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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
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 December 31, 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)
-----------------------
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)
(301) 527-1110
(Issuer's Telephone Number, Including Area Code)
-----------------------
Check whether the issuer: (1) 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 February 16, 1999, was 5,157,250.
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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 Statement of Financial Condition ....................... 2
Consolidated Statements of Operations
Quarterly and Nine Month Periods Ended December 31, 1998 and 1997.. 3
Consolidated Statements of Comprehensive Income
Quarterly and Nine Month Periods Ended December 31, 1998 and 1997.. 4
Consolidated Statements of Cash Flows
Quarterly and Nine Month Periods Ended December 31, 1998 and 1997.. 5
Notes to Consolidated Financial Statements .......................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation ....... 13
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 22
Item 6. Exhibits and Reports on Form 8-K ................................ 22
Signature ............................................................... 23
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
December 31,
----------------
1998
----------------
(Unaudited)
<S> <C>
ASSETS
Cash and cash equivalents $ 2,553,876
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 98,252
Securities purchased under agreements to resell 1,539,042
Receivables
Customers 192,214
Broker dealers and other 7,665,155
Affiliated companies 1,743,204
Other 15,534,169
Securities owned, at value
Government and agencies 5,737,766
Equities and other 16,795,918
Buildings, furniture and equipment, at cost (net of
accumulated depreciation and amortization of
$1,039,936) 1,619,618
Deferred taxes 4,803,704
Investments held for resale 175,787
Investments in affiliated companies 210,888
Goodwill 2,777,169
Other assets and deferred amounts 466,087
----------------
Total Assets $ 61,912,849
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings
Lines of credit $ 2,907,010
Affiliated companies 1,419,569
Other 1,738,647
Securities sold under agreements to repurchase 368,076
Securities loaned 4,187,159
Payables
Customers 4,307,010
Broker dealers and other 7,236,720
Accounts payable and accrued expenses 1,649,545
Other liabilities and deferred amounts 896,292
----------------
24,710,028
Long-term borrowings 9,387,714
----------------
Total liabilities 34,097,742
----------------
Minority interest in consolidated subsidiaries 10,103,141
----------------
Stockholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized; no shares
issued and outstanding at December 31, 1998 -
Common stock; $.05 par value; 10,000,000 shares
authorized; 4,767,750 shares issued and outstanding
at December 31, 1998 238,388
Paid-in capital 27,966,614
Retained earnings (accumulated deficit) (8,568,920)
Note receivable - common stock (331,704)
Unrealized gain/loss on available for sale investments -
Cumulative translation adjustment (1,592,412)
----------------
Total stockholders' equity 17,711,966
----------------
Total Liabilities and Stockholders' Equity $ 61,912,849
================
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Quarterly Period For the Nine Months
Ended December 31, Ended December 31,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Commissions $ 3,625,667 $ 631,131 $ 8,237,084 $ 1,615,510
Fees 1,443,299 45,685 2,146,639 380,951
Interest and dividends 444,175 166,479 846,381 394,675
Principal transactions, net
Trading 268,008 371,766 2,657,607 2,042,612
Investment 88,077 (259,555) 231,440 380,717
Gain on sale of interest in subsidiary - - 1,312,057 -
Other 759,653 397,876 1,542,668 779,410
Equity in earnings of unconsolidated affiliates 54,988 21,441 54,988 (117,832)
---------------- ---------------- ---------------- ----------------
Total revenues 6,683,867 1,374,823 17,028,864 5,476,043
---------------- ---------------- ---------------- ----------------
Costs and expenses
Compensation and benefits 4,323,418 467,355 10,687,266 1,803,672
Interest 230,854 35,724 335,116 173,560
Brokerage, clearing, exchange fees and other 84,308 57,648 1,324,647 575,661
Occupancy 499,012 209,067 1,302,584 621,601
Office supplies and expenses 326,626 151,000 1,001,600 364,378
Communications 537,555 92,726 1,314,265 340,290
Legal fees 196,618 46,323 818,009 122,441
Consulting fees 277,626 192,782 887,787 1,020,189
Travel 154,985 125,656 472,013 400,454
General and administrative 218,744 154,811 1,088,917 1,207,957
Depreciation and amortization 166,736 171,939 355,774 375,099
---------------- ---------------- ---------------- ----------------
Total costs and expenses 7,016,482 1,705,031 19,587,978 7,005,302
---------------- ---------------- ---------------- ----------------
Loss before provision for income taxes and
minority interest in earnings of subsidiaries (332,615) (330,208) (2,559,114) (1,529,259)
Provision (benefit) for income taxes 446,676 120,533 (218,757) 93,614
Minority interest in earnings of subsidiaries (100,683) 108,415 (273,663) 237,138
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 13,378 $ (101,260) $ (3,051,534) $ (1,198,507)
================ ================ ================ ================
Weighted average number of shares outstanding 4,767,750 3,063,000 4,595,202 3,063,000
================ ================ ================ ================
Basic and diluted earnings per share $ - $ (0.03) $ (0.66) $ (0.39)
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
For the Quarterly Period For the Nine Months
Ended December 31, Ended December 31,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ 13,378 $ (101,260) $ (3,051,534) $ (1,198,507)
Other comprehensive income (loss)
Foreign currency translation adjustments 611,870 (239,875) 548,208 (1,493,874)
Unrealized holding gains - 954,110 - 246,794
Less: recovery of unrealized holding losses - (954,110) - (246,794)
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) $ 625,248 $ (341,135) $ (2,503,326) $ (2,692,381)
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
------------------------------------
1998 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (3,051,534) $ (1,198,507)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 273,663 (237,138)
Depreciation and amortization 1,059,169 528,751
Deferred taxes 237,010 (49,423)
Gain on sale of interest in subsidiary (1,312,057) -
Equity in earnings (loss) of unconsolidated affiliates - 117,832
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies 887,981 (29,425)
Securities purchased under agreements to resell (651,872) (1,527,970)
Receivables
Customers 4,627,744 5,877,718
Brokers, dealers and others (3,260,547) (1,001,262)
Affiliated companies 543,073 (2,005,968)
Other (9,120,268) (4,073,651)
Securities owned, at value (13,855,772) 676,602
Other assets (71,769) (323,700)
Payables
Customers (1,098,454) 365,189
Brokers, dealers and others 1,067,561 5,151,384
Accounts payable and accrued expenses 564,671 (2,957,979)
----------------- -----------------
Net cash provided by (used in) operating activities (23,161,401) (687,547)
----------------- -----------------
Cash flows from investing activities
Net proceeds from (payments for)
Investments in affiliates - (896,688)
Sale of interest in subsidiary 1,180,500 -
Investments held for resale 693,173 2,054,907
Purchases of furniture and equipment - (280,855)
----------------- -----------------
Net cash provided by (used in) investing activities 1,873,673 877,364
----------------- -----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement - 725,000
Securities loaned 4,187,159 -
Short-term financings 2,092,219 (1,795,888)
Short-term borrowings from affiliated companies 1,738,647 (823,113)
Other long-term debt 7,367,627 (1,573,853)
----------------- -----------------
Net cash provided by (used in) financing activities 15,385,652 (3,467,854)
----------------- -----------------
Foreign currency translation adjustment 1,299,250 (1,351,177)
----------------- -----------------
Increase (decrease) in cash and cash equivalents (4,602,826) (4,629,214)
Cash and cash equivalents, beginning of period 7,156,702 7,255,793
----------------- -----------------
Cash and cash equivalents, end of period $ 2,553,876 $ 2,626,579
================= =================
</TABLE>
See notes to consolidated financial statements.
- 5 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
------------------------------------
1998 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
----------------- -----------------
Cash paid for interest $ 335,116 $ 173,560
----------------- -----------------
Non-cash transactions
Eastbrokers International shares issued as part of
EBI Securities Corporation acquisition $ 2,350,000 $ -
----------------- -----------------
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated (the
"Company") for the quarterly and nine month periods ended December 31, 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 as amended 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 December 31, 1998, the accompanying
consolidated financial statements include the financial position, results
of operations, comprehensive income and cash flows of Eastbrokers
Beteiligungs Aktiengesellschaft ("Eastbrokers AG") for the quarterly period
ended September 30, 1998, of EBI Securities Corporation ("EBI Securities")
(formerly Cohig & Associates) for the quarterly period ended December 31,
1998, and the Company for the quarterly period ended December 31, 1998.
For the nine month period ended December 31, 1998, the accompanying
consolidated financial statements include the financial position, results
of operations, comprehensive income, and cash flows of Eastbrokers
Beteiligungs Aktiengesellschaft ("Eastbrokers AG") for the nine month
period ended September 30, 1998, of EBI Securities Corporation ("EBI
Securities") from the date of acquisition (May 14, 1998) through December
31, 1998, and the Company for the nine month period ended December 31,
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 as amended 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.
- 7 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 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.
- 8 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 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.
- 9 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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 180
licensed representatives. EBI Securities provides its brokerage clients
with a broad range of traditional
- 10 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
3. ACQUISITION OF EBI SECURITIES CORPORATION (CONTINUED)
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 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.
On November 25, 1998, in order to increase its working capital, the Company
sold 10 newly issued units in a private placement consisting in the
aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C
Warrants to purchase 125,000 shares of Common Stock. The Company has the
right to redeem the Convertible Debentures on or before March 24, 1999, at
115% of the aggregate price or $1,265,000. The Company intends to redeem
the Convertible Debentures in full.
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.
- 11 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
5. SALE OF INTERESTS IN SUBSIDIARIES
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".
In December 1998, the Company sold its entire interest in its subsidiary,
Eastbrokers Budapest Rt. for 217,000,000 HUF (approximately $1,000,000 USD
at the then current exchange rates). The sale of Eastbrokers Budapest is
not reflected in the December 31, 1998, financial statements, since these
financial statements reflect the European operations for the quarter and
nine months ended September 30, 1998. The sale of Eastbrokers Budapest will
be reflected in the Company's March 31, 1999 financial statements. As of
the date of this filing, the Company has not yet determined the effect of
this transaction to the financial statements.
6. COMMITMENTS AND CONTINGENCIES
LEASES AND RELATED COMMITMENTS
The Company occupies office space under leases which expire at various
dates through 2003. These leases contain provisions for periodic
escalations to the extent of increases in certain operating and other
costs. The Company's subsidiaries occupy office space under various
operating leases which generally contain cancellation clauses whereby the
Company may cancel the lease with thirty to ninety days written notice.
7. COMPREHENSIVE INCOME
In June 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-purpose financial statements. This
statement was adopted by the Company beginning with the fiscal year ended
March 31, 1999 and the appropriate prior periods have been restated.
Due to the nature of the items reflected in the Statement of Comprehensive
Operations, no effect for income taxes has been recognized. Foreign
currency translation adjustments are primarily related to the investment in
the Company's foreign operations. Unrealized holding losses are related to
securities received in the sale of the Hotel Fortuna. As noted in the
consolidated financial statements for the year ended March 31, 1998
included herein, the Company has substantial net operating loss
carryforwards which it may or may not be able to utilize prior to their
expiration. Accordingly, no tax effect for these additional projected
losses has been reflected in these financial statements.
8. SUBSEQUENT EVENTS
In December 1998, the Company sold its subsidiary, Eastbrokers Budapest Rt.
for HUF 217,000,000 (approximately $1,000,000 USD at the then current
exchange rates). The sale of Eastbrokers Budapest is not reflected in the
December 31, 1998, financial statements, since these financial statements
reflect the European operations for the quarter and nine months ended
September 30, 1998. The sale of Eastbrokers Budapest will be reflected in
the Company's March 31, 1999, financial statements. The Company continues
to have a working relationship with the buyer and maintains a presence in
Budapest through its relationship with the buyer.
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EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
In December 1998, the Company entered into a non-binding letter agreement
pursuant to which it intended to acquire Lloyd Wade Securities, Inc.
("Lloyd Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd
Wade is a full service securities firm. The acquisition was contingent
upon, among other things, receipt of any necessary corporate and
stockholder approvals, all necessary governmental approvals, completion of
business, legal and financial due diligence and other customary conditions.
Since the signing of the non-binding letter of intent, the Company has been
unable to come to terms with Financial Services, Inc. On February 12, 1999,
the Company abandoned its effort to acquire Lloyd Wade.
In January, 1999, the Company sold 125,000 restricted shares of its common
stock in a private placement to a private investor for $4.00 per share. The
Company also issued 7,500 shares of its common stock to a broker at EBI
Securities Corporation as a commission in connection with this transaction.
In a subsequent event, in February, 1998, the Company's Austrian subsidiary
WMP Bank AG, purchased a forty-nine (49%) percent equity interest in
Stratego Invest a.s. Prague, a Czech securities and investment firm. The
purchase price was valued at approximately $2.9 million USD at the then
current exchange rates. The book value of Stratego Invest at the time of
purchase was approximately 190 million Czech koruna, or approximately $6.1
million USD at the then current exchange rates.
Stratego Invest is one of the leading Czech securities and investment
firms. The current management of Stratego Invest has a proven record of
profitability and they have well positioned the firm in order to expand
into the international securities marketplace. The partnership with
Stratego Invest will give the Company a strong partner in the Czech
marketplace, and at the same time, will provide Stratego Invest access to
the international marketplace through the Company's operations in Europe
and the US.
In February, 1999, the Company filed a registration statement on Form SB-2
covering the resale of certain securities held by various selling
stockholders.
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<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
of the Company's Annual Report on Form 10-KSB for the fiscal year ended March
31, 1998 and dated October 30, 1998. 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.
This Form 10-QSB for the quarterly period ended December 31, 1998, makes
reference to the Company's Annual Report on Form 10-KSB as amended 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.
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 throughout Central and Eastern Europe.
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.
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The Company currently operates a highly diversified investment banking and
securities network, with 20 US offices and 12 international branches and
affiliates located in the following countries: Austria; Czech Republic; Poland;
Hungary; Slovakia; Kazakhstan; Bulgaria; Croatia; Slovenia and; Azerbaijan. 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 utilize its emerging market
expertise in the areas of merchant banking, corporate finance, privatization and
trading, in order to expand throughout Central and Eastern Europe. However,
during 1998, the Company had to modify its business strategy in Europe, in
response to an overall economic downturn that covered much of Central and
Eastern Europe. This market downturn was further exacerbated by the global
financial crisis, which peaked in the Summer of 1998, and was caused in part by
the devaluation in the Russian Ruble. 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 and has eliminated much of its
workforce in Romania, Turkey, Russia and Bulgaria. In Poland, Slovenia, Croatia,
Kazakhstan and Slovakia, the Company is reevaluating its operations for
additional cost savings. In the Czech Republic and Hungary, the Company sold its
operations (see dispositions), however, the Company maintains an affiliate
relationship with the management in Hungary. The Company has re-entered the
Czech Republic through the purchase of a minority interest in Stratego Invest
a.s. Prague (see subsequent events). The Company has also organized an office in
Baku, Azerbaijan. 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 negative sentiment in emerging markets during 1998, 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 maintain solid long term involvement in the
region and to continue to provide its clients with quality brokerage and
investment banking services.
Since the Company's acquisition of EBI Securities in May 1998, the
Company's European subsidiaries now have direct access to the US securities
marketplace. The Company expects that during 1999, its two main subsidiaries,
EBI Securities and WMP Bank, will cross market to their respective retail and
institutional clientele, their research, corporate finance and trading
capabilities. The Company believes that it is possible to significantly increase
the overall revenue of the Company, if EBI Securities, through WMP Bank, is
successful in marketing US securities to Western European institutional
clientele, and vice-versa.
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
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<PAGE>
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
European middle market, corporate finance product in the US and also to provide
its European operations access to US corporate finance product, trading and
research capabilities. In the Spring of 1997, the Company purchased a U.S. based
broker-dealer, Eastbrokers North America, Inc. During the process of
establishing 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.
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,
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<PAGE>
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".
In December 1998, the Company entered into a non-binding letter agreement
pursuant to which it intended to acquire Lloyd Wade Securities, Inc. ("Lloyd
Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd Wade is a
full service securities firm. The acquisition was contingent upon, among other
things, receipt of any necessary corporate and stockholder approvals, all
necessary governmental approvals, completion of business, legal and financial
due diligence and other customary conditions. Since the signing of the
non-binding letter of intent, the Company has been unable to come to terms with
Financial Services, Inc. On February 12, 1999, the Company abandoned its effort
to acquire Lloyd Wade.
Results of Operations
See Note 1 of the Notes to Consolidated Financial Statements for the
Quarterly Period and Nine Months Ended December 31, 1998, for an explanation of
the basis of presentation of the financial statements.
For the quarterly period ended December 31, 1998, the Company generated
consolidated revenues in the amount of $6,683,867, compared to $1,374,823, for
the quarterly period ended December 31, 1997. For the nine month period ended
December 31, 1998, the Company generated consolidated revenues in the amount of
$17,028,864, compared to $5,476,043, for the nine month period ended December
31, 1997. Total revenues for the three and nine month periods ended December 31,
1998, are significantly higher than the previous periods due to the acquisition
of EBI Securities, which contributed approximately $4,933,232, and $9,300,016,
for the quarterly and nine month periods, respectively (the nine month numbers
are reported from May 14, 1998, the date of acquisition of EBI Securities - see
Note 3 to the Financial Statements). Total revenue for the nine months was also
effected from the sale of Eastbrokers Prague a.s. The Company recognized a gain
on the sale of its 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 $7,016,482,
for the quarterly period ended December 31, 1998, and $19,587,978, for the nine
month period ended December 31, 1998, compared to $1,705,031, for the quarterly
period ended December 31, 1997, and $7,005,302, for the nine month period ended
December 31, 1997. Total costs and expenses for the three month and nine month
periods ended December 31, 1998, are significantly higher than the previous
periods due to the acquisition of EBI Securities, which contributed
approximately $5,073,382, for the three month period and $11,703,382, for the
nine month period, respectively (the nine month numbers are reported from May
14, 1998, the date of acquisition of EBI Securities- see Note 3 to the Financial
Statements).
The Company's loss before provision for income taxes and minority interest
in earnings of subsidiaries was $332,615, for the quarterly period ended
December 31, 1998, and $2,559,114, for the nine month period ended December 31,
1998, compared to a loss of $330,208, for the quarterly period ended December
31, 1997, and $1,529,259, for the nine month period ended December 31, 1997. The
Company's provision for income taxes and minority interest in earnings of
subsidiaries for the quarterly and nine 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 reported consolidated net income of $13,378, for the quarterly
period ended December 31, 1998, and a consolidated net loss of $3,051,354, for
the nine month period ended December 31, 1998, compared to a consolidated net
loss of $101,260 for the quarterly period ended December 31, 1997, and a
consolidated net loss of $1,198,507, for the nine month period ended December
31, 1997.
The Company's slight net profit for the quarter ended December 31, 1998,
was attributable to several factors. First, in Europe, the Company's operations
were impacted by the global financial crisis that occurred during the Summer of
1998. Since the Company's financial statements for the period ended December 31,
1998, include the Company's European operations for the period ended September
30, 1998, this period of financial market volatility is reflected in the
Company's quarter ended December 31, 1999. Specifically, during this period, the
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Company's European operations experienced a slowdown in its commission, trading
and corporate finance business. Second, the Company's European operations
incurred costs related to the reduction of the workforce in several of its
European offices. Third, in the US, EBI Securities incurred higher costs
associated with the expansion of its operations in New York, California and
Colorado. In addition, EBI Securities experienced a continued slowdown in its
gross commission revenue through October. However, revenue at EBI Securities
increased significantly in November and December. And fourth, the Company
continued to incur higher than expected legal and consulting fees through
October, mainly due to costs associated with the completion of its audit for the
fiscal year ended March 31, 1998, which was completed on October 30, 1998.
On December 31, 1998, the Company had total assets of $61,912,849, and
total liabilities of $34,097,742, compared to $40,424,733, and $14,833,076,
respectively, on December 31, 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.
On November 25, 1998, in order to increase its working capital, the Company
sold 10 newly issued units in a private placement consisting in the aggregate of
$1,100,000 in 7 percent Convertible Debentures and Series C Warrants to purchase
125,000 shares of Common Stock. The Company has the right to redeem the
Convertible Debentures on or before March 24, 1999, at 115% of the aggregate
price or $1,265,000. The Company intends to redeem the Convertible Debentures in
full.
In January, 1999, the Company sold 125,000 restricted shares of its common
stock in a private placement to a private investor for $4.00 per share. The
Company also issued 7,500 shares of its common stock to a broker at EBI
Securities Corporation as a commission in connection with this transaction.
The cash flows for the nine month period ended December 31, 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.
In December 1998, the Company sold its subsidiary, Eastbrokers Budapest Rt.
for HUF 217,000,000 (approximately $1,000,000 USD at the then current exchange
rates). The Company continues to have a working relationship with the buyer and
maintains a presence in Budapest through its relationship with the buyer.
In December 1998, the Company entered into a non-binding letter agreement
pursuant to which it intends to acquire Lloyd Wade Securities, Inc. ("Lloyd
Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd Wade is a
full service securities firm. The acquisition is contingent upon, among other
things, receipt of any necessary corporate and stockholder approvals, all
necessary governmental approvals, completion of business, legal and financial
due diligence and other customary conditions. Since the signing of the
non-binding
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letter of intent, the Company has been unable to come to terms with Lloyd Wade.
On February 12, 1999, the Company abandoned its effort to acquire Lloyd Wade.
In a subsequent event, in February, 1998, the Company's Austrian subsidiary
WMP Bank AG, purchased a forty-nine (49%) percent equity interest in Stratego
Invest a.s. Prague, a Czech securities and investment firm. The purchase price
was valued at approximately $2.9 million USD at the then current exchange rates.
The book value of Stratego Invest at the time of purchase was approximately 190
million Czech koruna, or approximately $6.1 million USD at the then current
exchange rates.
Stratego Invest is one of the leading Czech securities and investment
firms. The current management of Stratego Invest has a proven record of
profitability and they have well positioned the firm in order to expand into the
international securities marketplace. The partnership with Stratego Invest will
give the Company a strong partner in the Czech marketplace, and at the same
time, will provide Stratego Invest access to the international marketplace
through the Company's operations in Europe and the US.
EMPLOYEES
At February 16, 1999, the Company currently has approximately 400 full-time
employees and 40 part-time employees. The reduction of employees from the prior
period is mainly due to the sale of Eastbrokers Budapest Rt. 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
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 June 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-purpose financial statements. This statement was
adopted by the Company beginning with the fiscal year ended March 31, 1999.
In June 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 will be effective for the Company's
annual report for the fiscal year ended March 31, 1999. In the initial year of
application, comparative information for earlier years is to be restated. At
this time, the Company does not believe that this statement will have a
significant impact on the Company.
In June 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 June 15, 1999. At this time,
the Company does not believe that this statement will have a significant impact
on the Company.
IMPACT OF THE 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.
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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 February 16, 1999, 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 first calendar quarter of
1999. 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 commenced in
January 1999, 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 2000 issues. As of February 16, 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
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<PAGE>
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
December 31, 1998, the Company estimates that it has expended approximately
$400,000 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 came 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 is expected to
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 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 may also result in unintended consequences.
During the transition period, companies will be required to use two different
currency units. Confusion may result from financial information being reported
in both the Euro and the national currency units. Another potential problem is
that companies will be required to report 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 must be converted to the Euro unit.
- 21 -
<PAGE>
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.
- 22 -
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 25, 1998, in order to increase its working capital, the Company
sold 10 newly issued units in a private placement consisting in the aggregate of
$1,100,000 in 7 percent Convertible Debentures and Series C Warrants to purchase
125,000 shares of Common Stock. The Company has the right to redeem the
Convertible Debentures on or before March 24, 1999, at 115% of the aggregate
price or $1,265,000. The Company intends to redeem the Convertible Debentures in
full. The Company has reserved 385,000 shares of its common stock underlying the
Convertible Debentures.
In January, 1999, the Company sold 125,000 restricted shares of its common
stock in a private placement to a private investor for $4.00 per share. The
Company also issued 7,500 shares of its common stock to a broker at EBI
Securities Corporation as a commission in connection with this transaction.
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
December 31, 1998.
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<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
Executive Vice President, Treasurer, Secretary
and Chief Financial Officer
Dated: February 16, 1999
- 24 -
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------------------
(27.1) Financial Data Schedule (Electronic Filing Only).
- 25 -
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
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0
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