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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
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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)
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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 [ ] No [X]
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 13, 1998, was 4,767,750.
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<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
Quarterly Period Ended June 30, 1998 ........................ 3
Consolidated Statements of Cash Flows .......................... 4
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 11
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 19
Signature ............................................................. 20
</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,
------------------------------------
1998 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,019,082 $ 4,549,638
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 95,163 523,248
Securities purchased under agreements to resell 894,656 2,890,428
Receivables
Customers 1,022,278 2,320,637
Broker dealers and other 8,847,217 663,371
Affiliated companies 5,565,427 3,960,207
Other 10,896,069 1,675,211
Securities owned, at value
Government and agencies 2,202,510 -
Equities and other 10,813,253 3,537,125
Buildings, furniture and equipment, at cost (net of
accumulated depreciation and amortization of
$955,936 and $804,014, respectively) 1,520,964 1,031,420
Deferred taxes 4,022,918 422,908
Investments held for resale 176,456 1,491,945
Investments in affiliated companies 143,405 7,935,226
Goodwill 2,790,555 2,333,454
Other assets and deferred amounts 394,425 888,284
---------------- ----------------
Total Assets $ 54,404,378 $ 34,223,102
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ 1,542,905 $ 1,893,761
Affiliated companies 1,597,091 3,291,069
Securities sold under agreements to repurchase - 1,245,593
Bonds payable - 2,307,500
Securities loaned 1,126,461 -
Payables
Customers 7,864,512 3,337,766
Broker dealers and other 3,073,946 2,567,255
Accounts payable and accrued expenses 2,027,554 498,175
Other liabilities and deferred amounts 1,553,502 597,871
---------------- ----------------
18,785,971 15,738,990
Long-term borrowings 9,065,857 1,307,419
---------------- ----------------
Total liabilities 27,851,828 17,046,409
---------------- ----------------
Minority interest in consolidated subsidiaries 9,459,208 1,594,029
---------------- ----------------
Stockholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized; no shares
issued and outstanding at September 30, 1998 or
September 30, 1997, respectively - -
Common stock; $.05 par value; 10,000,000 shares
authorized; 4,767,750 and 3,063,000 shares issued and
outstanding at September 30, 1998 and 1997, respectively 238,388 153,150
Paid-in capital 27,966,614 20,183,308
Retained earnings (accumulated deficit) (8,582,298) (1,614,876)
Note receivable - common stock (325,080) (300,000)
Unrealized gain/loss on available for sale investments - (954,110)
Cumulative translation adjustment (2,204,282) (1,884,808)
---------------- ----------------
Total stockholders' equity 17,093,342 15,582,664
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 54,404,378 $ 34,223,102
================ ================
</TABLE>
See notes to consolidated financial statements.
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<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,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Commissions $ 2,864,300 $ 247,038 $ 4,611,417 $ 673,175
Fees 494,720 302,587 703,340 335,266
Interest and dividends 213,524 112,968 402,206 199,313
Principal transactions, net
Trading 1,011,470 237,865 2,389,599 1,078,192
Investment (345,002) 490,484 143,363 640,272
Gain on sale of interest in subsidiary 1,312,057 - 1,312,057 -
Other 656,136 153,873 783,015 367,282
Equity in earnings of unconsolidated affiliates - (130,820) - (269,529)
---------------- ---------------- ---------------- ----------------
Total revenues 6,207,205 1,413,995 10,344,997 3,023,971
---------------- ---------------- ---------------- ----------------
Costs and expenses
Compensation and benefits 3,701,651 585,669 6,363,848 1,026,428
Interest 28,658 61,936 104,262 100,384
Brokerage, clearing, exchange fees and other 1,573,313 206,202 1,240,339 483,216
Occupancy 461,678 159,150 803,572 336,084
Office supplies and expenses 303,996 85,401 674,974 162,218
Communications 548,123 93,640 776,710 151,904
Legal fees 521,861 47,363 621,391 52,740
Consulting fees 344,645 468,456 610,161 741,499
Travel 214,724 172,236 342,416 255,810
General and administrative 574,292 637,891 844,785 880,501
Depreciation and amortization 84,000 75,134 189,038 176,000
---------------- ---------------- ---------------- ----------------
Total costs and expenses 8,356,941 2,593,078 12,571,496 4,366,784
---------------- ---------------- ---------------- ----------------
Loss before provision for income taxes and
minority interest in earnings of subsidiaries (2,149,736) (1,179,083) (2,226,499) (1,342,813)
Provision (benefit) for income taxes (610,356) 264,246 (665,433) 116,843
Minority interest in earnings of subsidiaries (94,563) 246,102 (172,980) 128,723
---------------- ---------------- ---------------- ----------------
Net loss $ (2,854,655) $ (668,735) $ (3,064,912) $ (1,097,247)
================ ================ ================ ================
Weighted average number of shares outstanding 4,476,737 3,007,121 44,736,737 3,007,121
================ ================ ================ ================
Primary and fully diluted earnings per share $ (0.64) $ (0.22) $ (0.68) $ (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,
------------------------------------
1998 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (3,064,912) $ (1,097,247)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 172,980 (128,723)
Depreciation and amortization 189,038 176,000
Deferred taxes 535,883 (132,970)
Gain on sale of interest in subsidiary (1,312,057) -
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 891,070 (403,974)
Securities purchased under agreements to resell (7,486) (2,481,563)
Receivables
Customers 3,797,680 (416,525)
Brokers, dealers and others (4,442,609) (90,972)
Affiliated companies (3,279,150) (2,448,290)
Other (4,482,168) 368,095
Securities owned, at value (2,518,351) 716,039
Other assets (107) 333,909
Payables
Customers 2,459,048 2,285,956
Brokers, dealers and others (3,095,213) 1,607,029
Accounts payable and accrued expenses 1,599,890 (1,979,861)
----------------- -----------------
Net cash provided by (used in) operating activities (12,556,464) (3,423,568)
----------------- -----------------
Cash flows from investing activities
Net proceeds from (payments for)
Investments in affiliates - (871,162)
Sale of interest in subsidiary 1,180,500 -
Investments held for resale 692,504 311,605
Purchases of furniture and equipment - (280,855)
----------------- -----------------
Net cash provided by (used in) investing activities 1,873,004 (840,412)
----------------- -----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement - 725,000
Securities loaned 1,126,461 -
Short-term financings (1,027,594) 291,579
Short-term borrowings from affiliated companies 1,565,154 1,810,369
Other long-term debt 7,045,770 373,045
----------------- -----------------
Net cash provided by (used in) financing activities 8,709,791 3,199,993
----------------- -----------------
Foreign currency translation adjustment (163,951) (1,253,999)
----------------- -----------------
Increase (decrease) in cash and cash equivalents (2,137,620) (2,317,986)
Cash and cash equivalents, beginning of period 7,156,702 6,867,624
----------------- -----------------
Cash and cash equivalents, end of period $ 5,019,082 $ 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,
------------------------------------
1998 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
----------------- -----------------
Cash paid for interest $ 28,658 $ 104,262
----------------- -----------------
Non-cash transactions
Eastbrokers International shares issued as part of
EBI Securities Corporation acquisition $ 2,350,000 $ -
----------------- -----------------
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD AND SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated (the
"Company") for the quarterly and six month periods ended September 30, 1998
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, 1998
include accounting policies and additional information pertinent to an
understanding of these interim financial statements.
For the quarterly period ended September 30, 1998, the accompanying
consolidated financial statements include the financial position, results
of operations and cash flows of Eastbrokers Beteiligungs Aktiengesellschaft
("Eastbrokers AG") for the quarterly period ended June 30, 1998, of EBI
Securities Corporation ("EBI Securities") (formerly Cohig & Associates) for
the quarterly period ended September 30, 1998, and the Company for the
quarterly period ended September 30, 1998.
For the six month period ended September 30, 1998, the accompanying
consolidated financial statements include the financial position, results
of operations and cash flows the financial position, of Eastbrokers
Beteiligungs Aktiengesellschaft ("Eastbrokers AG") for the six month period
ended June 30, 1998, of EBI Securities Corporation ("EBI Securities") from
the date of acquisition (May 14, 1998) through September 30, 1998, and the
Company for the six month period ended September 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated and its U.S. and international subsidiaries (collectively,
"Eastbrokers" or the "Company").
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.
See Note 18 -"Significant Estimates" in the Company's Annual Report on Form
10-KSB for the year ended March 31, 1998.
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.
- 6 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its U.S.
subsidiaries other than EBI Securities is March 31. At the time of the
Company's acquisition of EBI Securities in May 1998, the fiscal year end of
EBI Securities was September 30. The Company intends to change the fiscal
year of EBI Securities to match the year end of the parent company
effective March 31, 1999.
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 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 at 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 purchased 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. These
receivables are due on demand.
- 7 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND SIX MONTHS ENDED SEPTEMBER 30, 1998
(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. The
Company reflects this income in its investment banking revenue.
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. The Company reflects this income in its investment
banking revenue.
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 in foreign 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.
OFFICE FACILITIES, FURNITURE, AND EQUIPMENT
Office facilities and equipment are carried at cost and are depreciated on
a straight-line basis over the estimated useful life of the related assets
ranging from three to ten years.
COMMON STOCK DATA
Earnings per share is based on the weighted average number of common stock
and stock equivalents outstanding. The outstanding warrants and stock
options are currently excluded from the earnings per share calculation as
their effect would be antidilutive.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation expense for stock-based employee compensation plans at
fair value. The Company has elected to account for its stock-based
- 8 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). Under the provisions of APB No. 25, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's common stock at the date of grant over the
amount an employee must pay to acquire the stock.
DEFERRED INCOME TAXES
Deferred income taxes in the accompanying financial statements reflect
temporary differences in reporting results of operations for income tax and
financial accounting purposes. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
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
Goodwill is amortized on a straight line basis over periods from five to 25
years and is periodically evaluated for impairment on an undiscounted cash
flow basis.
RECLASSIFICATIONS
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
3. ACQUISITION OF EBI SECURITIES CORPORATION
In May 1998, the Company acquired all of the outstanding common stock of
Cohig & Associates, Inc., a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the
Company's common stock and an agreement to advance $1,500,000 in additional
working capital. Following the acquisition, the Company changed the name of
Cohig & Associates, Inc. to EBI Securities Corporation ("EBI Securities").
The Company intends to develop EBI Securities as the foundation to expand
its U.S. based investment banking and brokerage presence and anticipates
that EBI Securities will be the first in a series of possible acquisitions
targeting other successful medium size investment banking and brokerage
firms both domestically and internationally. Eastbrokers International
believes that its current organizational structure as an entrepreneurial,
well-capitalized, and international publicly traded company will be
particularly appealing to potential acquisition candidates.
EBI Securities is a full service brokerage firm specializing in providing
investment advice and counsel to individuals and small to middle market
institutions. At the present time, EBI Securities has approximately 150
licensed representatives. EBI Securities provides its brokerage clients
with a broad range of traditional investment products and services. EBI
Securities also strives to differentiate itself in the minds of investors
and corporate finance clients through its commitment to a professional but
personalized service, which not
- 9 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
3. ACQUISITION OF EBI SECURITIES CORPORATION (CONTINUED)
only sets it apart from the large firms, but also serves to develop
long-term client relationships. Its trading department makes a market in
approximately 150 securities which include its investment banking clients
and those securities that its research department has identified as
promising, small to middle-market, potentially high growth companies. EBI
Securities' investment banking department operates with a single goal in
mind: to enhance and develop the capital structures of small to middle
market emerging growth companies through private placements, bridge
financing, and public offerings which serves to enable the firm's corporate
finance clients to capitalize on promising business opportunities,
favorable market conditions, and/or late stage product development.
EBI Securities is registered as a broker-dealer with the SEC and is
licensed in 50 states and the District of Columbia. It is also a member of
the National Association of Securities Dealers ("NASD") and the Securities
Investor Protection Corporation ("SIPC"). Customer accounts are insured to
$25 million under the SIPC excess insurance program. EBI Securities
operates pursuant to the exemptive provisions of SEC Rule 15c3-3 (k)(2)(ii)
and clears all transactions with and for customers on a fully disclosed
basis.
EBI Securities maintains its clearing arrangement with Fiserv Correspondent
Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ: FISV).
Fiserv provides EBI Securities with back office support, transaction
processing services on all the principal national securities exchanges and
access to many other financial services and products. This arrangement
enables EBI Securities to offer its clients a broad range of products and
services that is typically only offered by firms that are larger and/or
have a larger capital base.
4. 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.
5. SALE OF INTEREST IN SUBSIDIARY
In June 1998, the Company sold 73.55 percent of its interest in Eastbrokers
Prague a.s. for 15 million Austrian Schillings (approximately $1,180,000
USD at the then current exchange rates). The Company recognized a gain on
the sale of this interest in Eastbrokers Prague a.s. before taxes of
approximately $1,312,000, at the then current exchange rates. This amount
is reflected in the revenue section under the caption, "Gain on sale of
interest in subsidiary".
- 10 -
<PAGE>
PART I -- FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain information set forth in this report under this caption Item 2.
"Management's Discussion and Analysis or Plan of Operation" includes "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. In addition, from time to time, the Company may publish
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended, or make oral statements that constitute forward-looking
statements. These forward-looking statements may relate to such matters as
anticipated financial performance, future revenues or earnings, business
prospectus, projected ventures, new products, anticipated market performance and
similar matters. Readers are cautioned not to place undue reliance on these
forward looking statements, which are made as of the date hereof. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company cautions readers that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. These
risks and uncertainties, many of which are beyond the Company's control,
include, but are not limited to: (i) transaction volume in the securities
markets, (ii) the volatility of the securities markets, (iii) fluctuations in
interest rates, (iv) changes in regulatory requirements which could affect the
cost of doing business, (v)fluctuations in currency rates, (vi) general economic
conditions, both domestic and international, (vii) changes in the rate of
inflation and related impact on securities markets, (viii) competition from
existing financial institutions and other new participants in the securities
markets, (ix) legal developments affecting the litigation experience of the
securities industry, (x) changes in federal and state tax laws which could
affect the popularity of products sold by the Company and (xi) the risks and
uncertainties set forth under the caption "Risk Factors" which appears in Item
1. Eastbrokers International Incorporated undertakes no obligation to release
publicly any revisions to the forward looking statements to reflect events or
circumstances after the date hereof or to reflect unanticipated events or
developments. Section 21E of the Securities and Exchange Act of 1934, as
amended, or make oral statements that constitute forward-looking statements.
These forward-looking statements may relate to such matters as anticipated
financial performance, future revenues or earnings, business prospectus,
projected ventures, new products, anticipated market performance and similar
matters. Readers are cautioned not to place undue reliance on these forward
looking statements, which are made as of the date hereof. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
cautions readers that a variety of factors could cause the Company's actual
results to differ materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. These risks and
uncertainties, many of which are beyond the Company's control, include, but are
not limited to: (i) transaction volume in the securities markets, (ii) the
volatility of the securities markets, (iii) fluctuations in interest rates, (iv)
changes in regulatory requirements which could affect the cost of doing
business, (v) fluctuations in currency rates, (vi) general economic conditions,
both domestic and international, (vii) changes in the rate of inflation and
related impact on securities markets, (viii) competition from existing financial
institutions and other new participants in the securities markets, (ix) legal
developments affecting the litigation experience of the securities industry, (x)
changes in federal and state tax laws which could affect the popularity of
products sold by the Company and (xi) the risks and uncertainties set forth
under the caption "Risk Factors" which appears in Item 1 of the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1998 and dated October
30, 1998.
This Form 10-QSB for the quarterly period ended September 30, 1998, makes
reference to the Company's Annual Report on Form 10-KSB dated October 30, 1998
("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
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.
- 11 -
<PAGE>
PLAN OF OPERATION
GENERAL OVERVIEW
Prior to August, 1996, the Company engaged in the purchase and sale of
newly privatized businesses in the Czech Republic. In August, 1996, the Company
entered the Central and Eastern European investment banking and securities
business through its acquisition of Eastbrokers Beteiligungs AG, an Austrian
holding company providing financial services in Eastern and Central Europe
through its network of subsidiaries. The acquisition of Eastbrokers AG was
intended to not only provide an earnings stream from brokerage activities, but
also position the Company to provide investment banking and corporate finance
services.
In March, 1997, the Company expanded its operations into the brokerage
business in the United States through its acquisition of an existing New
York-based broker dealer. In May, 1998, the Company continued the expansion of
its U.S. operations through the acquisition of Cohig & Associates ("EBI
Securities") a Denver, Colorado based investment banking and brokerage firm.
The Company currently operates a highly diversified investment banking and
securities network, with 20 US offices and 11 international branches located in
the following countries: Austria; Poland; Hungary; Russia; Slovakia; Turkey;
Kazakhstan; Romania; Bulgaria; Croatia; Slovenia. The Company's mission is to
build, through acquisitions and strategic alliances, a highly successful,
global, middle market, investment banking and securities firm.
EUROPEAN OPERATIONS
Since the acquisition of Eastbrokers AG, in August, 1996, the Company's
business strategy for its European operations was to: (1) market its emerging
market expertise; (2) develop an asset management business focused 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 and; (5) utilize its expertise
in the privatization activities throughout the region. During the past 12
months, the Company has had to modify this business strategy in response to the
global financial crisis, which peaked in the Summer of 1998, when the Russian
Ruble was devalued. This devaluation led to sharp decreases in stock markets
worldwide, particularly in Central and Eastern Europe. In addition, to falling
prices, liquidity in much of the region was significantly reduced. In order to
minimize the negative effects on the Company's financial operations, the Company
reduced its work force in Austria, Romania, Turkey, Russia and Bulgaria. In
Poland, Slovenia, Croatia, Kazakhstan, Slovakia and Hungary, the Company has
reevaluated its operations for additional cost savings. In the Czech Republic,
the Company sold its operations (see dispositions). Based upon further changes
in market conditions, the Company may close, sell or merge with third parties,
other European operations as it deems necessary.
Despite the current negative sentiment in emerging markets, the Company
believes that Central and Eastern Europe's ultimate unification into the
European Economic and Monetary Union, will lead to a significant increase in
investor interest in the region. This potential increase in the emerging market
interest will benefit those firms that have had existing operations in the
region. The Company intends to continue to maintain solid long term involvement
in the region and to continue to provide its clients with quality brokerage and
investment banking services.
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.
- 12 -
<PAGE>
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.
UNITED STATES OPERATIONS
Subsequent to the acquisition of Eastbrokers AG, the Company commenced
expansion of its brokerage operations in the United States. The Company's goal
was TO build a strong US brokerage presence that would enable it to distribute
middle market, international corporate finance product. In the Spring of 1997,
the Company purchased a U.S. based broker-dealer, Eastbrokers North America,
Inc. During the process of establishing the Eastbrokers North America, the
Company was approached by numerous U.S. based broker-dealers interested in being
acquired by the Company. Management believes that consolidation within the
securities industry, particularly in the United States, is inevitable. This
consolidation can be attributed to the current volatility prevailing in the
financial markets, the higher degree of capital needed to maintain solid
brokerage functions and the increased regulatory environment. The Company
decided that as a well-capitalized, entrepreneurially managed, international,
publicly-traded, investment banking firm, it would be particularly appealing to
the sellers of medium size brokerage firms. In addition, the Company believes
that the purchase and roll-up of complementary securities businesses both in the
United States and in Europe, can be financed by the issuance of its Common
Stock.
In May 1998, the Company made a significant step in its roll-up strategy in
the United States. The Company acquired all of the outstanding common stock of
Cohig & Associates, Inc., a Denver, Colorado based investment banking and
brokerage firm, in exchange for 445,000 unregistered shares of the Common Stock
and an agreement to advance $1,500,000 in additional working capital to Cohig &
Associates. Following the acquisition, the Company changed the name of Cohig &
Associates, Inc. to EBI Securities Corporation ("EBI Securities"). The Company
intends to develop EBI Securities as the foundation to expand its U.S. based
investment banking and brokerage presence and anticipates that EBI Securities
will be the first in a series of acquisitions targeting other successful medium
size investment banking and brokerage firms.
EBI Securities is a full service brokerage firm specializing in providing
investment advice and counsel to individuals and small to middle market
institutions. At the present time, EBI Securities has approximately 180 licensed
representatives. EBI Securities provides its brokerage clients with a broad
range of traditional investment products and services. EBI Securities also
strives to establish itself with investors and corporate finance clients through
its commitment to a professional but personalized service. Its trading
department makes a market in approximately 150 securities which include its
investment banking clients and those securities that its research department has
identified as promising, small to middle-market, potentially high growth
companies. EBI Securities' investment banking department operates with a single
goal in mind: to enhance and develop the capital structures of small to middle
market emerging growth companies through private placements, bridge financing,
and public offerings in order to enable the firm's corporate finance clients to
capitalize on promising business opportunities, favorable market conditions,
and/or late stage product development. The office space previously occupied by
Eastbrokers North America, has been converted into a branch office of EBI
Securities.
EBI Securities is registered as a broker-dealer with the SEC and is
licensed in 50 states and the District of Columbia. It is also a member of the
NASD and the Securities Investor Protection Corporation ("SIPC"). Customer
accounts are insured to $25 million under the SIPC excess insurance program. EBI
Securities operates pursuant to the exemptive provisions of SEC Rule 15c3-3
(k)(2)(ii) and clears all transactions with and for customers on a fully
disclosed basis.
- 13 -
<PAGE>
EBI Securities maintains its clearing arrangement with Fiserv Correspondent
Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ: FISV). Fiserv
provides EBI Securities with back office support, transaction processing
services on all the principal national securities exchanges and access to many
other financial services and products. This arrangement enables EBI Securities
to offer its clients a broad range of products and services that is typically
only offered by firms that are larger and/or have a larger capital base. Fiserv
has advised the Company that it is aware of the year 2000 computer issue and is
working to mitigate the effect of the year 2000 issue on its operations. See
Item 2 "Management's Discussion and Analysis or Plan of Operation - Impact of
the Year 2000".
RESULTS OF OPERATIONS
SEE Note 1 of the Notes to Consolidated Financial Statements for the
Quarterly Period and Six Months Ended September 30, 1998, for an explanation of
the basis of presentation of the financial statements. For the quarterly period
ended September 30, 1998, the Company generated consolidated revenues in the
amount of $6,207,205, compared to $1,413,995, for the quarterly period ended
September 30, 1997. For the six month period ended September 30, 1998 the
Company generated consolidated revenues in the amount of $10,344,997, compared
to $3,023,971 for the six month period ended September 30, 1997. Total revenues
for the three and six month periods ended September 30, 1998, are significantly
higher than the previous periods due to the acquisition of EBI Securities, which
contributed approximately $2,712,000 and $4,341,000 for the quarterly and six
month periods, respectively. Total revenue was also effected from the sale of
Eastbrokers Prague a.s. The Company recognized a gain on sale of interest in
Eastbrokers Prague a.s of approximately $1,312,000 before taxes. This amount is
reflected in the revenue section under the caption "Gain on sale of interest in
subsidiary."
The Company incurred total consolidated costs and expenses of $8,324,941,
for the quarterly period ended September 30, 1998, and $12,539,496, for the six
month period ended September 30, 1998, compared to $2,593,078, for the quarterly
period ended September 30, 1997, and $4,366,784, for the six month period ended
September 30, 1997. Total costs and expenses for the three month and six month
periods ended September 30, 1998 are significantly higher than the previous
periods due to the acquisition of EBI Securities, which contributed
approximately $4,939,000, for the three month period and $6,630,000, for the six
month period, respectively. The Company also incurred higher than expected legal
and consulting fees for the quarter, mainly due to costs associated with the
completion of its audit for the fiscal year ended March 31, 1998.
The Company's loss before provision for income taxes and minority interest
in earnings of subsidiaries was $2,149,736, for the quarterly period ended
September 30, 1998, and $2,226,499, for the six month period ended September 30,
1998, compared to $1,179,083, for the quarterly period ended September 30, 1997,
and $1,342,813, for the six month period ended September 30, 1997. The Company's
provision for income taxes and minority interest in earnings of subsidiaries for
the quarterly and six month periods, are attributed solely to the Company's
European operations, and are primarily related to WMP Bank AG and Eastbrokers
Budapest Rt.
The Company incurred a consolidated net loss of $2,854,655, for the
quarterly period ended September 30, 1998, and $3,064,912, for the six month
period ended September 30, 1998, compared to a consolidated net loss $668,735,
for the quarterly period ended September 30, 1997, and $1,097,247, for the six
month period ended September 30, 1997.
The Company's net loss for the quarter was primarily attributable to the
effect of the significant downturn in global stock markets during the period of
August and September. For the quarter ended September 30, 1998, the Company
incurred approximately $1,950,000 in trading losses due to inventory adjustments
that were marked down as of September 30, 1998. These adjustments were
approximately $1,250,000 for securities held by EBI Securities, and $700,000 for
foreign securities held by Eastbrokers AG and its affiliates. An increase in the
net loss for the quarter was also attributed to a slowdown in gross commission
revenue at EBI Securities during the months of August and September.
On September 30, 1998, the Company had total assets of $54,404,378, and
total liabilities of $27,851,828, compared to $34,223,102, and $17,046,409,
respectively, on September 30, 1997. 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.
- 14 -
<PAGE>
The cash flows for six month period ended September 30, 1998 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.
As a broker/dealer in securities, the Company will periodically acquire
positions in securities on behalf of its clients. As disclosed in "Note 2
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".
ACQUISITIONS AND DISPOSITIONS
In June 1998, the Company sold 73.55 percent of its interest in Eastbrokers
Prague a.s. for 15 million Austrian Schillings. The Company recognized a profit
from the sale of Prague of approximately $1,312,000, at the then current
exchange rates. This amount is reflected in the revenue section under gain on
sale of interest in subsidiary.
EMPLOYEES
At November 13, 1998, the Company currently has approximately 450 full-time
employees and 40 part-time employees. No employees are covered by collective
bargaining agreements and the Company believes its relations are good with both
its employees and its independent contractors and consultants.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. The new standard
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 was adopted by the Company beginning with the
interim reporting period ended December 31, 1997. The adoption did not impact
previously reported earnings per share amounts.
In September 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME." This statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purposes financial statements. This statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time, the Company does not believe that this statement will
have a significant impact on the Company.
In September 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." This statement established
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. This statement is effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be retained. At this time, the
Company does not believe that this statement will have a significant impact on
the Company.
In September 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for fiscal years beginning after September 15, 1999. At this
time, the Company does not believe that this statement will have a significant
impact on the Company.
- 15 -
<PAGE>
IMPACT OF THE YEAR 2000
YEAR 2000
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and internationally (the "Year 2000" issue). The potential costs and
uncertainties associated with the Year 2000 issue will depend on a number of
factors, including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other entities
with which they electronically interact.
The Company is currently in the process of a systems upgrade unrelated to
the Year 2000 issue. In conjunction with this upgrade, the Company is in the
process of establishing a program to address issues associated with the Year
2000. To ensure that the Company's computer systems are Year 2000 compliant, the
Company has been reviewing its systems and programs to identify those that
contain two-digit year codes, and the Company intends to replace them in
conjunction with the systems upgrade provided by the Baan Corporate Office
Solutions. In addition, the Company is in the process of contacting its major
external counterparties and suppliers to assess their compliance and remediation
efforts and the Company's exposure to them.
In addressing the Year 2000 issue, the Company has divided its program into
six phases:
(1) the Inventory phase, involving the identification of items that
may be affected by Year 2000 compliance issues, including facilities
and related non-information technology systems (embedded technology),
computer systems, hardware, and services and products provided by
third parties;
(2) the Assessment phase, involving the evaluation of items identified
in the Inventory phase to determine which will function properly with
the change to the new century, and the prioritizing of items which
will need remediation based on their potential impact to the Company;
(3) the Remediation phase, involving the analysis of the items that
are affected by Year 2000, the identification of problem areas and the
replacement of non-compliant items;
(4) the Testing phase involving the testing of all proposed repairs,
including forward date testing which simulates dates in the Year 2000;
(5) the Implementation phase consists of placing all items that have
been remediated and successfully tested into operation; and
(6) the Integration phase, involving the testing of the Company's
business critical systems in a future time environment with external
entities.
As of November 13, 1998, the Company had substantially completed the
Inventory phase and was also conducting the procedures associated with the
Assessment, Remediation, Testing and Implementation phases. The Company expects
to complete the Inventory and Assessment phase in the fourth calendar quarter of
1998. The Remediation and Testing phases with respect to business critical
applications are expected to be completed by the end of the first calendar
quarter of 1999. The Implementation phase is expected to be completed by the end
of the second calendar quarter of 1999. The Integration phase will commence at
the time the Company receives its new operating system in the fourth calendar
quarter of 1998 and will continue through 1999. In addition, the Company will
identify the major business relationships of the Company by the end of the first
calendar quarter of 1999, and many of them will be tested as soon thereafter as
practicable. The Company will continue to survey and communicate with
counterparties, intermediaries and vendors with whom it has important financial
and operational relationships to determine the extent to which they are
vulnerable to Year
- 16 -
<PAGE>
2000 issues. As of November 13, 1998, the Company has not yet received
sufficient information from all parties about their remediation plans to predict
the outcomes of their efforts. In particular, Management believes the level of
awareness and remediation efforts relating to the Year 2000 issue is less
advanced in the Eastern and Central European markets in which the Company
conducts business than in the United States.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. Such failures could have a material adverse effect on the
Company and may cause systems malfunctions, incorrect or incomplete transaction
processing resulting in failed trade settlements, the inability to reconcile
accounting books and records, the inability to reconcile trading positions and
balances with counterparties, inaccurate information to manage the Company's
exposure to trading risks and disruptions of funding requirements. In addition,
even if the Company successfully remediates its Year 2000 issues, it can be
materially and adversely affected by failures of third parties to remediate
their own Year 2000 issues. The failure of third parties with which the Company
has financial or operational relationships such as securities exchanges,
clearing organizations, depositories, regulatory agencies, banks, clients,
counterparties, vendors and utilities, to remediate their computer and
non-information technology systems issues in a timely manner could result in a
material financial risk to the Company.
If the above mentioned risks are not remedied, the Company may experience
business interruption or shutdown, financial loss, regulatory actions, damage to
the Company's global franchise and legal liability. The Company is currently
unable to quantify the adverse effect such risks impose, but management believes
that if the Year 2000 issue is not remedied there could be a material adverse
effect on the Company's financial position and results of operation.
The Company does not have business continuity plans in place that cover the
Year 2000 issue. The Company intends to evaluate Year 2000 specific contingency
plans during 1999 as part of its Year 2000 risk mitigation efforts.
Based upon current information, the Company estimates that the total cost
of implementing its Year 2000 initiative will be between $750,000 and
$1,500,000, including the cost of its general systems upgrade. The Year 2000
costs include all activities undertaken on Year 2000 related matters across the
Company, including, but not limited to, remediation, testing (internal and
external), third party review, risk mitigation and contingency planning. Through
September 30, 1998, the Company estimates that it has expended approximately
$350,000 on the Year 2000 project. These costs have been and will continue to be
funded through operating cash flow and are expensed in the period in which they
are incurred.
The Company's expectations about future costs and the timely completion of
its Year 2000 modifications are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. Factors that
could influence the amount of future costs and the effective timing of
remediation efforts include the success of the Company in identifying computer
programs and non-information technology systems that contain two-digit year
codes, the nature and amount of programming and testing required to upgrade or
replace each of the affected programs and systems, the nature and amount of
testing, verification and reporting required by the Company's regulators around
the world, including securities exchanges, central banks and various
governmental regulatory bodies, the rate and magnitude of related labor and
consulting costs, and the success of the Company's external counterparties and
suppliers, as well as worldwide exchanges, clearing organizations and
depositories, in addressing the Year 2000 issue.
IMPACT OF THE EURO
The Euro issue is the result of the Economic and Monetary Union (the "EMU")
which comes into effect on January 1, 1999 and the conversion of member states
to a single currency known as the Euro. The introduction of the Euro will have a
profound impact on the way enterprises operate. Further, it will be one of the
most important changes in the economic landscape of Europe in the next few
years.
The single currency is expected to contribute significantly to further
market integration throughout the member countries. Prices will be easier to
compare which should increase market transparency. As businesses
- 17 -
<PAGE>
recognize that they will no longer be exposed to foreign currency exchange rate
risks and the related costs of currency conversion, cross-border transactions
within the EMU are expected to become more attractive.
The introduction of the Euro has been described as a unique event in
history. This uniqueness is also the root of potential problems. During the
transition period, companies will be required to use two different currency
units. This could create a basic input functionality problem whereby enterprises
will receive financial information in both the Euro and the national currency
units. A potential output functionality problem may be that companies will be
required to produce financial information in either the Euro or the national
currency unit or in some cases both currencies. Further adding to potential
problems is a requirement that historical financial information stored in the
system must be converted to the Euro unit.
The Company is currently in the process of a systems upgrade unrelated to
the Year 2000 or Euro issues. In the course of this upgrade and addressing the
Year 2000 issue, the Company will be installing new software that is Euro
capable and will evaluate any potential problems identified that could be
related to the Euro issue. The Company is also monitoring the compliance of its
software suppliers in addressing this issue. Based on a recent evaluation, the
Company has determined that material costs and resources will not be required to
permit its computer systems to properly handle Euro reporting and transactions.
- 18 -
<PAGE>
PART II -- OTHER INFORMATION
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
September 30, 1998.
- 19 -
<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 16, 1998
- 20 -
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------------------
(27.1) Financial Data Schedule (Electronic Filing Only).
- 21 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,019,082
<SECURITIES> 14,005,582
<RECEIVABLES> 26,330,991
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,355,655
<PP&E> 2,476,900
<DEPRECIATION> 955,936
<TOTAL-ASSETS> 54,404,378
<CURRENT-LIABILITIES> 18,785,971
<BONDS> 9,065,857
0
0
<COMMON> 238,388
<OTHER-SE> 17,093,342
<TOTAL-LIABILITY-AND-EQUITY> 54,404,378
<SALES> 0
<TOTAL-REVENUES> 10,344,997
<CGS> 0
<TOTAL-COSTS> 12,571,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,262
<INCOME-PRETAX> (2,226,499)
<INCOME-TAX> (665,433)
<INCOME-CONTINUING> (3,064,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,064,912)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
