-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SqEw4znSvLcR9JEWAo4akWIdMgeW7DCZQeD82M2IbYCIaXGaBWqTGj+WTVeISL+I rUqAqw2PxhUqeVXhOjcLGg== 0000950172-96-000653.txt : 19961023 0000950172-96-000653.hdr.sgml : 19961023 ACCESSION NUMBER: 0000950172-96-000653 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960816 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961022 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINANCIAL SERVICES ACQUISITION CORP /DE/ CENTRAL INDEX KEY: 0000931707 STANDARD INDUSTRIAL CLASSIFICATION: LOAN BROKERS [6163] IRS NUMBER: 593262958 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-25056 FILM NUMBER: 96646147 BUSINESS ADDRESS: STREET 1: 667 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10021 BUSINESS PHONE: 2122461000 MAIL ADDRESS: STREET 1: 667 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10021 8-K/A 1 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
EURO BROKERS INVESTMENT CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL CONDITION December 31, December 31, June 30, 1994 1995 1996 ----------------------- ------------------ --------------- ASSETS (unaudited) - ------ 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.
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 ---------------- --------------- ------------- ------------- ------------- 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.
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 ----- ------- ----- -------- -------- 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) ======== ============ ============== ============ ============
Notes Foreign receivable from translation stockholders adjustments Total ---------------- ----------- ----- 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.
EURO BROKERS INVESTMENT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended -------------------------------------------------------- December 31, December 31, December 31, 1993 1994 1995 --------------- --------------- --------------- 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
For the Six Months Ended -------------------------------- June 30, June 30, 1995 1996 --------------- --------------- 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
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:
December 31, December 31, June 30, 1994 1995 1996 ------------- ----------- --------- (Unaudited) 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) 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)
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:
December 31, December 31, June 30, 1994 1995 1996 ------------ ------------ -------- (Unaudited) 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 ============ ============ ============
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:
For the Six For the Years Ended Months Ended December 31, December 31, June 30, 1994 1995 1996 ------------ ------------ -------- (unaudited) 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 ============ =========== ===========
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:
For the Years Ended December 31, 1993 December 31, 1994 December 31, 1995 ----------------- ----------------- ----------------- 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 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 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) ========== ===========
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:
For the Years Ended December 31, December 31, December 31, 1993 1994 1995 ----------- ---------- ----------- 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 =========== ========== ===========
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.
For the Six Months Ended For the Year Ended December 31, June 30, ----------------------------------------------------- -------------------------------- 1993 1994 1995 1995 1996 ----------------- ----------------- ----------------- --------------- ---------------- Commission Income (Unaudited) 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) 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 =========== =========== ===========
(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.
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: 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)
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) ----------------- ------------ ---------- --------- ------------- 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)
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.
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 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 =========== =========== =========== ========== ===========
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 EX-23 2 EXHIBIT 23.1 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 EX-99 3 EXHIBIT 99.1 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. -----END PRIVACY-ENHANCED MESSAGE-----