===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
-----------------------
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 [X] No [ ]
Transitional Small Business Disclosure Format: Yes [ ] No [x]
The total number of shares of the registrant's Common Stock, $.05 par value,
outstanding on November 10, 1999, was 5,206,750.
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<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Historical Financial Statements
Consolidated Statement of Financial Condition .................. 2
Consolidated Statements of Operations
Quarterly and Six Month Periods
Ended September 30, 1999 and 1998 ........................... 3
Consolidated Statements of Comprehensive Income
Quarterly and Six Month Periods
Ended September 30, 1999 and 1998 ........................... 4
Consolidated Statements of Cash Flows
Quarterly and Six Month Periods
Ended September 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 6. Exhibits and Reports on Form 8-K .............................. 23
Signature ............................................................. 24
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
September 30,
----------------
1999
----------------
(Unaudited)
<S> <C>
ASSETS
Cash and cash equivalents $ 2,162,767
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 52,231
Securities borrowed 2,404,330
Receivables
Customers 2,464,777
Broker dealers 1,239,523
Affiliated companies 5,071,130
Other 4,788,028
Securities owned, at value
Corporate equities 17,993,026
Other sovereign government obligations 1,854,561
Furniture and equipment, at cost (net of accumulated
depreciation and amortization of $1,378,383) 2,343,511
Deferred taxes 4,567,368
Investments in affiliated companies 2,902,032
Goodwill 2,167,329
Other assets and deferred amounts 1,227,746
-----------------
Total Assets $ 51,238,359
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 12,074,914
Advances from affiliated companies 967,514
Payables
Customers 1,104,979
Broker dealers and other 2,624,079
Securities sold under agreements to repurchase 2,577,249
Securities sold, not yet purchased, at value 969,896
Accounts payable and accrued expenses 1,196,022
Other liabilities and deferred amounts 1,703,890
-----------------
23,218,543
Long-term borrowings 3,845,397
-----------------
Total liabilities 27,063,940
-----------------
Minority interest in consolidated subsidiaries 7,257,150
-----------------
Shareholders' equity
Preferred stock; $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding at September 30, 1999 -
Common stock; $.05 par value; 10,000,000 shares authorized;
5,206,750 shares issued and outstanding at September 30, 1999 260,338
Paid-in capital 29,716,012
Accumulated deficit (9,365,995)
Note receivable - common stock and warrants (922,854)
Accumulated other comprehensive income (2,770,232)
-----------------
Total shareholders' equity 16,917,269
-----------------
Total Liabilities and Shareholders' Equity $ 51,238,359
=================
</TABLE>
See notes to consolidated financial statements.
- 2 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Quarterly Period For the Six Months
Ended September 30, Ended September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Commissions $ 4,281,616 $ 2,864,300 $ 10,300,319 $ 4,611,417
Fees 1,255,366 494,720 2,389,074 703,340
Interest and dividends 87,423 213,524 144,324 402,206
Principal transactions, net
Trading (594,547) 1,011,470 1,491,767 2,389,599
Investment 1,711,570 (345,002) 1,734,074 143,363
Gain on sale of interest in subsidiary - 1,312,057 - 1,312,057
Other 971,680 656,136 1,926,257 783,015
Equity in earnings of unconsolidated affiliates (3,495) - 80,723 -
---------------- ---------------- ---------------- ----------------
Total revenues 7,709,613 6,207,205 18,066,538 10,344,997
---------------- ---------------- ---------------- ----------------
Costs and expenses
Compensation and benefits 4,456,339 3,701,651 10,915,163 6,363,848
Brokerage, clearing, exchange fees and other 468,118 1,573,313 1,168,955 1,240,339
Occupancy 525,667 461,678 1,160,714 803,572
Communications 502,507 548,123 965,435 776,710
Office supplies and expenses 154,892 303,996 314,870 674,974
Interest 414,547 28,658 637,946 104,262
Professional fees 269,756 521,861 462,890 621,391
Consulting fees 236,353 344,645 361,854 610,161
Travel 47,700 214,724 150,840 342,416
General and administrative 336,737 574,292 686,964 844,785
Depreciation and amortization 120,830 84,000 238,243 189,038
---------------- ---------------- ---------------- ----------------
Total costs and expenses 7,533,446 8,356,941 17,063,874 12,571,496
---------------- ---------------- ---------------- ----------------
Income (loss) before provision for income taxes
and minority interest in earnings of subsidiaries 176,167 (2,149,736) 1,002,664 (2,226,499)
Provision for income taxes 162,307 (610,356) (116,150) (665,433)
Minority interest in earnings of subsidiaries (3,020) (94,563) (94,226) (172,980)
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 335,454 $ (2,854,655) $ 792,288 $ (3,064,912)
================ ================ ================ ================
Weighted average number of common
shares outstanding 5,206,750 4,476,737 5,206,750 4,476,737
================ ================ ================ ================
Basic and diluted earnings per share $ 0.064 $ (0.638) $ 0.152 $ (0.685)
================ ================ ================ ================
</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 Six Months
Ended September 30, Ended September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 335,454 $ (2,854,655) $ 792,288 $ (3,064,912)
Other comprehensive income (loss)
Foreign currency translation adjustments (461,417) 308,488 (1,560,070) (63,662)
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) $ (125,963) $ (2,546,167) $ (767,782) $ (3,128,574)
================ ================ ================ ================
</TABLE>
- 4 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A Delaware Corporation)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
------------------------------------
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 792,288 $ (3,064,912)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries 94,226 172,980
Depreciation and amortization 238,243 189,038
Deferred taxes 116,150 535,883
Gain on sale of interest in subsidiary - (1,312,057)
Equity in earnings (loss) of unconsolidated affiliates (80,723) -
Changes in operating assets and liabilities
Cash and securities segregated for regulatory purposes
or deposited with regulatory agencies - 891,070
Securities borrowed (750,588) (7,486)
Receivables
Customers 1,675,239 3,797,680
Brokers, dealers and others 1,117,442 (4,442,609)
Affiliated companies (2,967,201) (3,279,150)
Other 4,746,737 (4,482,168)
Securities owned, at value (6,306,031) (2,518,351)
Other assets 2,279,417 (107)
Payables
Customers (1,579,364) 2,459,048
Brokers, dealers and others (208,949) (3,095,213)
Accounts payable and accrued expenses (280,564) 1,599,890
----------------- ----------------
Net cash provided by (used in) operating activities (1,113,678) (12,556,464)
----------------- ----------------
Cash flows from investing activities
Net proceeds from (payments for)
Investments in affiliates (2,902,032) -
Sale of interest in subsidiary - 1,180,500
Investments held for resale - 692,504
Purchases of furniture and equipment (471,561) -
----------------- ----------------
Net cash provided by (used in) investing activities (3,373,593) 1,873,004
----------------- ----------------
Cash flows from financing activities
Net proceeds from (payments for)
Securities loaned 943,427 1,126,461
Short-term financings 9,462,856 (1,027,594)
Short-term borrowings from affiliated companies (3,732,307) 1,565,154
Other long-term debt (362,083) 7,045,770
----------------- ----------------
Net cash provided by (used in) financing activities 6,311,893 8,709,791
----------------- ----------------
Foreign currency translation adjustment (1,876,560) (163,951)
----------------- ----------------
Increase (decrease) in cash and cash equivalents (51,938) (2,137,620)
Cash and cash equivalents, beginning of period 2,214,705 7,156,702
----------------- ----------------
Cash and cash equivalents, end of period $ 2,162,767 $ 5,019,082
================= ================
</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 Six Months
Ended September 30,
------------------------------------
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Supplemental disclosure of cash flow information
Cash paid for income taxes $ - $ -
================= ================
Cash paid for interest $ 637,946 $ 104,262
================= ================
Non-cash transactions
Eastbrokers International shares issued as part of
EBI Securities Corporation acquisition $ - $ 2,350,000
================= ================
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 and six month period ended September 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 and six month period ended September 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 June 30, 1999, of EBI Securities Corporation ("EBI
Securities") (formerly Cohig & Associates) and the Company for the
quarterly period ended September 30, 1999.
For the quarterly period ended September 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 June 30, 1998, of EBI Securities from the date
of acquisition (May 14, 1998) through September 30, 1998, and the Company
for the quarterly period ended September 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include Eastbrokers International
Incorporated and its U.S. and international subsidiaries.
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 SEPTEMBER 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 SEPTEMBER 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 SEPTEMBER 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 SEPTEMBER 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 190
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 has been
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 SEPTEMBER 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.
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EASTBROKERS INTERNATIONAL INCORPORATED
(A DELAWARE CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
(UNAUDITED)
9. PROPOSED ACQUISITIONS
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. It is anticipated that this transaction will
be completed during the quarterly period ending December 31, 1999.
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. It is
anticipated that this transaction will be completed during the quarterly
period ended December 31, 1999.
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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
prospects, projected ventures, new products, anticipated market performance and
similar matters. The words "budgeted", "anticipate", "project", "estimate",
"expect", "may", "believe", "potential" and other similar statements are
intended to be among the statements that are considered "forward looking"
statements. 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, (xi) significant and
rapid changes in technology which could negatively affect our internet related
projects and (xii) 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 (the "Report"). 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.
This Form 10-QSB for the quarterly and six month period ended September 30,
1999, makes reference to our 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 our headquarters at 6000 Fairview Road, Suite 1410, Charlotte, North Carolina
28210, telephone number (704) 643-8220 and facsimile number (704) 643-8097.
References to "us", "our", or "we" collectively refer to Eastbrokers
International Incorporated ("Eastbrokers") and its subsidiaries.
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
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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.
Overall, our fiscal year ended March 31, 1999, was a very challenging year.
First, we had to contend with the global financial crisis, which resulted in
collapses in the Asian and Russian markets and caused enormous turmoil
throughout the emerging markets of Central and Eastern Europe. Second, 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 and second quarters of the current fiscal
year continued these trends. We have streamlined our operations in Europe and
under-performing assets have been sold or liquidated. We have also launched our
newly formed subsidiary, EBonlineinc.com, which merged into a publicly-traded
entity in July 1999. We remain committed to our mission of building, through
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. This was in response
to an overall economic downturn that covered much of Central and Eastern Europe.
This market downturn, which peaked during 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. Due to increased
interest in the region, 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 and/or strategic
relationships.
With the acquisition of EBI Securities in May 1998, our European
subsidiaries now have direct access to the US securities marketplace. During
1999, our two main subsidiaries, EBI Securities and WMP Bank AG ("WMP Bank"),
have begun the process to cross-market to their respective retail and
institutional clientele, their research, corporate finance and trading products.
We believe that it is possible to significantly increase our overall revenue, if
we are successful in marketing US securities to Western European institutional
clientele, and vice-versa.
In September 1999, we began utilizing the online trading capabilities of
SuttonOnline through our Czech Republic subsidiary Stratego Invest. It is
anticipated that we will soon extend these online trading capabilities to our
other European subsidiaries.
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
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available about foreign companies than about domestic companies. Foreign
companies are also not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies. In addition, unlike
investing in U.S. companies, securities of non-U.S. companies are generally
denominated in foreign currencies, thereby subjecting each security to changes
in value when the underlying foreign currency strengthens or weakens against the
U.S. dollar. Currency exchange rates can also be affected unpredictably by
intervention of U.S. or foreign governments or central banks or by currency
controls or political developments in the U.S. and abroad.
The value of international fixed income products also responds to interest
rate changes in the U.S. and abroad. In general, the value of such products will
rise when interest rates fall, and fall when interest rates rise. However,
interest rates in each foreign country and the U.S. may change independently of
each other. Debt and equity securities in emerging markets such as Central and
Eastern Europe may also not be as liquid as U.S. securities and their markets.
Securities of some foreign companies may involve greater risk than securities of
U.S companies. Investing in Central and Eastern European securities may further
result in higher expenses than investing in domestic securities because of costs
associated with converting foreign currencies to U.S. dollars and expenses
related to foreign custody procedures. Investment in Central and Eastern
European securities may also be subject to local economic or political risks,
including instability of some foreign governments, inadequate market controls,
the possibility of currency blockage or the imposition of withholding taxes on
dividend or interest payments and the potential for expropriation,
re-nationalization or confiscatory taxation and limitations on the use or
repatriation of funds or other assets.
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
U.S. brokerage presence that would enable us to distribute European middle
market, corporate finance product in the U.S. and also to provide our European
operations access to U.S. 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. Since establishing this
broker-dealer, we have been approached by numerous U.S. based broker-dealers
interested in becoming an acquisition target. We believe that continued
consolidation within the securities industry, particularly in the United States,
is inevitable. We believe that this consolidation can be attributed to the
current volatility prevailing in the world financial markets, the higher degree
of capitalization necessary to maintain sound brokerage operations and the
increased regulatory environment. We believe that our structure as a
well-capitalized, entrepreneurially managed, international, publicly-traded,
investment banking firm, has the potential to 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.
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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 us 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
"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 focus on a full service approach which has been
augmented through its corporate finance, proprietary research and trading
activities. EBI Securities provides our retail clients with a broad range of
traditional investment products and services. EBI Securities also strives to
distinguish itself with investors and corporate finance clients through a
commitment to 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 to not only generate
additional revenues through the leverage of our existing resources but also to
create a more stable and consistent revenue base. The potential result is
increased internal growth, 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 department is responsible for the generation of new fixed
income products and underwriting, trading, retail distribution and research of
government, municipal and corporate bonds. This department also provides
additional revenue generating opportunities and synergies to three of our other
departments, retail, corporate finance and equity trading. As EBI Securities
continues to expand the products and services available to our retail brokers
and their customers, this department provides additional investment
opportunities through new products, underwritings and/or independent research
ideas. Additionally, this department allows us to capture new business
opportunities that previously were outside the scope of our available services.
2. Asset Allocation. EBI Securities has developed an in-house asset
allocation program to augment the breadth of our sales force's efforts. This
program was developed utilizing industry software which, along with additional
marketing materials, has been customized for our use. This approach utilized by
this program represents an investment strategy based on the Noble Prize winning
study called "Modem Portfolio Theory" (MPT). MPT's premise is that a
personalized strategy can be created for each client whereby "optimal" risk vs.
return portfolios are generated 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 our sales force to
effectively utilize this program. The results to date have been very favorable
and this process is also seen as an effective tool for gathering assets. With
the new communication systems we are implementing, we expect this service will
be available at the desk top level to all brokers and will also enhance the
sales forces ability to effectively utilize this asset allocation program.
3. Managed Money. Recognizing the ongoing 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
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applicable business partners. EBI Securities intends to hire additional
salespeople with managed money experience in addition to actively re-educating
the existing sales force. In August 1999, EBI Securities received its license as
a Registered Investment Advisor (RIA) in Colorado. We are current licensed as an
RIA in three states, including New York.
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.
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 would also be 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 launched a new subsidiary, EBONLINEInc.com ("EBonline")
which was merged into a publicly traded company in July 1999. EBonline's common
shares trade in the over-the-counter market under the symbol "EBOL".
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. It is anticipated that EBonline may provide additional
ancillary business for our broker-dealer operations. As of the date of this
filing, EBonline now has over 2,000 business listings in its database.
PROPOSED ACQUISITIONS
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. It is anticipated that this transaction will be completed
during the quarterly period ending December 31, 1999.
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. It is anticipated that this transaction will be
completed during the quarterly period ending December 31, 1999.
RESULTS OF OPERATIONS
SEE Note 1 of the Notes to Consolidated Financial Statements for the
Quarterly Period Ended September 30, 1999, for an explanation of the basis of
presentation of the financial statements.
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For the quarterly period ended September 30, 1999, we generated
consolidated revenues of $7,709,613, compared to $6,207,205, for the quarterly
period ended September 30, 1998. For the six month period ended September 30,
1999, we generated consolidated revenues of $18,066,538 compared to $10,344,997
for the six month period ended September 30, 1998. The revenue for the quarterly
and six month period ended September 30, 1999 includes the one time gain from
the sale of a portion of our interest in EBonline of $925,000. The revenue for
the quarterly and six month period ended September 30, 1998 includes the one
time gain from the sale of our interest in subsidiary of $1,312,057. After
adjusting for the effects of these one time gains, our revenues were $6,784,613
and $4,895,148 for the quarterly periods ended September 30, 1999 and 1998,
respectively and $17,141,538 and $9,419,997 for the six month periods ended
September 30, 1999 and 1998, respectively. Our total revenues for the quarterly
and six month periods ended September 30, 1999, are significantly higher than
the same period in the previous year due primarily to increases in overall
commission, and investment banking revenue. Total revenue for the quarterly and
six month periods was also affected by the prior year sales of Eastbrokers
Prague a.s. and Eastbrokers Budapest and the December 1998 liquidations of
Eastbrokers Slovakia and Eastbrokers Romania. However, increases in revenue at
EBI Securities more than compensated for the reductions in revenue from the sale
and liquidation of our European subsidiaries in the prior year. For the
quarterly and six month periods ended September 30, 1999, EBI Securities
generated approximately $5,081,000 and $13,373,000, respectively compared with
revenue of approximately $2,712,000 and $4,341,000, respectively from the same
periods of a year earlier.
We incurred total consolidated costs and expenses of $7,533,446 and
$17,063,874 for the quarterly and six month periods ended September 30, 1999
compared to $8,356,941 and $12,571,496 for the quarterly and six month periods
ended September 30, 1998. Total costs and expenses for the quarterly and six
month periods were also affected by the prior year sales of Eastbrokers Prague
a.s. and Eastbrokers Budapest and the December 1998 liquidations of Eastbrokers
Slovakia and Eastbrokers Romania. However, increases in costs and expenses at
EBI Securities were related to the increased production levels. For the
quarterly and six month periods ended September 30, 1999, EBI Securities
incurred costs and expenses of approximately $5,735,000 and $13,704,000,
respectively compared with costs and expenses of approximately $4,939,000 and
$6,630,000, respectively from the same periods of a year earlier.
We are reporting consolidated net income for the quarterly and six month
periods ending September 30, 1999 of $335,454 and $792,288, respectively
compared to consolidated net losses of ($2,854,655) and ($3,064,912) for the
quarterly and six month periods ended September 30, 1998. The net income for the
quarterly and six month periods ended September 30, 1999 includes the one time
gain from the sale of a portion of our interest in EBonline of $925,000. The
Other contributing factors to the net income in the current year are primarily
attributable to the reorganization of our European offices, the elimination of
several non-performing assets in Europe and reduction of the losses at EBI
Securities. This reduction in losses at EBI Securities can be attributed to
increased commission and investment banking revenue and better than expected
performance of the trading department.
On September 30, 1999, we had total assets of $51,238,359, and total
liabilities of $27,063,940, compared to $54,404,378, and $27,851,828,
respectively, on September 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 September 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 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.
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ACQUISITIONS AND DISPOSITIONS
In February 1999, our Austrian subsidiary WMP Bank, 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 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 September 30, 1999, we currently have approximately 350 full-time
employees and 25 part-time employees. 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 continuing a systems upgrade unrelated to the Year 2000 issue. In
conjunction with this upgrade, we have established a program to address issues
associated with the Year 2000. To ensure that our
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computer systems are Year 2000 compliant, we are continually 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 Baan
Corporate Office Solutions. In addition, we are in the process of 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 November 15, 1999, we have completed the Inventory and Assessment
phases and are also conducting the procedures associated with the Remediation,
Testing and Implementation phases. The Remediation and Testing phases with
respect to business critical applications are substantially completed and
testing is continuing on an ongoing basis. We are in the Implementation phase is
also now substantially complete. The Integration phase commenced in January
1999, and will continue through 1999. In addition, we have identified our major
business relationships and many of them will be tested as soon as practicable.
We 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
November 15, 1999, we believe we have 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 our computer and non-information technology systems.
Such failures could have a material adverse effect on us 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 our exposure to trading risks and disruptions
of funding requirements. In addition, even if the we successfully remediate our
Year 2000 issues, we could be materially and adversely affected by failures of
third parties to remediate their own Year 2000 issues. The failure of third
parties with which we have 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 us.
- 21 -
<PAGE>
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
October 1, 1999, the Eastbrokers Group estimates that it has expended
approximately $800,000 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
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 September 30, 1999.
- 23 -
<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: November 15, 1999
- 24 -
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------------------
(27) Financial Data Schedule (Electronic Filing Only).
- 25 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,162,767
<SECURITIES> 19,847,587
<RECEIVABLES> 13,563,458
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,030,373
<PP&E> 3,721,894
<DEPRECIATION> 1,378,383
<TOTAL-ASSETS> 51,238,359
<CURRENT-LIABILITIES> 23,218,543
<BONDS> 3,845,397
0
0
<COMMON> 260,388
<OTHER-SE> 16,656,881
<TOTAL-LIABILITY-AND-EQUITY> 51,238,359
<SALES> 0
<TOTAL-REVENUES> 18,066,538
<CGS> 0
<TOTAL-COSTS> 17,063,874
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 637,946
<INCOME-PRETAX> 1,002,664
<INCOME-TAX> 116,150
<INCOME-CONTINUING> 792,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792,288
<EPS-BASIC> 0.152
<EPS-DILUTED> 0.152
</TABLE>
