl approximately
$72,000 USD. Interest on the outstanding balance of this obligation is computed
76
<PAGE>
at 8 percent per annum until paid in full. Dr. Muller-Tyl was the Chief
Operating Officer of Eastbrokers until his resignation in January 1998.
Eastbrokers leases office space from General Partners Immobilenz
("GPI")(formerly Residenz Realbesitz AG ("Residenz")) for its Vienna operations
pursuant to a month-to-month lease. Under the terms of the leases, the Company
incurred occupancy costs of approximately 1,200,000 Austrian Schillings
(approximately $95,000 USD) in the fiscal years ended March 31, 1998 and 1999.
The terms of this lease were negotiated such that Eastbrokers is subject to
occupancy expenses no greater than the current market rates. GPI is a subsidiary
of General Partners, an Austrian holding company and the beneficial owner of
2,187,920 shares of Common Stock. Mr. Kossner, a Director of Eastbrokers and an
officer of Eastbrokers from August, 1996 until November, 1996, owns
approximately 30 percent of the outstanding shares of General Partners. He is a
member of General Partners' Supervisory Board, WMP's Supervisory Board, the
Eastbrokers AG Supervisory Board, and is a Director of Eastbrokers.
At December 31,1998, Eastbrokers has a receivable related to securities
transactions from Mr. Kossner in the amount of 1,132,776 Austrian Schillings
(approximately $97,000 USD).
At December 31, 1998, Eastbrokers has a receivable related to share
transactions from Z.E. Beteiligungs AG ("ZE") in the amount of 7,745,600
Austrian Schillings (approximately $661,000 USD). ZE is a subsidiary of General
Partners.
WMP is an Austrian broker-dealer, market maker, and member of the Vienna
Stock Exchange. WMP's common stock is publicly traded on the Main Market of the
Vienna Stock Exchange. From time to time, WMP will make a market in stock of
companies that have a direct relationship to Eastbrokers through its Directors
or Shareholders. For the year ended March 31, 1999, Eastbrokers generated
profits of approximately $1,190,000 USD related to the trading of shares of
these companies.
In October 1997, WMP sold its interest in WMP Vermogensverwaltungs GmbH
("WMP GmbH"), primarily an inactive subsidiary to COR Industrieberatung GmbH,
for 2.5 million Austrian Schillings (approximately $200,000 USD). The sales
price approximated the cost basis of WMP GmbH at the date of disposition.
In December 1997, Eastbrokers Vienna sold its 51 percent interest in
Su(beta)warenindustrie Beteiligungs GmbH ("SWIB") to Mr. Schmid for 13 million
Austrian Schillings (approximately $1,025,000 USD). Eastbrokers acquired its
ownership interest in SWIB in mid-1997 for 510,000 Austrian Schillings
(approximately $40,000 USD). At the time of acquisition, the principal asset of
SWIB was an investment in a company which was entering bankruptcy proceedings
and there was considerable uncertainty regarding the future realizable value of
this asset. By December 1997, bankruptcy proceedings had progressed to a point
where an estimate could be made on the net realizable value of this asset. Based
on the information available at that time, SWIB's value at the date of
disposition was determined by the Board of Directors to be in the range of 12
million to 14 million Austrian Schillings (approximately $950,000 to $1,100,000
USD). The sale of SWIB resulted in a gain of approximately $1.0 million USD and
is included in the accompanying consolidated statement of operations.
As of December 31, 1998, ZE, a 26.27 percent owned subsidiary of General
Partners, owned approximately 25 percent of UCP Beteiligungs AG ("UCP AG"), an
Austrian holding company. UCP AG, in turn, owns 27.7 percent of a Russian
chemical company, UCP AOOT. Shares of UCP AOOT are listed over-the-counter on
the Vienna Stock Exchange. WMP is a market maker in the shares of UCP AOOT on
the Vienna Stock Exchange.
77
<PAGE>
Upon acquiring Eastbrokers Beteiligungs AG on August 1, 1996, Eastbrokers
assumed a receivable in the amount of 7,387,697 ATS (approximately $704,000 USD,
at the then current exchange rates) from Mr. Schmid. As of December 31, 1997,
the receivable increased due to cash advances to 8,046,177 ATS (approximately
$635,000 USD, at the then current exchange rates). These cash advances included
the U.S. Dollar denominated amount fluctuates based on the foreign currency
exchange rate. On May 31, 1998, Mr. Schmid entered into a Non-Negotiable Term
Note in the amount of 8,046,177 Austrian Schillings. This amount is reported in
the Receivable from executive officer in the consolidated statement of financial
condition. This Note bears interest at 8 percent per annum and matures May 31,
2000. It was collateralized by 150,000 shares of Eastbrokers' Common Stock. On
October 8, 1998, Mr. Schmid repaid 6,748,111 Austrian Schillings of the total
amount due. As of March 31, 1999, Mr. Schmid did not owe any remaining balance
under these arrangements.
Periodically, Eastbrokers engages in securities transactions with URBI
S.A. ("URBI"), a Spanish investment company. Mr. Kossner was a member of URBI's
Supervisory Board from November 1996 through June 1998 and Mr. Schmid was a
member until May 1997. All transactions between URBI and Eastbrokers were
consummated at the then current market prices. At December 31, 1997, the amount
due from URBI was 7,023,576 Austrian Schillings or approximately $555,000,
arising exclusively from various securities transactions. This amount is
reported in the Receivable from affiliated companies in the consolidated
statement of financial condition. Prior to June 30, 1998, URBI had repaid all
amounts due with respect to the transactions open at December 31, 1997. As of
December 31, 1998, Eastbrokers had a receivable from URBI in the amount of
2,780,030 Austrian Schillings or approximately $236,000 related to transactions
occurring subsequent to December 31, 1997. In addition, Eastbrokers entered into
a repurchase agreement with URBI in June 1997. This repurchase agreement and the
related shares of Vodni Stavby a.s., a Czech construction company, were sold to
a non-affiliated Czech Republic company in October 1997.
During October 1997, WMP entered into a stock loan transaction with VCH in
the amount of 4,065,000 Austrian Schillings (approximately $325,000). In August,
1998, VCH repaid Eastbrokers in full for this stock loan transaction. WMP
periodically engages in stock loan transactions as a portion of its normal
business operations.
In December 1997, WMP purchased 7,200,000 ATS (approximately $576,000) of
8 percent bonds due April 1, 2000 of ZE. This amount is reported in the
Securities owned at value, corporate equities in the consolidated statement of
financial condition. The ZE bonds earn a comparatively higher interest rates
(350 basis point above comparable Austrian governmental rates).
Eastbrokers conducts various business transactions with General Partners
throughout the year. As of December 31, 1998, the Company was owed $3,787,339
relating to these transactions.
As of December 31, 1997, Eastbrokers had a receivable from C.R.F. a.s., a
Slovak privatization company, related to a stock sale transaction and consulting
fees. The total amount due from these transactions was 7,078,500 Austrian
Schillings (approximately $559,000). This amount is reported in the Receivable
from affiliated companies in the consolidated statement of financial condition.
Mr. Schmid was the Chairman of the Board of C.R.F. a.s. from November 1995
through October 1997.
In September 1997, Martin A. Sumichrast acquired 50,000 shares of Common
Stock at a price of $6.00 per share in exchange for a note payable in the amount
of $300,000 to the Company. This amount is recorded in the Note
receivable-common stock in the consolidated statement of financial condition.
This note bears interest at 8 percent per annum and is due September 15, 1999.
This note was paid in full, with accrued interest in February 1999.
On December 23, 1998, the Board of Directors of the Company granted stock
options to Martin A. Sumichrast, Wolfgang Kossner and Kevin D. McNeil. Pursuant
78
<PAGE>
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 percent of 1 percent of
total revenue of the Company in excess of $6,000,000 per quarter, respectively.
Mr. Sumichrast and Mr. McNeil have forgiven any bonuses owed to them through the
period ending March 31, 1999. See "Executive Officer Compensation--Employment
Agreements."
On January 1, 1999, Martin A. Sumichrast and Kevin D. McNeil purchased
70,000 Class C Warrants and 32,583 Class C Warrants from Eastbrokers N.A.,
respectively, in each case for an amount equal to $0.25 per warrant. Each
warrant will entitle Mr. Sumichrast and Mr. McNeil, each, to purchase one (1)
share of the Company's common stock at a price of $7.00 per share. Payment for
the warrants will be in the form of unsecured promissory notes, with one-year
terms and interest accruing at 8 percent. Eastbrokers sold 200,000 shares at
$3.50 per share and 50,000 shares at $3.00 per share of common stock to Mr.
Martin A. Sumichrast and Mr. McNeil, respectively, in exchange for each of
Messrs. Sumichrast and McNeil issuing to the Company a promissory note in the
amount of $700,000 and $150,000, respectively.
Effective January 1, 1999, Wolfgang Kossner, Vice Chairman of the Board,
entered into a one-year Consulting Agreement with Eastbrokers. Mr. Kossner will
receive compensation for his services as a consultant to Eastbrokers of 200,000
Class C Warrants, payable in equal installments on March 31, 1999, June 30,
1999, September 30, 1999 and December 31, 1999. The value of the Class C
Warrants will be determined for compensation purposes using the Black 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
from Eastbrokers legal fees in the amount of $345,311.64 during the fiscal year
ended March 31, 1999. As of the date of this Prospectus, Mr. Schifferli has
received 7,500 shares of restricted Common Stock and 5,000 options to acquire
shares of Common Stock at $5.00 per share as non-employee director compensation.
EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
1. See Index to Exhibits on pages 81-82.
B. REPORTS ON FORM 8-K
1. Current Report on Form 8-K filed on February 22, 1999, as amended on
March 9, 1999.
2. Current Report on Form 8-K filed on March 16, 1999.
79
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this amendment to this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EASTBROKERS INTERNATIONAL INCORPORATED
(Registrant)
By /s/ Martin A. Sumichrast July 2, 1999
---------------------------------------------- ---------------------
Martin A. Sumichrast Date
Chairman, President, Chief Executive
Officer, and Director
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Martin A. Sumichrast July 2, 1999
---------------------------------------------- ---------------------
Martin A. Sumichrast Date
Chairman, President, Chief Executive
Officer, and Director
/s/ Kevin D. McNeil July 2, 1999
---------------------------------------------- ---------------------
Kevin D. McNeil Date
Executive Vice President, Treasurer,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ Michael Sumichrast July 2, 1999
---------------------------------------------- ---------------------
Michael Sumichrast, PhD Date
Director
/s/ Wolfgang Kossner July 2, 1999
---------------------------------------------- ---------------------
Wolfgang Kossner Date
Director
---------------------------------------------- ---------------------
Lawrence Chimerine, PhD Date
Director
/s/ Jay R. Schifferli July 2, 1999
---------------------------------------------- ---------------------
Jay R. Schifferli Date
Director
80
<PAGE>
EXHIBIT D
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------
Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
-----------------------
DELAWARE 52-1807562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6000 Fairview Road, Suite 1410, Charlotte, North Carolina 28210
(Address of principal executive offices) (Zip Code)
(704) 643-8220
(Registrant's telephone number, including area code)
-----------------------
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Transitional Small Business Disclosure Format: Yes [ ] No [x]
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on November 10, 1999, was 5,206,750.
===============================================================================
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Historical Financial Statements
Consolidated Statement of Financial Condition .................. 2
Consolidated Statements of Operations
Quarterly and Six Month Periods
Ended September 30, 1999 and 1998 ........................... 3
Consolidated Statements of Comprehensive Income
Quarterly and Six Month Periods
Ended September 30, 1999 and 1998 ........................... 4
Consolidated Statements of Cash Flows
Quarterly and Six Month Periods
Ended September 30, 1999 and 1998 ........................... 5
Notes to Consolidated Financial Statements ..................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 14
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 23
Signature ............................................................. 24
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
September 30,
----------------
1999
----------------
(Unaudited)
<S> <C>
ASSETS
Cash and cash equivalents $ 2,162,767
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 52,231
Securities borrowed 2,404,330
Receivables
Customers 2,464,777
Broker dealers 1,239,523
Affiliated companies 5,071,130
Other 4,788,028
Securities owned, at value
Corporate equities 17,993,026
Other sovereign government obligations 1,854,561
Furniture and equipment, at cost (net of accumulated
depreciation and amortization of $1,378,383) 2,343,511
Deferred taxes 4,567,368
Investments in affiliated companies 2,902,032
Goodwill 2,167,329
Other assets and deferred amounts 1,227,746
-----------------
Total Assets $ 51,238,359
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 12,074,914
Advances from affiliated companies 967,514
Payables
Customers 1,104,979
Broker dealers and other 2,624,079
Securities sold under agreements to repurchase 2,577,249
Securities sold, not yet purchased, at value 969,896
Accounts payable and accrued expenses 1,196,022
Other liabilities and deferred amounts 1,703,890
-----------------
23,218,543
Long-term borrowings 3,845,397
-----------------
Total liabilities 27,063,940
-----------------
Minority interest in consolidated subsidiaries 7,257,150
-----------------
Shareholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding at September 30, 1999 -
Common stock; $.05 par value; 10,000,000 shares authorized;
5,206,750 shares issued and outstanding at September 30, 1999 260,338
Paid-in capital 29,716,012
Accumulated deficit (9,365,995)
Note receivable - common stock and warrants (922,854)
Accumulated other comprehensive income (2,770,232)
-----------------
Total shareholders' equity 16,917,269
-----------------
Total Liabilities and Shareholders' Equity $ 51,238,359
=================
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Quarterly Period For the Six Months
Ended September 30, Ended September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Commissions $ 4,281,616 $ 2,864,300 $ 10,300,319 $ 4,611,417
Fees 1,255,366 494,720 2,389,074 703,340
Interest and dividends 87,423 213,524 144,324 402,206
Principal transactions, net
Trading (594,547) 1,011,470 1,491,767 2,389,599
Investment 1,711,570 (345,002) 1,734,074 143,363
Gain on sale of interest in subsidiary - 1,312,057 - 1,312,057
Other 971,680 656,136 1,926,257 783,015
Equity in earnings of unconsolidated affiliates (3,495) - 80,723 -
---------------- ---------------- ---------------- ----------------
Total revenues 7,709,613 6,207,205 18,066,538 10,344,997
---------------- ---------------- ---------------- ----------------
Costs and expenses
Compensation and benefits 4,456,339 3,701,651 10,915,163 6,363,848
Brokerage, clearing, exchange fees and other 468,118 1,573,313 1,168,955 1,240,339
Occupancy 525,667 461,678 1,160,714 803,572
Communications 502,507 548,123 965,435 776,710
Office supplies and expenses 154,892 303,996 314,870 674,974
Interest 414,547 28,658 637,946 104,262
Professional fees 269,756 521,861 462,890 621,391
Consulting fees 236,353 344,645 361,854 610,161
Travel 47,700 214,724 150,840 342,416
General and administrative 336,737 574,292 686,964 844,785
Depreciation and amortization 120,830 84,000 238,243 189,038
---------------- ---------------- ---------------- ----------------
Total costs and expenses 7,533,446 8,356,941 17,063,874 12,571,496
---------------- ---------------- ---------------- ----------------
Income (loss) before provision for income taxes
and minority interest in earnings of subsidiaries 176,167 (2,149,736) 1,002,664 (2,226,499)
Provision for income taxes 162,307 (610,356) (116,150) (665,433)
Minority interest in earnings of subsidiaries (3,020) (94,563) (94,226) (172,980)
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 335,454 $ (2,854,655) $ 792,288 $ (3,064,912)
================ ================ ================ ================
Weighted average number of common
shares outstanding 5,206,750 4,476,737 5,206,750 4,476,737
================ ================ ================ ================
Basic and diluted earnings per share $ 0.064 $ (0.638) $ 0.152 $ (0.685)
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
For the Quarterly Period For the Six Months
Ended September 30, Ended September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 335,454 $ (2,854,655) $ 792,288 $ (3,064,912)
Other comprehensive income (loss)
Foreign currency translation adjustments (461,417) 308,488 (1,560,070) (63,662)
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) $ (125,963) $ (2,546,167) $ (767,782) $ (3,128,574)
================ ================ ================ ================
</TABLE>
- 4 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
------------------------------------
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 792,288 $ (3,064,912)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 94,226 172,980
Depreciation and amortization 238,243 189,038
Deferred taxes 116,150 535,883
Gain on sale of interest in subsidiary - (1,312,057)
Equity in earnings (loss) of unconsolidated affiliates (80,723) -
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies - 891,070
Securities borrowed (750,588) (7,486)
Receivables
Customers 1,675,239 3,797,680
Brokers, dealers and others 1,117,442 (4,442,609)
Affiliated companies (2,967,201) (3,279,150)
Other 4,746,737 (4,482,168)
Securities owned, at value (6,306,031) (2,518,351)
Other assets 2,279,417 (107)
Payables
Customers (1,579,364) 2,459,048
Brokers, dealers and others (208,949) (3,095,213)
Accounts payable and accrued expenses (280,564) 1,599,890
----------------- ----------------
Net cash provided by (used in) operating activities (1,113,678) (12,556,464)
----------------- ----------------
Cash flows from investing activities
Net proceeds from (payments for)
Investments in affiliates (2,902,032) -
Sale of interest in subsidiary - 1,180,500
Investments held for resale - 692,504
Purchases of furniture and equipment (471,561) -
----------------- ----------------
Net cash provided by (used in) investing activities (3,373,593) 1,873,004
----------------- ----------------
Cash flows from financing activities
Net proceeds from (payments for)
Securities loaned 943,427 1,126,461
Short-term financings 9,462,856 (1,027,594)
Short-term borrowings from affiliated companies (3,732,307) 1,565,154
Other long-term debt (362,083) 7,045,770
----------------- ----------------
Net cash provided by (used in) financing activities 6,311,893 8,709,791
----------------- ----------------
Foreign currency translation adjustment (1,876,560) (163,951)
----------------- ----------------
Increase (decrease) in cash and cash equivalents (51,938) (2,137,620)
Cash and cash equivalents, beginning of period 2,214,705 7,156,702
----------------- ----------------
Cash and cash equivalents, end of period $ 2,162,767 $ 5,019,082
================= ================
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
------------------------------------
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
================= ================
Cash paid for interest $ 637,946 $ 104,262
================= ================
Non-cash transactions
Eastbrokers International shares issued as part of
EBI Securities Corporation acquisition $ - $ 2,350,000
================= ================
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated and its
U.S. and international subsidiaries (collectively, "Eastbrokers" or the
"Company") for the quarterly and six month period ended September 30, 1999
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 for the year ended March 31, 1999
include accounting policies and additional information pertinent to an
understanding of these interim financial statements.
For the quarterly and six month period ended September 30, 1999, 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 June 30, 1999, of EBI Securities Corporation ("EBI
Securities") (formerly Cohig & Associates) and the Company for the
quarterly period ended September 30, 1999.
For the quarterly period ended September 30, 1998, the accompanying
consolidated financial statements include the financial position, results
of operations, comprehensive income, and cash flows of Eastbrokers AG for
the quarterly period ended June 30, 1998, of EBI Securities from the date
of acquisition (May 14, 1998) through September 30, 1998, and the Company
for the quarterly period ended September 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated and its U.S. and international subsidiaries.
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 for the year ended March 31, 1999.
- 7 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
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 is March 31.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede
the Company's closing date by three months.
FINANCIAL INSTRUMENTS
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.
- 8 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities. These
receivables are due on demand.
UNDERWRITINGS
Underwritings include gains, losses, and fees, net of syndicate expenses
arising from securities offerings in which the Company acts as an
underwriter or agent. Underwriting fees are recorded at the time the
underwriting is completed and the income is reasonably determinable. The
Company reflects this income in its investment banking revenue.
FEES
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered
into by the Company. The Company reflects this income in its investment
banking revenue.
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade date
basis as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations in foreign currencies are translated
at year-end rates of exchange, and the income statements are translated at
weighted average rates of exchange for the year. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," gains or losses resulting from translating foreign
currency financial statements, net of hedge gains or losses and their
related tax effects, are reflected in cumulative translation adjustments, a
separate component of stockholders' equity. Gains or losses resulting from
foreign currency transactions are included in net income.
FURNITURE, AND EQUIPMENT
Furniture and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets
ranging from three to ten years.
COMMON STOCK DATA
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.
- 9 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. 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.
- 10 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
3. ACQUISITION OF EBI SECURITIES CORPORATION (CONTINUED)
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 190
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 100 securities which include its
investment banking clients and those securities that its research
department has identified as promising, small to middle-market, potentially
high growth companies. 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.
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.
In March 1999, Eastbrokers issued 10 percent Convertible Promissory Notes
due 2003 (the "10 percent Notes") in an aggregate principal amount of
$1,350,000. Holders of the 10 percent Notes have the right to convert their
10 percent Notes into shares of Common Stock at $5.75 per share. A portion
of the proceeds of the Notes was used to redeem the 7 percent Convertible
Debentures issued in November 1998.
In May 1999, Eastbrokers issued 5 percent Convertible Debentures due 2002
(the "5 percent Debentures") in an aggregate principal amount of
$2,000,000. Holders of the 5 percent Debentures have the right to convert
their 5 percent Notes into shares of Common Stock at the lesser of $5.50
per share or 90% of the average of the three lowest closing bid prices for
the 20 trading days ending five days before the date of delivery of the
notice of conversion. A portion of the proceeds of the Debentures has been
used to expand the Company's operations.
- 11 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
4. SHORT-TERM BORROWINGS (CONTINUED)
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.
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).
6. LIQUIDATION OF INTERESTS IN SUBSIDIARIES
The Company also has liquidated its investments Eastbrokers Romania and
Eastbrokers Slovakia as of December 31, 1998. The effects are a net loss of
$776,197 on the liquidation of Eastbrokers Slovakia and a net loss on the
liquidation of Eastbrokers Romania of $158,247 for a total loss on
liquidations of $934,444.
7. 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.
8. 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. As noted in the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1999, 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.
- 12 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
9. PROPOSED ACQUISITIONS
In July 1999, the Company announced that it has signed a letter of intent
to purchase a majority interest in Sutton Online, LLC
(http://www.suttononline.com) , an online trading firm that offers
individual investors, money managers and hedge funds, trade executions,
level II software & data, internet service and training for online
investors. Sutton Online also provides brokerage firms the necessary tools
to offer financial products via the internet. The transaction is
contingent, among other things, satisfactory completion of all due
diligence, the approval by both Board of Directors, and the execution of a
definitive purchase agreement. It is anticipated that this transaction will
be completed during the quarterly period ending December 31, 1999.
Also in July 1999, the Company announced that it has signed a letter of
intent to purchase the JB Sutton Group, LLC, a New York based brokerage and
investment banking firm. The transaction is contingent on, among other
things, satisfactory completion of all due diligence, the approval by both
Boards of Directors, the execution of definitive purchase and escrow
agreements and obtaining the necessary regulatory approvals. It is
anticipated that this transaction will be completed during the quarterly
period ended December 31, 1999.
- 13 -
<PAGE>
PART I -- FINANCIAL INFORMATION (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain information set forth in this report under this caption
"Management's Discussion and Analysis or Plan of Operation" includes "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. In addition, from time to time, we may publish
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended, or make oral statements that constitute forward-looking
statements. These forward-looking statements may relate to such matters as
anticipated financial performance, future revenues or earnings, business
prospects, projected ventures, new products, anticipated market performance and
similar matters. The words "budgeted", "anticipate", "project", "estimate",
"expect", "may", "believe", "potential" and other similar statements are
intended to be among the statements that are considered "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
readers that a variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include, but are not limited to: (i) transaction volume in
the securities markets, (ii) the volatility of the securities markets, (iii)
fluctuations in interest rates, (iv) changes in regulatory requirements which
could affect the cost of doing business, (v) fluctuations in currency rates,
(vi) general economic conditions, both domestic and international, (vii) changes
in the rate of inflation and related impact on securities markets, (viii)
competition from existing financial institutions and other new participants in
the securities markets, (ix) legal developments affecting the litigation
experience of the securities industry, (x) changes in federal and state tax laws
which could affect the popularity of products sold by us, (xi) significant and
rapid changes in technology which could negatively affect our internet related
projects and (xii) the risks and uncertainties set forth under the caption "Risk
Factors" which appears in Item 1 of our Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1999 (the "Report"). We undertake 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.
This Form 10-QSB for the quarterly and six month period ended September 30,
1999, makes reference to our Report. The Report includes information necessary
or useful to an understanding of our businesses and financial statement
presentations. We will furnish a copy of this Report upon request made directly
to our headquarters at 6000 Fairview Road, Suite 1410, Charlotte, North Carolina
28210, telephone number (704) 643-8220 and facsimile number (704) 643-8097.
References to "us", "our", or "we" collectively refer to Eastbrokers
International Incorporated ("Eastbrokers") and its subsidiaries.
PLAN OF OPERATION
GENERAL OVERVIEW
Prior to August, 1996, we were engaged in the purchase and sale of newly
privatized businesses in the Czech Republic. In August, 1996, we entered the
Central and Eastern European investment banking and securities business through
our acquisition of Eastbrokers Beteiligungs AG, an Austrian holding company
providing financial services in Eastern and Central Europe through its network
of subsidiaries. Our acquisition of Eastbrokers AG was intended to not only
provide an earnings stream from brokerage activities, but also position us to
provide investment banking and corporate finance services throughout Central and
Eastern Europe.
In March 1997, we expanded our brokerage operations in the United States
through the acquisition of an existing New York-based broker dealer. In May
1998, we continued the expansion of our U.S. operations through the acquisition
of Cohig & Associates ("EBI Securities"), a Denver, Colorado based investment
banking
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and brokerage firm. Currently, we operate a highly diversified investment
banking and securities network, with 20 US offices and 8 international branches
and affiliates located in the following countries: Austria; Czech Republic;
Poland; Kazakhstan; Croatia; Slovenia and Azerbaijan.
Overall, our fiscal year ended March 31, 1999, was a very challenging year.
First, we had to contend with the global financial crisis, which resulted in
collapses in the Asian and Russian markets and caused enormous turmoil
throughout the emerging markets of Central and Eastern Europe. Second, we had to
contend with the correction in the US equities market, which devastated an
already depressed small and micro-cap market. These two factors directly
accounted for 77 percent of our loss for the year ended March 31, 1999.
Despite these unprecedented market conditions, we have continued to grow
our assets under management, our commission revenue, underwriting fees and
distribution capabilities. Our first and second quarters of the current fiscal
year continued these trends. We have streamlined our operations in Europe and
under-performing assets have been sold or liquidated. We have also launched our
newly formed subsidiary, EBonlineinc.com, which merged into a publicly-traded
entity in July 1999. We remain committed to our mission of building, through
acquisitions and strategic alliances, a highly successful, global, middle
market, investment banking and securities firm.
EUROPEAN OPERATIONS
Since our acquisition of Eastbrokers AG, in August, 1996, the business
strategy for our European operations was to utilize our emerging market
expertise in the areas of merchant banking, corporate finance, privatization and
trading in order to expand throughout Central and Eastern Europe. However,
during 1998, we modified our business strategy in Europe. This was in response
to an overall economic downturn that covered much of Central and Eastern Europe.
This market downturn, which peaked during the Summer of 1998, led to sharp
decreases in stock markets worldwide, particularly in Central and Eastern
Europe. In addition to falling prices, the overall liquidity in the financial
markets throughout much of the region was significantly reduced. In order to
minimize the negative effects on our financial operations, we reduced our work
force in Austria and closed our operations in Slovakia, Romania, Turkey, Russia
and Bulgaria. In Austria, Poland, and Croatia, we made significant changes in
our management and cost structures. In the Czech Republic and Hungary, we sold
our operations. However, we continue to maintain an affiliate relationship with
the management in Hungary. We have re-entered the Czech Republic through the
purchase of a minority interest in Stratego Invest a.s. Prague. Due to increased
interest in the region, we also organized an office in Baku, Azerbaijan.
Despite the negative sentiment in emerging markets during 1998, we believe
that Central and Eastern Europe's ultimate unification into the European
Economic and Monetary Union, will lead to a significant increase in investor
interest in the region. This potential increase in the emerging market interest
will benefit those firms that have had existing operations in the region. We
intend to maintain solid long-term involvement in the region and to continue to
provide our clients with quality brokerage and investment banking services. We
also intend to expand our operations into other markets of Western Europe
through possible acquisitions, mergers, joint ventures and/or strategic
relationships.
With the acquisition of EBI Securities in May 1998, our European
subsidiaries now have direct access to the US securities marketplace. During
1999, our two main subsidiaries, EBI Securities and WMP Bank AG ("WMP Bank"),
have begun the process to cross-market to their respective retail and
institutional clientele, their research, corporate finance and trading products.
We believe that it is possible to significantly increase our overall revenue, if
we are successful in marketing US securities to Western European institutional
clientele, and vice-versa.
In September 1999, we began utilizing the online trading capabilities of
SuttonOnline through our Czech Republic subsidiary Stratego Invest. It is
anticipated that we will soon extend these online trading capabilities to our
other European subsidiaries.
While investing in the emerging markets of Central and Eastern Europe
involves risk considerations not typically associated with investing in
securities of U.S. issuers, we believe that such considerations are outweighed
by the benefits of diversification and potentially superior returns. Among the
considerations involved in investing in emerging markets, such as Central and
Eastern Europe, is that less information may be
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available about foreign companies than about domestic companies. Foreign
companies are also not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies. In addition, unlike
investing in U.S. companies, securities of non-U.S. companies are generally
denominated in foreign currencies, thereby subjecting each security to changes
in value when the underlying foreign currency strengthens or weakens against the
U.S. dollar. Currency exchange rates can also be affected unpredictably by
intervention of U.S. or foreign governments or central banks or by currency
controls or political developments in the U.S. and abroad.
The value of international fixed income products also responds to interest
rate changes in the U.S. and abroad. In general, the value of such products will
rise when interest rates fall, and fall when interest rates rise. However,
interest rates in each foreign country and the U.S. may change independently of
each other. Debt and equity securities in emerging markets such as Central and
Eastern Europe may also not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater risk than securities of
U.S companies. Investing in Central and Eastern European securities may further
result in higher expenses than investing in domestic securities because of costs
associated with converting foreign currencies to U.S. dollars and expenses
related to foreign custody procedures. Investment in Central and Eastern
European securities may also be subject to local economic or political risks,
including instability of some foreign governments, inadequate market controls,
the possibility of currency blockage or the imposition of withholding taxes on
dividend or interest payments and the potential for expropriation,
re-nationalization or confiscatory taxation and limitations on the use or
repatriation of funds or other assets.
UNITED STATES OPERATIONS
EBI SECURITIES CORPORATION
Subsequent to the acquisition of Eastbrokers AG, we commenced expansion of
our brokerage operations in the United States. Our goal was to build a strong
U.S. brokerage presence that would enable us to distribute European middle
market, corporate finance product in the U.S. and also to provide our European
operations access to U.S. corporate finance product, trading and research
capabilities. In the Spring of 1997, we purchased our first U.S. based
broker-dealer, Eastbrokers North America, Inc. Since establishing this
broker-dealer, we have been approached by numerous U.S. based broker-dealers
interested in becoming an acquisition target. We believe that continued
consolidation within the securities industry, particularly in the United States,
is inevitable. We believe that this consolidation can be attributed to the
current volatility prevailing in the world financial markets, the higher degree
of capitalization necessary to maintain sound brokerage operations and the
increased regulatory environment. We believe that our structure as a
well-capitalized, entrepreneurially managed, international, publicly-traded,
investment banking firm, has the potential to be particularly appealing to the
sellers of medium size brokerage firms. In addition, we believe that the
purchase and roll-up of complementary securities businesses both in the United
States and in Europe, can be financed by the issuance of our Common Stock.
In May 1998, we made a significant step in our roll-up strategy in the
United States. We acquired all of the outstanding common stock of Cohig &
Associates, Inc., a Denver, Colorado based investment banking and brokerage
firm. Following the acquisition, we changed the name of Cohig & Associates, Inc.
to EBI Securities Corporation. The office space previously occupied by
Eastbrokers North America, has been converted into a branch office of EBI
Securities. We believe that EBI Securities will be the first in a series of
acquisitions targeting other successful medium size investment banking and
brokerage firms.
EBI Securities operates 20 retail brokerage offices in 16 cities across the
United States. These offices include 10 company owned branches, and 10 franchise
branches employing over 200 people, of which 190 are registered representatives.
EBI Securities is registered as a broker-dealer with the SEC and is licensed in
50 states and the District of Columbia. It is also a member of the NASD and the
Securities Investor Protection Corporation ("SIPC"). Customer accounts are
insured to $25 million under the SIPC excess insurance program. EBI Securities
operates pursuant to the exemptive provisions of SEC Rule 15c3-3 (k)(2)(ii) and
clears all transactions with and for customers on a fully disclosed basis. Since
its inception Cohig/EBI has participated in the underwriting and/or
co-underwriting of over $400 million in initial and secondary equity and debt
offerings for over 30 public U.S. companies.
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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 us 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".
EBI Securities has primarily operated as a retail brokerage firm focusing
on individual investors with a focus on a full service approach which has been
augmented through its corporate finance, proprietary research and trading
activities. EBI Securities provides our retail clients with a broad range of
traditional investment products and services. EBI Securities also strives to
distinguish itself with investors and corporate finance clients through a
commitment to professional but personalized service. The trading department
makes markets in approximately 100 securities which include its investment
banking clients and those securities that its research department has identified
as promising, small to middle-market, potentially high growth companies. The
investment banking departments' mission is to enhance and develop the capital
structures of small to middle market emerging growth companies through private
placements, bridge financing, and public offerings in order to enable the firm's
corporate finance clients to capitalize on promising business opportunities,
favorable market conditions, and/or late stage product development.
EBI Securities is actively realigning itself to not only generate
additional revenues through the leverage of our existing resources but also to
create a more stable and consistent revenue base. The potential result is
increased internal growth, which compliments external growth through
acquisitions. Several initiatives that EBI Securities has undertaken in this
regard are as follows:
1. Fixed Income. In December 1998, EBI Securities added a fixed income
department. This department is responsible for the generation of new fixed
income products and underwriting, trading, retail distribution and research of
government, municipal and corporate bonds. This department also provides
additional revenue generating opportunities and synergies to three of our other
departments, retail, corporate finance and equity trading. As EBI Securities
continues to expand the products and services available to our retail brokers
and their customers, this department provides additional investment
opportunities through new products, underwritings and/or independent research
ideas. Additionally, this department allows us to capture new business
opportunities that previously were outside the scope of our available services.
2. Asset Allocation. EBI Securities has developed an in-house asset
allocation program to augment the breadth of our sales force's efforts. This
program was developed utilizing industry software which, along with additional
marketing materials, has been customized for our use. This approach utilized by
this program represents an investment strategy based on the Noble Prize winning
study called "Modem Portfolio Theory" (MPT). MPT's premise is that a
personalized strategy can be created for each client whereby "optimal" risk vs.
return portfolios are generated by mixing varying amounts of different asset
classes according to their correlation to one another. Many market studies
suggest that asset allocation rather than individual investment selection
accounts for over 90 percent of a typical portfolio's returns. EBI Securities
concurs with this notion, and as a result, is educating our sales force to
effectively utilize this program. The results to date have been very favorable
and this process is also seen as an effective tool for gathering assets. With
the new communication systems we are implementing, we expect this service will
be available at the desk top level to all brokers and will also enhance the
sales forces ability to effectively utilize this asset allocation program.
3. Managed Money. Recognizing the ongoing changes in the retail brokerage
business, EBI Securities is actively entering the field of managed money and
wrap fee compensation arrangements in place of the more traditional fee per
transaction approaches. In short, the managed money approach charges the client
a flat annual percentage of the money managed rather than a fee for each
transaction. Many people believe that this approach better aligns the investment
advisor's goals with that of the client. This approach requires some additional
accounting and registration procedures, both of which have been set in motion by
the firm and its
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applicable business partners. EBI Securities intends to hire additional
salespeople with managed money experience in addition to actively re-educating
the existing sales force. In August 1999, EBI Securities received its license as
a Registered Investment Advisor (RIA) in Colorado. We are current licensed as an
RIA in three states, including New York.
4. Premier Customer Accounts. The formation of an account for the firm's
biggest customers may allow better utilization of several of the initiatives
mentioned above. In addition, this sort of account may also give a customer a
good introduction into several other parts of the business. The most obvious of
these is online trading. Others include joint ventures and cross selling
opportunities with local community banks, mortgage companies, investment sites
and others.
5. Retail Expansion. Currently, EBI Securities is focusing on filling its
existing retail space in order to improve efficiencies. EBI Securities also
believes that retail expansion through additional offices will be most effective
if it occurs in and around the corporate headquarters in Denver, Colorado. EBI
Securities believes that creating a more visible sales force around the
corporate headquarters will create a number of efficiencies on several fronts.
These locations would also be easier and less expensive to manage from a
corporate perspective. In addition, economies of scale are created in terms of
advertising and community development, which can help to enhance the EBI
Securities name and make it a more recognizable entity amongst retail clients,
corporate finance clients and additional salespeople.
EBONLINEINC.COM
In April 1999, we launched a new subsidiary, EBONLINEInc.com ("EBonline")
which was merged into a publicly traded company in July 1999. EBonline's common
shares trade in the over-the-counter market under the symbol "EBOL".
EBonline is a Web-based business consisting of a website, globally
accessible via the Internet, designed to facilitate merger, acquisition and
corporate finance activity. The site attracts businesses looking to sell, make
an acquisition, seek a merger or joint venture partner, obtain debt or equity
capital or simply gain exposure within the international investment banking
community. In addition, the site attracts accredited investors looking for
investment opportunities. It is anticipated that EBonline may provide additional
ancillary business for our broker-dealer operations. As of the date of this
filing, EBonline now has over 2,000 business listings in its database.
PROPOSED ACQUISITIONS
In July 1999, we announced that we signed a letter of intent to purchase a
majority interest in Sutton Online, LLC (http://www.suttononline.com), an online
trading firm that offers individual investors, money managers and hedge funds,
trade executions, NASDAQ level II software & data, internet service and training
for online investors. Sutton Online also provides brokerage firms the necessary
tools to offer financial products via the internet. The transaction is
contingent, among other things, satisfactory completion of all due diligence,
the approval by both Board of Directors, and the execution of a definitive
purchase agreement. It is anticipated that this transaction will be completed
during the quarterly period ending December 31, 1999.
Also in July 1999, we announced that we signed a letter of intent to
purchase the JB Sutton Group, LLC, a New York based brokerage and investment
banking firm. The transaction is contingent on, among other things, satisfactory
completion of all due diligence, the approval by both Boards of Directors, the
execution of definitive purchase and escrow agreements and obtaining the
necessary regulatory approvals. It is anticipated that this transaction will be
completed during the quarterly period ending December 31, 1999.
RESULTS OF OPERATIONS
SEE Note 1 of the Notes to Consolidated Financial Statements for the
Quarterly Period Ended September 30, 1999, for an explanation of the basis of
presentation of the financial statements.
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For the quarterly period ended September 30, 1999, we generated
consolidated revenues of $7,709,613, compared to $6,207,205, for the quarterly
period ended September 30, 1998. For the six month period ended September 30,
1999, we generated consolidated revenues of $18,066,538 compared to $10,344,997
for the six month period ended September 30, 1998. The revenue for the quarterly
and six month period ended September 30, 1999 includes the one time gain from
the sale of a portion of our interest in EBonline of $925,000. The revenue for
the quarterly and six month period ended September 30, 1998 includes the one
time gain from the sale of our interest in subsidiary of $1,312,057. After
adjusting for the effects of these one time gains, our revenues were $6,784,613
and $4,895,148 for the quarterly periods ended September 30, 1999 and 1998,
respectively and $17,141,538 and $9,419,997 for the six month periods ended
September 30, 1999 and 1998, respectively. Our total revenues for the quarterly
and six month periods ended September 30, 1999, are significantly higher than
the same period in the previous year due primarily to increases in overall
commission, and investment banking revenue. Total revenue for the quarterly and
six month periods was also affected by the prior year sales of Eastbrokers
Prague a.s. and Eastbrokers Budapest and the December 1998 liquidations of
Eastbrokers Slovakia and Eastbrokers Romania. However, increases in revenue at
EBI Securities more than compensated for the reductions in revenue from the sale
and liquidation of our European subsidiaries in the prior year. For the
quarterly and six month periods ended September 30, 1999, EBI Securities
generated approximately $5,081,000 and $13,373,000, respectively compared with
revenue of approximately $2,712,000 and $4,341,000, respectively from the same
periods of a year earlier.
We incurred total consolidated costs and expenses of $7,533,446 and
$17,063,874 for the quarterly and six month periods ended September 30, 1999
compared to $8,356,941 and $12,571,496 for the quarterly and six month periods
ended September 30, 1998. Total costs and expenses for the quarterly and six
month periods were also affected by the prior year sales of Eastbrokers Prague
a.s. and Eastbrokers Budapest and the December 1998 liquidations of Eastbrokers
Slovakia and Eastbrokers Romania. However, increases in costs and expenses at
EBI Securities were related to the increased production levels. For the
quarterly and six month periods ended September 30, 1999, EBI Securities
incurred costs and expenses of approximately $5,735,000 and $13,704,000,
respectively compared with costs and expenses of approximately $4,939,000 and
$6,630,000, respectively from the same periods of a year earlier.
We are reporting consolidated net income for the quarterly and six month
periods ending September 30, 1999 of $335,454 and $792,288, respectively
compared to consolidated net losses of ($2,854,655) and ($3,064,912) for the
quarterly and six month periods ended September 30, 1998. The net income for the
quarterly and six month periods ended September 30, 1999 includes the one time
gain from the sale of a portion of our interest in EBonline of $925,000. The
Other contributing factors to the net income in the current year are primarily
attributable to the reorganization of our European offices, the elimination of
several non-performing assets in Europe and reduction of the losses at EBI
Securities. This reduction in losses at EBI Securities can be attributed to
increased commission and investment banking revenue and better than expected
performance of the trading department.
On September 30, 1999, we had total assets of $51,238,359, and total
liabilities of $27,063,940, compared to $54,404,378, and $27,851,828,
respectively, on September 30, 1998. As of the date of this filing, we believe
that we have adequate liquidity to meet our current obligations. However, no
assurances can be made as to our ability to meet our cash requirements in
connection with any expansion of our operations or any possible business
combinations.
The cash flows for the quarterly period ended September 30,1999, reflect
the volatile nature of the securities industry and the reallocation of our
assets indicative of a growing organization. The change in the foreign currency
translation adjustment is primarily related to the fluctuations in the various
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 our overall earnings as well as the
cumulative translation adjustment. The primary currencies affecting us are the
U.S. Dollar, Austrian Schilling, Czech Koruna, and the Polish Zloty.
As a broker/dealer in securities, we will periodically acquire positions in
securities on behalf of our clients. As disclosed in the notes of the financial
statements, we have title to various financial instruments in the countries in
which we operate. Certain of these investments may be characterized as
relatively illiquid and potentially subject to rapid fluctuations in liquidity.
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ACQUISITIONS AND DISPOSITIONS
In February 1999, our Austrian subsidiary WMP Bank, 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 us a strong partner in the Czech marketplace, and at the same time, will
provide Stratego Invest access to the international marketplace through our
operations in Europe and the US.
EMPLOYEES
At September 30, 1999, we currently have approximately 350 full-time
employees and 25 part-time employees. No employees are covered by collective
bargaining agreements and we believe our relations are good with both our
employees and our independent contractors and consultants.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
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 us
beginning with the interim reporting period ended December 31, 1997. The
adoption did not impact previously reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement was
adopted by us beginning with the fiscal year ended March 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement was effective for our annual report for
the fiscal year ended March 31, 1999. In the initial year of application,
comparative information for earlier years was restated. This statement did not
have a significant impact on us.
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, 2000. At this time,
we do not believe that this statement will have a significant impact on us.
IMPACT OF THE YEAR 2000
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally (the "Year 2000" issue). The potential costs and
uncertainties associated with the Year 2000 issue will depend on a number of
factors, including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other entities
with which they electronically interact.
We are continuing a systems upgrade unrelated to the Year 2000 issue. In
conjunction with this upgrade, we have established a program to address issues
associated with the Year 2000. To ensure that our
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computer systems are Year 2000 compliant, we are continually reviewing our
systems and programs to identify those that contain two-digit year codes, and we
intend to replace them in conjunction with the systems upgrade provided by Baan
Corporate Office Solutions. In addition, we are in the process of contacting its
major external counterparties and suppliers to assess their compliance and
remediation efforts and our exposure to them.
In addressing the Year 2000 issue, we have divided our program into six
phases:
(1) the Inventory phase, involving the identification of items that
may be affected by Year 2000 compliance issues, including facilities
and related non-information technology systems (embedded technology),
computer systems, hardware, and services and products provided by
third parties;
(2) the Assessment phase, involving the evaluation of items identified
in the Inventory phase to determine which will function properly with
the change to the new century, and the prioritizing of items which
will need remediation based on their potential impact to the Company;
(3) the Remediation phase, involving the analysis of the items that
are affected by Year 2000, the identification of problem areas and the
replacement of non-compliant items;
(4) the Testing phase involving the testing of all proposed repairs,
including forward date testing which simulates dates in the Year 2000;
(5) the Implementation phase consists of placing all items that have
been remediated and successfully tested into operation; and
(6) the Integration phase, involving the testing of the Company's
business critical systems in a future time environment with external
entities.
As of November 15, 1999, we have completed the Inventory and Assessment
phases and are also conducting the procedures associated with the Remediation,
Testing and Implementation phases. The Remediation and Testing phases with
respect to business critical applications are substantially completed and
testing is continuing on an ongoing basis. We are in the Implementation phase is
also now substantially complete. The Integration phase commenced in January
1999, and will continue through 1999. In addition, we have identified our major
business relationships and many of them will be tested as soon as practicable.
We 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
November 15, 1999, we believe we have 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 issue is less advanced in the Eastern and
Central European markets in which we conduct business than in the United States.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of our computer and non-information technology systems.
Such failures could have a material adverse effect on us and may cause systems
malfunctions, incorrect or incomplete transaction processing resulting in failed
trade settlements, the inability to reconcile accounting books and records, the
inability to reconcile trading positions and balances with counterparties,
inaccurate information to manage our exposure to trading risks and disruptions
of funding requirements. In addition, even if the we successfully remediate our
Year 2000 issues, we could be materially and adversely affected by failures of
third parties to remediate their own Year 2000 issues. The failure of third
parties with which we have financial or operational relationships such as
securities exchanges, clearing organizations, depositories, regulatory agencies,
banks, clients, counterparties, vendors and utilities, to remediate their
computer and non-information technology systems issues in a timely manner could
result in a material financial risk to us.
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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
October 1, 1999, the Eastbrokers Group estimates that it has expended
approximately $800,000 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.
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<PAGE>
PART II - OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
----------- -----------------------
(27) Financial Data Schedule (Electronic Filing Only).
b. There were no reports on Form 8-K filed during the quarterly period
ended September 30, 1999.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EASTBROKERS INTERNATIONAL INCORPORATED
(Registrant)
By /s/ Kevin D. McNeil
----------------------------------------------
Kevin D. McNeil
Vice President, Treasurer, and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 15, 1999
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