SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 8-K/A
Amendment No. 1 to
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------
August 16, 1996
Date of Report (Date of Earliest Event Reported)
FINANCIAL SERVICES ACQUISITION
CORPORATION
- -----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-25056 59-3262958
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
Two World Trade Center
Suite 8400
New York, New York 10048
(Address of Principal Executive Offices) (Zip Code)
(212) 748-7000
(Registrant's Telephone Number, Including Area Code)
667 Madison Avenue
New York, New York 10021
(Former Name or Former Address, if Changed
Since Last Report)
EURO BROKERS INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Continued)
This Amendment No. 1 on Form 8-K/A ("Amendment No. 1") amends
the Current Report on Form 8-K, dated August 16, 1996 (and filed August 26,
1996), of Financial Services Acquisition Corporation ("FSAC") in order to
provide certain historical and pro forma financial information that was
previously omitted or unavailable.
Item 5. Other Events
In connection with FSAC's application to list its securities on
the Nasdaq National Market, The Nasdaq Stock Market, Inc. has requested
FSAC to prepare and publicly file a consolidated balance sheet as of a date
following FSAC's merger transaction with Euro Brokers Investment
Corporation. Accordingly, attached as Exhibit 99.1 hereto is an unaudited
consolidated balance sheet of FSAC as of August 31, 1996.
Item 7. Financial Statements
(a)(1) Financial Statements of the Business Acquired.
EURO BROKERS INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
EURO BROKERS INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, December 31, June 30,
1994 1995 1996
----------------------- ------------------ ---------------
ASSETS (unaudited)
- ------
<S> <C> <C> <C>
Cash and cash equivalents $ 21,355,273 $ 27,013,350 $ 32,939,360
Restricted cash (Note 15) 1,799,175 1,785,490 1,787,647
Deposit with clearing organization (includes cash of
$635,077 and U.S. Treasury bills of
$1,493,432 at June 30, 1996) 199,109 2,076,302 2,128,509
Commissions receivable 16,851,230 18,502,261 19,993,037
Receivable from clearing firm 2,444,484 1,592,650 2,170,072
Securities owned 967,500
Prepaid expenses and other assets 6,342,895 6,804,925 6,879,402
Receivable from broker-dealers and customers 1,100,497
Equity in affiliated companies 2,543,149 2,951,864 2,772,912
Exchange memberships 101,000 140,000 140,000
Deferred taxes 1,081,275 5,520,348 5,040,513
Furniture, equipment and leasehold improvements 15,392,656 13,264,743 12,515,931
Intangible assets 2,836,786 2,426,809 2,221,806
------------ ------------ ------------
Total assets $ 71,914,532 $ 82,078,742 $ 89,689,686
============= ============= =============
December 31, December 31, June 30,
1994 1995 1996
----------------------- ------------------ ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Liabilities:
Accounts payable and accrued liabilities $ 16,169,212 $ 15,835,131 $ 16,703,663
Accrued compensation payable 10,446,615 15,998,721 18,653,411
Accrued interest payable 177,609 166,789 414,453
Income taxes payable 1,873,276 7,328,244 6,143,354
Obligations under capitalized leases 2,804,836 2,284,806 1,998,964
Payable to broker-dealers and customers 1,273,646
Securities sold not yet purchased 1,280,000
Deferred taxes payable 778,549 692,024 534,103
Notes payable 9,830,284 7,880,032 7,936,752
------------- ------------- -------------
43,360,381 50,185,747 53,658,346
------------- ------------- -------------
Minority interest in consolidated subsidiaries 492,154 501,731 285,119
------------- -------------- --------------
Commitments and contingencies (Notes 15 and 16)
Stockholders' equity:
Common Stock; Class A $.01 par value:
2,000,000 shares authorized, none issued
and outstanding; Class B $.001 par value:
2,000,000 authorized, 1,671,290 issued
and outstanding at December 31, 1994
and 1995 and June 30, 1996 4,258 4,258 1,671
Additional paid-in capital 48,200,186 48,193,040 37,672,464
Treasury stock at cost, 217,450 shares of Class A
and 412,610 shares of Class B at December
31, 1994 and 1995; none at June 30, 1996 (10,177,107) (10,177,107)
Accumulated deficit (10,713,316) (7,251,041) (2,649,804)
Notes receivable from stockholders (2,283,886) (2,243,709) (2,047,585)
Foreign translation adjustment 3,031,862 2,865,823 2,769,475
------------- -------------- ----------------
Total stockholders' equity 28,061,997 31,391,264 35,746,221
------------- ------------- ---------------
Total liabilities and stockholders' equity $ 71,914,532 $ 82,078,742 $ 89,689,686
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
EURO BROKERS INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended For the Six Months Ended
--------------------------------------------------- ------------------------------
December 31, December 31, December 31, June 30, June 30,
1993 1994 1995 1995 1996
---------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue: (unaudited)
Commission income $ 135,577,625 $ 144,586,661 $ 171,576,327 $ 87,888,359 $ 90,080,825
Interest income 1,203,082 1,090,789 1,462,744 669,676 840,831
2,274,759 697,522 732,347 875,741 164,517
------------- ------------- ------------- ------------- -------------
Other income 139,055,466 146,374,972 173,771,418 89,433,776 91,086,173
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Payroll and related costs 86,763,854 96,207,365 110,915,257 57,343,735 54,366,463
Communication costs 12,987,800 15,633,010 17,187,573 9,216,567 8,383,935
Travel and entertainment 8,681,483 10,493,903 10,224,384 5,187,858 5,369,774
Depreciation and
amortization 4,192,404 4,248,181 4,568,164 2,313,781 2,317,835
Clearing fees 863,445 3,647,556 3,777,710 2,244,386 2,116,366
General and administra-
tive expenses 9,235,053 7,355,734 7,845,403 4,376,351 4,063,782
Interest expense 2,702,759 1,635,547 775,077 404,158 299,522
Occupancy costs 4,452,232 5,640,070 5,854,525 2,861,941 3,033,358
Write-off of goodwill 12,643,948
------------- ------------- ------------- ------------- -------------
142,522,978 144,861,366 161,148,093 83,948,777 79,951,035
------------- ------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes and minority interest (3,467,512) 1,513,606 12,623,325 5,484,999 11,135,138
Provision for income taxes 4,858,901 3,333,989 7,393,196 3,888,533 6,086,881
------------- ------------- ------------- ------------- -------------
Income (loss) before minority interest (8,326,413) (1,820,383) 5,230,129 1,596,466 5,048,257
Minority interest in consolidated
subsidiaries (442,673) (250,480) (1,767,854) (1,129,425) (447,020)
------------- ------------- ------------- ------------- -------------
Net income (loss) ($ 8,769,086) ($ 2,070,863) $ 3,462,275 $ 467,041 $ 4,601,237
============= ============= ============= ============= =============
Earnings (loss) per share ($ 8.03) ($ 1.51) $ 2.07 $ 0.28 $ 2.75
Weighted average common shares
outstanding 1,091,896 1,375,513 1,671,290 1,671,290 1,671,290
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
EURO BROKERS INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Retained
Additional earnings/
Common paid-in Treasury (accumulated
stock capital stock deficit) Warrants
----- ------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 3,348 $ 18,442,515 ($3,623,839) $ 126,633 $5,141,145
Net loss (8,769,086)
Repayment of stockholder notes
Foreign translation adjustment
---------- --------------- --------------- -------------- -------------
Balance at December 31, 1993 3,348 18,442,515 (3,623,839) (8,642,453) 5,141,145
Retirement of warrants 5,141,145 (5,141,145)
Net loss (2,070,863)
Acquisition of treasury stock (6,553,268)
Issuance of common stock, net
of expenses 910 24,616,526
Repayment of stockholder notes
Foreign translation adjustment
---------- --------------- --------------- --------------- ------------
Balance at December 31, 1994 4,258 48,200,186 (10,177,107) (10,713,316)
Net income 3,462,275
Expenses relating to acquisi-
tion of common stock (7,146)
Repayment of stockholder notes
Foreign translation adjustment
---------- --------------- -------------- --------------- ------------
Balance at December 31, 1995 4,258 48,193,040 (10,177,107) (7,251,041)
Net income (unaudited) 4,601,237
Repayment of stockholder
notes (unaudited)
Foreign translation
adjustment (unaudited)
Expenses relating to exchange
of common stock in connection
with pending merger (unaudited) (346,056)
Retirement of treasury stock
(unaudited) (2,587) (10,174,520) 10,177,107
---------- --------------- -------------- --------------- ------------
Balance at June 30, 1996 (un-
audited) $ 1,671 $ 37,672,464 ($ 2,649,804)
======== ============ ============== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Notes Foreign
receivable from translation
stockholders adjustments Total
---------------- ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1992 ($ 3,989,714) $2,289,344 $18,389,432
Net loss (8,769,086)
Repayment of stockholder notes 269,363 269,363
Foreign translation adjustment 497,958 497,958
--------------- ------------
Balance at December 31, 1993 (3,720,351) 2,787,302 10,387,667
Retirement of warrants
Net loss (2,070,863)
Acquisition of treasury stock (6,553,268)
Issuance of common stock, net
of expenses 24,617,436
Repayment of stockholder notes 1,436,465 1,436,465
Foreign translation adjustment 244,560 244,560
--------------- ------------
Balance at December 31, 1994 (2,283,886) 3,031,862 28,061,997
Net income 3,462,275
Expenses relating to acquisi-
tion of common stock (7,146)
Repayment of stockholder notes 40,177 40,177
Foreign translation adjustment ( 166,039) ( 166,039)
--------------- ----------- ----------
Balance at December 31, 1995 (2,243,709) 2,865,823 31,391,264
Net income (unaudited) 4,601,237
Repayment of stockholder
notes (unaudited) 196,124 196,124
Foreign translation
adjustment (unaudited) (96,348) (96,348)
Expenses relating to exchange
of common stock in connection
with pending merger (unaudited) (346,056)
Retirement of treasury stock
(unaudited)
Balance at June 30, 1996 (un-
audited) ($ 2,047,585) $ 2,769,475 $ 35,746,221
============ =========== ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
EURO BROKERS INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended
--------------------------------------------------------
December 31, December 31, December 31,
1993 1994 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 8,769,086) ($ 2,070,863) $3,462,275
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,192,404 4,248,181 4,568,164
Provision for doubtful accounts 87,492 (196,300) (48,956)
Gain on sale of exchange memberships (490,000) (14,000)
Gain on sale of subsidiary (1,487,918)
Write off of goodwill 12,643,948
Unrealized foreign exchange loss 166,940
Undistributed earnings of affiliates (281,645) (137,775) (537,571)
Gain on sale of short-term investments (3,890)
Minority interest in consolidated subsidiaries 94,012 (55,416) 9,249
Imputed interest expense 110,529 120,806 129,358
Amortization of deferred expenses 19,963 12,031 5,269
Deferred income taxes (227,514) 1,971,504 (4,522,662)
Change in assets and liabilities:
(Increase) decrease in commissions receivable (567,689) 1,894,546 (1,654,378)
(Increase) decrease in deposits with clearing (447,722) 459,250 (1,877,193)
organizations
Increase in receivable from affiliates (811,890)
(Increase) decrease in receivable from clearing (1,203,810) (1,155,733) 852,262
firm
(Increase) decrease in securities owned (967,500) 967,500
Decrease (increase) in prepaid expenses and other (3,562,620) 1,939,161 (478,684)
assets
Increase in restricted cash (1,701,425)
Increase in receivable from broker dealers and
customers
Increase (decrease) in accrued compensation payable 10,236,008 (7,887,478) 5,552,106
Increase (decrease) in payable to broker dealers
and customers
Increase (decrease) in accounts payable and 5,607,377 1,473,250 (239,114)
accrued liabilities
(Decrease) increase in accrued interest payable (488,142) (300,161) (4,289)
Increase (decrease) in securities owned, not yet 1,280,000 (1,280,000)
purchased
(Decrease) increase in income taxes payable ( 214,910) (1,345,847) 5,494,722
----------- --------- ----------
Net cash provided by (used in) operating activities 13,390,412 (1,208,344) 10,384,058
---------- --------- ----------
Cash flows from investing activities:
Purchase of fixed assets (10,226,268) (4,340,179) (2,059,449)
Proceeds from sale of subsidiary in excess of 1,503,024
carrying value of investment
Minority interest in consolidated subsidiary (733,285)
Purchase of exchange memberships (101,000) (75,000)
Proceeds from sale of exchange memberships 1,762,000 50,000
Net sale (purchase) of short-term investments (139,979) 2,957,056
Investment in equity affiliates 36,885 ( 93,745)
-------------- ---------- -----------
Net cash used in investing activities ( 9,596,508) 314,762 (2,178,194)
---------- --------- ---------
Cash flows from financing activities:
Repayments of notes receivable from stockholders 269,363 105,676 40,177
Repayment of note payable (2,037,502)
Repayment of subordinated note payable (1,459,536) (17,660,000)
Issuance of secured demand note 23,000,000
Acquisition of treasury stock (5,221,260)
Issuance of common stock, net of expenses 1,617,436 (7,146)
Decrease in obligations under capitalized leases (374,125) (119,010) (507,946)
------------ ------------ ------------
Net cash used in financing activities (1,564,298) 1,722,842 (2,512,417)
------------ ------------ ------------
Effect of exchange rate changes on cash 234,779 233,079 (35,370)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,464,385 1,062,339 5,658,077
Cash and cash equivalents at beginning of year 17,828,549 20,292,934 21,355,273
----------- ----------- -----------
Cash and cash equivalents at end of year $20,292,934 $21,355,273 $27,013,350
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 2,771,710 $ 1,736,208 $ 650,007
Income taxes paid 4,230,493 2,828,794 881,875
SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITIES:
Reduction of notes receivable from stockholders in $1,330,789
connection with acquisition of treasury stock
Conversion of secured demand note to equity 23,000,000
Reduction of common stock and additional paid-in capital
in connection with the retirement of treasury stock
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------------
June 30, June 30,
1995 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net income (loss) $ 467,041 $ 4,601,237
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,313,781 2,317,835
Provision for doubtful accounts 60,962 (13,909)
Gain on sale of exchange memberships
Gain on sale of subsidiary
Write off of goodwill
Unrealized foreign exchange loss
Undistributed earnings of affiliates (582,831) (422,239)
Gain on sale of short-term investments
Minority interest in consolidated subsidiaries (7,158) (216,211)
Imputed interest expense 65,454 52,940
Amortization of deferred expenses 4,540 729
Deferred income taxes 6,382 318,788
Change in assets and liabilities:
(Increase) decrease in commissions receivable (4,232,056) (1,472,233)
(Increase) decrease in deposits with clearing (2,046,245) (52,169)
organizations
Increase in receivable from affiliates (186,669)
(Increase) decrease in receivable from clearing 709,519 (577,422)
firm
(Increase) decrease in securities owned 967,500
Decrease (increase) in prepaid expenses and other (410,656) 288,605
assets
Increase in restricted cash (764)
Increase in receivable from broker dealers and (1,100,497)
customers
Increase (decrease) in accrued compensation payable 2,651,067
Increase (decrease) in payable to broker dealers (115,970) 1,273,046
and customers
Increase (decrease) in accounts payable and 2,083,210 4,057,016
accrued liabilities
(Decrease) increase in accrued interest payable 327,228 245,470
Increase (decrease) in securities owned, not yet (1,280,000)
purchased
(Decrease) increase in income taxes payable 1,854,073 (4,349,219)
--------- ----------
Net cash provided by (used in) operating activities ( 1,895) 7,602,070
------------ -----------
Cash flows from investing activities:
Purchase of fixed assets (693,655) (1,369,440)
Proceeds from sale of subsidiary in excess of
carrying value of investment
Minority interest in consolidated subsidiary
Purchase of exchange memberships
Proceeds from sale of exchange memberships
Net sale (purchase) of short-term investments
Investment in equity affiliates 40,319
----------
Net cash used in investing activities ( 653,336) (1,369,440)
--------- ---------
Cash flows from financing activities:
Repayments of notes receivable from stockholders 1,150 196,124
Repayment of note payable
Repayment of subordinated note payable
Issuance of secured demand note
Acquisition of treasury stock
Issuance of common stock, net of expenses ( 7,146) ( 236,406)
Decrease in obligations under capitalized leases ( 321,931) ( 282,962)
----------- ------------
Net cash used in financing activities ( 327,927) ( 323,244)
----------- ----------
Effect of exchange rate changes on cash (20,895) 16,624
----------- ------------
Net increase (decrease) in cash and cash equivalents (1,004,053) 5,926,010
Cash and cash equivalents at beginning of year 21,355,273 27,013,350
----------- -----------
Cash and cash equivalents at end of year $20,351,220 $32,939,360
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid
Income taxes paid $ 607,498 $ 5,848,411
SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITIES:
Reduction of notes receivable from stockholders in
connection with acquisition of treasury stock
Conversion of secured demand note to equity
Reduction of common stock and additional paid-in capital $10,177,107
in connection with the retirement of treasury stock
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
EURO BROKERS INVESTMENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Information as of and for the six-month periods ended
June 30, 1995 and 1996 is unaudited)
NOTE 1 - ORGANIZATION AND OPERATIONS:
Euro Brokers Investment Corporation (the "Company"), incorporated in
December 1986, is the parent company to Euro Brokers Holdings, Inc.
("EBHI"). EBHI was incorporated in October 1986 for the purpose of
acquiring certain businesses from various subsidiaries of MAI plc, a public
company in the United Kingdom.
The Company, through its subsidiaries and affiliates is primarily an interdealer
broker of money market instruments, securities and derivative products and
selected securities, with offices in major financial centers, including New
York, London, Tokyo, Toronto and Hong Kong, and correspondent relationships
with other brokers throughout the world.
NOTE 2 - PROPOSED MERGER TRANSACTION:
On March 8, 1996, the Company entered into an Agreement and Plan of Merger
with Financial Services Acquisition Corporation ("FSAC") and EBIC
Acquisition Corp. ("Merger Sub"), a wholly owned subsidiary of FSAC,
providing for, among other things, the merger of Merger Sub with and into
the Company, with the Company surviving the merger as a wholly owned
subsidiary of FSAC. At the effective time of the merger, each outstanding
share of Class B Common Stock of the Company will be converted into the
right to receive, subject to certain adjustments and escrow arrangements
described below, consideration consisting of approximately (i) 2.64 newly
issued shares of FSAC's common stock, (ii) 4.53 newly issued redeemable
common stock purchase warrants of FSAC and (iii) $9.57 in cash.
The consideration will be adjusted as necessary to provide that, upon
consummation of the merger, the current stockholders of the Company will
own, in the aggregate, (i) a number of shares of FSAC common stock equal to
the number of shares of FSAC common stock outstanding immediately prior to
the merger and (ii) a number of warrants equal to the number of warrants
outstanding immediately prior to the merger. The cash portion of the
consideration will also be adjusted prior to the merger to reflect the
differences between the respective pre-merger net worths of FSAC and the
Company, subject to certain adjustments (and the initial escrow of $2
million), with the intention generally of equalizing the respective pre-
merger contributions of FSAC stockholders and Company stockholders to the
post-merger consolidated net worth of FSAC.
The merger will result, subject to certain escrow arrangements providing
for the initial deposit in escrow of 10% of the FSAC common stock
consideration (and subject to the payment of cash in lieu of fractional
shares and warrants), in the Company's current stockholders having a 50%
ownership of the merged entity. For accounting and financial purposes, the
merger will be treated as an issuance of shares by the Company for the net
assets of FSAC, consisting primarily of cash. The surviving corporation will
reflect in its consolidated financial statements the assets and liabilities
of both companies at their book values, and the historical earnings of the
Company will be presented as the historical earnings of the merged entity.
The merger was consummated on August 16, 1996. In accordance with the
adjustments contemplated by the merger agreement, the consideration that
was actually received for each outstanding share of Class B common stock of
the Company consisted of approximately (i) 2.70 shares of FSAC common stock
(approximately .27 shares of which were deposited in escrow), (ii) 4.53
FSAC warrants and (iii) $13.14 in cash (approximately $1.20 of which was
deposited in escrow).
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation:
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated. Investments in unconsolidated
affiliates where the Company may exercise significant influence over
operating and financial policies have been accounted for using the equity
method. Earnings from investments accounted for under the equity method
have been reflected as other income in the statement of operations.
Revenue recognition:
Commission income is recognized on a trade date basis.
Securities transactions:
Securities transactions are recorded on a trade date basis and are carried
at market value. Substantially all securities transactions are executed as
riskless principal and are cleared on a fully disclosed basis. As such,
those accounts are carried on the books of the Company's clearing firm.
Furniture, equipment and leasehold improvements:
Depreciation of furniture and equipment is computed on a straight line
basis using estimated useful lives of 3 to 5 years. Leasehold improvements
are amortized over the terms of the related leases or estimated useful
lives of the improvements, whichever period is shorter.
Exchange memberships:
The Company carries its exchange memberships at cost. At December 31, 1994
and 1995 and at June 30, 1996, the market value of these memberships
approximated cost.
During 1994, the Company sold its exchange memberships which it held at
December 31, 1993 realizing a gain of $490,000. During 1994, the Company
also purchased exchange memberships for an aggregate cost of $101,000.
During 1995, the Company sold two of its exchange memberships for $50,000,
realizing a gain of $14,000, and purchased an exchange membership at a cost
of $75,000.
Intangible assets:
Intangible assets principally include the values assigned to customer lists
and are being amortized on a straight line basis over their estimated
useful lives, which approximate 15 years. Accumulated amortization of
intangible assets aggregated $6,346,588, $6,756,592 and $6,961,594 at
December 31, 1994, December 31, 1995 and June 30, 1996, respectively.
The Company has a policy of reviewing the carrying value of intangible
assets to consider whether events or changes in circumstances have occurred
- - such as the loss of significant customers, a significant change in the
revenues received from customers or a significant change in the nature of
the brokerage business - which would indicate that the carrying amount of
such assets may not be recoverable, in which case the Company would
evaluate the estimated future cash flows expected to result from the asset.
Should the expected future cash flows be less than the carrying amount of
the asset, an impairment loss would be recognized to the extent that the
carrying value exceeds the fair value of the asset. There have been no
impairment losses with respect to intangible assets.
Goodwill:
The excess purchase price over net assets of businesses acquired was
originally recorded as goodwill and was being amortized on a straight line
basis over twenty years.
In recognition of certain business conditions and events, in 1993 the
Company reviewed the recorded value of goodwill based on an evaluation of
the net present value of future cash flows from certain of the Company's
foreign subsidiaries and affiliates. As a result of this reevaluation, it
was determined that there had been an other than temporary impairment in
the value of goodwill and, accordingly, amounts aggregating $10,839,790
which were previously attributable to goodwill associated with the
acquisition of foreign subsidiaries and amounts aggregating $1,804,158
which were previously attributable to goodwill associated with the
Company's investment in an affiliated company (see Note 7) were written off
as of December 31, 1993.
Foreign currency translation:
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars using exchange rates at the end of the year; revenues and
expenses are translated at average rates for the year.
Gains and losses on foreign currency translation of the financial
statements of operations whose functional currency is other than the U.S.
dollar, together with related hedges and tax effects, are reflected in the
foreign translation adjustment account in stockholders' equity. Foreign
currency exchange gains and losses from transactions and balances
denominated in a currency other than the related operating subsidiary's
functional currency are recorded in income.
Fair value of financial instruments:
The Company's securities owned and securities sold, not yet purchased are
carried at market value. Additionally, off-balance sheet financial
instruments, as described in Note 15, are valued at market with unrealized
gains and losses recorded in the financial statements.
Management estimates that the aggregate net fair value of other financial
instruments recognized on the statement of financial condition (including
cash equivalents, commission and other receivables, and notes payable)
approximates their carrying value, as such financial instruments are
short-term in nature, bear interest at current market rates, or, in the case
of notes payable, bear interest at rates which management believes are
comparable to current rates which could be obtained in similar financings.
Income taxes:
The Company files a consolidated federal income tax return which includes
U.S. subsidiaries in which the Company's ownership percentage is 80% or
greater. The Company and such U.S. subsidiaries also file separate and/or
combined income tax returns in various state and local tax jurisdictions.
The Company and its subsidiaries account for certain income and expense
items in a period different from that reported for tax purposes. The tax
effects of transactions are generally recognized in the financial
statements in the same period as the related items of income and expense,
regardless of when they are recognized for tax purposes.
During 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The adoption
of SFAS 109 had no material impact on the financial statements of the
Company.
Historical earnings per share:
The computation of earnings per share in each period does not give effect
to any merger-related transactions and is based on the weighted average
number of shares of the Company's common stock then outstanding.
Use of estimates:
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. Actual results could differ from those
estimates.
Unaudited information:
All unaudited information for the interim periods presented, in the opinion
of management, includes all adjustments, consisting only of normal
recurring accruals necessary for fair presentation.
NOTE 4 - CASH AND CASH EQUIVALENTS:
For the purpose of the financial statements the Company considers all
short-term investments with an initial maturity of three months or less to
be cash equivalents. Such investments are generally overnight Euro dollar
deposits.
NOTE 5 - COMMISSIONS RECEIVABLE:
Commissions receivable are reflected in the statement of financial
condition net of allowance for doubtful accounts of $520,600, $471,100 and
$444,200 at December 31, 1994, December 31, 1995 and June 30, 1996,
respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS:
The Company incurred interest expense which was in respect of debt payable
to its majority shareholders aggregating $1,848,700 and $789,200 for the
years ended December 31, 1993 and 1994 respectively. As described in Note
11, all such debt was repaid during 1994.
The Company's U.K. subsidiary paid $6,100,000 of interest on intercompany
loans to the Company's U.S. subsidiary. Such amount has been eliminated in
consolidation.
Prepaid expenses and other assets include loans to employees aggregating
$1,732,300, $2,317,500 and $2,298,000 at December 31, 1994, December 31, 1995
and June 30, 1996, respectively. Such loans generally bear interest at the
prime rate and are short term in nature.
NOTE 7 - EQUITY IN AFFILIATED COMPANIES:
The Company's equity in affiliated companies principally consists of a 15%
equity interest in Yagi Euro Corporation ("Yagi Euro"), which operates the
business of a broker of money market and foreign exchange and derivative
products in Tokyo and is 85% owned by Yagi Tanshi Company, Limited.
In addition, in 1994 the Company entered into a partnership arrangement
with Yagi Euro to broker certain derivative products in Tokyo. The results
of such business are consolidated in the Company's financial statements and
Yagi Euro's approximately 50% interest in the related profit or loss is
presented as minority interest.
During December 1995, the Company purchased a 33% interest in Pacific
Brokers International, LLC, a broker of off-balance sheet products in the
Far East.
The Company's investments in equity affiliates are as follows:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1994 1995 1996
------------- ----------- ---------
(Unaudited)
<S> <C> <C> <C>
Yagi Euro................................................. $2,543,149 $2,794,211 $2,604,771
Pacific Brokers International, LLC........................ 157,653 168,141
---------- ---------- -----------
$2,543,149 $2,951,864 $2,772,912
========== ========== ==========
Summarized financial information for Yagi Euro is as follows:
December 31, December 31, June 30,
1994 1995 1996
------------ ------------ --------
(Unaudited)
<S> <C> <C> <C>
Total assets.............................................. $20,237,126 $21,740,692 $22,124,481
Total liabilities......................................... 3,391,834 3,266,547 4,759,337
Revenues.................................................. 18,946,665 14,310,972 5,716,707
Net income (loss)......................................... 925,844 2,735,871 (142,748)
</TABLE>
NOTE 8 - ACQUISITION AND SALE OF SUBSIDIARY:
In 1992, the Company acquired a 51% interest in Liberty Euro Brokers
("LEB"), a newly formed broker of certain non-dollar denominated government
securities which conducts business in the United Kingdom.
Effective as of August 12, 1993, the Company sold its interest in LEB for
approximately $2,258,000, which resulted in a gain of approximately
$1,488,000 recorded in other income.
NOTE 9 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements are summarized below:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1994 1995 1996
------------ ------------ --------
(Unaudited)
<S> <C> <C> <C>
Furniture and telephone equipment........................... $ 11,672,050 $ 11,512,903 $ 11,788,625
Leasehold improvements...................................... 6,373,214 6,329,807 6,242,992
Computer and related equipment.............................. 6,460,324 7,265,569 8,133,040
Automobiles................................................. 3,846,861 3,113,004 2,824,379
----------- ----------- -----------
28,352,449 28,221,283 28,989,036
Less - Accumulated depreciation and amortization............ (12,959,793) (14,956,540) (16,473,105)
------------ ------------ ------------
$ 15,392,656 $ 13,264,743 $ 12,515,931
============ ============ ============
</TABLE>
NOTE 10 - OBLIGATIONS UNDER CAPITALIZED LEASES:
The Company has purchased automobiles and telecommunications equipment
under capitalized leases. The lease terms generally do not exceed three
years. The following is a schedule of future minimum lease payments under
capitalized leases together with the present value of the net minimum lease
payments as of December 31, 1995.
For the Years Ending December 31:
1996......................................... $ 1,304,805
1997......................................... 744,317
1998 and thereafter.......................... 566,233
------------
Total net minimum lease payments.................. 2,615,355
Less: amount representing interest................ 330,549
-----------
Present value of net minimum lease payments....... $ 2,284,806
===========
The gross amount of assets under capitalized leases are $2,804,800 and
$2,284,800 at December 31, 1994 and 1995, respectively, and $3,100,000 at
June 30, 1996. Such amounts are principally automobiles and are included in
furniture, equipment and leasehold improvements on the statement of
financial condition.
The charges to income resulting from the amortization of assets recorded
under capitalized leases were approximately $625,500, $681,200 and $644,700
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$327,700 and $280,900 for the six months ended June 30, 1995 and 1996,
respectively.
NOTE 11 - NOTES PAYABLE:
Notes payable at December 31, 1994 and 1995 and June 30, 1996 represent
convertible purchase price notes which were issued in December 1986 in
connection with the acquisition of the predecessor businesses and bear
interest at a stated rate of 6-1/8% per annum. The conversion feature
expired on November 30, 1993. The notes are due in equal annual
installments each November 30 from 1995 through 1999. The notes have been
adjusted for financial reporting purposes to reflect imputed interest at
fair market rates at the time of issuance which vary from 6.125% to 7.71%.
The notes are subordinated to the claims of financial institutions to a
maximum aggregate amount of $10,000,000. Approximately 55% of the reported
balance for the purchase price notes was denominated in British pounds
sterling at December 31, 1994 and 1995 and June 30, 1996.
On December 16, 1986, the Company executed a subordinated promissory note
in the amount of $13,000,000 payable to Annetinvest B.V., an affiliate of
Euro Brokers International Inc. ("EII"), a shareholder of the Company at
that time. The note was due on December 16, 1996 bearing interest at a
fixed rate of 9.25% per annum plus additional interest based on the
profitability of the Company up to a maximum of 4.5% per annum of the
principal balance outstanding. In November 1988, the Company executed a
second subordinated promissory note in the amount of $4,660,000, also
payable to Annetinvest B.V., which was due on January 31, 1999 bearing
interest at a variable rate of prime plus 1%.
In February 1994, the Company entered into a secured demand note payable
aggregating $23,000,000, which was scheduled to mature on December 31,
1995. The note had a stated interest rate of 10% during 1994 and 12% during
1995. The Company pledged certain assets and stock of certain subsidiaries
as collateral for the loan. The proceeds of the loan were used to repay the
Company's subordinated notes payable of $17,660,000, and to repurchase all
of the Class A common stock and warrants outstanding at December 31, 1993
as described in Note 14. In May, 1994, the $23,000,000 note was repaid in
connection with a stock purchase transaction as described in Note 14.
The change in notes payable is as follows:
<TABLE>
<CAPTION>
For the Six
For the Years Ended Months Ended
December 31, December 31, June 30,
1994 1995 1996
------------ ------------ --------
(unaudited)
<S> <C> <C> <C>
Balance at beginning of year................... $ 27,080,598 $ 9,830,284 $ 7,880,032
Repayment of subordinated note................. (17,660,000)
Repayment of principal......................... (2,037,502)
Secured demand note issued..................... 23,000,000
Secured demand note converted to equity........ (23,000,000)
Exchange rate difference....................... 288,880 (42,107) 3,781
Imputed interest............................... 120,806 129,357 52,939
------------- ------------ -----------
Balance at end of period....................... $ 9,830,284 $ 7,880,032 $ 7,936,752
============ =========== ===========
</TABLE>
NOTE 12 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) defined contribution plan for the Company's
U.S. operations covering substantially all salaried employees. The
Company's contributions to the 401(k) plan are based upon a percentage of
employee contributions. Total 401(k) plan expense approximated $161,000,
$216,000, and $222,000 for the years ended December 31, 1993, 1994 and
1995, respectively, and $158,900 and $162,000 for the six months ended June
30, 1995 and 1996, respectively.
NOTE 13 - INCOME TAXES:
Income (loss) from continuing operations before provision for income tax
and minority interest was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
For the Years Ended
December 31, 1993 December 31, 1994 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic....................................... $ 225,567 $ 3,089,709 $ 2,645,217
Foreign........................................ (3,693,079) (1,576,103) 9,978,108
----------- ----------- -----------
Total.......................................... ($ 3,467,512) $ 1,513,606 $12,623,325
=========== =========== ===========
The components of the provision for income taxes are as follows:
For the Years Ended
December 31, 1993 December 31, 1994 December 31, 1995
----------------- ----------------- -----------------
Current
<S> <C> <C> <C>
Federal.............................. $ 385,879 $1,103,197 $ 2,745,733
State and local...................... 701,500 706,747 931,547
Foreign.............................. 3,778,047 (76,684) 8,510,075
---------- ---------- ----------
4,865,426 1,733,260 12,187,355
---------- ---------- -----------
Deferred
Federal.............................. (99,515) 504,938 (1,946,254)
State and local...................... (191,063) 411,633 (164,502)
Foreign.............................. 284,053 684,158 (2,683,403)
-------------- ------------- ------------
(6,525) 1,600,729 (4,794,159)
-------------- ------------ ------------
Total..................................... $ 4,858,901 $ 3,333,989 $ 7,393,196
=========== =========== ===========
Deferred tax assets (liabilities) are comprised of the following:
December 31, 1994 December 31, 1995
----------------- -----------------
Assets
<S> <C> <C>
Bad debt reserve......................................... $ 138,000 $ 161,000
Amortization of leasehold improvements................... 172,361 221,354
Rent reserve............................................. 214,774 211,830
Deferred compensation.................................... 251,850 4,415,679
Miscellaneous reserves................................... 304,290 510,485
Foreign tax credits...................................... 2,675,017
Deferred tax asset valuation allowance................... (2,675,017)
---------- -----------
Gross deferred tax assets, after valuation allowance.. $1,081,275 $ 5,520,348
========== ===========
Liabilities
Depreciation............................................. (612,924) (447,092)
Unrealized foreign exchange (gain) loss.................. (165,625) (244,932)
----------- ----------
Gross deferred tax liabilities........................ ($ 778,549) ($ 692,024)
========== ===========
</TABLE>
The valuation allowance for deferred tax assets for the year ended December
31, 1995 was established for foreign tax credit carryforward benefits
generated during 1995, due to the uncertainty regarding their
realizability. The foreign tax credit carryforward will expire in the year
ended December 31, 2000.
Not reflected above are the tax effects of foreign currency translation
adjustments related to the hedging of foreign net investments. These tax
effects are recorded directly in stockholders' equity. Such amounts
recorded in stockholders' equity are a tax benefit (expense) of $221,000,
($370,000), and $20,600 in the years ended December 31, 1993, 1994 and
1995, respectively.
The provisions for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate to pretax income (loss) from continuing operations as a result of the
following differences:
<TABLE>
<CAPTION>
For the Years Ended
December 31, December 31, December 31,
1993 1994 1995
----------- ---------- -----------
<S> <C> <C> <C>
Tax at U.S. statutory rate........................ ($1,178,954) $ 514,626 $4,291,930
Increase (decrease) in tax resulting from:
Higher effective rates on exchanges of foreign
operations and tax benefit of losses not
recognized...................................... 1,351,406 1,283,444 1,847,061
Nondeductible meals and entertainment............. 398,923 869,536 868,507
Write-off of goodwill............................. 4,089,856
State and local taxes, net........................ 369,617 738,131 506,259
Other............................................. (171,947) (71,748) (120,561)
----------- ----------- -----------
$ 4,858,901 $3,333,989 $ 7,393,196
=========== ========== ===========
</TABLE>
NOTE 14 - STOCKHOLDERS' EQUITY:
Common stock:
There are 2,000,000 shares of Class B ($.001 par value) common stock of the
Company authorized, of which 1,671,290 shares were issued and outstanding
at December 31, 1994 and 1995 and June 30, 1996.
In May 1994, the holder of the $23,000,000 secured demand note (See Note
11), Welsh, Carson, Anderson & Stowe VI ("WCAS VI"), executed a stock
purchase agreement pursuant to which WCAS VI acquired 910,510 shares of
Class B common stock, representing a majority equity interest. The total
consideration paid was $25,000,000, which was comprised of the delivery of
the $23,000,000 secured demand note and $2,000,000 in cash.
The minority interest of Class B common stock not held by WCAS VI is held
by management and employees. Pursuant to a stock purchase agreement, the
Company has the option to repurchase its shares of Class B common stock
from minority shareholders if the owner of such shares is no longer
employed by the Company or its subsidiaries. The repurchase price depends
upon a number of factors, including the employee's length of service and
the fair market value of such stock as determined by the Board of
Directors.
The Company held 412,610 shares of Class B common stock in its treasury at
December 31, 1994 and 1995 and none at June 30, 1996.
At December 31, 1994 and 1995 and at June 30, 1996, there were 2,000,000
shares of Class A ($.01 par value) common stock of the Company authorized;
there were no shares outstanding. 217,450 shares of Class A Common stock
were held in treasury at December 31, 1994 and 1995 and none were held in
treasury at June 30, 1996. During 1994, the Company repurchased all of its
Class A common stock in connection with the stock purchase agreement
referred to above.
During March 1996 the Company retired the Class A and Class B common stock
which was held in its treasury.
Warrants:
At December 31, 1993, the Company had outstanding 977,143 warrants which
entitled the holder to purchase, at any time through March 31, 1994, one
share of Class A common stock per warrant. 622,450 warrants were
exercisable at $20.885 per share and 354,693 were exercisable at $13.14 per
share. All of the warrants were held by EII and were exercisable in whole
and not in part. The warrants were retired by the Company in February 1994,
pursuant to the secured demand note transaction described in Note 11.
Notes receivable from stockholders:
Notes receivable from stockholders of $2,283,886 and $2,243,709 at December
31, 1994 and 1995, respectively, and of $2,047,585 at June 30, 1996,
represent amounts due to the Company for the purchase of common stock of
the Company by certain of its employees. The notes have all matured and are
currently payable on demand. The notes bear interest at 5% per annum, and
are collateralized by the stock purchased therewith. The notes have been
reflected as a decrease to stockholders' equity.
In connection with the merger transaction described in Note 2, such
stockholders have agreed to repay such notes through the application of the
cash merger consideration otherwise payable to such stockholders. To the
extent such cash consideration is insufficient to repay all such notes, the
remaining balance thereof will be assigned to and immediately repaid by
certain members of the Company's management.
NOTE 15 - COMMITMENTS:
The Company is obligated under certain non-cancelable leases for office
space and telecommunication services.
The Company has executed various operating leases in respect of premises,
which contain escalation clauses for base rent, maintenance, electricity
and real estate tax increases.
At December 31, 1995, the Company had the following commitments under
long-term non-cancelable operating leases:
For the Year Ending December 31:
1996............................... $8,941,275
1997............................... 4,468,010
1998............................... 3,818,402
1999............................... 3,699,943
2000 and thereafter................ 18,362,690
Total minimum lease payments.......... $ 39,290,320
============
The Company has pledged (pound)1,150,000 in cash with a bank in respect of
a guarantee of its London premises lease. This amount has been reflected as
restricted cash on the statement of financial condition.
At December 31, 1994, the Company had forward contracts of approximately
$1,000,000 outstanding to buy foreign currency at various rates and dates
extending through September 16, 1996.
At December 31, 1995, the Company had forward contracts outstanding to buy
Sterling for $935,000 and sell 180,000,000 yen at various rates and dates
extending through September 30, 1996. Unrealized gains and losses have been
recognized in the statement of operations.
NOTE 16 - CONTINGENCIES:
In common with other money brokers, a subsidiary of the Company has, in the
past, received commissions on a number of interest rate swap transactions
which were booked on behalf of banks and local authorities in the United
Kingdom. Following the ruling by the House of Lords in relation to the
ultra vires nature of such contracts, some claims in a material amount have
been received for the return of certain of this brokerage. Management
believes it has adequately accrued for the reasonably estimated costs
associated with resolving this matter.
The Company and/or its subsidiaries are also subject to various legal
proceedings and claims that arise in the ordinary course of their businesses.
Management currently believes that resolving these matters will not have a
material adverse impact on the Company's consolidated financial condition,
results of operations or liquidity.
NOTE 17 - CONCENTRATION OF CREDIT RISK:
The Company has a policy of reviewing, on an ongoing basis, the credit
standing of its customers, which are primarily financial institutions, as
well as the credit worthiness of the clearing firm used by the Company.
Financial instruments subject to credit risk are primarily commissions
receivable, which are unsecured and short-term in nature. Receivable from
clearing firm represents a concentration of credit risk, and is related to
securities transactions cleared primarily through one correspondent broker.
NOTE 18 - GEOGRAPHIC DATA:
Summary financial information for each of the Company's geographic
locations is set forth below. Amounts include the consolidation of the
results of the operations of the Company's Tokyo and Hong Kong affiliates;
the Company's actual share, net of minority interest, approximates 50% in
each case.
<TABLE>
<CAPTION>
For the Six Months Ended
For the Year Ended December 31, June 30,
----------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
----------------- ----------------- ----------------- --------------- ----------------
Commission Income (Unaudited)
<S> <C> <C> <C> <C> <C>
New York.................... $63,143,793 $66,090,388 $69,081,547 $35,184,445 $40,275,560
London...................... 63,266,608 61,226,002 65,715,235 33,343,829 34,700,573
Canada...................... 2,790,582 3,091,433 3,452,205 1,765,101 1,698,625
Tokyo....................... 6,965,106 24,601,532 13,063,350 10,470,687
-----------
Hong Kong................... 6,376,642 7,213,732 8,725,808 4,531,634 2,935,380
----------- ------------ ------------- --------- ---------
Total..................... $135,577,625 $144,586,661 $171,576,327 $87,888,359 $90,080,825
============ ============ ============ =========== ===========
Operating Profit (Loss):
New York.................... $ 2,541,645 $ 4,301,375 $ 3,021,226 $ 1,352,417 $3,952,249
London...................... (1,529,404) (2,960,188) 2,901,237 (478,161) 4,091,004
Canada...................... 66,735 (249,413) (874,440) (474,564) (134,349)
Tokyo....................... (1,522,512) 1,140,723 6,985,361 4,546,313 3,052,240
Hong Kong................... (989,502) (126,387) (16,677) (78,082) (435,858)
----------- ---------- ---------- ---------- -----------
Total..................... $(1,433,038) $ 2,106,110 $12,016,707 $4,867,923 $10,525,286
Income (Loss) Before
Tax and Minority Interest:
New York.................... $ 225,565 $ 3,089,709 $ 2,645,217 $1,297,580 $ 9,702,400
London...................... (1,305,441) (2,447,859) 3,783,500 (156,085) (1,030,531)
Canada...................... 116,387 (219,617) (841,294) (454,345) (129,188)
Tokyo....................... (1,522,512) 1,204,470 7,017,027 4,812,457 3,033,704
Hong Kong................... (981,511) (113,097) 18,875 (14,608) (441,247)
------------ ----------- ----------- ----------- ----------
Total..................... $(3,467,512) $1,513,606 $12,623,325 5,484,999 $11,135,138
============ =========== =========== =========== ===========
Net Income (Loss):
New York.................... (571,236) 418,316 $ 440,773 $111,280 5,525,433
London...................... (5,922,785) (2,428,422) 1,711,233 (509,634) (1,176,148)
Canada...................... 46,008 (176,748) (688,849) (290,429) (129,188)
Tokyo....................... (1,522,512) 173,672 1,989,492 1,163,274 606,176
Hong Kong (798,561) (57,681) 9,626 (7,450) (225,036)
-------- ------------ ---------- ----------- ----------
Total $(8,769,086) $ (2,070,863) $ 3,462,275 $ 467,041 4,601,237
========== ============ ============ =========== =========
At December 31, At June 30,
----------------------------------- ---------------
1994 1995 1996
----------------- ----------------- ---------------
Identifiable Assets: (Unaudited)
<S> <C> <C> <C>
New York.................... $35,347,675 $38,962,574 $47,474,087
London...................... 29,412,600 31,767,594 31,426,226
Canada...................... 1,573,157 1,789,815 1,833,093
Tokyo....................... 3,823,416 7,656,963 7,161,101
Hong Kong................... 1,757,684 1,901,796 1,795,179
------------ ----------- ----------
Total..................... $71,914,532 $82,078,742 $89,689,686
=========== =========== ===========
</TABLE>
(a)(2)
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
and Stockholders of
Euro Brokers Investment Corporation
In our opinion, the accompanying consolidated statement of
financial condition and the related consolidated statements of operations,
changes in stockholder's equity and cash flows present fairly, in all
material respects, the financial position of Euro Brokers Investment
Corporation and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
/s/ PRICE WATERHOUSE LLP
New York, New York
February 26, 1996,
except as to Note 2
which is as of August 16, 1996
(b) Pro Forma Financial Information.
The unaudited pro forma consolidated statements of operations
for the year ended December 31, 1995 and the six months ended June 30, 1996
and the unaudited pro forma consolidated statement of financial condition
as of June 30, 1996 include the accounts of FSAC and Euro Brokers
Investment Corporation ("EBIC"). The unaudited pro forma financial
statements reflect the merger of EBIC Acquisition Corp., a wholly owned
subsidiary of FSAC, with and into EBIC (the "Merger") accounted for as a
recapitalization of EBIC, with the issuance of shares by EBIC for the net
assets of FSAC, consisting primarily of cash. The pro forma financial
statements were derived by adjusting the historical financial statements of
FSAC and EBIC for certain transactions pursuant to the Merger described in
the notes to the unaudited pro forma consolidated financial statements.
The unaudited pro forma consolidated statements of operations
for the year ended December 31, 1995 and the six months ended June 30, 1996
were prepared as if the Merger had occurred on January 1, 1995. The
unaudited pro forma consolidated statement of financial condition was
prepared as if the Merger had occurred on June 30, 1996. The pro forma
financial data does not purport to be indicative of the results which
actually could have been obtained had such transaction been completed as of
the assumed dates or which may be obtained in the future.
The pro forma financial data should be read in conjunction with
(i) the notes hereto, (ii) FSAC's unaudited financial statements and the
notes thereto as of and for the quarter ended June 30, 1996, included in
the Form 10-Q of FSAC for the quarterly period ended June 30, 1996, and
FSAC's audited financial statements and the notes thereto as of and for the
year ended December 31, 1995, included in FSAC's Annual Report on Form 10-K
for the year ended December 31, 1995, and (iii) the audited and unaudited
financial information for EBIC included elsewhere in this Current Report.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
FINANCIAL
SERVICES EURO BROKERS
ACQUISITION INVESTMENT PRO FORMA ADJUSTMENTS
CORPORATION CORPORATION DR. CR. PRO FORMA(1)
-------------- ------------ ------------- --------------- -------------
Revenue:
<S> <C> <C> <C> <C> <C>
Commission income ...................... $ -- $ 171,576,327 $ -- $ -- $ 171,576,327
Interest income ........................ 1,102,027 1,462,744 1,102,027(2) -- 1,462,744
Other income ........................... -- 732,347 -- -- 732,347
------------- ----------- ----------- ------- ------------
1,102,027 173,771,418 1,102,027 -- 173,771,418
------------- ----------- ----------- ------- ------------
Costs and expenses:
Payroll and related costs .............. -- 110,915,257 480,000(3) -- 111,395,257
Communication costs .................... -- 17,187,573 -- -- 17,187,573
Travel and entertainment ............... -- 10,224,384 -- -- 10,224,384
Depreciation and amortization .......... 13,092 4,568,164 -- -- 4,581,256
Clearing fees .......................... -- 3,777,710 -- -- 3,777,710
General and administrative
expenses ............................ 158,986 7,845,403 -- -- 8,004,389
Interest expense ....................... -- 775,077 -- -- 775,077
State franchise taxes .................. 13,000 -- -- -- 13,000
Acquisition costs ...................... 239,817 -- -- 239,817(4) --
Occupancy costs ........................ 60,000 5,854,525 -- 60,000(5) 5,854,525
------------- ----------- ----------- ------- ------------
484,895 161,148,093 480,000 299,817 161,813,171
------------- ----------- ----------- ------- ------------
Income before provision for income taxes
and minority interest ................ 617,132 12,623,325 1,582,027 299,817 11,958,247
Provision for income taxes ............. 219,000 7,393,196 -- 513,000(6) 7,099,196
------------- ----------- ----------- ------- ------------
Income before minority interest ........ 398,132 5,230,129 1,582,027 812,817 4,859,051
Minority interest ...................... -- (1,767,854) -- -- (1,767,854)
------------- ----------- ----------- ------- ------------
Net income ............................. $ 398,132 $ 3,462,275 $ 1,582,027 $ 812,817 $ 3,091,197
Common stock shares outstanding ........ 4,416,666 1,671,290 -- -- 9,011,332(7)
------------- ----------- ----------- ------- ------------
Earnings per share ..................... $ 0.09 $ 2.07 -- -- $ .34(8)
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
FINANCIAL SERVICES EURO BROKERS
ACQUISITION COR- INVESTMENT PRO FORMA ADJUSTMENTS
PORATION CORPORATION DR. CR. PRO FORMA(1)
----------------- ------------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Commission income....................... $ - $ 90,080,825 $ - $ - $ 90,080,825
Interest income......................... 482,237 840,831 482,237(2) - 840,831
Other income............................ - 118,809 - - 118,809
Foreign exchange gain................... - 45,708 - - 45,708
---------- ------------ --------- --------- ------------
482,237 91,086,173 482,237 0 91,086,173
---------- ------------ --------- --------- ------------
Costs and expenses:
Payroll and related costs............... - 54,366,463 240,000(3) - 54,606,463
Communication costs..................... - 8,383,935 - - 8,383,935
Travel and entertainment................ - 5,369,774 - - 5,369,774
Depreciation and amortization........... 6,546 2,317,835 - - 2,324,381
Clearing fees........................... - 2,116,366 - - 2,116,366
General and administrative
expenses............................. 86,737 4,063,782 - - 4,150,519
Interest expense........................ - 299,522 - - 299,522
State franchise taxes................... 9,160 - - - 9,160
Occupancy costs......................... 30,000 3,033,358 - 30,000(5) 3,033,358
---------- ------------ --------- --------- ------------
132,443 79,951,035 240,000 30,000 80,293,478
---------- ------------ --------- --------- ------------
Income before provision for income
taxes and minority interest.......... 349,794 11,135,138 722,237 30,000 10,792,695
Provision for income taxes.............. 119,000 6,086,881 - 277,000(6) 5,928,881
---------- ------------ --------- --------- ------------
Income before minority interest......... 230,794 5,048,257 722,237 307,000 4,863,814
Minority interest....................... - (447,020) - - (447,020)
---------- ------------ --------- --------- ------------
Net income.............................. $ 230,794 $ 4,601,237 $ 722,237 $307,000 $ 4,416,794
========== =========== ========= ======== ============
Common stock shares outstanding......... 4,416,666 1,671,290 9,011,332(7)
Earnings per share...................... $ 0.05 $ 2.75 $ 0.49(8)
</TABLE>
Notes to Unaudited Pro Forma Consolidated Statements of Operations
1. FSAC stockholders exercised their right to demand the redemption of
certain shares of FSAC common stock in connection with the Merger
("Redemption Rights") with respect to 136,000 shares, and the
unaudited pro forma consolidated statements of operations are
presented on this basis.
2. For the year ended December 31, 1995, represents the elimination of
interest income of $1,102,027 on FSAC's short-term investments and
investment in a U.S. government security deposited in a trust account
for the benefit of FSAC's public stockholders (the "Trust"), which was
liquidated upon consummation of the Merger to pay the cash portion of
the Merger consideration. For the six months ended June 30, 1996,
represents the elimination of six-months' interest income of $482,237
on FSAC's short-term investments and investment in a U.S. government
security deposited in the Trust, which was liquidated upon consummation
of the Merger to pay the cash portion of the Merger consideration.
3. For the year ended December 31, 1995, represents the annual salary to
be paid to the President of FSAC ($450,000) and the increase in annual
salaries to senior management of EBIC ($30,000) pursuant to certain
employment agreements entered into in connection with the Merger. For
the six months ended June 30, 1996, represents the portion of
six-months' salary to be paid to the President of FSAC ($225,000) and
the six-months' portion of the increase in annual salaries to senior
management of EBIC ($15,000) pursuant to the above-referenced
employment agreements.
4. For the year ended December 31, 1995, represents the elimination of
non-recurring costs, primarily professional fees, in connection with a
letter of intent relating to a proposed acquisition agreement which was
terminated in July 1995. These non-recurring costs are unrelated to the
Merger and would not have been incurred if the acquisition had occurred
on January 1, 1995.
5. Represents the elimination of FSAC occupancy expense due to the
consolidation of the office space of FSAC and EBIC.
6. Represents the income tax provision at an effective rate of 40% on the
adjustments described in notes 2 to 5 above.
7. This number is based on 4,416,666 shares of FSAC Common Stock
outstanding immediately prior to the Merger (less 136,000 shares
redeemed) and the issuance of a like number of shares as part of the
Merger consideration. In addition, this number of shares reflects
consummation of a unit purchase option exchange, in which all of FSAC's
outstanding 333,333 unit purchase options were exchanged, contingent
upon and immediately following effectiveness of the Merger, for 225,000
newly-issued shares of FSAC common stock. As a result, the aggregate
Merger consideration, in order to maintain the 50% interest of EBIC
stockholders on a pro forma basis, was also increased by 225,000 shares
of FSAC common stock. This number does not take into account the
issuance of cash in lieu of fractional shares of FSAC common stock in
connection with the Merger.
8. Based on market prices for FSAC common stock at and preceding June 30,
1996, the 15,133,332 FSAC warrants that will be outstanding giving
effect to the Merger (disregarding the issuance of cash in lieu of
fractional warrant interests in connection with the Merger) would have
been anti-dilutive and, accordingly, were not included in the per share
calculations. If and when the post-Merger market price of FSAC common
stock consistently exceeds the $5.00 per share warrant exercise price,
the FSAC warrants will have a dilutive impact on earnings per share.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF JUNE 30, 1996
FINANCIAL SERVICES EURO BROKERS
ACQUISITION COR- INVESTMENT PRO FORMA ADJUSTMENTS
PORATION CORPORATION DR. CR. PRO FORMA(1)
------------------ ------------- --------------- ----------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash & cash equivalents........................... $ 230,922 $32,939,360 $ 18,944,960(2) $ 1,215,368(3) $30,992,459
2,047,585(6) 21,955,000(4)
Restricted cash................................... - 1,787,647 - - 1,787,647
Commissions receivable............................ - 19,993,037 - - 19,993,037
Equity in affiliated companies.................... - 2,772,912 - - 2,772,912
Receivable from clearing firm..................... - 2,170,072 - - 2,170,072
Receivable from broker dealers and customers...... - 1,100,497 - - 1,100,497
Deposit with clearing organization................ - 2,128,509 - - 2,128,509
Short-term investment and accrued interest
thereon........................................ 754,637 - - - 754,637
U.S. Government security deposited in Trust 0
and accrued interest thereon................... 18,944,960 - - 18,944,960(2) -
Prepaid expenses and other assets................. - 6,879,402 - - 6,879,402
Exchange memberships.............................. - 140,000 - - 140,000
Deferred taxes.................................... - 5,040,513 - - 5,040,513
Furniture, equipment and leasehold
improvements................................... - 12,515,931 - - 12,515,931
Deferred acquisition costs........................ 734,672 - 734,672(3) 0
Intangible assets................................. 44,980 2,221,806 - - 2,266,786
---------- ----------- ---------- ---------- -----------
Total assets................................... 20,710,171 89,689,686 20,992,545 42,850,000 88,542,402
========== =========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accounts payable and accrued liabilities....... $ 851,123 $16,703,663 $ 1,046,096(3) $ - $16,508,690
Accrued compensation payable................... - 18,653,411 - - 18,653,411
Accrued interest payable....................... - 414,453 - - 414,453
Income taxes payable........................... - 6,143,354 - - 6,143,354
Obligations under capitalized leases........... - 1,998,964 - - 1,998,964
Payable to broker dealers and customers........ - 1,273,646 - - 1,273,646
Deferred taxes payable......................... 42,000 534,103 - - 576,103
Notes payable.................................. - 7,936,752 - - 7,936,752
Common stock, redemption payable............... - - - 720,167(5) 720,167
---------- ---------- ---------- ---------- ----------
893,123 53,658,346 1,046,096 720,167 54,225,540
---------- ---------- ---------- ---------- ----------
Minority interest................................. - 285,119 - - 285,119
Common stock, subject to possible 3,787,098 - 3,787,098(5) - 0
redemption................................. ---------- ----------- ---------- --------- ----------
Stockholders' equity:
Common Stock, $.001 par value.................. 3,700 - - 581(5) 9,011
4,730(7)
Common stock................................... - 1,671 1,671(7) - 0
Additional paid-in capital..................... 15,710,140 37,672,464 903,944(3) 3,066,350(5) 33,903,061
21,955,000(4) 316,110(8)
3,059(7)
Retained earnings (deficit).................... 316,110 (2,649,804) 316,110(8) - (2,649,804)
Notes receivable from stockholders............. - (2,047,585) - 2,047,585(6) 0
Foreign translation adjustments................ - 2,769,475 - - 2,769,475
---------- ----------- ----------- --------- ----------
Total Stockholders' equity..................... 16,029,950 35,746,221 23,179,784 5,435,356 34,031,743
---------- ----------- ----------- --------- ----------
Total liabilities and stockholders' equity..... $20,710,171 $89,689,686 $28,012,978 $6,155,523 $88,542,402
=========== =========== =========== ========== ===========
</TABLE>
Notes to Unaudited Pro Forma Consolidated Statement of Financial Condition
1. FSAC stockholders exercised their Redemption Rights in connection with
the Merger with respect to 136,000 shares of FSAC common stock, and
the unaudited pro forma consolidated statement of financial condition
is presented on this basis.
There were 1,671,290 shares of EBIC common stock outstanding as of
June 30, 1996. On a pro forma basis after the Merger, giving effect to
the redemption of 136,000 shares of FSAC common stock, approximately
9,011,332 shares of FSAC common stock will be outstanding, which
assumes 4,416,666 of previously outstanding shares, 136,000 shares
redeemed, 225,000 shares issued in respect of the unit purchase option
exchange, and 4,505,666 shares (disregarding rounding for fractional
shares) issued in exchange for outstanding shares of EBIC Common
Stock.
2. Represents the release of restricted cash from the Trust as a result
of the Merger.
3. Represents payment of $1,215,368 of the total estimated expenses of
$1,250,000 to be incurred by FSAC and EBIC in connection with the
Merger. Charged to additional paid in capital of EBIC at June 30, 1996
is $346,056 of such costs.
4. Represents payment of the actual aggregate cash consideration of
approximately $21,955,000 to holders of EBIC common stock under the
terms of the Merger (including adjustments to the cash consideration
based on changes in FSAC and EBIC's respective net worths through
August 15, 1996, the last day prior to the Merger).
5. Represents the reclassification of FSAC common stock subject to
possible redemption on the basis of FSAC stockholders having exercised
their Redemption Rights with respect to 136,000 shares at $5.295345
per share (which in the aggregate approximates $720,167).
6. Represents the repayment of notes receivable from certain EBIC
stockholders concurrent with the Merger.
7. Represents the recapitalization of stockholders' equity based upon the
issuance in the Merger of FSAC common stock in exchange for EBIC
common stock.
8. Represents reclassification of FSAC retained earnings prior to the
Merger to additional paid-in capital.
(c) Exhibits.
The following Exhibits are filed with this Amendment No. 1:
Exhibit
Number Description
23.1 Consent of Price Waterhouse LLP.
99.1 Financial Services Acquisition Corporation, Consolidated
Statement of Financial Condition as at August 31, 1996
(unaudited).
SIGNATURE
Pursuant to 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 hereunto duly authorized.
FINANCIAL SERVICES
ACQUISITION CORPORATION
By: /s/ Gilbert Scharf
Name: Gilbert Scharf
Title: Chairman of the Board,
President and Chief
Executive Officer
Date: October 22, 1996
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 on Form 8-K/A
(amending the Current Report on Form 8-K, dated August 16, 1996) of
Financial Services Acquisition Corporation of our report dated February 26,
1996, except as to Note 2 which is as of August 16, 1996, relating to the
financial statements of Euro Brokers Investment Corporation, which appears
in such Amendment.
/s/ PRICE WATERHOUSE LLP
New York, New York
October 18, 1996
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
August 31, 1996 (unaudited)
ASSETS
Cash and cash equivalents $ 21,448,534
Restricted cash (Note 14) 1,798,232
Deposit with clearing firm
(Includes cash of $713,078 and U.S.
Treasury bills of $6,430,624 at
August 31, 1996) 7,143,702
Commissions receivable 20,469,749
Receivable from clearing firm 2,238,384
Receivable from broker-dealers and
customers 4,288,780
Securities owned 5,826,804
Prepaid expenses and other assets 6,523,472
Receivable from affiliates 261,329
Equity in affiliated companies 2,794,239
Exchange memberships 140,000
Deferred taxes 5,063,352
Furniture, equipment and leasehold
improvements 13,274,425
Intangible assets 2,153,470
-------------
Total assets $ 93,424,472
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 17,448,056
Accrued compensation payable 13,443,738
Accrued interest payable 500,489
Short-term borrowings 8,368,641
Income taxes payable 7,219,392
Obligations under capitalized leases 1,884,040
Payable to affiliates 1,190,752
Deferred taxes payable 579,266
Notes payable 7,980,663
------------
58,615,037
------------
325,312
------------
Minority interest in Consolidated
Subsidiaries
Commitments and contingencies
(Notes 14 and 15)
Stockholders' equity
Preferred stock, $.001 par value:
1,000,000 shares authorized, none
issued and outstanding
Common stock, $.001 par value:
30,000,000 shares authorized,
5,192,165 issued and outstanding at
August 31, 1996 (Note 13) 5,192
Additional paid-in capital 33,696,039
Accumulated deficit (2,014,837)
Foreign translation adjustment 2,797,729
-------------
Total stockholders' equity 34,484,123
Total liabilities and stockholders' -------------
equity $ 93,424,472
=============
The accompanying notes are an integral part of this
consolidated statement of financial condition.
FINANCIAL SERVICES ACQUISITION CORPORATION
NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AUGUST 31, 1996 (UNAUDITED)
NOTE 1 - ORGANIZATION AND OPERATIONS:
Financial Services Acquisition Corporation (the "Company"), was
incorporated in Delaware on August 18, 1994 with the objective of acquiring
or merging with an operating business in the financial services industry (a
"Business Combination"). The Company's founding stockholders purchased
833,333 of its common shares, $.001 par value ("Common Stock"), for $25,000
in August, 1994.
The registration statement for the Company's initial public offering
("Offering") was declared effective November 30, 1994. The Company
consummated the Offering in December 1994 and raised net proceeds of
$19,150,098 (Note 3). The Company's management had broad discretion with
respect to the specific application of the net proceeds of the Offering,
although substantially all of the net proceeds of the Offering were
intended to be generally applied toward consummating a Business
Combination. The Company deposited $17,414,998 of the Offering proceeds in
an interest bearing trust account ("Trust Fund") to be held until the
earlier of (i) the consummation of a Business Combination or (ii)
liquidation of the Company. The Trust Fund indenture limited investments
to U.S. Government securities with maturities of 180 days or less. The
remaining proceeds were to be used to pay for business, legal and
accounting due diligence on prospective acquisitions, and continuing
general and administrative expenses in addition to other expenses.
On March 8, 1996, the Company entered into a merger agreement to acquire
Euro Brokers Investment Corporation ("EBIC"), a privately-held
international and domestic inter-dealer broker for a broad range of
financial instruments. Under the terms of the agreement, a newly-formed,
wholly-owned subsidiary of the Company was merged with and into EBIC (the
"Merger"), with each outstanding share of EBIC common stock being converted
into the right to receive, after giving effect to certain adjustments and
subject to certain escrow arrangements, approximately (i) 2.70 shares of
Common Stock (approximately 4,505,666 shares in the aggregate), (ii) 4.53
of the Company's redeemable common stock purchase warrants (approximately
7,566,666 warrants in the aggregate) and (iii) $13.14 in cash
(approximately $22.0 million in the aggregate).
The Merger was consummated on August 16, 1996.
EBIC, incorporated in December 1986, through its subsidiaries and
affiliates is primarily an inter-dealer broker of money market instruments,
derivative products and selected securities, with offices in major
financial centers, including New York, London, Tokyo, Toronto and Hong
Kong, and correspondent relationships with other brokers throughout the
world. EBIC and its subsidiaries comprise substantially all of the
Company's business and assets.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation:
The Merger has been accounted for as a recapitalization of EBIC, with the
issuance of shares by EBIC for the net assets of the Company, consisting
primarily of cash. The historical assets and liabilities of the Company
and EBIC have been reflected on the consolidated statement of financial
condition at their respective book values.
The consolidated statement of financial condition includes the accounts of
the Company and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Investments
in unconsolidated affiliates where the Company may exercise significant
influence over operating and financial policies have been accounted for
using the equity method.
Revenue recognition:
Commission income is recognized on a trade date basis.
Securities transactions:
Securities transactions are recorded on a trade date basis and are carried
at market value. Substantially all securities transactions are executed
as riskless principal and are cleared on a fully disclosed basis. As such,
those accounts are carried on the books of the Company's clearing firm.
Furniture, equipment and leasehold improvements:
Depreciation of furniture and equipment is computed on a straight line
basis using estimated useful lives of 3 to 5 years. Leasehold improvements
are amortized over the terms of the related leases or estimated useful
lives of the improvements, whichever period is shorter.
Exchange memberships:
The Company carries its exchange memberships at cost. At August 31, 1996,
the market value of these memberships approximated cost.
Intangible assets:
Intangible assets principally include the values assigned to customer lists
and are being amortized on a straight line basis over their estimated
useful lives, which approximate 15 years. Accumulated amortization of
intangible assets aggregated $7,029,928 at August 31, 1996.
The Company has a policy of reviewing the carrying value of intangible
assets to consider whether events or changes in circumstances have occurred
- -- such as the loss of significant customers, a significant change in the
revenues received from customers or a significant change in the nature of
the brokerage business -- which would indicate that the carrying amount of
such assets may not be recoverable, in which case the Company would
evaluate the estimated future cash flows expected to result from the asset.
Should the expected future cash flows be less than the carrying amount of
the asset, an impairment loss would be recognized to the extent that the
carrying value exceeds the fair value of the asset. There have been no
impairment losses with respect to intangible assets.
Foreign currency translation:
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars using exchange rates at the end of the year; revenues and
expenses are translated at average rates for the year.
Gains and losses on foreign currency translation of the financial
statements of operations whose functional currency is other than the U.S.
dollar, together with related hedges and tax effects, are reflected in the
foreign translation adjustment account in stockholders' equity. Foreign
currency exchange gains and losses from transactions and balances
denominated in a currency other than the related operating subsidiary's
functional currency are recorded in income.
Fair value of financial instruments:
The Company's securities owned are carried at market value. Additionally,
any off-balance sheet financial instruments are valued at market with
unrealized gains and losses recorded in the financial statements.
Management estimates that the aggregate net fair value of other financial
instruments recognized on the statement of financial condition (including
cash equivalents, commission and other receivables, and notes payable)
approximates their carrying value, as such financial instruments are
short-term in nature, bear interest at current market rates, or, in the
case of notes payable, bear interest at rates which management believes
are comparable to current rates which could be obtained in similar
financings.
Income taxes:
The Company will file (as EBIC has previously filed) a consolidated federal
income tax return which includes U.S. subsidiaries in which the Company's
ownership percentage is 80% or greater. The Company and such U.S.
subsidiaries also file separate and/or combined income tax returns in
various state and local tax jurisdictions.
The Company and its subsidiaries account for certain income and expense
items in a period different from that reported for tax purposes. The tax
effects of transactions are generally recognized in the financial
statements in the same period as the related items of income and expense,
regardless of when they are recognized for tax purposes.
Use of estimates:
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. Actual results could differ from those
estimates.
NOTE 3 - PUBLIC OFFERING:
On December 7, 1994, the Company sold 3,333,333 units ("Units") in the
Offering. On December 30, 1994, a further 250,000 Units were sold. Each
Unit consists of one share of the Company's Common Stock and two
redeemable common stock purchase warrants. Each warrant entitles the holder
to purchase from the Company one share of Common Stock at an exercise
price of $5.00 during the period commencing on the consummation of a
Business Combination and ending November 30, 2001. The warrants are
redeemable at a price of $.01 per warrant upon 30 days' notice at any time,
but only if the last sale price of the Common Stock is at least $8.50 per
share for the 20 consecutive trading days ending on the third day prior to
the date on which notice of redemption is given.
Prior to the Offering, the Company issued an aggregate of $200,000 of
promissory notes to certain accredited investors. These notes bore
interest at the rate of 10% per annum and were repaid on the consummation
of the Company's Offering with accrued interest. In addition, the investors
were issued 400,000 warrants which are identical to the warrants discussed
above, except that they are not redeemable by the Company until 90 days
after the consummation of a Business Combination.
In connection with the Offering, the Company also sold 333,333 Unit
Purchase Options (the "IPO Options") to the Offering underwriters and
certain of their designees. Each IPO Option entitles the holder thereof to
acquire a Unit, at $9.90 per unit, consisting of one share of Common Stock
and two warrants (which are identical to the Offering warrants discussed
above, except that the exercise price per warrant is $6.25 and the
expiration date is November 30, 1999). In connection with the Merger, the
Company issued an aggregate of 225,000 shares of Common Stock in exchange
for all outstanding IPO Options and, accordingly, no IPO Options remain
outstanding.
NOTE 4 - CASH AND CASH EQUIVALENTS:
The Company considers all short-term investments with an initial maturity
of three months or less to be cash equivalents.
NOTE 5 - COMMISSIONS RECEIVABLE:
Commissions receivable are reflected in the statement of financial
condition net of allowances for doubtful accounts of $465,800 at August 31,
1996.
NOTE 6 - RELATED PARTY TRANSACTIONS:
Prepaid expenses and other assets include loans to employees aggregating
$1,737,191 at August 31, 1996. Such loans generally bear interest at the
prime rate and are short-term in nature.
NOTE 7 - EQUITY IN AFFILIATED COMPANIES:
The Company's equity in affiliated companies principally consists of a 15%
equity interest in Yagi Euro Corporation ("Yagi Euro"), which operates the
business of a broker of money market and foreign exchange products in Tokyo
and is 85% owned by Yagi Tanshi Company, Limited. During 1995, the Company
purchased a 33% interest in Pacific Brokers International, LLC, a broker
of off-balance sheet products in the Far East.
The Company's investments in equity affiliates at August 31, 1996 are as
follows:
Yagi Euro $ 2,626,098
Pacific Brokers International, LLC 168,141
-----------
$ 2,794,239
===========
NOTE 8 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements at August
31, 1996 are summarized below:
Furniture and telephone equipment $ 11,937,193
Leasehold improvements 6,392,325
Computer and related equipment 8,890,438
Automobiles 2,585,050
------------
29,805,006
Less - Accumulated depreciation
and amortization (16,530,581)
------------
$ 13,274,425
============
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings represent financings of security positions. The loans
are fully collateralized by securities valued at $10,200,000 at August 31,
1996 and bear interest at a variable rate based on the federal funds rate
plus 2%.
NOTE 10 - OBLIGATIONS UNDER CAPITALIZED LEASES:
The Company has purchased automobiles and telecommunications equipment
under capitalized leases. The lease terms generally do not exceed three
years. The gross amount of assets under capitalized leases are $2,839,502
at August 31, 1996. Such amounts are principally automobiles and are
included in furniture, equipment and leasehold improvements on the
statement of financial condition.
NOTE 11 - NOTES PAYABLE:
Notes payable represent convertible purchase price notes which were issued
in December 1986 in connection with the acquisition of the predecessor
businesses of EBIC and bear interest at a stated rate of 6-1/8% per annum.
The conversion feature expired on November 30, 1993. The notes are due in
equal annual installments each November 30 from 1995 through 1999. The
notes have been adjusted for financial reporting purposes to reflect
imputed interest at fair market rates at the time of issuance which vary
from 6.125% to 7.71%. The notes are subordinated to the claims of financial
institutions to a maximum aggregate amount of $10,000,000. Approximately
55% of the reported balance for the purchase price notes was denominated in
British pounds sterling at August 31, 1996.
NOTE 12 - EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) defined contribution plan for the Company's
U.S. operations covering substantially all salaried employees. The
Company's contributions to the 401(k) plan are based upon a percentage of
employee contributions.
At the August 1996 special meeting of the Company's stockholders held in
connection with the Merger, the Company' stockholders also approved the
Company's 1996 Stock Option Plan (the "Stock Option Plan"), providing (as
amended) for grants of nonqualified and incentive stock options to direc-
tors, executive officers and key employees, as determined by the
compensation committee of the Company's Board of Directors. The committee
determines the option price (not to be less than fair market value for
incentive options) at the date of grant. Generally, it is anticipated that
options granted will vest in equal 20% installments over five years and
expire ten years from the date of grant. A total of 1,800,000 shares of
Common Stock is reserved for issuance pursuant to the Stock Option Plan.
NOTE 13 - STOCKHOLDERS' EQUITY:
Preferred stock:
The Company is authorized to issue 1,000,000 shares of preferred stock with
such designations, voting and other rights and preferences as may be
determined from time to time by its Board of Directors. At August 31, 1996,
no shares of preferred stock were issued or outstanding.
Common stock and warrants:
The Company is authorized to issue 30,000,000 shares of Common Stock. At
August 15, 1996, immediately prior to the Merger (Note 1), the Company had
outstanding 4,416,666 shares of Common Stock, 7,566,666 warrants and
333,333 IPO Options. In connection with the Merger and related transac-
tions, the Company redeemed, pursuant to the then-requirements of its
Certificate of Incorporation, 136,000 shares of Common Stock, issued
225,000 shares of Common Stock in exchange for all 333,333 IPO Options, and
agreed to issue to former EBIC stockholders as the non-cash portion of the
Merger consideration, in order to provide them with a 50% interest (subject
to certain escrow arrangements and the payment of cash in lieu of
fractional interests) in the Company's post-Merger capitalization, up to
4,505,666 shares of Common Stock and up to 7,566,666 series B redeemable
common stock purchase warrants (which are economically identical to the
Offering warrants discussed above).
At August 31, 1996, the Company had outstanding 5,192,165 shares of Common
Stock and 8,006,915 warrants, reflecting the fact that at that time only a
small percentage of the certificates formerly representing EBIC common
stock (all of which was cancelled in the Merger) had been exchanged for the
Merger consideration. Once all such certificates are exchanged, the Company
expects it will have approximately 9,011,295 shares of Common Stock and
15,133,290 warrants outstanding (which numbers take into account
anticipated rounding for fractional interests). At August 31, 1996, the
Company had 15,133,332 shares of Common Stock reserved for issuance upon
exercise of the warrants expected to be outstanding following the Merger
(disregarding rounding for fractional interests) and an additional
1,800,000 shares reserved for issuance upon exercise of options that may be
granted pursuant to the Stock Option Plan.
At October 16, 1996, the Company had outstanding 8,914,781 shares of Common
Stock and 14,953,196 warrants, reflecting the fact that approximately 98%
of all outstanding certificates formerly representing shares of EBIC
common stock had been exchanged for the Merger consideration.
NOTE 14 - COMMITMENTS:
Subsidiaries of the Company are obligated under certain noncancelable
leases for office space and telecommunication services. Such subsidiaries
have executed various operating leases in respect of premises, which
contain escalation clauses for base rent, maintenance, electricity and real
estate tax increases.
At December 31, 1995, the Company on a consolidated basis had the following
commitments under long-term non-cancelable operating leases:
For the year Ending December 31, 1996 $ 8,941,275
1997 4,468,010
1998 3,818,402
1999 3,699,943
2000 and thereafter 18,362,690
-------------
Total minimum lease payments $ 39,290,320
=============
A subsidiary of the Company has pledged 1,150,000 pounds in cash with a
bank in respect of a guarantee of its London premises lease. This amount
has been reflected as restricted cash in the statement of financial
condition.
NOTE 15 - CONTINGENCIES:
In common with other money brokers, a subsidiary of EBIC has, in the past,
received commissions on a number of interest rate swap transactions which
were booked on behalf of banks and local authorities in the United Kingdom.
Following the ruling by the House of Lords in relation to the ultra vires
nature of such contracts, some claims in a material amount have been
received for the return of certain of this brokerage. Management believes
it has adequately accrued for the reasonably estimated costs associated
with resolving this matter. The Company and/or its subsidiaries are also
subject to various legal proceedings and claims that arise in the ordinary
course of their businesses. Management currently believes that resolving
these matters will not have a material adverse impact on the Company's
consolidated financial condition, results of operations or liquidity.
NOTE 16 - CONCENTRATION OF CREDIT RISK:
The Company has a policy of reviewing, on an ongoing basis, the credit
standing of its customers, which are primarily financial institutions, as
well as the credit worthiness of the clearing firm used by the Company.
Financial instruments subject to credit risk are primarily commissions
receivable, which are unsecured and short-term in nature. Receivable from
clearing firm represents a concentration of credit risk, and is related to
securities transactions cleared primarily through one correspondent broker.
