===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------
Commission file number 0-26202
EASTBROKERS INTERNATIONAL INCORPORATED
(Exact name of small business issuer as specified in its charter)
-----------------------
DELAWARE 52-1807562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6000 Fairview Road, Suite 1410, Charlotte, North Carolina 28210
(Address of principal executive offices) (Zip Code)
(704) 643-8220
(Registrant's telephone number, including area code)
15245 SHADY GROVE ROAD, SUITE 340, ROCKVILLE, MARYLAND 20850
(Former Address)
-----------------------
Check whether the issuer: (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 August 16, 1999, was 5,206,750.
===============================================================================
<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 Periods Ended June 30, 1999 and 1998 .............. 3
Consolidated Statements of Comprehensive Income
Quarterly Periods Ended June 30, 1999 and 1998 .............. 4
Consolidated Statements of Cash Flows
Quarterly Periods Ended June 30, 1999 and 1998 .............. 5
Notes to Consolidated Financial Statements ..................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 14
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 23
Item 4. Submission of Matters to a Vote of Security Holders............ 23
Item 6. Exhibits and Reports on Form 8-K .............................. 24
Signature ............................................................. 25
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
June 30,
----------------
1999
----------------
(Unaudited)
<S> <C>
ASSETS
Cash and cash equivalents $ 2,919,547
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 47,166
Securities borrowed 956,914
Receivables
Customers 9,476,013
Broker dealers and other 3,397,422
Affiliated companies 7,676,667
Other 3,755,205
Securities owned, at value
Corporate equities 14,016,583
Other sovereign government obligations 1,707,620
Furniture and equipment, at cost (net of accumulated
depreciation and amortization of $1,257,553) 2,174,057
Deferred taxes 4,477,832
Investments in affiliated companies 3,386,283
Goodwill 2,191,778
Other assets and deferred amounts 978,314
----------------
Total Assets $ 57,161,401
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 7,364,087
Advances from affiliated companies 3,836,660
Payables
Customers 580,960
Broker dealers and other 10,122,884
Securities sold under agreements to repurchase 292,997
Securities sold, not yet purchased, at value 3,389,925
Accounts payable and accrued expenses 1,370,254
Other liabilities and deferred amounts 1,994,915
----------------
28,952,682
Long-term borrowings 3,841,487
----------------
Total liabilities 32,794,169
----------------
Minority interest in consolidated subsidiaries 7,307,791
----------------
Shareholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding at June 30, 1999 -
Common stock; $.05 par value; 10,000,000 shares authorized;
5,206,750 shares issued and outstanding at June 30, 1999 260,338
Paid-in capital 29,716,012
Accumulated deficit (9,701,449)
Note receivable - common stock and warrants (906,645)
Accumulated other comprehensive income (2,308,815)
----------------
Total shareholders' equity 17,059,441
----------------
Total Liabilities and Shareholders' Equity $ 57,161,401
================
</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
Ended June 30,
------------------------------------
1999 1998
---------------- ----------------
(Unaudited)
<S> <C> <C>
Revenues
Commissions $ 6,018,703 $ 1,747,117
Fees 1,133,708 208,620
Interest and dividends 56,901 188,682
Principal transactions, net
Trading 2,086,314 1,378,129
Investment 22,504 488,365
Other 954,577 126,879
Equity in earnings of unconsolidated affiliates 84,218 -
---------------- ----------------
Total revenues 10,356,925 4,137,792
---------------- ----------------
Costs and expenses
Compensation and benefits 6,458,824 2,162,197
Brokerage, clearing, exchange fees and other 700,837 167,026
Occupancy 635,047 341,894
Communications 462,928 228,587
Office supplies and expenses 159,978 370,978
Interest 223,399 75,604
Professional fees 193,134 99,530
Consulting fees 125,501 265,516
Travel 114,190 127,692
General and administrative 339,177 270,493
Depreciation and amortization 117,413 105,038
---------------- ----------------
Total costs and expenses 9,530,428 4,214,555
---------------- ----------------
Income (loss) from continuing operations
before provision for income taxes and
minority interest in earnings of subsidiaries 826,497 (76,763)
Provision for income taxes (278,457) (55,077)
Minority interest in earnings of subsidiaries (91,206) (78,417)
---------------- ----------------
Net income (loss) $ 456,834 $ (210,257)
================ ================
Weighted average number of common shares outstanding 5,206,750 4,767,000
================ ================
Basic and diluted earnings per share $ 0.088 $ (0.044)
================ ================
</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
Ended June 30,
------------------------------------
1999 1998
---------------- ----------------
(Unaudited)
<S> <C> <C>
Net income (loss) $ 456,834 $ (210,257)
Other comprehensive income (loss)
Foreign currency translation adjustments (1,098,653) (406,809)
---------------- ----------------
Comprehensive income (loss) $ (641,819) $ (617,066)
================ ================
</TABLE>
- 4 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Quarterly Period
Ended June 30,
------------------------------------
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 456,834 $ (210,257)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries (91,206) 78,417
Depreciation and amortization 117,413 229,512
Deferred taxes 278,457 -
Equity in earnings (loss) of unconsolidated affiliates - -
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies 3,265 904,342
Securities purchased under agreements to resell - -
Receivables (6,655,915) (3,721,650)
Securities owned, at value (2,182,647) (8,716,761)
Other assets 692,407 4,099
Payables
Customers 2,103,383 1,153,707
Brokers, dealers and others (7,289,856) 1,411,174
Accounts payable and accrued expenses 184,703 616,999
----------------- ----------------
Net cash provided by (used in) operating activities (12,383,162) (8,250,418)
----------------- ----------------
Cash flows from investing activities
Net proceeds from (payments for)
Investments in affiliates (2,900,000) -
Investments held for resale - -
Purchases of furniture and equipment (229,858) -
----------------- ----------------
Net cash provided by (used in) investing activities (3,129,858) -
----------------- ----------------
Cash flows from financing activities
Net proceeds from (payments for)
Net proceeds from private placement - -
Short-term financings 2,000,000 (713,214)
Short-term borrowings from affiliated companies 6,149,003 3,229,456
Other long-term debt 4,386,549 2,717,153
----------------- ----------------
Net cash provided by (used in) financing activities 12,535,552 5,233,395
----------------- ----------------
Foreign currency translation adjustment (1,259,687) (372,150)
----------------- ----------------
Increase (decrease) in cash and cash equivalents (4,237,155) (3,389,173)
Cash and cash equivalents, beginning of period 7,156,702 7,156,702
----------------- ----------------
Cash and cash equivalents, end of period $ 2,919,547 $ 3,767,529
----------------- ----------------
</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 Quarterly Period
Ended June 30,
------------------------------------
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
================= ================
Cash paid for interest $ 223,399 $ 75,604
================= ================
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 ENDED JUNE 30, 1999
(UNAUDITED)
1. INTERIM REPORTING
The financial statements of Eastbrokers International Incorporated and its
U.S. and international subsidiaries (collectively, "Eastbrokers" or the
"Company") for the quarterly period ended June 30, 1999 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, 1999
include accounting policies and additional information pertinent to an
understanding of these interim financial statements.
For the quarterly period ended June 30, 1999, 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 March
31, 1999, of EBI Securities Corporation ("EBI Securities") (formerly Cohig
& Associates) and the Company for the quarterly period ended June 30, 1999.
For the quarterly period ended June 30, 1998, the accompanying consolidated
financial statements include the financial position, results of operations,
comprehensive income, and cash flows of Eastbrokers AG for the quarterly
period ended March 31, 1998, of EBI Securities from the date of acquisition
(May 14, 1998) through June 30, 1998, and the Company for the quarterly
period ended June 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.
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, 1999.
- 7 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FISCAL YEAR-END
The fiscal year-end of Eastbrokers International Incorporated and its U.S.
subsidiaries is March 31.
FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES
The fiscal year-end of the Company's European subsidiaries is December 31.
These subsidiaries are included on the basis of closing dates that precede
the Company's closing date by three months.
FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities and the
Company's trading positions 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.
- 8 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
FURNITURE, AND EQUIPMENT
Furniture 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 ENDED JUNE 30, 1999
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (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 5 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. 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.
- 10 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
3. ACQUISITION OF EBI SECURITIES CORPORATION (CONTINUED)
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 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 100 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.
In March 1999, Eastbrokers issued 10 percent Convertible Promissory Notes
due 2003 (the "10 percent Notes") in an aggregate principal amount of
$1,350,000. Holders of the 10 percent Notes have the right to convert their
10 percent Notes into shares of Common Stock at $5.75 per share. A portion
of the proceeds of the Notes was used to redeem the 7 percent Convertible
Debentures issued in November 1998.
In May 1999, Eastbrokers issued 5 percent Convertible Debentures due 2002
(the "5 percent Debentures") in an aggregate principal amount of
$2,000,000. Holders of the 5 percent Debentures have the right to convert
their 5 percent Notes into shares of Common Stock at the lesser of $5.50
per share or 90% of the average of the three lowest closing bid prices for
the 20 trading days ending five days before the date of delivery of the
notice of conversion. A portion of the proceeds of the Debentures will be
used to expand the Company's operations.
- 11 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
4. SHORT-TERM BORROWINGS (CONTINUED)
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 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.
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).
6. LIQUIDATION OF INTERESTS IN SUBSIDIARIES
The Company also has liquidated its investments Eastbrokers Romania and
Eastbrokers Slovakia as of December 31, 1998. The effects are a net loss of
$776,197 on the liquidation of Eastbrokers Slovakia and a net loss on the
liquidation of Eastbrokers Romania of $158,247 for a total loss on
liquidations of $934,444.
7. 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.
8. 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. As noted in the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1999, 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.
- 12 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
9. SUBSEQUENT EVENTS
In July 1999, the Company announced that it has signed a letter of intent
to purchase a majority interest in Sutton Online, LLC
(http://www.suttononline.com) , an online trading firm that offers
individual investors, money managers and hedge funds, trade executions,
level II software & data, internet service and training for online
investors. Sutton Online also provides brokerage firms the necessary tools
to offer financial products via the internet. The transaction is
contingent, among other things, satisfactory completion of all due
diligence, the approval by both Board of Directors, and the execution of a
definitive purchase agreement.
Also in July 1999, the Company announced that it has signed a letter of
intent to purchase the JB Sutton Group, LLC, a New York based brokerage and
investment banking firm. The transaction is contingent on, among other
things, satisfactory completion of all due diligence, the approval by both
Boards of Directors, the execution of definitive purchase and escrow
agreements and obtaining the necessary regulatory approvals.
- 13 -
<PAGE>
PART I -- FINANCIAL INFORMATION (CONTINUED)
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain information set forth in this report under this caption
"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, we 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, we caution readers that a variety of factors could cause our actual
results to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. These risks and uncertainties, many
of which are beyond our 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
us and (xi) the risks and uncertainties set forth under the caption "Risk
Factors" which appears in Item 1 of our Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1999 and dated July 2, 1999. We undertake 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 June 30, 1999, makes
reference to our Annual Report on Form 10-KSB dated July 2, 1999 ("Report"). The
Report includes information necessary or useful to an understanding of our
businesses and financial statement presentations. We will furnish a copy of this
Report upon request made directly to the Company's headquarters at 6000 Fairview
Road, Suite 1410, Charlotte, North Carolina 28210, telephone number (704)
643-8220 and facsimile number (704) 643-8097. Our earnings are subject to wide
fluctuations since many factors over which we have 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, we were engaged in the purchase and sale of newly
privatized businesses in the Czech Republic. In August, 1996, we entered the
Central and Eastern European investment banking and securities business through
our acquisition of Eastbrokers Beteiligungs AG, an Austrian holding company
providing financial services in Eastern and Central Europe through its network
of subsidiaries. Our acquisition of Eastbrokers AG was intended to not only
provide an earnings stream from brokerage activities, but also position us to
provide investment banking and corporate finance services throughout Central and
Eastern Europe.
In March 1997, we expanded our brokerage operations in the United States
through the acquisition of an existing New York-based broker dealer. In May
1998, we continued the expansion of our U.S. operations through the acquisition
of Cohig & Associates ("EBI Securities"), a Denver, Colorado based investment
banking and brokerage firm. Currently, we operate a highly diversified
investment banking and securities network, with 20 US offices and 8
international branches and affiliates located in the following countries:
Austria; Czech Republic; Poland; Kazakhstan; Croatia; Slovenia and Azerbaijan.
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Overall, 1998, was a very challenging year. First, we had to contend with
the global financial crisis, which resulted in the collapse in the Asian and
Russian markets and caused enormous turmoil throughout the emerging markets of
Central and Eastern Europe. Second, the we had to contend with the correction in
the US equities market, which devastated an already depressed small and
micro-cap market. These two factors directly accounted for 77 percent of our
loss for the year ended March 31, 1999.
Despite these unprecedented market conditions, we have continued to grow
our assets under management, our commission revenue, underwriting fees and
distribution capabilities. Our first quarter of the current fiscal year
continued these trends. We have streamlined our operations in Europe and
under-performing assets were sold or liquidated. We have also launched a new
subsidiary, EBonlineinc.com, which merged into a publicly-traded entity in July
1999. As of August 13, 1999, we own approximately 48 percent of EBonlineinc.com.
We remain committed to our mission of building, through a acquisitions and
strategic alliances, a highly successful, global, middle market, investment
banking and securities firm.
EUROPEAN OPERATIONS
Since our acquisition of Eastbrokers AG, in August, 1996, the business
strategy for our European operations was to utilize our 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, we modified our business strategy in Europe, in response to an
overall economic downturn that covered much of Central and Eastern Europe. This
market downturn, which peaked in the Summer of 1998, led to sharp decreases in
stock markets worldwide, particularly in Central and Eastern Europe. In addition
to falling prices, the overall liquidity in the financial markets throughout
much of the region was significantly reduced. In order to minimize the negative
effects on our financial operations, we reduced our work force in Austria and
closed our operations in Slovakia, Romania, Turkey, Russia and Bulgaria. In
Austria, Poland, and Croatia, we made significant changes in our management and
cost structures. In the Czech Republic and Hungary, we sold our operations.
However, we continue to maintain an affiliate relationship with the management
in Hungary. We have re-entered the Czech Republic through the purchase of a
minority interest in Stratego Invest a.s. Prague. We also organized an office in
Baku, Azerbaijan.
Despite the negative sentiment in emerging markets during 1998, we believe
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. We
intend to maintain solid long term involvement in the region and to continue to
provide our clients with quality brokerage and investment banking services. We
also intend to expand our operations into other markets of Western Europe
through possible acquisitions, mergers, joint ventures or strategic
relationships.
Since the acquisition of EBI Securities in May 1998, our European
subsidiaries now have direct access to the US securities marketplace. We expect
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. We believe that it is
possible to significantly increase our overall revenue, 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, we believe 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.
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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
EBI SECURITIES CORPORATION
Subsequent to the acquisition of Eastbrokers AG, we commenced expansion of
our brokerage operations in the United States. Our goal was to build a strong US
brokerage presence that would enable us to distribute European middle market,
corporate finance product in the US and also to provide our European operations
access to US corporate finance product, trading and research capabilities. In
the Spring of 1997, we purchased our first U.S. based broker-dealer, Eastbrokers
North America, Inc. During the process of establishing this broker-dealer, we
were approached by numerous U.S. based broker-dealers interested in being
acquired by us. We believe 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. We have decided that as a well-capitalized,
entrepreneurially managed, international, publicly-traded, investment banking
firm, we would be particularly appealing to the sellers of medium size brokerage
firms. In addition, we believe 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 our Common Stock.
In May 1998, we made a significant step in our roll-up strategy in the
United States. We acquired all of the outstanding common stock of Cohig &
Associates, Inc., a Denver, Colorado based investment banking and brokerage
firm. Following the acquisition, we changed the name of Cohig & Associates, Inc.
to EBI Securities Corporation. The office space previously occupied by
Eastbrokers North America, has been converted into a branch office of EBI
Securities. We believe that EBI Securities will be the first in a series of
acquisitions targeting other successful medium size investment banking and
brokerage firms.
EBI Securities operates 20 retail brokerage offices in 16 cities across the
United States. These offices include 10 company owned branches, and 10 franchise
branches employing over 200 people, of which 190 are registered representatives.
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. Since
its inception Cohig/EBI has participated in the underwriting and/or
co-underwriting of over $400 million in initial and secondary equity and debt
offerings for over 30 public U.S. companies.
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
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effect of the year 2000 issue on its operations. See "Management's Discussion
and Analysis or Plan of Operation - Impact of the Year 2000".
EBI Securities has primarily operated as a retail brokerage firm focusing
on individual investors with a full service approach which the company augmented
with corporate finance, proprietary research and trading activities. EBI
Securities provides our 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 a commitment to a
professional but personalized service. The trading department makes markets in
approximately 100 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. The investment banking
departments' mission is 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.
EBI Securities is actively realigning itself in order to create additional
revenue growth that leverages existing resources and creates a more stable base
of revenue. The potential result is increased growth internally, which
compliments external growth through acquisitions. Several initiatives that EBI
Securities has undertaken in this regard are as follows:
1. Fixed Income. In December 1998, EBI Securities added a fixed income
department. This group is responsible for the underwriting, trading, retail
distribution and research of government, municipal and corporate bonds. This
group adds an additional profit center to the three existing divisions of
retail, corporate finance and equity trading and also creates synergies with the
other departments. As EBI Securities works to broaden the product base of its
retail brokers and their customers, the fixed income department creates new
product through underwritings or independent research ideas. Additionally, the
fixed income department allows EBI Securities corporate finance to capture
business that would not have been previously available.
2. Asset Allocation. EBI Securities has developed an in-house asset
allocation program to augment the breadth of the sales force's efforts. This in
house system was developed utilizing industry software which, along with
additional marketing materials, is customized for the firm. This approach
represents an investment strategy which is based on a Noble Prize winning study
called "Modem Portfolio Theory" (MPT). MPT's basis is that people can create
"optimal" risk vs. return portfolios by mixing varying amounts of different
asset classes according to their correlation to one another. Many market studies
suggest that asset allocation rather than individual investment selection
accounts for over 90 percent of a typical portfolio's returns. EBI Securities
concurs with this notion, and as a result, is educating the sales force to
utilize the program. The results have been very favorable and effective tool for
gathering assets. EBI Securities believes that the new communication systems
that are being implemented and which will be available at the desk top level to
all brokers, will also enhance the sales forces ability utilize the asset
allocation model.
3. Managed Money. In keeping with the changes in the retail brokerage
business, EBI Securities is actively entering the field of managed money and
wrap fee compensation arrangements in place of the more traditional fee per
transaction approaches. In short, the managed money approach charges the client
a flat annual percentage of the money managed rather than a fee for each
transaction. Many people believe that this approach better aligns the investment
advisor's goals with that of the client. This approach requires some additional
accounting and registration procedures, both of which have been set in motion by
the firm and its applicable business partners. EBI Securities intends to hire
additional salespeople with managed money experience in addition to actively
re-educating the existing sales force.
4. Premier Customer Accounts. The formation of an account for the firm's
biggest customers may allow better utilization of several of the initiatives
mentioned above. In addition, this sort of account may also give a customer a
good introduction into several other parts of the business. The most obvious of
these is online trading. Others include joint ventures and cross selling
opportunities with local community banks, mortgage companies, investment sites
and others.
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5. Retail Expansion. Currently, EBI Securities is focusing on filling its
existing retail space in order to improve efficiencies. EBI Securities also
believes that retail expansion through additional offices will be most effective
if it occurs in and around the corporate headquarters in Denver, Colorado. EBI
Securities believes that creating a more visible sales force around the
corporate headquarters will create a number of efficiencies on several fronts.
These locations make it easier and less expensive to manage from a corporate
perspective. In addition, economies of scale are created in terms of advertising
and community development, which can help to enhance the EBI Securities name and
make it a more recognizable entity amongst retail clients, corporate finance
clients and additional salespeople.
EBONLINEINC.COM
In April 1999, we organized a new subsidiary, EBonlineinc.com ("EBonline")
in conjunction with A1 Internet.com, Inc. A1 provides comprehensive,
cost-effective Internet technology solutions to businesses and organizations
with a total turnkey approach. Services are designed to enable companies to
operate more efficiently by outsourcing their Internet work, communications,
e-commerce, and database needs. A1 offers web development, design, connectivity,
database applications, distance learning, and information integration programs.
Services include web programming, e-commerce, web-site hosting, national leased
line connections, dial-up, xDSL, and e-mail access. A1 Internet.com Inc.'s
website is: http://www.a1is.com
EBonline is a Web-based business consisting of a website, globally
accessible via the Internet, designed to facilitate merger, acquisition and
corporate finance activity. The site attracts businesses looking to sell, make
an acquisition, seek a merger or joint venture partner, obtain debt or equity
capital or simply gain exposure within the international investment banking
community. In addition, the site attracts accredited investors looking for
investment opportunities.
EBonline will derive its revenue from three initial sources: monthly
membership fees, banner advertising income and consulting fees from syndicate
members. Syndicate members will be made up of recognized financial services
firms that have been selected from around the world. They have met EBbonline's
standards for professionalism and integrity and they have agreed to provide
financial advisory services, write research and expose the qualifying companies
to the investment community. The broad exposure provided to these companies may
attract institutional investors and public interest. The syndicate members will
also be able to electronically make available to all accredited investors of the
site any offering memoranda. We believe that EBonline's approach to connecting
businessmen and investors to a group of recognized financial professionals is
truly unique, cost effective and efficient.
We believe that the combination of finance and the internet will
differentiate EBonline from its competition. Other similarly focused sites offer
business listings and matching services, but none are backed by an international
group of emerging growth financial specialists such as EBonline.
In April 1999, EBonline released a beta version of its website, at URL
address http://www.EBonlineinc.com. In July 1999, EBonline launched its website
(same address). EBonline has retained EBI Securities as its investment banker
for the purposes of raising capital in our second quarter. In July 1999,
EBonline merged into a publicly traded company and we currently own
approximately 48 percent of the issued and outstanding common shares. EBonline's
common shares trade in the over-the-counter market under the symbol "EBOL". On
August 13, 1999, the closing share price for EBonline was $5.50. EBonline is
currently in the process of raising additional equity capital for expansion and
marketing. If successful, our ownership percentage will be diluted by the new
shares issued.
In July 1999, we announced that we signed a letter of intent to purchase a
majority interest in Sutton Online, LLC (http://www.suttononline.com), an online
trading firm that offers individual investors, money managers and hedge funds,
trade executions, NASDAQ level II software & data, internet service and training
for online investors. Sutton Online also provides brokerage firms the necessary
tools to offer financial products via the internet. The transaction is
contingent, among other things, satisfactory completion of all due diligence,
the approval by both Board of Directors, and the execution of a definitive
purchase agreement.
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Also in July 1999, we announced that we signed a letter of intent to
purchase the JB Sutton Group, LLC, a New York based brokerage and investment
banking firm. The transaction is contingent on, among other things, satisfactory
completion of all due diligence, the approval by both Boards of Directors, the
execution of definitive purchase and escrow agreements and obtaining the
necessary regulatory approvals.
RESULTS OF OPERATIONS
SEE Note 1 of the Notes to Consolidated Financial Statements for the
Quarterly Period Ended June 30, 1999, for an explanation of the basis of
presentation of the financial statements.
For the quarterly period ended June 30, 1999, we generated consolidated
revenues in the amount of $10,356,925, compared to $4,137,792, for the quarterly
period ended June 30, 1998. Our total revenues for the quarterly period ended
June 30, 1999, are significantly higher than the previous periods due to
increases in overall commission, investment banking and trading revenue. Revenue
for the quarterly period ended June 30, 1999, as compared to the prior year's
quarter was also higher due to the consolidation of EBI Securities for an entire
quarter versus the quarterly period ended June 30, 1998, which included the
revenue of EBI Securities from May 14, 1998, the date of acquisition of EBI
Securities. Total revenue for the quarterly period was also effected by the
prior year sales of Eastbrokers Prague a.s. and Eastbrokers Budapest and the
December 1998 liquidations of Eastbrokers Slovakia and Eastbrokers Romania.
We incurred total consolidated costs and expenses of $9,530,428, for the
quarterly period ended June 30, 1999, compared to $4,214,555, for the quarterly
period ended June 30, 1998. Total costs and expenses for the quarterly period
ended June 30, 1999, are significantly higher than the previous periods due to
the consolidation of EBI Securities for an entire quarter versus the quarterly
period ended June 30, 1998, which included the costs and expenses of EBI
Securities from May 14, 1998, the date of acquisition of EBI Securities.
We are reporting consolidated net income for the quarterly period ending
June 30, 1999 of $456,834 compared to a consolidated net loss of ($210,257) for
the quarterly period ended June 30, 1998. The net income in the current year is
primarily attributable to the reorganization of our European offices, the
elimination of several non-performing assets in Europe and improved
profitability at EBI Securities. The improved profitability at EBI Securities
can be attributed to increased commission and investment banking revenue and
better than expected performance of the trading department.
On June 30, 1999, we had total assets of $57,161,401, and total liabilities
of $32,794,169, compared to $55,098,723, and $26,593,587, respectively, on June
30, 1998. As of the date of this filing, we believe that we have adequate
liquidity to meet our current obligations. However, no assurances can be made as
to our ability to meet our cash requirements in connection with any expansion of
our operations or any possible business combinations.
The cash flows for the quarterly period ended June 30,1999, reflect the
volatile nature of the securities industry and the reallocation of our assets
indicative of a growing organization. The change in the foreign currency
translation adjustment is primarily related to the fluctuations in the various
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 our overall earnings as well as the
cumulative translation adjustment. The primary currencies affecting the us are
the U.S. Dollar, Austrian Schilling, Czech Koruna, and the Polish Zloty.
As a broker/dealer in securities, we will periodically acquire positions in
securities on behalf of our clients. As disclosed in the notes of the financial
statements, we have title to various financial instruments in the countries in
which we operate. Certain of these investments may be characterized as
relatively illiquid and potentially subject to rapid fluctuations in liquidity.
ACQUISITIONS AND DISPOSITIONS
In February 1999, our 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
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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 us a strong partner in the Czech marketplace, and at the same time, will
provide Stratego Invest access to the international marketplace through our
operations in Europe and the US.
EMPLOYEES
At June 30, 1999, we currently have approximately 350 full-time employees
and 25 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 we believe our relations are good with both
our employees and our 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 us
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 us 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 was effective for our annual report for
the fiscal year ended March 31, 1999. In the initial year of application,
comparative information for earlier years was restated. This statement did not
have a significant impact on us.
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, 2000. At this time,
we do not believe that this statement will have a significant impact on us.
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.
We are currently in the process of a systems upgrade unrelated to the Year
2000 issue. In conjunction with this upgrade, we are in the process of
establishing a program to address issues associated with the Year 2000. To
ensure that our computer systems are Year 2000 compliant, we have been reviewing
our systems and programs to identify those that contain two-digit year codes,
and we intend to replace them in conjunction with the systems upgrade provided
by the Baan Corporate Office Solutions. In addition, we are in the process of
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contacting its major external counterparties and suppliers to assess their
compliance and remediation efforts and our exposure to them.
In addressing the Year 2000 issue, we have divided our 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 August 16, 1999, we have completed the Inventory and Assessment
phases and are also conducting the procedures associated with the Remediation,
Testing and Implementation phases. We have completed the Inventory and
Assessment phase. The Remediation and Testing phases with respect to business
critical applications are substantially completed. We are in the Implementation
phase and it is expected to be completed by the end of the third calendar
quarter of 1999. The Integration phase commenced in January 1999, and will
continue through 1999. In addition, we have identified the major business
relationships of the Eastbrokers Group and many of them will be tested as soon
as practicable. The Eastbrokers Group 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 August 16, 1999, we have 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 we conduct
business than in the United States.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Eastbrokers Group's computer and non-information
technology systems. Such failures could have a material adverse effect on the
Eastbrokers Group 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
Eastbrokers Group's exposure to trading risks and disruptions of funding
requirements. In addition, even if the Eastbrokers Group 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 Eastbrokers Group 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
Eastbrokers Group.
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If the above mentioned risks are not remedied, the Eastbrokers Group may
experience business interruption or shutdown, financial loss, regulatory
actions, damage to the Eastbrokers Group's global franchise and legal liability.
The Eastbrokers Group 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 Eastbrokers Group's
financial position and results of operation.
The Eastbrokers Group does not have business continuity plans in place that
cover the Year 2000 issue. The Eastbrokers Group intends to evaluate Year 2000
specific contingency plans during 1999 as part of its Year 2000 risk mitigation
efforts.
Based upon current information, the Eastbrokers Group 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
July 1, 1999, the Eastbrokers Group estimates that it has expended approximately
$600,000 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 Eastbrokers Group'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 Eastbrokers Group 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
Eastbrokers Group'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 Eastbrokers
Group'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 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 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 Eastbrokers Group 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 Eastbrokers Group 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 Eastbrokers Group is
also monitoring the compliance of its software suppliers in addressing this
issue. Based on a recent evaluation, the Eastbrokers Group 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
CHANGES IN SECURITIES AND USE OF PROCEEDS
In April 1999, we issued restricted shares to various individuals in
exchange for the performance for various duties.
Our non-officer Board members, Dr. Lawrence Chimerine, Jay R. Schifferli,
Esq., and Michael Sumichrast, PhD each received 7,500 shares of common stock and
5,000 options to acquire shares of common stock at $5.00 per share.
A registered representative of EBI Securities received 2,500 shares of
restricted common stock as compensation for his assistance in arranging a
transaction on behalf of the firm.
A consultant received 7,500 shares as compensation for services rendered in
connection with the planning and design of a new computer network and broker
workstations.
In May 1999, we issued 5 percent Convertible Debentures due 2002 (the "5
percent Debentures") in an aggregate principal amount of $2,000,000. Holders of
the 5 percent Debentures have the right to convert their 5 percent Notes into
shares of Common Stock at the lesser of $5.50 per share or 90% of the average of
the three lowest closing bid prices for the 20 trading days ending five days
before the date of delivery of the notice of conversion. A portion of the
proceeds of the 5 percent Debentures will be used to expand our operations. The
shares of common stock underlying this debenture were restricted at the time of
placement although they did include certain registration rights.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 12, 1999, we held the 1998 Annual Meeting of Stockholders of
Eastbrokers International Incorporated ("Annual Meeting"). At this meeting, our
Board of Directors submitted one proposed amendment to our 1996 Stock Option
Plan. The Board of Directors also submitted proposals to the shareholders to
elect two directors for a term of three years and one director for a term of two
years and to ratify the appointment of our independent auditors for the current
fiscal year. The holders of 3,747,911 shares of stock entitled to vote, which
constituted a quorum, were present at the annual meeting in person or by proxy.
As of the record date, there were 5,157,250 shares issued and outstanding.
Proposal No. 1 - Election of Directors. Three nominees, Martin A.
Sumichrast, Wolfgang Kossner and Dr. Michael Sumichrast, were submitted to a
vote of the shareholders. The nomination of Messr. Martin A. Sumichrast to serve
as a director for a three year term was approved with 3,733,935 shareholders
voting for the nomination and 13,976 votes withheld. The nomination of Messr.
Wolfgang Kossner to serve as a director for a three year term was approved with
3,733,654 shareholders voting for the nomination and 14,257 votes withheld. The
nomination of Messr. Michael Sumichrast for a two year term was approved with
3,733,935 shareholders voting for the nomination and 13,976 votes withheld.
There were no votes against any of the nominees. Dr. Lawrence Chimerine and Jay
R. Schifferli continue to serve as directors for their respective terms.
Proposal No. 2 - Amendment to the Company's 1996 Stock Option Plan. An
amendment was submitted to the shareholders to increase the number of shares
available under the plan from 600,000 to 850,000. The required affirmative vote
of sixty-six and two thirds percent of the outstanding shares was met. 3,577,281
voted in favor of the proposal, 155,772 voted against the proposal, and 10,423
abstained from voting.
Proposal No. 3 - Ratification of the Appointment of Auditors. The
appointment of the accounting firm of Spicer, Jeffries & Co. was confirmed by
the shareholders. 3,729,668 voted in favor of the proposal, 2,750 voted against
the proposal, and 15,493 abstained from voting.
- 23 -
<PAGE>
PART II -- OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
----------- -----------------------
(27) Financial Data Schedule (Electronic Filing Only).
b. There were no reports on Form 8-K filed during the quarterly period
ended June 30, 1999.
- 24 -
<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
(Principal Financial and Accounting Officer)
Dated: August 16, 1999
- 25 -
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------------------
(27) Financial Data Schedule (Electronic Filing Only).
- 26 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,919,547
<SECURITIES> 16,681,117
<RECEIVABLES> 24,305,307
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,091,917
<PP&E> 3,431,610
<DEPRECIATION> 1,257,553
<TOTAL-ASSETS> 57,161,401
<CURRENT-LIABILITIES> 28,952,682
<BONDS> 3,841,487
0
0
<COMMON> 260,388
<OTHER-SE> 16,799,103
<TOTAL-LIABILITY-AND-EQUITY> 57,161,401
<SALES> 0
<TOTAL-REVENUES> 10,356,925
<CGS> 0
<TOTAL-COSTS> 9,530,428
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,399
<INCOME-PRETAX> 826,497
<INCOME-TAX> 278,457
<INCOME-CONTINUING> 456,834
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 456,834
<EPS-BASIC> 0.088
<EPS-DILUTED> 0.088
</TABLE>
