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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission File Number 0-25056
FINANCIAL SERVICES ACQUISITION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-3262958
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two World Trade Center, 84th Floor, New York, NY 10048
- -------------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 748-7000
--------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of class)
Redeemable Common Stock Purchase Warrants
(Title of class)
Units consisting of one share of Common Stock and two Warrants
(Title of class)
Series B Redeemable Common Stock Purchase Warrants
(Title of class)
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (assuming directors, executive officers and 5% stockholders
are affiliates), based on the Nasdaq National Market closing sales price of
$3-1/16 on March 26, 1997, was approximately $13,303,800.
As of March 26, 1997, 8,949,656 shares of Common Stock were
outstanding.
Documents Incorporated by Reference: Those portions of registrant's
Proxy Statement for Annual Meeting of Stockholders (which registrant intends to
file pursuant to Regulation 14A on or before April 30, 1997) that contain
information required to be included in Part III of this Form 10-K are
incorporated by reference into Part III hereof as provided therein.
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FINANCIAL SERVICES ACQUISITION CORPORATION
INDEX
PAGE
PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 13
Item 3. Legal Proceedings.............................................. 13
Item 4. Submission of Matters to a Vote of
Security-Holders............................................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 14
Item 6. Selected Financial Data......................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 17
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 25
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 25
Item 11. Executive Compensation.......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 26
Item 13. Certain Relationships and Related Transactions.................. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 26
Signatures....................................................... 27
Consolidated Financial Statements and Notes...................... F-1
Index to Consolidated Financial Statements....................... F-2
Exhibit Index................................................... X-1
2
PART I
ITEM 1. BUSINESS
GENERAL
Financial Services Acquisition Corporation (the "Registrant" or "FSAC")
was incorporated in Delaware in August 1994 with the objective of acquiring or
merging with an operating business in the financial services industry. To this
end, FSAC consummated an initial public offering in December 1994 and raised net
proceeds of approximately $20 million.
On March 8, 1996, FSAC entered into a merger agreement to acquire Euro
Brokers Investment Corporation ("EBIC"), a privately-held domestic and
international inter-dealer broker for a broad range of financial instruments.
Pursuant to the merger agreement, a newly-formed, wholly-owned subsidiary of
FSAC merged (the "Merger") with and into EBIC on August 16, 1996, with EBIC
thereby becoming a wholly-owned subsidiary of FSAC. EBIC, together with its
subsidiaries and affiliates, currently comprise substantially all of FSAC's
business and assets and are hereinafter collectively with FSAC referred to as
the "Company."
Pursuant to the Merger, each outstanding share of EBIC common stock was
converted into the right to receive, after giving effect to certain adjustments
and subject to certain escrow arrangements, approximately, (i) 2.70 shares of
the common stock, $.001 par value ("Common Stock"), of FSAC (approximately
4,505,666 shares in the aggregate), (ii) 4.53 of FSAC's Series B redeemable
common stock purchase warrants (approximately 7,566,666 warrants in the
aggregate) and (iii) $13.14 in cash (approximately $22 million in the
aggregate). The intent and general effect of the stock and warrant components of
the Merger consideration was to provide former stockholders of EBIC with an
aggregate 50% post-Merger equity interest in FSAC; consistent with this
objective, the cash component of the Merger consideration was intended generally
to equalize the respective contributions of FSAC stockholders and EBIC
stockholders to the post-Merger consolidated net worth of FSAC by paying to the
former stockholders of EBIC an aggregate amount equal to the pre-Merger
difference between FSAC's and EBIC's respective net worths (each as calculated
in accordance with the merger agreement).
In connection with and immediately following the Merger, FSAC also
consummated an exchange with the holders of its outstanding options, issued in
connection with the 1994 initial public offering, to acquire 333,333 units of
FSAC (each unit consisting of one share of Common Stock and two warrants). In
the exchange, all such unit purchase options were acquired by FSAC for an
aggregate consideration consisting of 225,000 newly issued shares of Common
Stock.
As disclosed at the time of the Merger, FSAC continues to contemplate
making (subject to the advice of its financial advisors) an exchange offer in
1997 to acquire all of its outstanding warrants, on the basis of one share of
Common Stock for a number of warrants to be determined. Pursuant to an agreement
entered into at the time of the Merger, certain officers and 5% stockholders who
currently hold approximately 48% of all outstanding warrants are obligated to
tender into any such exchange offer that occurs prior to November 30, 1997 at
least such portion of the warrants then held by them as is proportionate to the
percentage of warrants tendered by all other warrant holders.
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There can be no assurance, however, that such an exchange offer will be
made or, if made, as to the exchange ratio at which it will occur or the other
terms and conditions thereof.
The Merger has been accounted for as a recapitalization of EBIC, with
the issuance of shares by EBIC for the net assets of FSAC. Accordingly,
financial and other information of the Company presented herein for dates and
periods prior to the Merger, unless otherwise indicated, represent financial and
other information of EBIC (and its subsidiaries and affiliates) for such dates
and periods.
OVERVIEW
The Company, through its subsidiaries and affiliates, is a leading
domestic and international inter-dealer brokerage firm, specializing in emerging
market debt, money market instruments, derivatives, natural gas and electricity,
repurchase agreements and other fixed income securities. The Company conducts
its business through principal offices in New York, London, Tokyo, Toronto,
Sydney and Mexico City and by means of correspondent relationships with other
brokers throughout the world. The Company operates in each of these six
financial centers (other than Tokyo and Sydney) through wholly-owned
subsidiaries. In Tokyo, the Company has a 50% interest in a partnership (the
"Tokyo Partnership") with Yagi Euro Corporation ("Yagi Euro") and a 15% minority
interest in Yagi Euro itself. In Sydney, the Company has a controlling interest
in a joint venture with management and a financial partner.
The Company functions primarily as an intermediary, matching up the
trading needs of its customers, who are primarily well-capitalized banks,
investment banks and broker-dealers. The Company assists its customers in
executing trades by identifying counterparties with reciprocal interests. The
Company provides its services through an international network of brokers who
service direct phone lines to most of the Company's approximately 2,000 clients
and through proprietary screen systems and other delivery systems that provide
customers with historical data and real-time pricing information in the
Company's various products. Customers use the Company's services for several
reasons. First, a customer can benefit from the Company's worldwide broker and
telecommunications network, which communicates with and services most of the
largest banks and securities firms. Second, the Company provides customers with
anonymity, thereby enhancing their flexibility and ability to act without
signaling their intentions to the marketplace. Third, because of its network,
the Company can provide high-quality pricing and market information, as well as
sophisticated analytics and trading and arbitrage opportunities.
The Company's transactions are principally of two types, (i)
transactions whereby the Company acts only as a matching broker and (ii)
transactions whereby the Company acts as a matched riskless principal. Primarily
in transactions involving money market instruments, derivative products and
certain repurchase agreements, the trades are arranged while preserving the
customers' anonymity, but executed at the last instant on a name give-up basis
and settled directly between the counterparties. In these transactions the
Company acts solely as the matching broker and is never a counterparty. In the
second type of transaction, primarily
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securities transactions, the Company acts as a matched riskless principal,
connecting the buyer and seller for the transaction on a fully anonymous basis
by having the Company act as the counterparty for each. This type of transaction
is then promptly settled through one of various clearing institutions with which
the Company has contractual arrangements. Except for limited positions in
connection with its municipal securities business (discussed below), the Company
does not in this or other types of trades it currently brokers seek to take
positions for its own account.
PRODUCTS
The Company's business generally falls into the brokerage of three
broad groups of products: (i) money market instruments, (ii) derivative products
and (iii) securities products.
Money Market Instruments
In general, money market instruments take the form of deposits or other
negotiable instruments placed by one financial institution with another, at an
agreed-upon rate of interest, for a fixed period of time. Money market
instruments primarily include Eurodollar deposits, term and overnight Federal
Fund deposits, Eurocurrency deposits, certificates of deposit, banker's
acceptances and short term commercial paper. The most traditional product in
this category is the Eurodollar deposit, which are U.S. dollar deposits placed
with financial institutions domiciled outside the United States (including
branches of U.S. banks). Eurocurrency deposits are non-dollar deposits placed
outside the country of denomination, such as Euro Swiss Franks, Euro
Deutchemarks and Euro Yen. The Company brokers money market instruments
predominantly to multinational banks.
Derivative Products
A derivative products transaction generally is an agreement entered
into by two parties, in which each commits to a series of payments based upon
the price performance of an underlying financial instrument or commodity for a
specified period of time. This category includes a broad range of sophisticated
financial techniques employed by multinational banks, financial institutions,
securities dealers and corporations. Some of the types of derivatives most
frequently brokered by the Company are interest rate swaps, interest rate
options, forward rate agreements and energy-related derivatives.
In an interest rate swap, two parties agree to exchange interest rate
payment obligations on a notional principal amount over the term of the swap. No
principal is exchanged, and market risk is limited to differences in the
interest payments. Swaps enable institutions that may not be able to obtain low
cost fixed rate funding, but who can borrow lower cost floating rate funds, to
swap those floating rate obligations for fixed rate obligations and obtain a
fixed rate cost of funds that they could not otherwise access. Interest rate
options, which may also be structured as "cap," "floor" or "swaption"
transactions, are transactions in which one party grants the other the right
(but not the obligation) to receive a payment equal to the amount by which an
interest rate either exceeds (for call options) or is less than (for put
options) a specified strike rate.
5
Forward rate agreements (`FRAs") are over-the-counter, off-balance
sheet instruments similar to interest rate futures, designed to give the
counterparties protection against a shift in interest rates for time deposits.
The buyer, or borrower, of a FRA agrees to pay the seller, or lender, at some
specified future settlement date, an amount of interest based on a notional
principal at a fixed rate for a specified period of time. The seller agrees to
pay the buyer, on the same future settlement date, an amount of interest based
on the same amount of notional principal and the same period of time, but based
on the then-prevailing market rate for the time period. No actual principal is
exchanged. On the settlement date, the buyer and the seller calculate the
present value of the net interest owed, and one party pays the other
accordingly.
Energy-related derivatives, including options and physical contracts
based on natural gas, electricity and emissions, generally are transactions in
which payments based on fixed and floating commodities indices are exchanged.
The Company also brokers trades in cross currency swaps, in which
interest rate flows denominated in different currencies are exchanged, based on
predetermined notional amounts, in order to convert exposure in one currency to
another. In both the United Kingdom and Tokyo, a large portion of the Company's
derivative products business is non-dollar denominated. The Company brokers
derivative products predominantly to multinational banks and investment banks.
Securities Products
Products brokered by the Company in this category include debt
obligations issued by governments, banks and corporations. The Company brokers
transactions in municipal securities, emerging market debt, U.S Treasury zero
coupon bonds, U.S. domestic convertible bonds, U.S. Treasury options and other
corporate securities. This category also includes repurchase agreements.
Emerging market debt, including Brady bonds, local sovereign issues and
Euro bonds, as well as options and repurchase agreements on the foregoing, in
1996 constituted the fastest growing area within the securities products
category, and is brokered by specialized teams located in New York, London and
Mexico City and through a joint venture in Buenos Aires. The market coverage of
the teams from these locations is worldwide. The Company's brokerage of emerging
market debt utilizes direct communication phone lines and proprietary,
computerized screen systems located directly in customers' offices.
Repurchase agreements are contractual obligations entered into by two
counterparties, first to sell securities and then to repurchase those same
securities (or the reverse in the case of a buyer) at an agreed upon future date
and price. The Company acts as an intermediary primarily for the U.S. Primary
Government Dealer community (banks and dealers licensed to participate in
auctions of U.S. Treasury securities), as well as for a number of U.S. regional
banks and dealers, in the negotiation and execution of U.S. Treasury and
mortgaged-backed repurchase agreements.
6
The Company disseminates repurchase agreement market information via its
proprietary, computerized screens and, in Canada, has begun brokering repurchase
agreements on Canadian securities through a proprietary, interactive dealing
system known as Canadian Automated Brokerage Service, in which executions,
instead of being "voice-brokered," are achieved through screens and keypads
located and activated in customers' offices. Based on the results and customer
acceptance of the initial testing of this system, the Company intends in April
1997 to use it to begin brokering Canadian government bills and short-dated
notes, which will involve a more extensive roll-out.
In June 1996, the Company began brokering municipal securities,
generally acting as a matched riskless principal, but also taking limited
proprietary positions. In October 1996, the Company also established a U.S.
convertible bond desk, generally brokering such instruments on a name give-up
basis.
In late 1995, the Company also began a securities lending business,
primarily in U.S. government and agency securities and U.S. corporate bonds, but
also in non-dollar government securities and corporate bonds, in which it
arranges for the lending of such securities from institutional investor
portfolios, in exchange for cash or other collateral, to securities dealers and
other market participants who need them to manage their positions. The Company
also engages in certain structured finance activities, primarily involving the
arranging of investment agreements between municipal bond issuers and financial
investment agreement providers.
The Company brokers securities products predominantly to banks,
investment banks and other financial institutions.
COMMUNICATIONS NETWORK AND INFORMATION SYSTEMS
The Company has a global communications network through which it
conducts its business and a sophisticated computerized information system over
which it receives and transmits current market information. Its teams of
computer and communications specialists provide technological support to the
network. The Company is continually upgrading its technological facilities in
order to access and collate market information and redistribute it virtually
instantaneously throughout its network. Through the continued development and
use of proprietary software, computerized screen displays, digital networks and
interactive capabilities, the Company keeps its communication, technology and
information systems as current as possible.
Due to the need for instantaneous communications, the majority of the
Company's customers are connected to the Company via direct point to point
telephone and data lines around the world. The Company's intranet, with its
sophisticated host computer system and digital facilities, is used to connect
via one network the Company's offices and specific customers who trade in
certain products, including emerging market debt, repurchase agreements,
options, bankers acceptances and certificates of deposit. In this way, all
parties have simultaneous access to market bids and offers.
7
Most of the markets in which the Company operates are highly efficient,
offering participants immediate access and enormous liquidity. Some markets are
subject to a high degree of volatility. Even the slightest variation in price
can make the difference between missing or executing a transaction.
Consequently, the Company's business depends heavily on the use of advanced
telephone equipment, computer systems and pricing software. Direct line voice
communication, real-time computerized screen systems and instantaneous trade
execution for its clients are all imperative for the Company's continued success
in the inter-dealer brokerage business. For this reason, the Company intends to
continue to expand and enhance its communication and information system
networks. As discussed above, the Company is also currently developing and
testing an interactive trading system in selected securities in the Canadian
market.
PERSONNEL
As of February 28, 1997, the Company employed 561 brokers, plus an
additional administrative staff, including officers and senior managers, of 164
persons, for a total employee headcount of 725. Of the brokers, 279 were located
in the U.S. and 204 were located in Europe, with the balance distributed among
the Company's other office locations. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
relations with employees to be good and regards compensation and employee
benefits to be competitive with those offered by other inter-dealer brokerage
firms.
GEOGRAPHIC DATA
Note 20 of the Notes to the Consolidated Financial Statements contains summary
financial information, for each year of the three-year period ended December 31,
1996, with respect to each of the Company's principal geographic locations.
COMPETITION
The inter-dealer brokerage industry is highly competitive. The success
of a company within this industry is dependent on the experience of and extent
of client networks developed by its personnel, its range of products, its
commission rates and the general quality, speed and reliability of its service.
While there are not many large international inter-dealer brokers and entry into
this industry is costly, the Company encounters intense competition in all
aspects of its business from several companies which are divisions of much
larger financial services conglomerates and therefore have significantly greater
resources than the Company, in addition to access to a wider pool of potential
clients. Moreover, all brokerage firms are subject to the pressures of offering
their services at a lower price. The use of volume discounting has become more
widespread in recent years. As a result, increases in market volumes do not
necessarily result in proportionate increases in brokerage commissions and
revenues.
As global communication advances and new technologies are developed,
the inter-dealer brokerage industry also will become more susceptible to the
possibility of losing clients to
8
companies and products that facilitate fully automated dealing, allowing
principals to circumvent the intermediary and obviating the need for the
inter-dealer broker. In particular, Electronic Brokering Systems (a company
owned by a consortium of commercial banks) and Reuters 2000-2 are each
electronic systems that have reduced the need for voice brokering in the spot
foreign exchange market. While these systems so far have proved viable only in
markets involving very standardized products, and the Company believes that more
complex financial vehicles, in particular derivatives, are not amenable to fully
electronic matching, there can be no guarantee that such systems will not be
developed in the future. If developed, such systems could have significant
adverse effects on the Company's business, although, as discussed above, the
Company has spent considerable efforts developing, testing and beginning the
implementation of its interactive trading system in Canada.
The Company is inherently reliant on relationships with clients that
develop over time, and certain of the Company's brokers have established
long-term associations with customers. The Company's success depends to a
significant extent on these connections and on the performance and experience of
a number of key management and sales personnel. The loss of one or more of these
key employees, who are often the target of aggressive recruitment efforts by
competitors within the industry, could have a material adverse effect on the
Company. While the Company has entered into employment agreements with and
granted stock options to many of its key employees, and has no reason to believe
that other key personnel will not remain with the Company, there can be no
assurance that such employment agreements or stock-based compensation will be
effective in retaining such persons' services or that other key personnel will
remain with the Company indefinitely. Nor can there be any guarantee that the
Company will be able to attract and retain qualified, experienced individuals,
whether to replace current personnel or as a result of expansion, because
competition in the brokerage industry for such individuals is intense.
The Company also faces intense competition from other inter-dealer
brokers to achieve revenues from, and the widest dissemination and acceptance
of, the data generated and collected from its brokerage business. Although the
Company currently is seeking to enhance such revenues, there can be no
assurances that the Company will be successful in its efforts.
REGULATION
The Company and its subsidiaries, in the ordinary course of their
business, are subject to extensive regulation at international, federal and
state levels by various regulatory bodies which are charged with safeguarding
the integrity of the securities and other financial markets and protecting the
interests of customers participating in those markets.
Euro Brokers Maxcor Inc. ("EBMI"), a wholly owned subsidiary of the
Company, is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC"), all applicable states, and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). Broker-dealers are subject to
regulations that cover all aspects of the securities business, including initial
licensing requirements, sales and trading practices, safekeeping of
9
customers' funds and securities, capital structure, record-keeping and the
conduct of directors, officers and employees. The SEC, other governmental
regulatory authorities, including state securities commissions and
self-regulatory organizations may institute administrative proceedings, which
may result in censure, fine, the issuance of cease-and-desist orders, the
suspension or expulsion of a broker-dealer, its officers or employees or other
similar consequences.
As a futures commission merchant, EBMI is also registered with the
Commodity Futures Trading Commission and is a member of the National Futures
Association and the New York Cotton Exchange and, as such, its activities in the
futures and options-on-futures markets are subject to regulation by these
bodies.
EBMI is also a member of the Government Securities Clearing Corporation
("GSCC") for the purpose of clearing certain U.S. Treasury Repurchase Agreements
and other U.S. Treasury securities. Such membership requires EBMI to maintain a
minimum net capital of $10,000,000, including a minimum deposit with GSCC of
$5,000,000.
Euro Brokers Inc. ("EBI"), a subsidiary of the Company, is an
investment advisor, registered with the SEC, pursuant to its securities lending
activities. As a result, EBI's investment advisory business is subject to
various federal and state laws and regulations that generally grant supervisory
agencies and bodies broad administrative powers, including the power to limit or
restrict EBI from carrying on its investment advisory business in the event that
it fails to comply with such laws and regulations and/or to impose other
censures and fines.
The Company's business is also subject to extensive regulation by
various non-U.S. governments and regulatory bodies, including the Bank of
England, the Securities and Futures Authority (the "SFA") and the Director
General of Fair Trading in the United Kingdom, the Ontario Securities
Commission, the Hong Kong Foreign Exchange and Deposit Brokers' Association, the
Bank of Japan, the Japanese Ministry of Finance and the Australian Securities
Commission. The compliance requirements of these different overseer bodies may
include, but are not limited to, net capital or stockholders' equity
requirements.
Additionally, as part of the harmonization process within the European
Community (the "EC"), member countries are required to adopt European
legislation, including an Investment Services Directive ("ISD") and Capital
Adequacy Directive ("CAD") which are designed to regulate the European market,
with the result that the qualification thresholds and ongoing compliance
requirements affecting the Company have recently undergone change. The SFA in
1996 issued new rules with respect to the ISD and CAD of the EC, and in
particular, regarding consolidated supervision. These rules impose varying
capital thresholds on the Company's U.K. subsidiaries depending upon, among
other things, the activities of such subsidiaries. The application of these
rules to the Company and its subsidiaries could result in the Company and/or its
subsidiaries having to meet more stringent capital adequacy requirements. The
SFA has currently confirmed the categorization of the Company's U.K. subsidiary,
Euro Brokers Financial Services Limited ("EBFSL"), as a "Category D" firm which,
as such, is not subject to
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the consolidated supervision rules. Accordingly, the Company believes that none
of the currently conducted operations of EBFSL or its other U.K. subsidiaries
subject any of them to any capital requirements of the SFA for which they are
not in compliance. It is possible that future activities of such subsidiaries,
including any activities that cause the loss of EBFSL's categorization as a
Category D firm, may require the allocation of additional capital.
Additional legislation and regulations, changes in rules promulgated by
the SEC or other U.S. federal and state governmental regulatory authorities,
self-regulatory organizations or clearing organizations, as well as non-U.S.
governments or governmental regulatory agencies, or changes in the
interpretation or enforcement of laws and rules, may directly affect the manner
of operation and profitability of the Company. In addition, any expansion of the
Company's activities into new areas may subject the Company to additional
regulatory requirements that could similarly affect such operation and
profitability.
CAUTIONARY STATEMENTS
As provided under the Private Securities Reform Act of 1995, the
Company desires to caution investors that the following factors, among others
(including the factors discussed under the "Competition" and "Regulation"
headings above), could affect the Company's results of operations and cause such
results to differ materially from those anticipated in forward-looking
statements made in this report and elsewhere by or on behalf of the Company.
Economic and Market Conditions
The Company's brokerage business and its profitability are affected by
many factors, including the volatility of securities markets, the volume, size
and timing of securities transactions, the level and volatility of interest
rates, legislation affecting the business and financial communities and the
economy in general. Low trading volume may reduce revenues, which would
generally negatively impact profitability because a portion of the Company's
costs are fixed.
Liability for Unsettled Trades
The Company functions as an intermediary, matching the trading needs of
financial institutions by providing specialized services. Some of these
transactions are executed on a name give-up basis, that is, once the specific
economic terms of a proposed transaction are agreed, the names of the individual
counterparties are disclosed, and subject to acceptance of the credit, the
transaction is completed directly by both counterparties. Other transactions are
completed with the Company acting as a matched riskless principal in which the
respective parties to the transaction know the Company as the counterparty. The
transactions are then settled through a clearing institution. In the process of
executing brokerage transactions, from time to time in the fast moving markets
in which the Company operates, miscommunications can arise whereby transactions
are completed with only one counterparty ("out trades"), thereby creating a
potential liability for the Company. These occurrences usually become known to
the Company on the day
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of the trade or, as a result of the settlement process, within a few days of the
trade. Out trades generally increase with increases in the volatility of the
market. In general, the Company does not experience a high incidence of out
trades, but in those situations in which they occur, the Company typically
disposes of the unmatched position within a short time frame. While out trades
have not had a significant adverse affect on the Company to date, there can be
no guarantee that the incidence of such occurrences will not increase in the
future or that they will not have a material adverse effect on the financial
condition or results of operations of the Company at that time.
Clearing Arrangements
Daiwa Securities America Inc. ("Daiwa") acts as EBMI's primary clearing
agent on a fully-disclosed basis. Under the terms of their agreement, Daiwa
clears as principal a significant portion of EBMI's transactions in emerging
market debt and, among other services, prepares and mails confirmations and
monthly statements to customers. All customers are pre-approved by Daiwa and,
accordingly, once Daiwa matches and confirms both sides of a trade, Daiwa
accepts all credit risks associated with any customer non-performance of such
trade. Although the Daiwa/ EBMI relationship has been ongoing for approximately
3 years, the agreement is terminable by either party upon 30 days' prior notice.
In the event of a termination, EBMI believes that a new clearing arrangement
could be established in a timely fashion with another clearing correspondent on
terms acceptable to EBMI. It remains possible, however, that the disruption from
such a change, or the terms of any such new arrangement, could have a material
adverse effect on the Company's results of operations or financial condition.
European Market Unification
The "European Monetary Union" is scheduled to commence on January 1,
1999 when the European Currency Unit will be replaced by the "Euro" at the
conversion rate of 1:1, and those national currencies which are to participate
in the European Monetary Union will ultimately cease to exist as separate
currencies by virtue of being replaced by the Euro. The introduction of a single
currency for the EC could eliminate the European cross-currency market and have
an adverse impact on the Company's business. Moreover, deregulation within the
EC will allow brokers from any EC country to conduct business in any other EC
country without the necessity of complying with the specific local regulations,
and could increase the competitive challenges faced by the Company.
Litigation and Arbitration
Many aspects of the Company's business involve varying risks of
liability. In recent years, there has been an increasing incidence of litigation
and arbitration involving participants in the inter-dealer brokerage industry,
including employee claims alleging discrimination or defamation in connection
with terminations and competitor claims alleging theft of trade secrets, unfair
competition or tortious interference in connection with new employee or new desk
hires. A settlement or judgment related to these or similar types of claims or
activities could have a material adverse effect on the Company's results of
operations or financial condition.
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Lack of Diversification
EBIC and its subsidiaries and affiliates currently comprise
substantially all of FSAC's business and assets. Accordingly, the prospects for
FSAC's performance and the market prices for FSAC's securities is highly
dependent upon the performance of EBIC's inter-dealer brokerage business.
Although FSAC is continuously seeking to strengthen and improve EBIC's
inter-dealer brokerage business, it is also currently exploring various options
for diversifying FSAC's businesses and sources of income. These possibilities
include the establishment of an asset management subsidiary, the sale and other
exploitation of data generated and collected in the course of EBIC's business
and/or acquisitions or other business combinations to enhance or complement
EBIC's business. There can be no assurances, however, that FSAC will be
successful in achieving these goals or others related to diversification or, if
achieved, whether they will positively affect the Company's financial condition
and results of operations.
ITEM 2. PROPERTIES
The Company has principal offices in each of the following locations:
New York, New York; London, England; Tokyo, Japan; Toronto, Canada; Greenwich,
Connecticut; Mexico City, Mexico; and Sydney, Australia. The Company leases all
of its office space and has material lease obligations with respect to its New
York and London premises. The Company occupies an aggregate of approximately
49,000 square feet of space in 2 World Trade Center in downtown New York under
leases expiring on various dates from 2004 through 2007 (with a lease break
provision in 2002). The Company occupies approximately 36,000 square feet of
space in downtown London under a lease expiring in 2018 (with a lease break
provision in 2003).
The Company believes that its facilities are suitable and adequate for
its present and anticipated purposes. See Note 15 of Notes to Consolidated
Financial Statements for further information regarding future minimum rental
commitments under the Company's existing leases.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or its subsidiaries are subject to various legal
proceedings, arbitrations and claims that arise in the ordinary course of their
businesses. Although the results of legal proceedings and arbitrations cannot be
predicted with certainty, based on information currently available and
established reserves, management believes that resolving these matters will not
have a material adverse impact on the Company's consolidated financial condition
or results of operations as set forth in the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of its fiscal year ended December 31, 1996.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since November 12, 1996, the Company's Common Stock has been traded on
the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol
FSAT. Prior to that time, the Common Stock was quoted on the OTC Bulletin Board,
an NASD sponsored and operated inter-dealer automated quotation system for
equity securities not listed on The Nasdaq Stock Market. Such over-the-counter
market quotations reflect inter-dealer prices, without retail markups, markdowns
or commissions and may not necessarily represent actual transactions.
The following table sets forth (i) the range of high and low sales
prices for the Common Stock, as reported by The Nasdaq Stock Market, for the
period beginning on November 12, 1996 when the Common Stock began trading on the
Nasdaq National Market and (ii) for all other periods, the range of high and low
closing bid prices for the Common Stock on the OTC Bulletin Board, as reported
by the NASD.
COMMON STOCK:
High Low
---- ---
YEAR ENDED DECEMBER 31, 1995
----------------------------
First Quarter............................. $4-3/8 $4-1/4
Second Quarter............................ 4-9/16 4-1/4
Third Quarter............................. 4-5/8 4-1/2
Fourth Quarter............................ 4-5/8 4-3/8
YEAR ENDED DECEMBER 31, 1996
----------------------------
First Quarter............................. $4-7/8 $4-5/8
Second Quarter............................ 5-1/16 4-7/8
Third Quarter............................. 5-3/8 4-13/16
Fourth Quarter (through November 11)...... 5-1/4 3-1/2
Fourth Quarter (from November 12)......... 4 2-5/8
As of March 25, 1997 there were 62 holders of record of the Common
Stock. The Company is aware that certain holders of record hold a substantial
number of shares of Common Stock as nominees for a significant number of
beneficial owners. Based on a broker-dealer inquiry made by the Company's
transfer agent in early March 1997, the Company believes there are approximately
460 beneficial owners of the Common Stock.
The Company has never declared any cash dividends on the Common Stock.
It is the present intention of the Company's Board of Directors to retain all
earnings, if any, for use in the Company's business operations and, accordingly,
the Company does not anticipate declaring any cash dividends on the Common Stock
in the foreseeable future.
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," each included elsewhere in this Form 10-K. Statement of Operations
data presented below includes reclassifications of certain revenue and expense
items which are not directly associated with operations. Such reclassifications
include interest income, interest expenses, foreign exchange effects and other
non-operating items.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS
Revenue:
Commission income $ 113,931,938 $ 135,577,625 $ 144,586,661 $ 171,576,327 $ 178,109,899
Other income 424,094 722,838 207,522 518,052 590,959
------------- ------------- ------------- ------------- -------------
114,356,032 136,300,463 144,794,183 172,094,379 178,700,858
------------- ------------- ------------- ------------- -------------
Operating costs:
Payroll and related costs 71,104,552 86,763,854 96,207,365 110,915,257 115,536,731
Communication costs 12,412,982 12,987,800 15,633,010 17,187,573 18,288,441
Travel and entertainment 7,671,840 8,681,483 10,493,903 10,224,384 11,355,183
Depreciation and
amortization 3,857,122 4,192,404 4,248,181 4,568,164 4,734,101
Occupancy costs 2,868,475 4,452,232 5,640,070 5,854,525 6,539,150
Clearing fees 863,445 3,647,556 3,777,710 4,411,515
General and administrative 5,312,106 7,148,335 6,817,988 7,550,059 8,255,316
Write-off of goodwill 12,643,948
------------- ------------- ------------- ------------- -------------
103,227,077 137,733,501 142,688,073 160,077,672 169,120,437
------------- ------------- ------------- ------------- -------------
Operating profit (loss) 11,128,955 ( 1,433,038) 2,106,110 12,016,707 9,580,421
------------- ------------- ------------- ------------- -------------
Other non-operating income (expenses):
Interest expense ( 3,264,992) ( 2,702,759) ( 1,635,547) ( 775,077) ( 693,132)
Other non-operating expenses ( 631,900) ( 2,086,718) ( 520,607) ( 295,344) ( 632,247)
Other non-operating income 1,487,918 490,000
Interest income 1,450,349 1,203,082 1,090,789 1,462,744 1,801,442
Foreign exchange gain (loss) ( 1,581,467) 64,003 ( 17,139) 214,295 ( 8,229)
------------- ------------- ------------- ------------- -------------
( 4,028,010) ( 2,034,474) ( 592,504) 606,618 467,834
------------- ------------- ------------- ------------- -------------
Income (loss) before provision
for income taxes and
minority interest 7,100,945 ( 3,467,512) 1,513,606 12,623,325 10,048,255
Provision for income taxes 6,037,250 4,858,901 3,333,989 7,393,196 6,650,606
------------- ------------- ------------- ------------- -------------
Income (loss) before minority
interest 1,063,695 ( 8,326,413) ( 1,820,383) 5,230,129 3,397,649
Minority interest 371,020 ( 442,673) ( 250,480) ( 1,767,854) 307,311
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 1,434,715 ($ 8,769,086) ($ 2,070,863) $ 3,462,275 $ 3,704,960
============= ============= ============= ============= =============
15
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets $ 72,163,710 $ 76,631,544 $ 71,914,532 $ 82,078,742 $ 97,172,715
Obligations under capitalized 3,209,983 2,766,961 2,804,836 2,284,806 1,428,764
leases
Notes payable 28,236,068 27,080,598 9,830,284 7,880,032 7,379,762
Total liabilities 52,452,868 65,695,698 43,360,381 50,185,747 64,881,249
Minority interest 1,321,410 548,179 492,154 501,731 ( 159,408)
Stockholders' equity 18,389,432 10,387,667 28,061,997 31,391,264 32,450,874
PRO FORMA PER SHARE INFORMATION(a)
Net income $ 0.38 $ 0.41
Book value $ 3.48 $ 3.60
Pro forma common shares outstanding 9,011,295 9,011,295
(a) The Merger acquisition of EBIC by FSAC in August 1996 has been
accounted for as a recapitalization of EBIC. For meaningful
year-to-year comparisons, pro forma per share information, including
pro forma common shares outstanding, has been presented as if all
shares to be issued in the Merger had been issued as of January 1, 1995
and all such shares were outstanding for the merged and recapitalized
entity since that date. See Notes 1 and 13 of the Notes to the
Consolidated Financial Statements.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues currently are derived almost exclusively from
commissions. Generally, the Company receives a commission from both
counterparties in a trade, although in trades of certain products only one party
pays a commission. The dollar amount of the average transaction generating a
commission varies significantly by the type of product and the duration of the
transaction. Similarly, the applicable commission will vary according to product
and may also reflect high transaction volume discounts or other customer
rebates.
Other sources of revenues include interest income, derived primarily
from deposits with clearing organizations and interest associated with municipal
securities positions, gains and losses on securities transactions, earnings from
the Company's equity affiliate, Yagi Euro, and foreign exchange gains and
losses.
The largest single component of the Company's expenses is compensation
paid to its brokers. Attracting and retaining qualified brokerage personnel with
strong customer relationships is a prerequisite in the Company's business and in
the brokerage business in general. Brokers are generally compensated by a
combination of fixed salary and incentive payments based on commissions
generated by them or on the net profitability of their particular products. For
this purpose, revenue and direct expenses are regularly tracked by desk (which
may involve one or more products) and often by broker, at each location. Direct
client contact, including entertainment, is also an integral part of the
Company's marketing program and represents another significant component of its
expenses.
The cost of maintaining sophisticated trading room environments and a
worldwide telecommunications network also comprises another significant portion
of the Company's expenses. It is this infrastructure that enables the Company to
support its existing client base and improve and expand its existing product
lines, as well as provide a base for offering brokerage services in newly
developing financial instruments. Expansion also generally leads to an increase
in the number of brokerage personnel since the markets usually require brokers
to specialize in a single product or group of related products, rather than to
function as market generalists.
Reference is made to Item 6 above, "Selected Financial Data," for a
summary table comparison of changes in the major categories of revenues and
expenses over the Company's five most recent fiscal years.
YEAR ENDED DECEMBER 31, 1996
Management believes that the Company's results of operations for 1996
represent reasonable overall performance in view of the difficult market
conditions experienced generally by the inter-dealer brokerage industry during
the year, especially in the latter half when continued
17
flat yield curves contributed to fairly quiet markets. In addition, many of the
Company's more mature product groups, such as money market instruments and
interest rate derivatives, experienced significant reductions in commission
rates and thus commission income. These reductions, due in part to consolidation
in the banking sector and lower margins being earned by the Company's customers,
were not offset by increased volume. Accordingly, the Company has continually
reviewed and attempted to modify its cost structure, and in particular broker
compensation arrangements, in order to make its costs more variable with changes
in commission income.
At the same time the Company has continued to expand its product range,
most noticeably by commencing the brokerage of municipal securities in June 1996
and the brokerage of U.S. convertible debt in October 1996 and by continuing the
expansion of its international emerging market debt network into Mexico and
South America, with further expansion into the Russian Federation and South
Africa planned for early 1997. Additionally, 1996 saw the Company continue to
expand its energy derivatives group in conjunction with the deregulation of
energy markets in the United States.
The Company is continually investing in information distribution and
technology. In this regard, during 1996 the Company undertook the implementation
of an interactive electronic execution system. The system, known as Canadian
Automated Brokerage Service, was deployed in the Canadian securities market in
late 1996 with an initial roll-out to Canadian repurchase agreements, with
expansion into Canadian government bills and short-dated bonds planned for the
first half of 1997. While it is too early to gauge the system's success,
management believes that the Canadian markets are ready to accept and embrace
such a system at this time.
After completion of the Merger transaction between FSAC and EBIC in
August 1996, the Company's management performed a complete review of the
Company's operations, including each and every trading desk in each of its
offices. In connection therewith, the Company decided to discontinue or combine
certain of its desks that were either performing poorly or were not viewed as an
integral part of its core business. In addition, shortly after the completion of
the Merger, certain senior management members decided to terminate their
employment with the Company. These members have entered into agreements which,
among other things, include their covenants not to compete with the business of
the Company for varying periods of time. Aggregate pre-tax costs of
approximately $2,825,000 associated with the decision to discontinue certain
desks and with these management separations have been fully accrued as of
December 31, 1996.
During 1996, the Company's 51% owned Hong Kong subsidiary, Yagi Euro
(Hong Kong) Limited ("YEHK"), continued to sustain losses and entered into a
joint venture with Martin Brokers (Hong Kong) Limited ("Martins"), which was
experiencing similar difficulties, in the hope of rationalizing costs and
improving operating results. The transaction involved each of YEHK and Martins
contributing their respective businesses and net assets to the joint venture in
exchange for the common stock of the joint venture (57.5% to YEHK and 42.5% to
Martins) and notes. Subsequent to the completion of the joint venture, however,
the performance of the combined Hong Kong operation was not acceptable.
Discussions with the Company's Japanese
18
partner in YEHK, Yagi Euro, resulted in the joint decision to sell YEHK's
interest in the venture to Martins. The disposition resulted in a loss of
approximately $277,000 and was fully reserved for as of December 31, 1996.
In addition, during 1996, a United Kingdom subsidiary of the Company
formed and acquired a controlling interest in a joint venture in Sydney,
Australia, established primarily for the brokerage of Australian dollar and
Southeast Asian derivative products. The joint venture has incurred both greater
start-up and operating costs than expected, and the Company is currently in
discussions with the joint venture management and its financial partner to
effect a recapitalization that is expected to include an infusion of secured
funds by management and specified cost rationalizations. Although the Company
hopes to maintain the joint venture and improve its profitability, there can be
no assurances that it will be able to do so. Any number of factors, including an
inability to agree on a recapitalization plan or at any time to meet capital
adequacy requirements of Australian regulators or to sustain sufficient cash
flows, could require the liquidation or sale of the joint venture. Accordingly,
the Company has fully reserved for its net capital investment in the joint
venture, in an amount of approximately $150,000, as of December 31, 1996.
In the aggregate, in the last quarter of 1996 the Company incurred
pre-tax charges of approximately $3.3 million related to the desk closings,
management changes, the Hong Kong sale and Australia joint venture reserve
discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Commission income for the year ended December 31, 1996 increased
$6,533,572 to $178,109,899, compared to $171,576,327 for the year ended December
31, 1995. Commission income for 1996 is primarily reflective of increased
business in emerging market debt, commodity derivatives and repurchase
agreements. Part of the increase is also attributable to new business in 1996,
principally municipal securities and securities lending.
Interest income for 1996 increased $338,698 to $1,801,442, compared to
$1,462,744 for 1995, due to a slight increase in interest bearing assets,
principally deposits with clearing organizations, as well as approximately
$147,000 in interest associated with municipal securities positions held during
1996.
Other income for 1996 decreased by $149,618 to $582,729, from $732,347
in 1995. The decrease was principally due to the net effect for 1996 of reduced
foreign exchange gains of approximately $220,000, reduced earnings from the
Company's equity affiliate, Yagi Euro, of approximately $210,000 and an increase
in income from gains on securities transactions of $333,000.
Payroll and related costs for 1996 increased $4,621,474 to
$115,536,731, compared to $110,915,257 for 1995. These costs increased slightly
to 64.9% of commission income for 1996, as compared to 64.6% of commission
income for 1995. The increase was primarily due to the
19
inclusion of a provision for severance and related costs of $2,787,000 which was
accrued to fully provide for the costs associated with certain desk closures and
management changes. Absent the provision for severance costs, payroll costs as a
percentage of commission income decreased, reflective of cost reductions
initially implemented in 1995 and management's ongoing efforts to reduce
compensation costs by more closely correlating compensation to commission
income.
Communication costs for 1996 increased $1,100,868 to $18,288,441,
compared to $17,187,573 for 1995. The increase was primarily the result of
expansion of business, principally in emerging market debt.
Travel and entertainment costs for 1996 increased $1,130,799 to
$11,355,183, or 6.4% of commission income, compared to $10,224,384 or 6.0% of
commission income for 1995. The overall increase is reflective of efforts to
expand business as well as gain market share in existing businesses where quiet
markets prevailed.
Occupancy costs represent expenses incurred in connection with various
operating leases in respect of the Company's office premises and include base
rent and related escalations, maintenance, electricity and real estate taxes.
These costs increased $684,625 to $6,539,150 for 1996, compared to $5,854,525
for 1995. The increase is principally attributable to the increase in rent of
$284,000 for premises of the Hong Kong operation pursuant to the joint venture
with Martins, the absence of a rent credit received in 1995 for the U.K.
premises aggregating $250,000, and the costs of other small offices opened in
Connecticut, Pennsylvania and Mexico pursuant to expansion of business.
In 1996, depreciation and amortization expense, which consists
principally of depreciation of communication and computer equipment, automobile
leases and amortization of leasehold improvements, increased $165,937 to
$4,734,101, compared to $4,568,164 for 1995, reflective of continued expansion
of the Company's proprietary screen system principally in emerging market debt
related business.
Clearing fees are fees for transaction settlements and credit
enhancement which are charged by clearing institutions where the Company acts as
riskless principal on a fully matched basis. These expenses increased $633,805
to $4,411,515 for 1996, compared to $3,777,710 for 1995, due principally to the
growth in the volume of transactions in emerging market debt.
General, administrative and other expenses include such operating
expenses as corporate insurance, office supplies and expenses, legal fees, audit
and tax fees, consulting fees, food costs, and dues to various industry
associations. These expenses increased $1,042,159 to $8,887,562 in 1996,
compared to $7,845,403 in 1995. The increase is principally attributable to
costs of approximately $427,000 that were accrued in 1996 relating to the
disposition of the Hong Kong joint venture, reserves for losses at the Australia
joint venture, and non-recurring legal and accounting fees of approximately
$632,000.
20
Interest expense decreased $81,945 to $693,132 in 1996, compared to
$775,077 in 1995. The net decrease is attributable to the effects of reduced
interest expense associated with a repayment of principal on the Company's
indebtedness incurred in connection with the acquisition of certain EBIC
predecessor companies, partially offset by an increase in interest associated
with financing municipal securities positions.
Provision for income taxes decreased $742,590 to $6,650,606 for 1996,
compared to $7,393,196 for 1995, primarily due to a decrease in income before
tax. The increased effective tax rate reflects the effect of losses in certain
taxing jurisdictions for which no tax benefits have been recorded. The Company
has historically incurred a high effective tax rate due to the non-deductibility
of certain expenses, including entertainment expenses, and amortization of
intangibles. The impact of these adjustments on the effective tax rate is also
affected by the level of pre-tax accounting income.
Minority interest of $307,311 for 1996 represents the total interests
of approximately $1,404,000 of the Company's joint venture partners in the
aggregate losses incurred by the Hong Kong and Australia operations, reduced by
the interest of approximately $1,096,000 of the Company's partner in the Tokyo
Partnership. Minority interest of $1,767,854 for 1995 relates primarily to the
joint venture partner's share of earnings of the Tokyo Partnership.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Commission income for the year ended December 31, 1995 increased
$26,989,666 to $171,576,327, compared to $144,586,661 for the year ended
December 31, 1994. The increase in commission income in 1995 was the result of
the inclusion of a full year of operations for several initiatives undertaken in
1994, primarily the Tokyo Partnership, Yen derivatives, options on government
bonds and equity options. Nonetheless, revenues were adversely impacted by
reductions in commissions from interest rate swaps, energy related commodity
swaps and repurchase agreements in New York.
Interest income for 1995 increased $371,955 to $1,462,744, compared to
$1,090,789 for 1994, due to an increase in the average cash and cash equivalents
balances, accompanied by an increase in the average interest rates earned on
short-term investments.
Other income for 1995 of $732,347 primarily reflects earnings from
equity affiliates, principally Yagi Euro, and other income for 1994 of $697,522
primarily reflects a gain on the sale of exchange memberships.
Payroll and related costs for 1995 increased $14,707,892 to
$110,915,257, compared to $96,207,365 for 1994. These costs, as a percentage of
commission income, remained consistent in 1994 and 1995 and, in general,
increased proportionally with revenues, since competitive pressures continued to
require fixed salary plus incentive arrangements based on an individual or desk
basis. The 1995 results also include the costs incurred in connection with the
consolidation
21
and elimination of certain products, while the cost reductions associated
therewith will not be fully realized until 1996.
Communication costs for 1995 increased $1,554,563 to $17,187,573,
compared to $15,633,010 for 1994. Increased costs resulted from an expansion in
the communications network in emerging market debt and the addition of certain
new products by the New York, Tokyo, Toronto and Hong Kong offices. Such
increases were partially offset by a reduction of costs in London resulting from
a consolidation of certain desks.
Travel and entertainment costs for 1995 decreased $269,519 to
$10,224,384, or 6.0% of commission income, compared to $10,493,903, or 7.3% of
commission income, for 1994. The reduction was the result of increased efforts
to control such expenses.
Occupancy costs increased $214,455 to $5,854,525 for 1995, compared to
$5,640,070 for 1994. The increase was the net result of expansion of office
space in New York, Connecticut and Hong Kong and the closure of the Company's
Los Angeles office in late 1994.
In 1995, depreciation and amortization expense increased $319,983 to
$4,568,164, compared to $4,248,181 for 1994. This increase was the result of the
continued expansion of certain business in New York and the expansion of the
Company's proprietary screen system in New York and London.
Clearing fees increased $130,154 to $3,777,710, compared to $3,647,556
for 1994, due to an increase in the volume of transactions, offset by only a
slight reduction in the per transaction fee.
General, administrative and other expenses for 1995 increased $489,669
to $7,845,403, compared to $7,355,734 for 1994, partially due to costs
associated with the Tokyo Partnership, which for 1995 reflect a full year of
operations versus only a partial year for 1994 (during which the partnership was
formed).
Interest expense for 1995 decreased $860,470 to $775,077, compared to
$1,635,547 for 1994, due to the reduction of debt outstanding.
Provision for income taxes for 1995 increased $4,059,207 to $7,393,196,
compared to $3,333,989 for 1994. This increase was primarily the result of the
increase in taxable income. The 1995 effective tax rate includes the effect of
the non-deductibility of entertainment expenses, state and city taxes and
foreign income subject to higher income tax rates. The 1994 effective tax rate
includes the effect of these elements and of foreign losses for which no tax
benefit was recognized.
Minority interest in consolidated subsidiary increased $1,517,374 to
$1,767,854 in 1995, from $250,480 in 1994, primarily due to increased
profitability of the Tokyo Partnership.
22
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
A substantial portion of the Company's assets, similar to other
brokerage firms, is liquid, consisting of cash, cash equivalents and assets
readily convertible into cash, such as commissions receivable, receivables from
broker-dealers, customers and clearing firm and securities owned.
Securities owned principally reflect municipal security positions taken
in connection with the Company's brokerage of municipal securities business,
which commenced in June 1996. Positions are generally held for short periods of
time and for the purpose of facilitating anticipated customer needs and are
generally financed by a combination of cash margin and short term borrowings
from the Company's clearing firm. At year-end 1996, as reflected on the
Consolidated Statement of Financial Condition, the Company had net assets
relating to securities transactions of approximately $4.5 million, reflecting
securities owned of approximately $8.7 million, securities sold, not yet
purchased of approximately $1.7 million and a receivable from broker-dealers and
customers of approximately $9.0 million, financed by short-term borrowings of
approximately $9.7 million and a payable to broker-dealers and customers of
approximately $1.8 million.
During August 1996, one the Company's U.S. subsidiaries became a member
of GSCC for the purpose of clearing U.S. Treasury Repurchase Agreements. Such
membership required a minimum net regulatory capital of $10,000,000, including a
pledge of $5,000,000 in U.S. Treasury Securities, which has been reflected as
deposits with clearing organizations on the Consolidated Statement of Financial
Condition.
Notes payable at December 31, 1996 of approximately $7.4 million
includes $6,279,000 that reflects the remaining three equal annual installments
of principal due on November 30 of each of 1997, 1998 and 1999 on notes issued
by the Company in connection with the acquisition of EBIC's predecessor business
in December 1986. In each of 1995 and 1996, the Company repaid approximately $2
million of the notes. The three remaining annual installments, and interest
thereon, are expected to be met from operating activities. The other
approximately $1.1 million included in notes payable reflects notes issued to
minority stockholders in August 1996 by the Company's Hong Kong joint venture,
the accounts of which are included on a consolidated basis in the Consolidated
Financial Statements. In connection with the Company's February 1997 disposition
of its interest in such joint venture, such notes payable are no longer a
liability of the Company or any of its subsidiaries or affiliates.
Net cash used in operations for 1996 was approximately $1.0 million.
The net use of cash is the result of net income of approximately $3.7 million
adjusted to reflect approximately $4.7 of non-cash expenses principally for
depreciation and amortization. These positive cash effects were offset by
decreases in cash attributable to increased deposits with clearing organizations
of $5.1 million (in connection with the Company's GSCC membership described
above) and an increase in net assets associated with securities transactions of
approximately $4.5 million (as described above).
23
Operating activities in 1995 provided approximately $10.4 million in
cash, resulting from approximately $3.5 million in net income plus approximately
$4.6 million in non-cash items, principally depreciation and amortization, and
the net positive effects of other working capital items.
Operating activities in 1994 reflect cash used of approximately $1.2
million which is attributable to a net loss of approximately $2.1 million
adjusted for the non-cash impact of depreciation and amortization of $4.2
million, less the effect of the timing of compensation payments (that is,
payments made in 1994 for which the accruals were made in 1993).
The Company and its subsidiaries, in the ordinary course of their
business, are subject to extensive regulation at international, federal and
state levels by various regulatory bodies which are charged with safeguarding
the integrity of the securities and other financial markets and protecting the
interest of customers. The compliance requirements of these different regulatory
bodies may include, but are not limited to, net capital or stockholders' equity
requirements. The Company has historically met regulatory net capital or
stockholders' equity requirements and believes it will be able to continue to do
so in the future.
Investing Activities
Investing activities for 1996 and 1995 reflect cash used of
approximately $3.9 million and $2.2 million, respectively, for purchases of
fixed assets. The increase is reflective of the Company's continuing commitment
to upgrade communication and information system technology. Investing activities
for 1994 provided cash of $315,000, which was the net effect of fixed asset
purchases of approximately $4.3 million and sales of short term investments
and exchange memberships aggregating approximately $4.6 million.
Financing Activities
Net cash used in financing activities for 1996 was approximately $4.3
million and is reflective of a net effect of approximately $2.2 million of net
cash used in connection with the deemed recapitalization of EBIC pursuant to the
Merger (as reflected in the Consolidated Statement of Cash Flows included in the
Consolidated Financial Statements), net repayment of notes payable of
approximately $1.0 million (as described above) and decreased obligations under
expired capitalized leases of approximately $1.0 million.
Cash used in financing activities for 1995 was approximately $2.5
million and is primarily attributable to repayment of notes payable of
approximately $2.0 million and decreased obligations under capitalized leases of
approximately $500,000.
In 1994 financing activities provided approximately $1.7 million in
cash, primarily relating to the net impact of the retirement of debt from
proceeds associated with the issuance of new common stock.
24
EFFECTS OF INFLATION
Because the Company's assets are to a large extent liquid in nature,
they are not significantly affected by inflation. However, increases in certain
Company expenses due to inflation, such as employee compensation, travel and
entertainment and occupancy and communication costs, may not be readily
recoverable in the price of its services. In addition, to the extent inflation
increases or decreases volatility in the securities markets, the Company's
brokerage business is likely to be affected by corresponding increases or
decreases in brokerage transaction volumes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this
Form 10-K. See Item 14 and the F-pages that follow.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by Item 9 is incorporated herein by reference
to the Company's definitive proxy statement for the 1997 Annual Meeting of
Stockholders (the "Proxy Statement"). The Company intends to file the Proxy
Statement with the SEC on or prior to April 30, 1997. The Company has previously
reported such information, which relates to its decision of December 2, 1996 to
change independent accountants from BDO Seidman LLP to Price Waterhouse, LLP, in
Amendment No. 1 to its Current Report on Form 8-K/A, filed with the SEC on
December 13, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to the Proxy Statement. The Company intends to file the Proxy Statement with the
SEC on or prior to April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the Proxy Statement, except that such incorporation by reference shall not be
deemed to specifically incorporate by reference the information referred to in
Item 402(a) of Regulation S-K. The Company intends to file the Proxy Statement
with the SEC on or prior to April 30, 1997.
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the Proxy Statement. The Company intends to file the Proxy Statement with the
SEC on or prior to April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the Proxy Statement. The Company intends to file the Proxy Statement with the
SEC on or prior to April 30, 1997.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Listed on page F-2 of the Consolidated Financial Statements
included in this Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements.
(a)(3) Exhibits
Listed in the Exhibit Index appearing at page X-1 of this Form
10-K.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated December 2, 1996, was filed
by the Company with the SEC on December 6, 1996, with Amendment
No. 1 thereto filed with the SEC on Form 8-K/A on December 13,
1996. The Reports related to the Company's decision to engage
Price Waterhouse LLP as its independent accountant and to
dismiss BDO Seidman, LLP as such independent accountant.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FINANCIAL SERVICES ACQUISITION CORPORATION
By: /s/ Gilbert D. Scharf
----------------------------------
Gilbert D.Scharf,
Chairman of the Board, President and Chief
Executive Officer
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Gilbert D. Scharf Chairman of the Board, President March 27, 1997
- -------------------------- and Chief Executive Officer
Gilbert D. Scharf
/s/ Michael J. Scharf Chief Financial and Principal March 27, 1997
- -------------------------- Accounting Officer, Treasurer,
Michael J. Scharf Secretary and Director
/s/ Larry S. Kopp Director March 27, 1997
- --------------------------
Larry S. Kopp
/s/ Denis Martin Director March 27, 1997
- --------------------------
Denis Martin
/s/ James W. Stevens Director March 27, 1997
- --------------------------
James W. Stevens
/s/ Frederick B. Whittemore Director March 27, 1997
- ---------------------------
Frederick B. Whittemore
/s/ William B. Wigton Director March 27, 1997
- --------------------------
William B. Wigton
27
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
F-1
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
CONTENTS PAGE
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statement of Financial Condition F-4
Consolidated Statement of Operations F-6
Consolidated Statement of Changes in Stockholders' Equity F-7
Consolidated Statement of Cash Flows F-8
Notes to the Consolidated Financial Statements F-10
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
and Stockholders of
Financial Services Acquisition Corporation
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations,
changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Financial Services
Acquisition Corporation and its subsidiaries at December 31, 1995 and
1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, 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.
/s/ Price Waterhouse LLP
New York, New York
March 6, 1997
F-3
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, December 31,
1995 1996
---- ----
ASSETS
Cash and cash equivalents $27,013,350 $18,231,926
Restricted cash (Note 15) 1,785,490 1,968,851
Commissions receivable 18,502,261 18,558,643
Equity in affiliated companies 2,951,864 2,756,741
Receivable from clearing firm 1,592,650 2,200,062
Deposits with clearing organizations 2,076,302 7,181,992
Securities owned 8,751,276
Receivable from broker-dealers and
customers 9,042,613
Prepaid expenses and other assets 6,944,925 6,177,118
Deferred tax asset 5,520,348 6,662,193
Furniture, equipment and leasehold
improvements 13,264,743 13,624,500
Intangible assets 2,426,809 2,016,800
----------- -----------
Total assets $82,078,742 $97,172,715
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(CONTINUED)
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
- ------------------------------------ ------------- ------------
Liabilities:
Short-term borrowings $ $ 9,688,983
Accounts payable and accrued liabilities 16,001,920 17,336,032
Accrued compensation payable 15,998,721 22,973,060
Income taxes payable 7,328,244 1,804,543
Obligations under capitalized leases 2,284,806 1,428,764
Securities sold, not yet purchased 1,724,531
Payable to broker-dealers and customers 1,826,250
Deferred taxes payable 692,024 719,324
Notes payable 7,880,032 7,379,762
------------- ------------
50,185,747 64,881,249
------------- ------------
Minority interest in consolidated subsidiaries 501,731 ( 159,408)
------------- ------------
Commitments and contingencies
(Notes 15 and 16)
Stockholders' equity (Note 13):
Preferred stock, at December 31, 1995, none
authorized, at December 31, 1996, $.001
par value, 1,000,000 shares authorized,
none outstanding
Common stock, at December 31, 1995, Class A
$.01 par value; 2,000,000 shares authorized,
none outstanding, Class B $.001 par value,
2,000,000 shares authorized, 1,671,290
outstanding; at December 31, 1996, $.001 par
value, 30,000,000 shares authorized,
9,011,295 outstanding 4,258 9,011
Additional paid-in capital 48,193,040 33,533,806
Treasury stock at cost ( 10,177,107)
Accumulated deficit ( 7,251,041) ( 3,546,081)
Notes receivable from stockholders ( 2,243,709)
Foreign translation adjustment 2,865,823 2,454,138
------------- -------------
Total stockholders' equity 31,391,264 32,450,874
------------- -------------
Total liabilities and stockholders' $ 82,078,742 $ 97,172,715
equity ============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended
December 31, December 31, December 31,
1994 1995 1996
------------- ------------- -------------
Revenue:
Commission income $ 144,586,661 $ 171,576,327 $ 178,109,899
Interest income 1,090,789 1,462,744 1,801,442
Other income 697,522 732,347 582,729
------------- ------------- -------------
146,374,972 173,771,418 180,494,070
------------- ------------- -------------
Costs and expenses:
Payroll and related costs 96,207,365 110,915,257 115,536,731
Communication costs 15,633,010 17,187,573 18,288,441
Travel and entertainment 10,493,903 10,224,384 11,355,183
Occupancy costs 5,640,070 5,854,525 6,539,150
Depreciation and
amortization 4,248,181 4,568,164 4,734,101
Clearing fees 3,647,556 3,777,710 4,411,515
General, administrative
and other expenses 7,355,734 7,845,403 8,887,562
Interest expense 1,635,547 775,077 693,132
------------- ------------- -------------
144,861,366 161,148,093 170,445,815
------------- ------------- -------------
Income before provision for income
taxes and minority interest 1,513,606 12,623,325 10,048,255
Provision for income taxes 3,333,989 7,393,196 6,650,606
------------- ------------- -------------
Income (loss) before minority
interest ( 1,820,383) 5,230,129 3,397,649
Minority interest in consolidated
subsidiaries ( 250,480) ( 1,767,854) 307,311
------------- ------------- -------------
Net income (loss) ($ 2,070,863) $ 3,462,275 $ 3,704,960
============= ============= =============
Pro forma common shares outstanding
(Note 1) 9,011,295 9,011,295
Pro forma earnings per share (Note 1) $.38 $.41
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Notes
Additional receivable Foreign
Common paid-in Treasury Accumulated EBIC from translation
stock capital stock deficit warrants stockholders adjustment Total
------ ----------- ----------- ----------- ---------- ------------ ----------- -----------
Balance at December 31, 1993 $3,348 $18,442,515 ($3,623,839) ($8,642,453) $5,141,145 ($3,720,351) $2,787,302 $10,387,667
Retirement of warrants 5,141,145 (5,141,145)
Net loss (2,070,863) (2,070,863)
Acquisition of treasury stock (6,553,268) (6,553,268)
Issuance of common stock, net of
expenses 910 24,616,526 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 4,258 48,200,186 (10,177,107) (10,713,316) (2,283,886) 3,031,862 28,061,997
Net income 3,462,275 3,462,275
Expenses relating to acquisition
of common stock (7,146) (7,146)
Repayment of stockholder notes 40,177 40,177
Foreign translation adjustment (166,039) (166,039)
------ ----------- ----------- ----------- ---------- ----------- ---------- -----------
Balance at December 31, 1995 4,258 48,193,040 (10,177,107) (7,251,041) (2,243,709) 2,865,823 31,391,264
Retirement of treasury stock (2,587) (10,174,520) 10,177,107
Net income 3,704,960 3,704,960
Foreign translation adjustment (411,685) (411,685)
Recapitalization in connection
with the Merger (See Note 1)
Retirement of EBIC stock (1,671) 1,671
Issuance of shares to EBIC
shareholders (Note 13) 9,011 18,234,239 18,243,250
Cash consideration paid to
EBIC shareholders (21,955,012) (21,955,012)
Repayment of stockholder
notes 2,243,709 2,243,709
EBIC expenses incurred in
connection with Merger (765,612) (765,612)
------ ----------- ----------- ----------- ---------- ----------- ---------- -----------
Balance at December 31, 1996 $9,011 $33,533,806 $ ($3,546,081) $ $ $2,454,138 $32,450,874
====== =========== =========== =========== ========== =========== ========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the
Year Ended
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ($ 2,070,863) $ 3,462,275 $ 3,704,960
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 4,248,181 4,568,164 4,734,101
Provision for doubtful accounts ( 196,300) ( 48,956) ( 45,361)
Gain on sale of exchange memberships ( 490,000) ( 14,000)
Undistributed earnings of affiliates ( 137,775) ( 537,571) ( 636,148)
Minority interest in consolidated subsidiaries ( 55,416) 9,249 ( 635,630)
Imputed interest expense 120,806 129,358 106,287
Amortization of deferred expenses 12,031 5,269 1,457
Deferred income taxes 1,971,504 ( 4,522,662) ( 1,055,635)
Change in assets and liabilities:
Decrease (increase) in commissions receivable 1,894,546 ( 1,654,378) 644,622
(Decrease) increase in receivable from clearing firm ( 1,155,733) 852,110 ( 607,412)
Increase in deposits with clearing organizations ( 1,877,041) ( 5,092,794)
(Increase) decrease in securities owned ( 967,500) 967,500 ( 8,751,276)
Increase in receivable from broker-dealers and customers ( 9,042,613)
Decrease (increase) in prepaid expenses and other assets 2,398,411 ( 478,684) 1,184,235
Increase in short-term borrowings 9,688,983
Increase (decrease) in accounts payable and accrued
liabilities 1,173,089 ( 243,403) 569,448
(Decrease) increase in accrued compensation payable ( 7,887,478) 5,552,106 6,231,912
Increase (decrease) in securities owned, not yet purchased 1,280,000 ( 1,280,000) 1,724,531
Increase in payable to broker-dealers and customers 1,825,650
(Decrease) increase in income taxes payable ( 1,345,847) 5,494,722 ( 5,555,680)
----------- ----------- -----------
Net cash (used in) provided by operating activities ( 1,208,344) 10,384,058 ( 1,006,363)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets ( 4,340,179) ( 2,059,449) ( 4,030,004)
Net sale of short-term investments 2,957,056
Investment in equity affiliates 36,885 ( 93,745) 113,070
Net (purchase) sale of exchange memberships 1,661,000 ( 25,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities 314,762 ( 2,178,194) ( 3,916,934)
----------- ----------- -----------
F-8
FINANCIAL SERVICES ACQUISITION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(continued)
For the Year Ended
December 31, December 31, December31,
1994 1995 1996
------------ ------------ ------------
Cash flows from financing activities:
Repayment of notes payable (2,037,502) (1,027,396)
Repayment of subordinated note payable (17,660,000)
Issuance of common stock, net of expenses 1,617,436 (7,146)
Issuance of secured demand note 23,000,000
Decrease in obligations under capitalized leases (119,010) (507,946) (1,001,529)
Acquisition of treasury stock (5,221,260)
Issuance of shares in connection with Merger 18,243,250
EBIC expenses incurred in connection with Merger (765,612)
Cash merger consideration paid to EBIC shareholders (21,955,012)
Increase in minority shareholders (25,001)
Repayments of notes receivable from stockholders 105,676 40,177 2,243,709
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,722,842 (2,512,417) (4,287,591)
------------ ------------ ------------
Effect of exchange rate changes on cash 233,079 (35,370) 429,464
------------ ------------ ------------
Net increase (decrease)in cash and cash equivalents 1,062,339 5,658,077 (8,781,424)
Cash and cash equivalents at beginning of year 20,292,934 21,355,273 27,013,350
------------ ------------ ------------
Cash and cash equivalents at end of year $ 21,355,273 $ 27,013,350 $ 18,231,926
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 1,736,028 $ 650,007 $ 616,750
Income taxes paid 2,828,794 881,875 12,070,364
Supplemental disclosure of non-cash activities:
Reduction of notes receivable from stockholders in
connection with acquisition of treasury stock $ 1,330,789
Conversion of secured demand note to equity 23,000,000
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
FINANCIAL SERVICES ACQUISITION CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 31, 1996
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
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. To this end, the Company
consummated an initial public offering in December 1994 and raised net proceeds
of approximately $20 million.
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,
pursuant to which a newly-formed, wholly-owned subsidiary of the Company would
merge (the "Merger") with and into EBIC. The Merger was consummated on August
16, 1996. Pursuant thereto, each outstanding share of EBIC common stock was
converted into the right to receive, after giving effect to certain adjustments
and subject to certain escrow arrangements, approximately (i) 2.70 shares of the
common stock, $.001 par value ("Common Stock"), of the Company (approximately
4,505,666 shares in the aggregate), (ii) 4.53 of the Company's Series B
redeemable common stock purchase warrants (approximately 7,566,666 warrants in
the aggregate) and $13.14 in cash (approximately $22 million in the aggregate).
In connection with and immediately following the Merger, the Company also
consummated an exchange with the holders of its outstanding options, issued in
connection with the 1994 initial public offering, to acquire 333,333 units of
the Company (each unit consisting of one share of Common Stock and two
warrants). In the exchange, all such unit purchase options were acquired by the
Company for an aggregate consideration consisting of 225,000 newly issued shares
of Common Stock.
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 and Tokyo, and correspondent relationships with other
brokers throughout the world. EBIC and its affiliates comprise substantially all
of the Company's business and assets.
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. The historical
assets and liabilities of the Company and EBIC have been combined and reflected
in the statement of financial condition at their respective book values. The
consolidated results of operations and financial position of the Company for
periods and dates prior to the Merger are the consolidated historical results of
operations and financial position of EBIC and its subsidiaries and affiliates
for such periods and dates. Pro forma number of shares outstanding and related
pro forma earnings per share information have been presented as if all shares to
be issued in the Merger had been issued as of January 1, 1995 (See Note 13) and
all such shares were outstanding for the merged and recapitalized entity since
that date.
F-10
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation:
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries and other entities over which it exercises
control. 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.
Securities owned and securities sold but not yet purchased are carried at market
value with unrealized gains and losses reflected in income.
Gains on securities transactions of approximately $333,000 for the year ended
December 31, 1996 have been included in other income in the Consolidated
Statement of Operations.
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, 1995 and
1996, the market value of these memberships approximated cost.
At December 31, 1995 and 1996, the cost of such memberships aggregated $140,000
and has been included in prepaid expenses and other assets.
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 $6,756,592 and $7,166,596 at December 31, 1995 and 1996,
respectively.
F-11
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: Continued:
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
assets. 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 and securities sold, not yet purchased are
carried at market value. Additionally, 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, commissions 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 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.
F-12
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: Continued:
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- ACQUISITION AND SALE OF BUSINESS:
During 1996, the Company's 51% owned Hong Kong subsidiary, Yagi Euro (Hong Kong)
Limited ("YEHK") entered into a joint venture with Martin Brokers (Hong Kong)
Limited ("Martins") whereby YEHK contributed its business and substantially all
of its net assets to the joint venture in exchange for 57.5% of the common stock
of the joint venture and a note. Martins also contributed its business and net
assets in exchange for 42.5% of the common stock and notes. The Company's
financial statements include the accounts of the joint venture on a consolidated
basis and, at December 31, 1996, include notes payable aggregating approximately
$1,100,000 that were issued to minority shareholders in connection with the
transaction. As described in Note 19, YEHK sold its interest in the joint
venture to Martins in February 1997.
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 $471,100 and $434,400 at December 31,
1995, and 1996, respectively.
NOTE 6- RELATED PARTY TRANSACTIONS:
The Company incurred interest expense which was in respect of debt payable to
its then majority shareholder aggregating $789,200 for the year ended
December 31, 1994. All such debt was repaid during 1994.
Prepaid expenses and other assets include loans to employees aggregating
$2,317,500 and $1,526,000 at December 31, 1995 and 1996, respectively. Such
loans generally bear interest at the prime rate and are short term in nature.
F-13
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, 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.
The Company's investments in equity affiliates are as follows:
December 31, December 31,
1995 1996
------------ ------------
Yagi Euro $ 2,794,211 $ 2,604,439
Other 157,653 152,302
------------ ------------
$ 2,951,864 $ 2,756,741
============ ============
Summarized financial information for Yagi Euro is as follows:
December 31, December 31,
1995 1996
------------ ------------
Total assets $ 21,740,692 $ 20,729,326
Total liabilities 3,266,547 3,366,396
Revenues 14,310,972 10,169,693
Net income 2,735,871 1,296,149
NOTE 8 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements are summarized below:
December 31, December 31,
1995 1996
------------ ------------
Furniture and telephone equipment $ 11,512,903 $ 13,579,847
Leasehold improvements 6,329,807 6,865,342
Computer and related equipment 7,265,569 10,193,793
Automobiles 3,113,004 2,156,887
------------ ------------
28,221,283 32,795,869
Less- Accumulated depreciation
and amortization ( 14,956,540) ( 19,171,369)
------------ ------------
$ 13,264,743 $ 13,624,500
============ ============
F-14
NOTE 9 - 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, 1996:
For the Year Ending December 31,
1997 $ 829,638
1998 627,705
1999 162,745
----------
Total net minimum lease payments 1,620,088
Less: amount representing interest 191,324
----------
Present value of net minimum
lease payments $1,428,764
==========
The gross amount of assets under capitalized leases are $3,361,700 and
$2,435,700 at December 31, 1995 and 1996, respectively. 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 $681,200, $644,700 and $520,200 for the
years ended December 31, 1994, 1995 and 1996, respectively.
NOTE 10 - NOTES PAYABLE:
Notes payable at December 31, 1995 and 1996 primarily 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 of 7.71%.
The notes are subordinated to the claims of financial institutions to a maximum
aggregate amount of $10,000,000. Approximately 54% and 57% of the reported
balance of the purchase price notes was denominated in British pounds sterling
at December 31, 1995 and 1996, respectively.
Notes payable at December 31, 1996 also included notes issued by the Company's
Hong Kong joint venture to minority shareholders in connection with the
formation of the joint venture. In February 1997 the Company sold its interest
in the joint venture, (See Note 19) and, accordingly, the notes payable are no
longer a liability of the Company.
F-15
NOTE 10 - NOTES PAYABLE: Continued:
The change in notes payable is as follows:
For the Year Ended
-------------------------------
December 31, December 31,
1995 1996
------------ ------------
Balance at beginning of year $ 9,830,284 $ 7,880,032
Repayment of principal (2,037,502) (2,128,469)
Exchange rate difference (42,108) 420,839
Imputed interest 129,358 106,287
Issuance of note to Martin Brokers
(Hong Kong) Limited 1,101,073
------------ ------------
Balance at end of year $ 7,880,032 $ 7,379,762
============ ============
NOTE 11- 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, subject to a maximum limit, based upon a
percentage of employee contributions. Total 401(k) plan expense approximated
$216,000 and $222,000 and $308,000 for the years ended December 31, 1994, 1995
and 1996, respectively.
NOTE 12 - INCOME TAXES:
Income (loss) from continuing operations before provision for income tax and
minority interest was taxed under the following jurisdictions:
For the Year Ended
--------------------------------------------------
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ ------------
Domestic $ 3,089,709 $ 2,645,217 $ 11,570,041
Foreign (1,576,103) 9,978,108 (1,521,786)
------------ ------------ ------------
Total $ 1,513,606 $ 12,623,325 $ 10,048,255
============ ============ ============
F-16
NOTE 12 - INCOME TAXES: Continued:
The components of the provision for income taxes are as follows:
For the Year Ended
--------------------------------------------------
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ ------------
Current
Federal $ 1,103,197 $ 2,745,733 $ 3,965,812
State and local 706,747 931,547 1,968,578
Foreign (76,684) 8,510,075 2,488,923
------------ ------------ ------------
1,733,260 12,187,355 8,423,313
------------ ------------ ------------
Deferred
Federal 504,938 (1,946,254) (506,338)
State and local 411,633 (164,502) (390,189)
Foreign 684,158 (2,683,403) (876,180)
------------ ------------ ------------
1,600,729 (4,794,159) (1,772,707)
------------ ------------ ------------
Total $ 3,333,989 $ 7,393,196 $ 6,650,606
============ ============ ============
Deferred tax assets (liabilities) are comprised of the following:
December 31, December 31,
1995 1996
------------ ------------
Assets
Bad debt reserve $ 161,000 $ 149,500
Amortization of leasehold
improvements 221,354 294,161
Rent reserve 211,830 254,535
Deferred compensation 4,415,679 5,583,442
Miscellaneous reserve 510,485 380,555
Foreign tax credits 2,675,017 1,990,000
Deferred tax asset valuation
allowance (2,675,017) (1,990,000)
------------ ------------
Gross deferred tax asset, after
valuation allowance $ 5,520,348 $ 6,662,193
============ ============
Liabilities
Depreciation (447,092) (54,164)
Unrealized foreign exchange
(gain) loss (244,932) (665,160)
------------ ------------
Gross deferred tax liabilities $ (692,024) $ (719,324)
============ ============
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.
F-17
NOTE 12 - INCOME TAXES: Continued:
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 tax benefit (expense) of ($370,000), $20,600 and
($272,000) in the years ended December 31, 1994, 1995 and 1996, respectively.
The provision 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 from continuing operations as a result of the following differences:
For the Year Ended
--------------------------------------------------
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ ------------
Tax at U.S. statutory rate $ 514,626 $ 4,291,930 $ 3,516,889
Increase (decrease) in tax
resulting from:
Higher effective rates on
earnings of foreign
operations and tax benefit
of foreign losses not
recognized 1,283,444 1,847,061 1,413,660
Nondeductible meals and
entertainment 869,536 868,507 1,018,345
State and local taxes, net 738,131 506,259 1,025,952
Other (71,748) (120,561) (324,240)
------------ ------------ ------------
$ 3,333,989 $ 7,393,196 $ 6,650,606
============ ============ ============
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 December 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
December 31, 1996, the Company had outstanding 8,926,547 shares of Common Stock,
7,566,666 redeemable common stock purchase warrants (issued in connection with
the Company's 1994 initial public offering) and 7,408,487 Series B redeemable
common stock purchase warrants (issued in connection with the Merger and
economically identical to the public offering warrants). Once all certificates
formerly representing EBIC common stock (all of which were canceled in the
Merger) are exchanged, the Company expects it will have approximately 9,011,295
shares of Common Stock and an aggregate of approximately 15,133,332 warrants
outstanding. Each of the Company's
F-18
NOTE 13 - STOCKHOLDERS' EQUITY: Continued:
outstanding warrants (both series) currently entitles the holder thereof to
purchase from the Company one share of Common Stock at an exercise price of
$5.00 per share. The warrants expire on November 20, 2001 and are redeemable at
a price of $.01 per warrant upon 30 day's notice at any time, but only if the
last sale price of the Common Stock has been at least $8.50 per share for 20
consecutive trading days ending on the third day prior to the date on which
notice of redemption is given.
At December 31, 1996, the Company had 15,133,332 shares of Common Stock reserved
for issuance upon exercise of all warrants and an additional 1,800,000 shares
reserved for issuance upon exercise of options that have been and may be granted
pursuant to the Company's 1996 Stock Option Plan (see Note 14).
Notes receivable from stockholders:
Notes receivable from stockholders of $2,243,709 at December 31, 1995, represent
amounts due to the Company for the purchase of common stock of EBIC by certain
of its employees. The notes all matured and were payable on demand. The notes
bore interest at 5% per annum, and were collateralized by the EBIC stock
purchased therewith. The notes have been reflected as a decrease to
stockholders' equity.
In connection with the Merger described in Note 1, such notes have been repaid
through the application of the cash Merger consideration otherwise payable to
such stockholders.
NOTE 14 - STOCK OPTION PLAN:
The FSAC 1996 Stock Option Plan, as amended (the "Plan"), provides for the
granting of stock options, in the form of incentive stock options ("ISOs") and
non-qualified stock options, to directors, executive officers and key employees
of the Company and its subsidiaries, as determined by the compensation committee
of the Company's Board of Directors. Options to purchase a maximum of 1,800,000
shares of Common Stock are available under the Plan. In the case of ISOs, the
duration of the option may not exceed ten years and the exercise price must be
at least equal to the fair market value on the date of grant of a share of
Common Stock. Employee options granted to date generally are ISOs and vest and
become exercisable in equal 20% installments on each of the first five
anniversaries of the date of the grant. Non-employee director options granted to
date are non-qualified stock options and vest in equal 50% installments on the
dates that are respectively six and twelve months following the date of grant.
Under the Plan, unless otherwise determined by the compensation committee,
options may only be exercised during the period of employment or service with
the Company or the 30-day period thereafter (or, in the case of death,
disability or retirement, the one-year period thereafter).
F-19
NOTE 14 - STOCK OPTION PLAN: Continued:
A summary of the Company's stock option activity follows:
Weighted average
Shares exercise price
--------- ----------------
Outstanding at January 1, 1996 0
Granted 1,260,000 $ 5.07
---------
Outstanding at December 31, 1996 1,260,000
=========
Exercise prices for options outstanding at December 31, 1996 ranged from $5.00
to $5.50. The weighted average fair value of options granted during the year was
$1.93 per share based on the value of the Common Stock at the date of grant.
Because stock options under the Plan have characteristics significantly
different from those of traded options and because changes in subjective
assumptions can materially affect the fair value estimated, the Company used the
Black-Scholes pricing model with the following weighted average assumptions for
options granted during 1996: expected volatility of 30%; risk free interest rate
of 6.56% and an expected option life of five years.
The Company applies APB Opinion 25 in accounting for the Plan and, accordingly,
does not recognize any compensation cost associated with the Plan in the
consolidated financial statements. Had compensation costs for the Plan been
determined based on the fair value at the grant dates for the options under SFAS
No. 123, net income and earnings per share for the year ended December 31, 1996
would approximate the pro forma amounts indicated below:
Net income As reported $ 3,704,960
Pro forma 2,099,972
Earnings per share As reported $ .41
Pro forma .23
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.
F-20
NOTE 15 - COMMITMENTS: Continued:
At December 31, 1996, the Company had the following commitments under long-term
non-cancelable operating leases:
For the Year Ending December 31, 1996 $ 9,445,795
1997 4,832,234
1998 4,047,982
1999 3,946,044
2000 and thereafter 18,032,138
------------
Total minimum lease payments $ 40,304,193
============
The Company has pledged (pound)1,150,500 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 16 - CONTINGENCIES:
The Company and/or its subsidiaries are subject to various legal proceedings,
arbitrations and claims that arise in the ordinary course of their businesses.
Although the results of legal proceedings and arbitrations cannot be predicted
with certainty, based on information currently available and established
reserves, management believes that resolving these matters will not have a
material adverse impact on the Company's consolidated financial condition or
results of operations.
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 - NET CAPITAL REQUIREMENTS:
The Company's U.S. broker dealer subsidiary Euro Brokers Maxcor Inc.("EBMI") is
subject to the Securities and Exchange Commission's Uniform Net Capital Rule
(rule 15c3-1) which requires the maintenance of minimum net capital. EBMI has
elected to use the alternative method, as permitted by the rule, which requires
that EBMI maintain minimum net capital, as defined, equal to the greater of
$250,000; 2% of aggregate debit items arising from customer transactions, as
defined; or 4% of the funds required to be segregated pursuant to the Commodity
Exchange Act and regulations thereunder. At December 31, 1996, EBMI's net
capital was $11,778,015 and exceeded the minimum requirement of $250,000 by
$11,528,015. In addition, a number of the Company's other subsidiaries
F-21
NOTE 18 - NET CAPITAL REQUIREMENTS: Continued:
operating in various countries are subject to capital rules and regulations
issued by the designated regulatory authorities to which they are subject.
NOTE 19 - SUBSEQUENT EVENT:
On February 5, 1997 the Company's YEHK subsidiary completed the sale of its
57.5% interest in Euro Yagi Martin Limited, its joint venture in Hong Kong with
Martins. The business was sold to the minority shareholder for $323,000 at a
loss of $277,000, which was fully reserved at December 31, 1996.
Commission income, expenses and net loss before minority interest for Euro Yagi
Martin Limited which have been reflected in the consolidated statement of
operations for the year ended December 31, 1996 were $8,085,000, $9,885,000 and
$1,800,000, respectively.
NOTE 20- GEOGRAPHIC DATA:
The following tables set forth, for each year in the three-year period ended
December 31, 1996, summary financial information for each of the Company's
principal geographic locations. United States amounts principally derive from
the Company's New York office, but include the results of operations of all of
its U.S.-based operations. Tokyo amounts include the consolidation of the
results of operations of the Tokyo Partnership and Hong Kong amounts include the
consolidation of the results of operations of the Company's Hong Kong joint
venture (a 51% interest prior to June 1996 and a controlling, approximately 30%
beneficial interest, during the balance of 1996). The Company's stake in the
Hong Kong joint venture was subsequently sold in February 1997 as described in
Note 19. Results of operations from the Company's Australia joint venture are
consolidated into the results of operations for the United Kingdom.
F-22
Year Ended December 31,
-------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
Commission income:
United States $ 66,090,388 $ 69,081,547 $ 82,178,265
United Kingdom 61,226,002 65,715,235 64,399,407
Canada 3,091,433 3,452,205 3,375,172
Japan 6,965,106 24,601,532 20,071,821
Hong Kong 7,213,732 8,725,808 8,085,234
-------------- -------------- --------------
Total $ 144,586,661 $ 171,576,327 $ 178,109,899
============== ============== ==============
Income (loss) from operations:
United States $ 4,301,375 $ 3,021,226 $ 5,045,727
United Kingdom (2,960,188) 2,901,237 1,452,943
Canada (249,413) (874,440) (452,261)
Japan 1,140,723 6,985,361 4,919,490
Hong Kong (126,387) (16,677) (1,385,478)
-------------- -------------- --------------
Total $ 2,106,110 $ 12,016,707 $ 9,580,421
============== ============== ==============
F-23
NOTE 20- GEOGRAPHIC DATA: Continued:
At December 31,
-------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
Identifiable assets:
United States $ 35,347,675 $ 38,962,574 $ 59,489,742
United Kingdom 29,412,600 31,767,594 26,434,750
Canada 1,573,157 1,789,815 1,927,895
Japan 3,823,416 7,656,963 6,704,895
Hong Kong 1,757,684 1,901,796 2,615,433
-------------- -------------- --------------
Total $ 71,914,532 $ 82,078,742 $ 97,172,715
============== ============== ==============
F-24
EXHIBIT INDEX
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of March 8, 1996, as
amended, by and among the Registrant, EBIC Acquisition Corp.
and Euro Brokers Investment Corporation ("EBIC"), without
exhibits and schedules (incorporated herein by reference to
Exhibit 2.1 of the Registrant's Quarterly Report on Form
10-Q, dated May 15, 1996 (the "Form 10-Q")
2.2 Security Transfer Agreement, dated as of March 8, 1996, among
the Registrant, Gilbert Scharf, Michael Scharf, Welsh,
Carson, Anderson & Stowe VI, L.P. ("WCAS") and certain
individuals (incorporated herein by reference to Exhibit 2.2
of the Form 10-Q)
2.3 Majority Stockholders Agreement, dated as of March 8, 1996,
among the Registrant, EBIC Acquisition Corp. and WCAS
(incorporated herein by reference to Exhibit 2.3 of the Form
10-Q)
2.4 Escrow Agreement, dated as of March 8, 1996, among the
Registrant, EBIC Acquisition Corp., EBIC, Donald R.A.
Marshall, WCAS and United States Trust Company of New York,
as escrow agent (incorporated herein by reference to Exhibit
2.4 of the Form 10-Q)
2.5 Registration Rights Agreement, dated as of August 16, 1996,
by and among the Registrant and the persons listed in Annexes
I, II and III thereto (incorporated by reference to Exhibit
2.5 of the Registrant's Current Report on Form 8-K, dated
August 16, 1996)
2.6 UPO Exchange and Custodial Agreement, dated as of June 24,
1996, by and among the Registrant, GKN Securities Corp.,
Barington Capital Group, L.P. and Graubard, Mollen & Miller,
as custodian (incorporated herein by reference to Exhibit 4.5
of the Registrant's Registration Statement on Form S-4 (No.
333-06753) dated June 25, 1996) (the "Form S-4")
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3 of
the Registrant's Registration Statement on Form 8-A, dated
October 28, 1996)
3.2 Amended and Restated Bylaws of the Registrant*
4.1 Form of Common Stock Certificate (incorporated herein by
reference to Exhibit 4.1 of Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (No.
33-85346), dated November 23, 1994 ("Amendment No. 1")
4.2 Form of Redeemable Common Stock Purchase Warrant
(incorporated herein by reference to Exhibit 4.2 of Amendment
No. 1)
X-1
4.3 Warrant Agreement, dated as of November 30, 1994, by and
between the Registrant and Continental Stock Transfer & Trust
Company (incorporated herein by reference to Exhibit 4.4 of
Amendment No.1)
4.4 Form of Series B Redeemable Common Stock Purchase Warrant
(incorporated herein by reference to Exhibit 4.2 of the Form
S-4)
4.5 Warrant Agreement, dated as of June 5, 1996, by and between
the Registrant and Continental Stock Transfer & Trust Company
(incorporated herein by reference to Exhibit 4.3 of the Form
S-4)
4.6 Rights Agreement, dated as of December 6, 1996, between the
Registrant and Continental Stock Transfer & Trust Company, as
rights agent (incorporated herein by reference to Exhibit 1
to the Registrant's Registration Statement on Form 8-A, dated
December 6, 1996)
4.7 Agreement to furnish Debt Instruments*
10.1 Agreement of Lease, dated September 10, 1992, by and between
Euro Brokers Inc. and The Port Authority of New York and New
Jersey (the "NY Lease")*
10.2 Supplement No. 1 to the NY Lease, dated March 21, 1993*
10.3 Supplement No. 2 to the NY Lease, dated July 1, 1994*
10.4 Underlease of Premises, dated 28 May 1993, between
Chestermount Properties Limited and Euro Brokers Holdings
Limited*
10.5 Letter Agreements, each dated September 9, 1994 ("Letter
Agreements"), among the Registrant, certain stockholders of
the Registrant, GKN Securities Corp. and Barington Capital
Group, L.P. (incorporated herein by reference to Exhibit 10.2
of the Registrant's Registration Statement on Form S-1 (No.
33-85346), dated October 19, 1994)
10.6 Form of Share Escrow Agreement among the Registrant, the
stockholders party to the Letter Agreements and Continental
Stock Transfer & Trust Company of New York (incorporated
herein by reference to Exhibit 10.6 of Amendment No. 1)
10.7+ Financial Services Acquisition Corporation 1996 Stock Option
Plan, as amended and restated*
10.8+ Employment Agreement, dated March 8, 1996, by and between the
Registrant and Gilbert Scharf (incorporated herein by
reference to Exhibit 10.8 of the Form 10-Q)
10.9+ Employment Agreement, dated March 8, 1996, by and between
EBIC and Keith Reihl (incorporated herein by reference to
Exhibit 10.7 to the Form S-4
10.10+ Employment Agreement, dated as of September 11, 1996, by and
between the Registrant and Roger Schwed*
X-2
10.11+ Employment Agreement, dated 23 May 1994, by and between Euro
Brokers Limited and Michael Morrison*
10.12+ Employment Agreement, dated as of September 1, 1996, by and
between Euro Brokers Inc. and Walter E. Dulski*
10.13+ Agreement, dated as of November 19, 1996, by and among the
Registrant, EBIC and Donald R.A. Marshall*
10.14 Agreement for Securities Clearance Services, dated June 7,
1993, as amended, by and between Daiwa Securities America
Inc. and Euro Brokers Maxcor Inc.*(1)
11 Statement re Computation of Per Share Earnings*
21 Subsidiaries of the Registrant*
27 Financial Data Schedule (filed in electronic form only)
- --------------------------
* Filed herewith
+ Connotes a management contract or compensatory plan or arrangement in
which a director or executive officer of the Registrant participates.
(1) Portions of this exhibit have been redacted and confidential treatment
sought pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.
X-3