===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB/A No. 1
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 August 15, 1997, was 3,003,000.
===============================================================================
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Historical Financial Statements
Consolidated Statements of Financial Condition ................. 2
Consolidated Statements of Operations
Quarter Ended December 31, 1996 ............................. 3
Nine Months Ended December 31, 1996 ......................... 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 2. Changes in Securities.......................................... 17
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>
June 30,
------------------------------------
1996 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,027,968 $ 5,866,770
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations - 434,597
Securities purchased under agreements to resell - 1,399,147
Receivables
Customers 3,612,495
Broker dealers and other - 1,396,304
Affiliated companies 1,500,000 1,648,608
Other - 3,285,194
Securities owned, at value
Equities and other - 3,027,709
Buildings, furniture and equipment, at cost (net of
accumulated depreciation and amortization of
$3,600 and $890,458, respectively) 24,700 1,059,112
Deferred taxes - 322,637
Investments held for resale - 1,154,535
Investments in affiliated companies - 8,595,010
Goodwill - 2,430,365
Net assets of discontinued operations 9,323,897 -
Other assets and deferred amounts 336,302 1,257,393
---------------- ----------------
Total Assets $ 16,212,867 $ 35,489,876
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ - $ 1,623,079
Affiliated companies - 2,697,642
Securities sold under agreements to repurchase - 1,200,793
Bonds payable - 2,307,500
Payables
Customers - 4,087,402
Broker dealers and other - 895,022
Accounts payable and accrued expenses 131,811 1,325,562
Other liabilities and deferred amounts - 1,308,151
---------------- ----------------
131,811 15,445,151
Long-term borrowings 2,027,176 1,046,684
---------------- ----------------
Total liabilities 2,158,987 16,491,835
---------------- ----------------
Minority interest in consolidated subsidiaries - 1,770,893
---------------- ----------------
Stockholders' equity
Common stock; $.05 par value; 10,000,000 shares
authorized; 1,781,000 and 3,003,000 shares issued and
outstanding at June 30, 1996 and 1997, respectively 89,050 152,400
Paid-in capital 13,693,733 20,031,828
Retained earnings (accumulated deficit) 271,097 (946,141)
Treasury stock, at cost - (213,750)
Unrealized gain/loss on available for sale investments - (939,094)
Cumulative translation adjustment - (858,095)
---------------- ----------------
Total stockholders' equity 14,053,880 17,227,148
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 16,212,867 $ 35,489,876
---------------- ----------------
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
------------------------------------
1996 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
Revenues
Commissions $ - $ 426,137
Fees - 32,679
Interest and dividends - 86,345
Principal transactions, net
Trading - 840,327
Investment - 149,788
Other 275,720 213,409
Equity in earnings of unconsolidated affiliates - (138,709)
---------------- ----------------
Total revenues 275,720 1,609,976
---------------- ----------------
Costs and expenses
Compensation and benefits 94,200 440,759
Interest 92,070 38,448
Brokerage, clearing, exchange fees and other - 277,014
Occupancy - 176,934
Office supplies and expenses - 76,817
Communications - 58,264
Advertising - 63,554
Legal fees - 5,377
Consulting fees - 273,043
Travel - 101,321
Education - 8,774
Automotive - 18,142
General and administrative 128,738 66,844
Depreciation and amortization - 100,866
Loss on foreign currency transactions 38,444 67,549
---------------- ----------------
Total costs and expenses 353,452 1,773,706
---------------- ----------------
Income (loss) from continuing operations
before provision for income taxes and
minority interest in earnings of subsidiaries (77,732) (163,730)
Provision for income taxes - (147,403)
Minority interest in earnings of subsidiaries - (117,379)
---------------- ----------------
Income (loss) from continuing operations (77,732) (428,512)
Loss from discontinued operations 5,774 -
Loss on sale of discontinued operations - -
---------------- ----------------
Net income (loss) $ (71,958) $ (428,512)
---------------- ----------------
Weighted average number of shares outstanding 1,781,000 (1) 3,003,000
---------------- ----------------
Income (loss) from continuing operations per share $ (0.04) $ (0.14)
---------------- ----------------
Net income (loss) per share $ (0.04) $ (0.14)
---------------- ----------------
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
------------------------------------
1996 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (71,958) $ (428,512)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries - 117,379
Depreciation and amortization - 100,866
Deferred taxes - (32,699)
Equity in earnings (loss) of unconsolidated affiliates - 138,709
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies - (315,323)
Securities purchased under agreements to resell - (990,282)
Receivables
Customers 325,942 (1,708,383)
Brokers, dealers and others - (823,905)
Affiliated companies (1,500,000) (136,691)
Other - (1,241,888)
Securities owned, at value - 1,225,455
Other assets 155,241 (35,200)
Payables
Customers - 3,035,592
Brokers, dealers and others - (65,204)
Accounts payable and accrued expenses (50,238) (442,194)
----------------- -----------------
Net cash provided by (used in) operating activities (1,141,013) (1,602,280)
----------------- -----------------
Cash flows from investing activities
Net proceeds from (payments for)
Investments in affiliates - (1,530,946)
Investments held for resale 1,677,623 1,223,519
Purchases of furniture and equipment (19,185) (182,788)
----------------- -----------------
Net cash provided by (used in) investing activities 1,658,438 (490,215)
----------------- -----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement - 725,000
Short-term financings 744 20,897
Short-term borrowings from affiliated companies - 1,216,942
Other long-term debt - 112,310
----------------- -----------------
Net cash provided by (used in) financing activities 744 2,075,149
----------------- -----------------
Foreign currency translation adjustment (680,787) (983,508)
----------------- -----------------
Increase (decrease) in cash and cash equivalents (162,618) (1,000,854)
Cash and cash equivalents, beginning of period 5,190,586 6,867,624
----------------- -----------------
Cash and cash equivalents, end of period $ 5,027,968 $ 5,866,770
----------------- -----------------
</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 Three Months
Ended June 30,
------------------------------------
1996 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
----------------- -----------------
Cash paid for interest $ 92,070 $ 38,448
----------------- -----------------
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated (the
"Company") for the three months ended June 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 three months ended June 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 three months ended March 31, 1996.
For the three months ended June 30, 1997, the accompanying consolidated
financial statements include the financial position, results of operations
and cash flows of the Company for the three months ended June 30, 1997. The
financial position of its subsidiary, Eastbrokers Beteiligungs
Aktiengesellschaft ("Eastbrokers AG") is as of March 31, 1997. The results
of operations and cash flows of Eastbrokers AG are for the three months
ended March 31, 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.
- 6 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 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 THREE MONTHS ENDED JUNE 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 THREE MONTHS ENDED JUNE 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
$6,340,000 on March 31, 1997. The summarized statement of financial
condition and statement of operations information for WMP for the three
months ended March 31, 1997 was as follows:
March 31,
1997
Summarized Statement of Financial Condition -------------
Total assets $17,049,652
Total liabilities 3,690,485
------------
Stockholders' equity $13,359,167
------------
- 9 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
4. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
INVESTMENT IN WMP BORSENMAKLER AKTIENGESELLSCHAFT (CONTINUED)
March 31,
1997
Summarized Statement of Operations ---------------
Revenues $ 352,295
Expenses 488,247
--------------
Net income $ (135,952)
--------------
This summarized financial information has been translated from the Austrian
Schilling into U.S dollars at the foreign currency exchange rates as of
March 31, 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. At March 31, 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 March 31, 1997,
the Company's proportionate share of the losses related to these operations
totaled approximately $72,000 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 $ 895,454
Corporate equities - Hungary 503,693
------------
$ 1,399,147
------------
Securities owned at value
Corporate equities - Austria $ 1,125,097
Corporate equities - Czech Republic 644,598
Corporate equities - Slovak Republic 572,843
Corporate equities - Poland 685,171
------------
$ 3,027,709
------------
- 10 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
5. FINANCIAL INSTRUMENTS (CONTINUED)
June 30,
1997
Available for sale securities ------------
Corporate equities - Czech Republic $ 1,154,535
------------
$ 1,154,535
------------
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 three months ended June 30, 1997, makes reference
to the Company's Annual Report 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 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 such 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 an earnings stream
from its core brokerage business, but also positions the Company to provide
investment banking and corporate finance services in an emerging market
infrastructure and growth industries.
The Company's business strategy is to (1) utilize its marketing and Central
and Eastern Europe emerging market expertise to take advantage of opportunities
for growth in this sector of the global securities market; (2) develop the base
of its asset management business through concentrating on Central and Eastern
European debt and equity securities; (3) enhance and develop the Company's
merchant banking activities; (4) identify potential corporate finance candidates
for investment banking opportunities; (5) utilize its expertise in the
privatization activities still available 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 believes that investment in the emerging markets of Central and
Eastern Europe will continue to grow rapidly in the coming years. Currently,
Hungary, Romania, and Poland are enjoying enhanced interest on the part of
foreign investors. The Company has successfully marketed its NIF Trud
Privatization Fund of Bulgaria. NIF Trud has approximately 100,000 shareholders
and owns interests in 73 Bulgarian companies. The Company currently is the
exclusive management company for NIF Trud. The Company intends to provide
ongoing management services to NIF Trud and investment banking services to
certain of the companies in its portfolio.
- 12 -
<PAGE>
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 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.
The Company is also in the process of building its research department to
include reviewing the general market conditions, specific industries, and
individual companies and providing timely, cost effective information with
respect thereto in monthly newsletters, which will discuss Central and Eastern
European economic and currency trends and give readers specific investment
recommendations and ideas. The potential fee for this service, if any, has not
yet been determined.
Management also continued its preparations to offer certain services and
products to firms and individuals associated with the U.S. capital markets.
The Company intends to have its North American offices fully operational
prior to the end of its fiscal year ending March 31, 1998. This subsidiary is
currently in the process of obtaining its restriction letter from the NASD. The
Company anticipates this letter will be received by sometime in mid-October
1997. Once the restriction letter is received, this subsidiary may begin
conducting business. The Company estimates that it will require approximately
three months from the date the restriction letter is received to become fully
operational. 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 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 intends to utilize the services of the Bear Stearns Companies, Inc.
("Bear Stearns") as its fully disclosed clearing broker. Bear Stearns is
recognized as one of the leading firms in clearing transactions in emerging
markets such as Central and Eastern Europe.
In preparation for the opening of the Bulgarian stock exchange in late
1997/early 1998, 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.
Results of Operations. See Note 1 of the Notes to Consolidated Financial
Statements For the Three Months Ended June 30, 1997, for an explanation of the
basis of presentation of the financial statements. For the three month period
ended June 30, 1997, the Company generated consolidated revenues in the amount
of
- 13 -
<PAGE>
$1,609,976, compared to $275,720 for the three month period ended June 30, 1996.
For the corresponding period of the prior year, Eastbrokers AG generated
consolidated revenues of approximately $1,500,000 which is relatively consistent
with the current quarter's total revenues. Total revenues are significantly
below management's original expectations due to the unexpected and continuing
downturn of the market in the Czech Republic. 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 $1,773,706
for the three month period ended June 30, 1997, compared to $353,452 for the
three month period ended June 30, 1996. For the corresponding period of the
prior year, Eastbrokers AG generated total consolidated expenses of
approximately $1,300,000. The change from the prior year to the current year is
related to start up expenses in its New York operations and continuing
consulting expenses related to potential corporate finance opportunities. Most
of the increase for the Company is attributable to the primarily to the change
from the hospitality industry to the securities industry.
The Company incurred a consolidated net loss of $428,512 for the three
month period ended June 30, 1997, compared to a consolidated net loss of $71,958
for the three month period ended June 30, 1996. For the corresponding period of
the prior year, Eastbrokers AG generated net income of approximately $64,000.
This change is primarily attributable to the significant downturn of the market
in the Czech Republic, start up expenses related to the New York operations,
continuing consulting expenses related to corporate finance opportunities,
losses from WMP, and the development of the Company's Bulgarian operations. The
Czech Republic operations contributed approximately $190,000 to the net loss for
the quarter and the start up expenses related to the New York operations
contributed approximately $120,000 to the net loss for the quarter. In response
to the unexpected downturn in the Czech Republic, the Company has downsized its
Prague based operations. The Company is also in the process of 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. 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. At the present time, management expects the Company to report operating
losses in each of the next two quarters.
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. Accordingly, no
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 had an exceptional
quarter due to the continued influx of foreign investment.
On June 30, 1997, the Company had total current assets of $21,825,359 and
total current liabilities of $15,445,151, compared to $6,527,968 and $131,811,
respectively, on June 30, 1996. As of the date of this
- 14 -
<PAGE>
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 $1,110,000. 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 June 30, 1997.
Management anticipates that the Company will continue to generate negative cash
flows through the next two quarters. 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 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, 1997. 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 quarterly period ended June 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 quarterly period ended June 30, 1997, the Company reported a
foreign currency translation adjustment in its statement of cash flows of
approximately $984,000. The effect of the exchange rate changes on a country by
country basis are approximately as follows: Austria -- $680,000, Czech Republic
- -- $124,000, Hungary -- $110,000, Poland -- $70,000.
In April 1997, the Company issued 125,002 shares of common stock, par value
$.05, of the Company ("Common Stock"). The securities were sold to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,012 or $6.00 per share. The net proceeds to the Company
were $725,012. There were no underwriting discounts or commissions. The Offering
was made pursuant to an exemption from registration under Rule 506 of the
Securities Act of 1933, as amended (the "Securities Act"). The Offering was made
only to selected "accredited investors" as that term is defined in Rule 501(a)
of the Securities Act.
Proposed Public Offering
The Company has signed a letter of intent relating to a proposed public
offering of its securities (the "Offering"). The proposed Offering is
anticipated to consist of units comprised of: (i) newly authorized and issued
shares of preferred stock, $.01 par value per share ("Preferred Stock") which
will be offered at a discount, not to exceed 20% of the closing bid price of the
Common Stock the day before the Offering becomes effective; and (ii) warrants to
purchase shares of Common Stock. This beneficial conversion discount will be
accounted for as a preferred stock dividend that may materially impact earnings
attributable to common shareholders. The Preferred
- 15 -
<PAGE>
Stock will be convertible into one share of Common Stock on the second
anniversary of the effective date of the Offering and will pay an annual
dividend of six percent (6%) in respect of the two years before it is converted.
The proposed Offering, which will be made only be means of a prospectus, is
anticipated to occur in late 1997/early 1998 and to generate gross proceeds of
approximately $7 million. These proceeds will be primarily used for working
capital purposes. There can be no assurances that such Offering will be
successfully completed.
- 16 -
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) In April 1997, the Company issued 125,002 shares of common stock, par value
$.05, of the Company ("Common Stock"). The securities were sold to three
individuals: Calvin S. Caldwell, Frank Huang and Jay Raubvogel for a total
offering price of $750,012 or $6.00 per share. The net proceeds to the Company
were $725,012. There were no underwriting discounts or commissions. The Offering
was made pursuant to an exemption from registration under Rule 506 of the
Securities Act of 1933, as amended (the "Securities Act"). The Offering was made
only to selected "accredited investors" as that term is defined in Rule 501(a)
of the Securities Act.
ITEM 5. OTHER INFORMATION
The Company has signed a letter of intent relating to a proposed public
offering of its securities (the "Offering"). The proposed Offering is
anticipated to consist of units comprised of: (i) newly authorized and issued
shares of the Company's preferred stock, $.01 par value per share ("Preferred
Stock") which will be offered at a discount, not to exceed 20% of the closing
bid price of the Common Stock the day before the Offering becomes effective; and
(ii) warrants to purchase shares of Common Stock. The Preferred Stock will be
convertible into one share of Common Stock on the second anniversary of the
effective date of the Offering and will pay an annual dividend of six percent
(6%) in respect of the two years before it is converted. The proposed Offering,
which will be made only be means of a prospectus, is anticipated to occur in
late 1997 and to generate gross proceeds of approximately $7 million. These
proceeds will be primarily used for working capital purposes. There can be no
assurances that such Offering will be successfully completed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits required by Item 601 of Regulation S-B
Exhibit No. Description
----------- -----------------------
(27.1) Financial Data Schedule (Electronic Filing Only).
b. No reports on Form 8-K were filed during the three month period ended
June 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: October 16, 1997
- 18 -
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------------------
(27.1) Financial Data Schedule (Electronic Filing Only).
- 19 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,866,770
<SECURITIES> 5,581,391
<RECEIVABLES> 9,942,601
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,825,359
<PP&E> 1,949,570
<DEPRECIATION> 890,458
<TOTAL-ASSETS> 35,489,876
<CURRENT-LIABILITIES> 15,445,151
<BONDS> 1,046,684
0
0
<COMMON> 152,400
<OTHER-SE> 17,074,748
<TOTAL-LIABILITY-AND-EQUITY> 35,489,876
<SALES> 0
<TOTAL-REVENUES> 1,609,976
<CGS> 0
<TOTAL-COSTS> 1,773,706
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,448
<INCOME-PRETAX> (163,730)
<INCOME-TAX> 147,403
<INCOME-CONTINUING> (428,512)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (428,512)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
