===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------
Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
-----------------------
DELAWARE 52-1807562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15245 SHADY GROVE ROAD, SUITE 340, ROCKVILLE, MARYLAND 20850 (Address
of principal executive offices) (Zip Code)
(301) 527-1110
(Registrant's telephone number, including area code)
-----------------------
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 [ ]
Transitional Small Business Disclosure Format: Yes [ ] No [x]
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on November 10, 1997, was 3,063,000.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition ..................... 2
Consolidated Statements of Operations
Quarterly Period and Six Months Ended September 30, 1997 ......... 3
Consolidated Statements of Cash Flows .............................. 4
Notes to Consolidated Financial Statements ......................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 12
PART II -- OTHER INFORMATION
Item 5. Other Information.............................................. 17
Item 6. Exhibits and Reports on Form 8-K .............................. 17
Signature ............................................................. 18
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------
1996 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,639,410 $ 4,549,638
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 33,577 523,248
Securities purchased under agreements to resell 6,687,236 2,890,428
Receivables
Customers 3,677,096 2,320,637
Broker dealers and other 774,643 663,371
Affiliated companies 1,531,703 3,960,207
Other 2,788,603 1,675,211
Securities owned, at value
Equities and other 967,572 3,537,125
Buildings, furniture and equipment, at cost (net of
accumulated depreciation and amortization of
$178,714 and $1,066,458, respectively) 2,135,336 1,031,420
Deferred taxes 143,996 422,908
Investments held for resale 262,300 1,491,945
Investments in affiliated companies 5,665,728 7,935,226
Goodwill 777,874 2,333,454
Net assets of discontinued operations 7,957,012 -
Other assets and deferred amounts 751,013 888,284
---------------- ----------------
Total Assets $ 39,793,099 $ 34,223,102
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ 1,080,924 $ 1,893,761
Affiliated companies 297,697 3,291,069
Securities sold under agreements to repurchase - 1,245,593
Bonds payable - 2,307,500
Payables
Customers 9,490,175 3,337,766
Broker dealers and other 887,197 2,567,255
Accounts payable and accrued expenses 765,788 498,175
Other liabilities and deferred amounts 1,097,301 597,871
---------------- ----------------
13,619,082 15,738,990
Long-term borrowings 5,632,434 1,307,419
---------------- ----------------
Total liabilities 19,251,516 17,046,409
---------------- ----------------
Minority interest in consolidated subsidiaries 2,510,546 1,594,029
---------------- ----------------
Stockholders' equity
Common stock; $.05 par value; 10,000,000 shares
authorized; 2,871,000 and 3,063,000 shares issued and
outstanding at September 30, 1996 and 1997, respectively 143,550 153,150
Paid-in capital 19,089,233 20,183,308
Retained earnings (accumulated deficit) (1,201,746) (1,614,876)
Note receivable - common stock - (300,000)
Unrealized gain/loss on available for sale investments - (954,110)
Cumulative translation adjustment - (1,884,808)
---------------- ----------------
Total stockholders' equity 18,031,037 15,582,664
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 39,793,099 $ 34,223,102
================ ================
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE QUARTERLY PERIOD FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------ ------------------------------------
1996 1997 1996 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Commissions $ - $ 247,038 $ - $ 673,175
Fees - 302,587 - 335,266
Interest and dividends - 112,968 - 199,313
Principal transactions, net
Trading - 237,865 - 1,078,192
Investment - 490,484 - 640,272
Other 73,891 153,873 349,611 367,282
Equity in earnings of unconsolidated affiliates - (130,820) - (269,529)
---------------- ---------------- ---------------- ----------------
Total revenues 73,891 1,413,995 349,611 3,023,971
---------------- ---------------- ---------------- ----------------
Costs and expenses
Compensation and benefits 137,500 585,669 231,700 1,026,428
Interest 41,355 61,936 133,425 100,384
Brokerage, clearing, exchange fees and other - 206,202 - 483,216
Occupancy - 159,150 - 336,084
Office supplies and expenses - 85,401 - 162,218
Communications - 93,640 - 151,904
Advertising - 23,298 - 86,852
Legal fees - 47,363 - 52,740
Consulting fees - 468,456 - 741,499
Travel - 154,489 - 255,810
Education - 6,495 - 15,269
Automotive - 17,747 - 35,889
General and administrative 82,161 608,098 210,899 674,942
Depreciation and amortization 4,487 75,134 4,487 176,000
Loss on foreign currency transactions - - 38,444 67,549
---------------- ---------------- ---------------- ----------------
Total costs and expenses 265,503 2,593,078 618,955 4,366,784
---------------- ---------------- ---------------- ----------------
Income (loss) from continuing operations
before provision for income taxes and
minority interest in earnings of subsidiaries (191,612) (1,179,083) (269,344) (1,342,813)
Provision for income taxes - 264,246 - 116,843
Minority interest in earnings of subsidiaries - 246,102 - 128,723
---------------- ---------------- ---------------- ----------------
Income (loss) from continuing operations (191,612) (668,735) (269,344) (1,097,247)
Income from discontinued operations 36,125 - 41,899 -
Loss on sale of discontinued operations (1,323,083) - (1,323,083) -
---------------- ---------------- ---------------- ----------------
Net income (loss) $ (1,478,570) $ (668,735) $ (1,550,528) $ (1,097,247)
================ ================ ================ ================
Weighted average number of shares outstanding 2,871,000 3,007,121 2,871,000 3,007,121
================ ================ ================ ================
Income (loss) from continuing operations per share $ (0.07) $ (0.22) $ (0.09) $ (0.36)
================ ================ ================ ================
Net income (loss) per share $ (0.52) $ (0.22) $ (0.54) $ (0.36)
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
------------------------------------
1996 1997
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (1,550,528) $ (1,097,247)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries - (128,723)
Depreciation and amortization 4,487 176,000
Deferred taxes 76,565 (132,970)
Loss on sale of discontinued operations 1,323,083 -
Equity in earnings (loss) of unconsolidated affiliates - 269,529
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies - (403,974)
Securities purchased under agreements to resell - (2,481,563)
Receivables
Customers (421,112) (416,525)
Brokers, dealers and others - (90,972)
Affiliated companies (2,215,772) (2,448,290)
Other - 368,095
Securities owned, at value - 716,039
Other assets 279,649 333,909
Payables
Customers - 2,285,956
Brokers, dealers and others - 1,607,029
Accounts payable and accrued expenses 399,097 (1,979,861)
----------------- -----------------
Net cash provided by (used in) operating activities (2,104,531) (3,423,568)
----------------- -----------------
Cash flows from investing activities
Net proceeds from (payments for)
Acquisition of Eastbrokers Beteiligungs AG, net of cash acquired (245,107) -
Investments in affiliates - (871,162)
Investments held for resale 1,677,623 311,605
Purchases of furniture and equipment - (280,855)
----------------- -----------------
Net cash provided by (used in) investing activities 1,432,516 (840,412)
----------------- -----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement - 725,000
Capital contributions by minority interests - -
Short-term financings - 291,579
Short-term borrowings from affiliated companies 1,191,210 1,810,369
Other long-term debt (97,007) 373,045
----------------- -----------------
Net cash provided by (used in) financing activities 1,094,203 3,199,993
----------------- -----------------
Foreign currency translation adjustment 26,636 (1,253,999)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 448,824 (2,317,986)
Cash and cash equivalents, beginning of period 5,190,586 6,867,624
----------------- -----------------
Cash and cash equivalents, end of period $ 5,639,410 $ 4,549,638
================= =================
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
------------------------------------
1996 1997
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
----------------- -----------------
Cash paid for interest $ 92,070 $ 100,384
----------------- -----------------
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated (the
"Company") for the three months ended September 30, 1997 have been prepared
by the Company, are unaudited, and are subject to year-end adjustments.
These unaudited financial statements reflect all known adjustments (which
included only normal, recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented in
accordance with generally accepted accounting principles. The results
presented herein for the interim periods are not necessarily indicative of
the actual results to be expected for the fiscal year.
The notes accompanying the consolidated financial statements in the
Company's Annual Report on Form 10-KSB for the year ended March 31, 1997
include accounting policies and additional information pertinent to an
understanding of these interim financial statements.
For the six months ended September 30, 1996, the accompanying consolidated
financial statements include the financial position, results of operations
and cash flows of the Company and the discontinued operations of its
subsidiary, Hotel Fortuna a.s., for the six months ended June 30, 1996.
For the six months ended September 30, 1997, the accompanying consolidated
financial statements include the financial position, results of operations
and cash flows of the Company for the six months ended September 30, 1997.
The financial position of its subsidiary, Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers AG") is as of June 30, 1997. The results
of operations and cash flows of Eastbrokers AG are for the six months ended
June 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated (formerly Czech Industries, Inc.) and its U.S. and
international subsidiaries (collectively, "Eastbrokers" or the "Company").
The shareholders of the Company approved the name change on December 10,
1996 at its Annual Meeting of Shareholders.
These consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position and the results of the operations of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Management believes that the estimates
utilized in the preparation of the consolidated financial statements are
prudent and reasonable. Actual results could differ from these estimates.
The Company, through its subsidiaries, provides a wide range of financial
services primarily in the United States, Central Europe, and Eastern
Europe. Its businesses include securities underwriting, distribution and
trading; merger, acquisition, restructuring, and other corporate finance
advisory activities; asset management; merchant banking and other principal
investment activities; brokerage and research services; and securities
clearance services. These services are provided to a diversified group of
clients and customers, including corporations, governments, financial
institutions, and individuals. Substantially all of the Company's revenues
and expenses are generated through its European subsidiaries and
affiliates. Accordingly, no segment information has been provided.
- 6 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANGE IN FISCAL YEAR-END
On February 10, 1996, the Board of Directors unanimously approved a change
in the Company's fiscal year-end from December 31 to March 31. This change
became effective for the fiscal period ended March 31, 1996.
The fiscal year-end of the Company's domestic subsidiary was also changed
to March 31.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European Subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede
the Company's closing date by three months.
FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities and the
Company's trading positions, as well as financial instruments with
off-balance sheet risk, are carried at market or fair values or are carried
at amounts which approximate fair value because of their short-term nature.
Estimates of fair value are made at a specific point in time, based on
relevant market information and information about the financial instrument,
specifically, the value of the underlying financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. The Company has no investments in derivatives.
Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried as their original
costs. The carrying value of such equity securities is adjusted when
changes in the underlying fair values are readily ascertainable, generally
as evidenced by listed market prices or transactions which directly affect
the value of such equity securities. Downward adjustments relating to such
equity securities are made in the event that the Company determines that
the eventual realizable value is less than the carrying value.
Securities classified as available for sale are carried at fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity. Realized gains and losses on these securities are
determined on a specific identification basis and are included in earnings.
COLLATERALIZED SECURITIES TRANSACTIONS
Accounts receivable from and payable to customers include amounts due on
cash transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities sold under agreements to resell are treated as financing
arrangements and are carried at contract amounts reflecting the amounts at
which the securities will be subsequently resold as specified in the
respective agreements. The Company takes possession of the underlying
securities purchased under agreements to resell and obtains additional
collateral when the market value falls below the contract value.
The maximum term of these agreements is generally less than ninety-one
days.
OTHER RECEIVABLES
From time to time, the Company provides operating advances to select
companies as a portion of its merchant banking activities.
- 7 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNDERWRITINGS
Underwritings include gains, losses, and fees, net of syndicate expenses
arising from securities offerings in which the Company acts as an
underwriter or agent. Underwriting fees are recorded at the time the
underwriting is completed and the income is reasonably determinable.
FEES
Fees are earned from providing merger and acquisition, financial
restructuring advisory, and general management advisory services. Fees are
recorded based on the type of engagement and terms of the contract entered
into by the Company.
SECURITIES TRANSACTIONS
Government and agency securities and certain other debt obligations
transactions are recorded on a trade date basis. All other securities
transactions are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
COMMISSIONS
Commissions and related clearing expenses are recorded on a trade-date
basis as securities transactions occur.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of operations having non-U.S. dollar functional
currencies are translated at year-end rates of exchange, and the income
statements are translated at weighted average rates of exchange for the
year. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation," gains or losses resulting
from translating foreign currency financial statements, net of hedge gains
or losses and their related tax effects, are reflected in cumulative
translation adjustments, a separate component of stockholders' equity.
Gains or losses resulting from foreign currency transactions are included
in net income.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. Common stock data for the fiscal year
ended December 31, 1995 and the transition period ended March 31, 1996 have
been retroactively adjusted throughout these consolidated financial
statements to reflect a one-for-five reverse common stock split in
September 1996. The outstanding warrants and stock options are currently
excluded from the earnings per share calculation as their effect would be
antidilutive.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company
considers all demand deposits held in banks and certain highly liquid
investments with maturities of 90 days or less other than those held for
sale in the ordinary course of business to be cash equivalents.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are amortized on a straight-line basis
over periods from five to 25 years and are periodically evaluated for
impairment.
- 8 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
3. ACQUISITION OF EASTBROKERS BETEILIGUNGS AKTIENGESELLSCHAFT
Eastbrokers Vienna is an Austrian based holding company that has
established a presence in 12 Central and Eastern European countries through
its network of subsidiaries and affiliate offices. On August, 1, 1996, the
Company acquired 80 percent of the outstanding stock of Eastbrokers
Beteiligungs Aktiengesellschaft ("Eastbrokers Vienna") through the issuance
of 1,080,000 shares of the Company's common stock valued at $5,400,000. At
the time of the acquisition, the Company's stock was trading at
approximately $7.50 per share. A discount to the per share price was
recognized in consideration of the size of the block of shares with respect
to the number of outstanding shares and because the stock issued was
restricted stock. As a participant in Eastbrokers Vienna's capital
increase, the Company later acquired an additional 245,320 of an available
270,000 shares for cash increasing its ownership percentage to 83.62
percent. In two separate transactions in November and December 1996, the
Company purchased 67,756 additional shares, increasing its ownership
percentage to approximately 92 percent.
The fair value of the net assets acquired under these transactions
approximated $8,300,000. The acquisition has been accounted for under the
purchase method of accounting. The excess of the purchase price over the
fair value of the net assets acquired resulted in the Company recording
approximately $1,900,000 in goodwill, which is being amortized over 25
years on a straight-line basis. The significant equity investment of the
Company, WMP, was written up to book value, which approximated estimated
market value at the date of acquisition. The amount of this net write-up
was approximately $607,000 USD. The purchase agreement contains certain
provisions whereby the selling shareholders may be eligible to receive an
additional 120,000 shares of the Company's common stock in the event
certain earnings targets are achieved.
4. INVESTMENTS IN AFFILIATED COMPANIES
INVESTMENT IN WMP BORSENMAKLER AKTIENGESELLSCHAFT
Through its subsidiary, Eastbrokers Vienna, the Company owns a 49 percent
interest in the outstanding capital stock of WMP Borsenmakler
Aktiengesellschaft ("WMP"). WMP is a stock broker-dealer and market maker
in Vienna, Austria and is licensed as a Class B bank under Austrian law. A
Class B bank may, at its discretion, conduct any of the normal activities
associated with a bank with one major exception: it cannot accept customer
deposits.
The Company accounts for this investment using the equity method of
accounting. The carrying value of this investment was approximately
$6,080,000 on June 30, 1997. The summarized statement of financial
condition and statement of operations information for WMP for the three
months ended June 30, 1997 was as follows:
June 30,
1997
Summarized Statement of Financial Condition -------------
Total assets $16,070,447
Total liabilities 3,245,647
------------
Stockholders' equity $12,824,800
------------
- 9 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
4. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
INVESTMENT IN WMP BORSENMAKLER AKTIENGESELLSCHAFT (CONTINUED)
June 30,
1997
Summarized Statement of Operations ---------------
Revenues $ 992,131
Expenses 1,122,403
--------------
Net income $ (130,272)
--------------
This summarized financial information has been translated from the Austrian
Schilling into U.S dollars at the foreign currency exchange rates as of
June 30, 1997. Fluctuations in the foreign currency exchange rates may
affect the comparability of this information on a period to period basis.
INVESTMENTS IN OTHER UNCONSOLIDATED AFFILIATES
The Company also has other investments in unconsolidated affiliates through
Eastbrokers Vienna. These affiliates are accounted for using the equity
method of accounting. These investments are predominantly start-up
operations. As of June 30, 1997, these unconsolidated affiliate investments
included the following offices: Zagreb, Croatia; Ljubljana, Slovenia;
Almaty, Kazakstan; Moscow, Russia; Sofia, Bulgaria; Slovakia Industries;
and NIF TRUD Investment Fund. During the three months ended June 30, 1997,
the Company's proportionate share of the losses related to these operations
totaled approximately $139,000 USD.
RECEIVABLES FROM AFFILIATED COMPANIES
Periodically, the Company provides operating advances to its unconsolidated
affiliates. These advances are generally due on demand and are not subject
to interest charges.
5. FINANCIAL INSTRUMENTS
Financial instruments owned consist of the Company's proprietary trading
and investment accounts, securities purchased under agreements to resell,
and investments held for resale. The Company's financial instruments, at
fair value, are as follows:
June 30,
1997
Securities purchased under agreements to resell ------------
Sovereign government debt - Hungary $ 2,052,204
Corporate equities - Hungary 838,224
------------
$ 2,890,428
------------
Securities owned at value
Corporate equities - Austria $ 1,485,239
Sovereign government debt - Hungary 938,399
Corporate equities - Czech Republic 264,577
Corporate equities - Slovak Republic 274,835
Corporate equities - Poland 574,075
------------
$ 3,537,125
------------
- 10 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
5. FINANCIAL INSTRUMENTS (CONTINUED)
June 30,
1997
Available for sale securities ------------
Corporate equities - Austria $ 352,396
Corporate equities - Czech Republic $ 1,139,519
------------
$ 1,491,945
------------
6. SHORT-TERM BORROWINGS
The Company meets its short-term financing needs through lines of credit
with financial institutions, advances from affiliates, and by entering into
repurchase agreements whereby securities are sold with a commitment to
repurchase at a future date.
LINES OF CREDIT
These lines of credit carry interest rates between 7.00 percent and 12.00
percent as computed on an annual basis.
ADVANCES FROM AFFILIATED COMPANIES
Periodically, the Company's subsidiaries and affiliates will provide
operating advances to other members in the affiliated group. These advances
are generally due on demand and are not subject to interest charges.
7. DISCONTINUED OPERATIONS
In October 1996, the Company agreed to sell its interest in the Hotel
Fortuna, a.s. ("Fortuna") for 100,000 shares of Ceske energeticke zavody
a.s. ("CEZ") and 86,570 shares of Vodni stavby Praha a.s. based on the then
current market prices for each stock. In November 1996, the sales
transaction was completed. As of the sale date, the Company revised its
estimate of the net realizable value of the shares received based on the
then current market prices for each stock. As a result, the Company
recognized a loss on the sale of discontinued operations of ($1,323,083).
Income from discontinued operations was $41,899 through the sale date. The
minority interest in consolidated subsidiaries has been significantly
reduced due to the elimination of the minority interest attributable to the
Company's investment in the Hotel Fortuna a.s.
- 11 -
<PAGE>
PART I -- FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in this Item contains forward looking statements.
Readers are cautioned not to place undue reliance on this information which
speaks only as of the date hereof. The matters referred to in such statements
could be effected by the risks and uncertainties involved in the Company's
business, including (without limitation) the effect of political, economic and
market conditions both domestically and in Eastern and Central Europe and the
matters discussed in Item 1 of the Company's Report on Form 10-KSB for the year
ended March 31, 1997 entitled "Description of Business - Risk Factors". Further,
the Company undertakes no obligation to release publicly any revisions to these
forward looking statements to reflect events occurring after the date hereof or
to reflect unanticipated events or developments.
This Form 10-QSB for the quarterly period ended September 30, 1997, makes
reference to the Company's Annual Report and amendments thereto on Form 10-KSB
dated June 30, 1997 ("Report"). The Report includes information necessary or
useful to an understanding of the Company's businesses and financial statement
presentations. The Company will furnish a copy of this Report upon request made
directly to the Company's headquarters at 15245 Shady Grove Road, Suite 340,
Rockville, Maryland 20850, telephone number (301) 527-1110 and facsimile number
(301) 527-1112.
The Company's principal activities changed dramatically during the 1997
fiscal year. During the fiscal year ending March 31, 1997, the Company
completely disposed of its interest in the Hotel Fortuna, a.s. and acquired
Eastbrokers Beteiligungs Aktiengesellschaft ("Eastbrokers AG"), an Austrian
based securities broker-dealer providing financial services in Central and
Eastern Europe through its network of subsidiaries and affiliate offices.
The earnings of the Company are subject to wide fluctuations since many
factors over which the Company has little or no control, particularly the
overall volume of trading and the volatility and general level of market prices,
may significantly affect its operations.
Plan of Operation
On August 1, 1996, the Company consummated its acquisition of Eastbrokers
AG reflecting its previously stated objective of seeking to invest into, merge
with or acquire one or more companies in growth oriented industries. Although
the Company's focus had been primarily in the Czech Republic, its original
mission was to pursue investment opportunities throughout Eastern and Central
Europe. Eastbrokers AG is a holding company providing financial services in
Eastern and Central Europe through its network of subsidiaries. The acquisition
of Eastbrokers AG is intended to not only provide a revenue stream from its core
brokerage and trading business, but also positions the Company to access
investment banking and corporate finance products throughout Central and Eastern
Europe.
The Company's business strategy is to (1) utilize its Central and Eastern
Europe emerging market expertise to take advantage of opportunities and to
service the global securities market; (2) develop an asset management business
concentrating on Central and Eastern European debt and equity securities; (3)
develop the Company's merchant banking activities; (4) identify potential
corporate finance candidates for investment banking opportunities; (5) expand
its privatization activities in Central and Eastern Europe; and (6) through its
U.S. subsidiary, Eastbrokers North America, build a distribution network for
financial products developed by the Central and Eastern European operations.
Management also believes there are significant opportunities available in this
region for specialized account and institutional sales.
The Company intends to have its North American offices fully operational
prior to the end of December 1997. After an extended regulatory review,
Eastbrokers North America, Inc. ("Eastbrokers NA") obtained regulatory approval
on November 4, 1997. Accordingly, Eastbrokers NA may now commence operations and
begin accepting customer accounts. It may also actively pursue and solicit
qualified institutional clients. This subsidiary will act as an introducing
broker in that it does not clear its own securities transactions, but instead,
it intends to contract to have such transactions cleared through clearing broker
on a fully disclosed basis. In a fully disclosed clearing transaction, the
identity of the Company's client is known to the clearing broker. Generally, a
clearing broker physically maintains the client's account and performs a variety
of services
- 12 -
<PAGE>
as agent for the Company, including clearing all securities transactions
(delivery of securities sold, receipt of securities purchased and transfer of
related funds). The Company has executed clearing contracts with Bear Stearns
Companies, Inc. ("Bear Stearns") and Herzog Heine Geduld, Inc. ("Herzog") to
serve as its fully disclosed clearing brokers. Bear Stearns and Herzog are
recognized as leading firms in clearing transactions.
Eastbrokers NA intends to develop a U.S. client base to market various
emerging market corporate securities and other proprietary corporate finance
products originating from the Company's offices in Central and Eastern Europe.
Eastbrokers NA also intends to offer domestic products. These domestic products
will include not only the typical debt and equity securities, but also
specialized products such as the U.S. Treasury Trading Program. This program is
designed to be an "intraday" trading vehicle (i.e., no overnight positions will
be held in this program) providing customers with next day access to their
funds.
The Company is currently in the process of developing a program utilizing
Level One American Depository Receipts ("ADR") for several of its Central and
Eastern European corporate clients. Under this ADR program, the shares of these
corporate clients would be utilized to create an ADR which would be listed on
the U.S. over-the-counter market.
The Company is also in the process of developing its research department to
provide clients with timely information on the general market conditions,
specific industries, economic and currency trends and select individual
companies throughout Central and Eastern Europe. As a significant portion of
this development process, the Company has created a proprietary research product
known as Eastbrokers Golden Wolves. Eastbrokers Golden Wolves provides
information on growth companies in Central and Eastern Europe. The Company's
research products are currently available through the internet at www.ebna.com.
The potential fee for this service, if any, has not yet been determined.
The Company believes that investment in the emerging markets of Central and
Eastern Europe will continue to grow rapidly in the coming years. Currently,
Hungary, Kazakhstan, Poland, and Romania are enjoying enhanced interest on the
part of foreign investors. The Company has successfully marketed its Trud &
Kapital Privatization Fund of Bulgaria ("Trud") to over 100,000 Bulgarian
citizens. Trud has approximately 100,000 shareholders and owns interests in over
60 Bulgarian companies. The Company currently is the exclusive management
company for Trud. The Company intends to provide ongoing management services to
Trud and investment banking services to certain of the companies in its
portfolio.
The Bulgarian Stock Exchange is currently scheduled to open in late
1997/early 1998, In preparation for this opening, the Company has concentrated a
significant portion of its assets in companies related to its Bulgarian
operations. However, there is no guarantee that these operations will be
successful.
While investing in the emerging markets of Central and Eastern Europe
involves risk considerations not typically associated with investing in
securities of U.S. issuers, the Company believes that such considerations are
outweighed by the benefits of diversification and potentially superior returns.
Among the considerations involved in investing in emerging markets such as
Central and Eastern Europe is that less information may be available about
foreign companies than about domestic companies. Foreign companies are also not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. In addition, unlike investing in U.S.
companies, securities of non-U.S. companies are generally denominated in foreign
currencies, thereby subjecting each security to changes in value when the
underlying foreign currency strengthens or weakens against the U.S. dollar.
Currency exchange rates can also be affected unpredictably by intervention of
U.S. or foreign governments or central banks or by currency controls or
political developments in the U.S. and abroad.
The value of international fixed income products also responds to interest
rate changes in the U.S. and abroad. In general, the value of such products will
rise when interest rates fall, and fall when interest rates rise. However,
interest rates in each foreign country and the U.S. may change independently of
each other.
Debt and equity securities in emerging markets such as Central and Eastern
Europe may also not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater risk than securities of
U.S companies. Investing in Central and Eastern European securities may further
result in higher expenses than investing in domestic securities because of costs
associated with converting foreign currencies to U.S. dollars and expenses
related to foreign custody procedures. Investment in Central and Eastern
European
- 13 -
<PAGE>
securities may also be subject to local economic or political risks, including
instability of some foreign governments, inadequate market controls, the
possibility of currency blockage or the imposition of withholding taxes on
dividend or interest payments and the potential for expropriation,
re-nationalization or confiscatory taxation and limitations on the use or
repatriation of funds or other assets.
Due to the continued expansion of its operations in Central and Eastern
Europe, the Company has determined that it will make a change in its auditors to
a firm with more expertise and experience in the international marketplace. The
Board of Directors has appointed Deloitte & Touche as independent public
accountants of the Company for the fiscal year ending March 31, 1998. This
appointment will be submitted to a vote of the stockholders of the Company for
their ratification at the Company's next Annual Meeting which is scheduled for
December 17, 1997.
On October 31, 1997, a date subsequent to this report, the Company
announced its intent to open a full service brokerage operation in the Ukraine
prior to December 31, 1997 subject to obtaining the required regulatory
approvals. International money managers anticipate that the Ukraine should
continue to be one of the most important economies of the former Soviet Union,
second only to Russia. As such, they have already committed several billion
dollars for investment into the Ukraine.
Results of Operations. See Note 1 of the Notes to Consolidated Financial
Statements for the Six Months Ended September 30, 1997, for an explanation of
the basis of presentation of the financial statements. For the quarterly period
ended September 30, 1997, the Company generated consolidated revenues in the
amount of $1,413,995, compared to $73,891 for the quarterly period ended
September 30, 1996. For the quarterly period ended June 30, 1997, Eastbrokers AG
generated consolidated revenues of $1,129,249. Quarterly information is not
available for Eastbrokers AG for quarterly period ended June 30, 1996. The
significant change from the prior year's total revenues for the Company is a
combination of the effects of the disposition of the Hotel Fortuna a.s. and the
acquisition of Eastbrokers AG on August 1, 1996. Quarterly information is
generally not available for Eastbrokers AG for periods prior to the acquisition
as there is no statutory reporting requirements other than year-end.
The Company incurred total consolidated costs and expenses of $2,593,078
for the quarterly period ended September 30, 1997, compared to $265,503 for the
quarterly period ended September 30, 1996. For the quarterly period ended June
30, 1997, Eastbrokers AG incurred total consolidated costs and expenses of
$1,886,835. Quarterly information is not available for Eastbrokers AG for
quarterly period ended June 30, 1996. A significant portion of the consolidated
costs and expenses can be attributed to expenses incurred in the development of
the Company's New York and Bulgarian operations and continuing consulting
expenses incurred in the review and development of potential corporate finance
opportunities.
The Company incurred a consolidated net loss from continuing operations of
$668,735 for the quarterly period ended September 30, 1997, compared to a
consolidated net loss from continuing operations of $191,612 for the quarterly
period ended September 30, 1996. For the quarterly period ended June 30, 1997,
Eastbrokers AG incurred a consolidated net loss from continuing operations of
$420,714. Quarterly information is not available for Eastbrokers AG for
quarterly period ended June 30, 1996. This change is primarily attributable to
the significant downturn of the market in the Czech Republic, expenses related
to the development of the New York and Bulgarian operations, continuing
consulting expenses related to corporate finance opportunities, and operating
losses generated from WMP. The Czech Republic operations contributed
approximately $230,000 to the net loss for the quarter and the start up expenses
related to the New York operations contributed approximately $220,000 to the net
loss for the quarter. The development of the Company's New York and Bulgarian
operations has consumed a substantial amount of the Company's resources in that
key members of management have devoted significant amounts of time and energy to
these projects. These activities have contributed approximately $960,000 in
costs and expenses for the first six months of the current fiscal year.
Management has evaluated the costs incurred to date and has determined that
these projects represent valuable worthwhile activities in the best interest of
the Company. In response to the unexpected downturn in the Czech Republic, the
Company has downsized its Prague based operations. The Company is also reviewing
its Central and Eastern European operations to identify potential cost savings
or additional revenue producing opportunities. Based on the results of this
evaluation, management may determine to restructure or downsize other offices as
appropriate. Based on the reviews of the operations to date, the Company plans
to reduce costs by streamlining its Rockville, Maryland and Vienna, Austria
operations. These cost cutting measures and the reduction of the Prague, Czech
Republic office should result in significant expense reductions over the course
of
- 14 -
<PAGE>
the next fiscal year. WMP total revenues are approximately 60 percent below the
total revenues for the corresponding period of the prior year. This decrease is
attributable to the introduction of the electronic trading system to the
continuous trading section of the Vienna Stock Exchange which significantly
reduced the volume of institutional trades handled by WMP. In response to this
change, WMP has significantly reduced its operating costs to minimize its
operating losses and is in the process of applying for an expanded banking
license. WMP is also in the process of developing its EASDAQ trading department
which should be fully operational during the first half of calendar 1998. At the
present time, management expects the Company to report an operating loss in the
next quarter.
Other changes affecting the net loss for the quarter include the effects of
income taxes and minority interest in the earnings of subsidiaries. The Company
is subject to income taxation in multiple jurisdictions (countries). As such,
losses in one jurisdiction can generally not be utilized to offset taxable
income in another jurisdiction. Also, to utilize the tax losses incurred, the
Company may be subject to jurisdictional audit requirements which require an
audit by a governmental agency prior to their allowance as an offset to taxable
income. Accordingly, certain jurisdictions may generate taxable income while
others generate losses that will be suspended until such time the local
jurisdictional authorities approve the utilization of the losses. The combined
effective tax rate is the result of multiple jurisdictions and uncertainties
related to the utilization of loss carryforwards in certain jurisdictions. These
factors may vary from quarter to quarter. With regard to U.S. operations, the
Company's policy is to suspend the losses incurred until such time as the loss
carryforwards have a reasonable expectation of being utilized. Since the New
York office has received regulatory approval to commence operations, the Company
has recognized an estimated tax benefit of approximately $73,000 related to this
office. No other income tax benefit has been recorded for the current quarter
related to U.S. operations. At the time the 10-KSB for the year ended March 31,
1997 was filed, the Company did not anticipate any significant changes in the
effective tax rates being utilized. However, due to the effects created by
multiple jurisdictions and the share of the net income or loss attributable to
each jurisdiction, the effective tax rate is subject to change. During the prior
year, the Company acquired the outstanding minority interest of two of its
subsidiaries which significantly reduced the effect of minority interest to
earnings. The minority interest in earnings for the current quarter is primarily
attributable to the Company's Hungarian operations which continued its strong
results of the first quarter due to the continued influx of foreign investment.
On September 30, 1997, the Company had total current assets of $20,119,865
and total current liabilities of $15,738,990, compared to $22,099,840 and
$13,619,082, respectively, on September 30, 1996. As of the date of this filing,
the Company believes that it has adequate liquidity to meet its current
obligations. However, no assurances can be made as to the Company's ability to
meet its cash requirements in connection with any expansion of the Company's
operations or any possible business combinations.
As a broker/dealer in securities, the Company will periodically acquire
positions in securities on behalf of its clients. As disclosed in "Note 3
Financial Instruments", the Company has title to various financial instruments
in the countries in which it operates. Certain of these investments may be
characterized as relatively illiquid and potentially subject to rapid
fluctuations in liquidity. Those securities are classified as "available for
sale securities". As of June 30, 1997, the Company's material concentration in
the securities portfolio is limited to its investment in Vodni Stavby Praha
a.s., a security traded on the Prague Stock Exchange Main Market (Czech
Republic). As of June 30, 1997, the market value of the Company's ownership
interest in this security was approximately $1,140,000. At the present time, the
securities market in the Czech Republic is under extreme pressure to initiate
reforms to protect the interests of the minority shareholders. These pressures
are depressing the market and it is possible that the Company will see a further
devaluation in this investment. All other securities are relatively liquid and
the carrying value approximates the market value as of the balance sheet date.
The Company does not have any material concentrations or commitments to
high-yield issuers as of the balance sheet date.
The costs associated with the Company's involvement in privatization
activities, its pursuit of corporate finance opportunities, the unexpected
downturn of the economy of the Czech Republic and the effect this downturn has
had on the Company's operations and the costs associated with the start up of
the New York operations are the primary factors contributing to the negative
operating cash flows experienced in the quarterly period ended September 30,
1997. Management anticipates that the Company will continue to generate negative
cash flows through the next quarter. Management also anticipates that
preliminary work performed related to corporate finance activities will begin
generating operating cash flows in the fourth quarter of the fiscal year
- 15 -
<PAGE>
ending March 31, 1998 and its efforts in the various privatization activities
will begin generating operating cash flows near the beginning of the Company's
fiscal year beginning April 1, 1998. However, there is no guarantee that such
operating cash flows will materialize by the anticipated dates or whether they
will be sufficient to offset other operational expenses.
The cash flows for six month period ended September 30, 1997 reflect the
volatile nature of the securities industry and the reallocation of the Company's
assets indicative of a growing organization. The change in the foreign currency
translation adjustment is primarily related to the fluctuations in the Company's
functional currencies to the U.S. dollar. The U.S. dollar and its unexpected
strength coupled with the unexpected weakness of the European currencies
(including the German Deutchmarke) have negatively impacted the Company's
overall earnings as well as the cumulative translation adjustment. The primary
functional currencies affecting the Company are as follows: U.S. Dollar,
Austrian Schilling, Czech Koruna, Hungarian Forint, Slovak Koruna and the Polish
Zloty. For the six month period ended September 30, 1997, the Company reported a
cumulative foreign currency translation adjustment in its statement of cash
flows of approximately $1,254,000. The effect of the exchange rate changes on a
country by country basis are approximately as follows: Austria -- $870,000,
Czech Republic -- $160,000, Hungary -- $134,000, Poland -- $90,000.
- 16 -
<PAGE>
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Proposed Increase to the Company's Authorized Capital Stock
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Certificate of Incorporation to increase the number
of authorized shares of capital stock of the Company to a total of twenty
million (20,000,000) shares, consisting of ten million (10,000,000) shares of
Common Stock, pr value $.05 per share ("Common Stock") and ten million
(10,000,000) shares of preferred stock, par value $.01 per share ("Preferred
Stock"). The capital stock of the Company, prior to the approval of the
amendment, consists solely of 10,000,000 shares of Common Stock, $.05 par value
per share of which 3,063,000 were outstanding as of November 10, 1997.
The Board of Directors believes that it is in the Company's best interests
to have shares of preferred stock available for issuance to meet the Company's
future business needs as they arise. In particular, a portion of the shares of
Preferred Stock that would become available for issuance if the proposal were
adopted may be used by the Company in connection with a public offering or
private placement of the Company's securities. The Company has elected to defer
consideration of the previously disclosed proposed public offering of its
securities until mid 1998, at which time the advisability of such proposed
transaction will be reconsidered. The Company's management has no present
arrangements, agreements, understandings, or plans for the additional shares
proposed to be authorized.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits required by Item 601 of Regulation S-B
Exhibit No. Description
----------- -----------------------
(27) Financial Data Schedule (Electronic Filing Only).
b. No reports on Form 8-K were filed during the three month period ended
September 30, 1997.
- 17 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
EASTBROKERS INTERNATIONAL INCORPORATED
(Registrant)
By /s/ Kevin D. McNeil
----------------------------------------------
Kevin D. McNeil
Vice President, Treasurer, and Chief Financial Officer
Dated: November 14, 1997
- 18 -
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------------------
(27) Financial Data Schedule (Electronic Filing Only).
- 19 -
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,549,638
<SECURITIES> 6,427,553
<RECEIVABLES> 8,619,426
<ALLOWANCES> 0
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<CURRENT-ASSETS> 20,119,865
<PP&E> 2,097,878
<DEPRECIATION> 1,066,458
<TOTAL-ASSETS> 34,223,102
<CURRENT-LIABILITIES> 15,738,990
<BONDS> 1,307,419
0
0
<COMMON> 153,150
<OTHER-SE> 15,429,514
<TOTAL-LIABILITY-AND-EQUITY> 34,223,102
<SALES> 0
<TOTAL-REVENUES> 3,023,971
<CGS> 0
<TOTAL-COSTS> 4,366,784
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,384
<INCOME-PRETAX> (1,342,813)
<INCOME-TAX> (116,843)
<INCOME-CONTINUING> (1,097,247)
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<NET-INCOME> (1,097,247)
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