-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qic4QfdtqiKMO1UiIg9wkYIW5mpJQbplSG9ZhNAEM9FvZ/igeAMkxV8BBtiLgA5n O05D3rk8Iren4tATHc376g== 0000899627-99-000001.txt : 19990225 0000899627-99-000001.hdr.sgml : 19990225 ACCESSION NUMBER: 0000899627-99-000001 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 DATE AS OF CHANGE: 19990224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTBROKERS INTERNATIONAL INC CENTRAL INDEX KEY: 0000899627 STANDARD INDUSTRIAL CLASSIFICATION: 6799 IRS NUMBER: 521807562 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-26202 FILM NUMBER: 99543572 BUSINESS ADDRESS: STREET 1: 15245 SHADY GROVE RD STREET 2: STE 340 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3015271110 MAIL ADDRESS: STREET 1: 15245 SHADY GROVE ROAD, SUITE 340 CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: CZECH INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19950308 FORMER COMPANY: FORMER CONFORMED NAME: CZECH FUND DATE OF NAME CHANGE: 19930329 10QSB 1 QUARTER ENDED DECEMBER 31, 1998 =============================================================================== 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 December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------- Commission file number 0-26202 EASTBROKERS INTERNATIONAL INCORPORATED (Exact Name Of Small Business Issuer As Specified In Its Charter) ----------------------- DELAWARE 52-1807562 (State Or Other Jurisdiction Of (I.R.S. Employer Identification No.) Incorporation Or Organization) 15245 SHADY GROVE ROAD, SUITE 340, ROCKVILLE, MARYLAND 20850 (Address Of Principal Executive Offices) (301) 527-1110 (Issuer's Telephone Number, Including Area Code) ----------------------- Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Transitional Small Business Disclosure Format: Yes [ ] No [x] The total number of shares of the registrant's Common Stock, $.05 par value, outstanding on February 16, 1999, was 5,157,250. =============================================================================== EASTBROKERS INTERNATIONAL INCORPORATED
Page PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Historical Financial Statements Consolidated Statement of Financial Condition ....................... 2 Consolidated Statements of Operations Quarterly and Nine Month Periods Ended December 31, 1998 and 1997.. 3 Consolidated Statements of Comprehensive Income Quarterly and Nine Month Periods Ended December 31, 1998 and 1997.. 4 Consolidated Statements of Cash Flows Quarterly and Nine Month Periods Ended December 31, 1998 and 1997.. 5 Notes to Consolidated Financial Statements .......................... 7 Item 2. Management's Discussion and Analysis or Plan of Operation ....... 13 PART II -- OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds........................ 22 Item 6. Exhibits and Reports on Form 8-K ................................ 22 Signature ............................................................... 23
PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EASTBROKERS INTERNATIONAL INCORPORATED (A Delaware Corporation) Consolidated Statement of Financial Condition
December 31, ---------------- 1998 ---------------- (Unaudited) ASSETS Cash and cash equivalents $ 2,553,876 Cash and securities segregated for regulatory purposes or deposited with clearing organizations 98,252 Securities purchased under agreements to resell 1,539,042 Receivables Customers 192,214 Broker dealers and other 7,665,155 Affiliated companies 1,743,204 Other 15,534,169 Securities owned, at value Government and agencies 5,737,766 Equities and other 16,795,918 Buildings, furniture and equipment, at cost (net of accumulated depreciation and amortization of $1,039,936) 1,619,618 Deferred taxes 4,803,704 Investments held for resale 175,787 Investments in affiliated companies 210,888 Goodwill 2,777,169 Other assets and deferred amounts 466,087 ---------------- Total Assets $ 61,912,849 ================ LIABILITIES AND STOCKHOLDERS' EQUITY Short-term borrowings Lines of credit $ 2,907,010 Affiliated companies 1,419,569 Other 1,738,647 Securities sold under agreements to repurchase 368,076 Securities loaned 4,187,159 Payables Customers 4,307,010 Broker dealers and other 7,236,720 Accounts payable and accrued expenses 1,649,545 Other liabilities and deferred amounts 896,292 ---------------- 24,710,028 Long-term borrowings 9,387,714 ---------------- Total liabilities 34,097,742 ---------------- Minority interest in consolidated subsidiaries 10,103,141 ---------------- Stockholders' equity Preferred stock; $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding at December 31, 1998 - Common stock; $.05 par value; 10,000,000 shares authorized; 4,767,750 shares issued and outstanding at December 31, 1998 238,388 Paid-in capital 27,966,614 Retained earnings (accumulated deficit) (8,568,920) Note receivable - common stock (331,704) Unrealized gain/loss on available for sale investments - Cumulative translation adjustment (1,592,412) ---------------- Total stockholders' equity 17,711,966 ---------------- Total Liabilities and Stockholders' Equity $ 61,912,849 ================
See notes to consolidated financial statements. - 2 - EASTBROKERS INTERNATIONAL INCORPORATED (A Delaware Corporation) Consolidated Statements of Operations
For the Quarterly Period For the Nine Months Ended December 31, Ended December 31, ------------------------------------ ------------------------------------ 1998 1997 1998 1997 ---------------- ---------------- ---------------- ---------------- (Unaudited) (Unaudited) Revenues Commissions $ 3,625,667 $ 631,131 $ 8,237,084 $ 1,615,510 Fees 1,443,299 45,685 2,146,639 380,951 Interest and dividends 444,175 166,479 846,381 394,675 Principal transactions, net Trading 268,008 371,766 2,657,607 2,042,612 Investment 88,077 (259,555) 231,440 380,717 Gain on sale of interest in subsidiary - - 1,312,057 - Other 759,653 397,876 1,542,668 779,410 Equity in earnings of unconsolidated affiliates 54,988 21,441 54,988 (117,832) ---------------- ---------------- ---------------- ---------------- Total revenues 6,683,867 1,374,823 17,028,864 5,476,043 ---------------- ---------------- ---------------- ---------------- Costs and expenses Compensation and benefits 4,323,418 467,355 10,687,266 1,803,672 Interest 230,854 35,724 335,116 173,560 Brokerage, clearing, exchange fees and other 84,308 57,648 1,324,647 575,661 Occupancy 499,012 209,067 1,302,584 621,601 Office supplies and expenses 326,626 151,000 1,001,600 364,378 Communications 537,555 92,726 1,314,265 340,290 Legal fees 196,618 46,323 818,009 122,441 Consulting fees 277,626 192,782 887,787 1,020,189 Travel 154,985 125,656 472,013 400,454 General and administrative 218,744 154,811 1,088,917 1,207,957 Depreciation and amortization 166,736 171,939 355,774 375,099 ---------------- ---------------- ---------------- ---------------- Total costs and expenses 7,016,482 1,705,031 19,587,978 7,005,302 ---------------- ---------------- ---------------- ---------------- Loss before provision for income taxes and minority interest in earnings of subsidiaries (332,615) (330,208) (2,559,114) (1,529,259) Provision (benefit) for income taxes 446,676 120,533 (218,757) 93,614 Minority interest in earnings of subsidiaries (100,683) 108,415 (273,663) 237,138 ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 13,378 $ (101,260) $ (3,051,534) $ (1,198,507) ================ ================ ================ ================ Weighted average number of shares outstanding 4,767,750 3,063,000 4,595,202 3,063,000 ================ ================ ================ ================ Basic and diluted earnings per share $ - $ (0.03) $ (0.66) $ (0.39) ================ ================ ================ ================
See notes to consolidated financial statements. - 3 - EASTBROKERS INTERNATIONAL INCORPORATED (A Delaware Corporation) Consolidated Statements of Comprehensive Income
For the Quarterly Period For the Nine Months Ended December 31, Ended December 31, ------------------------------------ ------------------------------------ 1998 1997 1998 1997 ---------------- ---------------- ---------------- ---------------- (Unaudited) (Unaudited) Net income (loss) $ 13,378 $ (101,260) $ (3,051,534) $ (1,198,507) Other comprehensive income (loss) Foreign currency translation adjustments 611,870 (239,875) 548,208 (1,493,874) Unrealized holding gains - 954,110 - 246,794 Less: recovery of unrealized holding losses - (954,110) - (246,794) ---------------- ---------------- ---------------- ---------------- Comprehensive income (loss) $ 625,248 $ (341,135) $ (2,503,326) $ (2,692,381) ================ ================ ================ ================
See notes to consolidated financial statements. - 4 - EASTBROKERS INTERNATIONAL INCORPORATED (A Delaware Corporation) Consolidated Statements of Cash Flows
For the Nine Months Ended December 31, ------------------------------------ 1998 1997 ----------------- ----------------- (Unaudited) Cash flows from operating activities Net income (loss) $ (3,051,534) $ (1,198,507) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Minority interest in earnings of subsidiaries 273,663 (237,138) Depreciation and amortization 1,059,169 528,751 Deferred taxes 237,010 (49,423) Gain on sale of interest in subsidiary (1,312,057) - Equity in earnings (loss) of unconsolidated affiliates - 117,832 Changes in operating assets and liabilities Cash and securities segregated for regulatory purposes or deposited with regulatory agencies 887,981 (29,425) Securities purchased under agreements to resell (651,872) (1,527,970) Receivables Customers 4,627,744 5,877,718 Brokers, dealers and others (3,260,547) (1,001,262) Affiliated companies 543,073 (2,005,968) Other (9,120,268) (4,073,651) Securities owned, at value (13,855,772) 676,602 Other assets (71,769) (323,700) Payables Customers (1,098,454) 365,189 Brokers, dealers and others 1,067,561 5,151,384 Accounts payable and accrued expenses 564,671 (2,957,979) ----------------- ----------------- Net cash provided by (used in) operating activities (23,161,401) (687,547) ----------------- ----------------- Cash flows from investing activities Net proceeds from (payments for) Investments in affiliates - (896,688) Sale of interest in subsidiary 1,180,500 - Investments held for resale 693,173 2,054,907 Purchases of furniture and equipment - (280,855) ----------------- ----------------- Net cash provided by (used in) investing activities 1,873,673 877,364 ----------------- ----------------- Cash flows from financing activities Net proceeds from (payments for) Net proceeds from private placement - 725,000 Securities loaned 4,187,159 - Short-term financings 2,092,219 (1,795,888) Short-term borrowings from affiliated companies 1,738,647 (823,113) Other long-term debt 7,367,627 (1,573,853) ----------------- ----------------- Net cash provided by (used in) financing activities 15,385,652 (3,467,854) ----------------- ----------------- Foreign currency translation adjustment 1,299,250 (1,351,177) ----------------- ----------------- Increase (decrease) in cash and cash equivalents (4,602,826) (4,629,214) Cash and cash equivalents, beginning of period 7,156,702 7,255,793 ----------------- ----------------- Cash and cash equivalents, end of period $ 2,553,876 $ 2,626,579 ================= =================
See notes to consolidated financial statements. - 5 - EASTBROKERS INTERNATIONAL INCORPORATED (A Delaware Corporation) Consolidated Statements of Cash Flows (continued)
For the Nine Months Ended December 31, ------------------------------------ 1998 1997 ----------------- ----------------- (Unaudited) Supplemental disclosure of cash flow information Cash paid for income taxes $ - $ - ----------------- ----------------- Cash paid for interest $ 335,116 $ 173,560 ----------------- ----------------- Non-cash transactions Eastbrokers International shares issued as part of EBI Securities Corporation acquisition $ 2,350,000 $ - ----------------- -----------------
See notes to consolidated financial statements. - 6 - EASTBROKERS INTERNATIONAL INCORPORATED (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 1. INTERIM REPORTING The financial statements of Eastbrokers International Incorporated (the "Company") for the quarterly and nine month periods ended December 31, 1998 have been prepared by the Company, are unaudited, and are subject to year-end adjustments. These unaudited financial statements reflect all known adjustments (which included only normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented in accordance with generally accepted accounting principles. The results presented herein for the interim periods are not necessarily indicative of the actual results to be expected for the fiscal year. The notes accompanying the consolidated financial statements in the Company's Annual Report on Form 10-KSB as amended for the year ended March 31, 1998 include accounting policies and additional information pertinent to an understanding of these interim financial statements. For the quarterly period ended December 31, 1998, the accompanying consolidated financial statements include the financial position, results of operations, comprehensive income and cash flows of Eastbrokers Beteiligungs Aktiengesellschaft ("Eastbrokers AG") for the quarterly period ended September 30, 1998, of EBI Securities Corporation ("EBI Securities") (formerly Cohig & Associates) for the quarterly period ended December 31, 1998, and the Company for the quarterly period ended December 31, 1998. For the nine month period ended December 31, 1998, the accompanying consolidated financial statements include the financial position, results of operations, comprehensive income, and cash flows of Eastbrokers Beteiligungs Aktiengesellschaft ("Eastbrokers AG") for the nine month period ended September 30, 1998, of EBI Securities Corporation ("EBI Securities") from the date of acquisition (May 14, 1998) through December 31, 1998, and the Company for the nine month period ended December 31, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION The consolidated financial statements include Eastbrokers International Incorporated and its U.S. and international subsidiaries (collectively, "Eastbrokers" or the "Company"). These consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of the operations of the Company. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates utilized in the preparation of the consolidated financial statements are prudent and reasonable. Actual results could differ from these estimates. See Note 18 -"Significant Estimates" in the Company's Annual Report on Form 10-KSB as amended for the year ended March 31, 1998. The Company, through its subsidiaries, provides a wide range of financial services primarily in the United States, Central Europe, and Eastern Europe. Its businesses include securities underwriting, distribution and trading; merger, acquisition, restructuring, and other corporate finance advisory activities; asset management; merchant banking and other principal investment activities; brokerage and research services; and securities clearance services. These services are provided to a diversified group of clients and customers, including corporations, governments, financial institutions, and individuals. - 7 - EASTBROKERS INTERNATIONAL INCORPORATED (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FISCAL YEAR-END The fiscal year-end of Eastbrokers International Incorporated and its U.S. subsidiaries other than EBI Securities is March 31. At the time of the Company's acquisition of EBI Securities in May 1998, the fiscal year end of EBI Securities was September 30. The Company intends to change the fiscal year of EBI Securities to match the year end of the parent company effective March 31, 1999. FISCAL YEAR-END OF THE COMPANY'S EUROPEAN SUBSIDIARIES The fiscal year-end of the Company's European Subsidiaries is December 31. These subsidiaries are included on the basis of closing dates that precede the Company's closing date by three months. FINANCIAL INSTRUMENTS Substantially all of the Company's financial assets and liabilities and the Company's trading positions are carried at market or fair values or are carried at amounts which approximate fair value because of their short-term nature. Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument, specifically, the value of the underlying financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. The Company has no investments in derivatives. Equity securities purchased in connection with merchant banking and other principal investment activities are initially carried at their original costs. The carrying value of such equity securities is adjusted when changes in the underlying fair values are readily ascertainable, generally as evidenced by listed market prices or transactions which directly affect the value of such equity securities. Downward adjustments relating to such equity securities are made in the event that the Company determines that the eventual realizable value is less than the carrying value. Securities classified as available for sale are carried at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses on these securities are determined on a specific identification basis and are included in earnings. COLLATERALIZED SECURITIES TRANSACTIONS Accounts receivable from and payable to customers include amounts due on cash transactions. Securities owned by customers are held as collateral for these receivables. Such collateral is not reflected in the consolidated financial statements. Securities purchased under agreements to resell are treated as financing arrangements and are carried at contract amounts reflecting the amounts at which the securities will be subsequently resold as specified in the respective agreements. The Company takes possession of the underlying securities purchased under agreements to resell and obtains additional collateral when the market value falls below the contract value. The maximum term of these agreements is generally less than ninety-one days. OTHER RECEIVABLES From time to time, the Company provides operating advances to select companies as a portion of its merchant banking activities. These receivables are due on demand. - 8 - EASTBROKERS INTERNATIONAL INCORPORATED (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) UNDERWRITINGS Underwritings include gains, losses, and fees, net of syndicate expenses arising from securities offerings in which the Company acts as an underwriter or agent. Underwriting fees are recorded at the time the underwriting is completed and the income is reasonably determinable. The Company reflects this income in its investment banking revenue. FEES Fees are earned from providing merger and acquisition, financial restructuring advisory, and general management advisory services. Fees are recorded based on the type of engagement and terms of the contract entered into by the Company. The Company reflects this income in its investment banking revenue. SECURITIES TRANSACTIONS Government and agency securities and certain other debt obligations transactions are recorded on a trade date basis. All other securities transactions are recorded on a settlement date basis and adjustments are made to a trade date basis, if significant. COMMISSIONS Commissions and related clearing expenses are recorded on a trade-date basis as securities transactions occur. TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of operations in foreign currencies are translated at year-end rates of exchange, and the income statements are translated at weighted average rates of exchange for the year. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," gains or losses resulting from translating foreign currency financial statements, net of hedge gains or losses and their related tax effects, are reflected in cumulative translation adjustments, a separate component of stockholders' equity. Gains or losses resulting from foreign currency transactions are included in net income. OFFICE FACILITIES, FURNITURE, AND EQUIPMENT Office facilities and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful life of the related assets ranging from three to ten years. COMMON STOCK DATA Earnings per share is based on the weighted average number of common stock and stock equivalents outstanding. The outstanding warrants and stock options are currently excluded from the earnings per share calculation as their effect would be antidilutive. - 9 - EASTBROKERS INTERNATIONAL INCORPORATED (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages, but does not require, companies to record compensation expense for stock-based employee compensation plans at fair value. The Company has elected to account for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Under the provisions of APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. DEFERRED INCOME TAXES Deferred income taxes in the accompanying financial statements reflect temporary differences in reporting results of operations for income tax and financial accounting purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. CASH AND CASH EQUIVALENTS For purposes of the consolidated financial statements, the Company considers all demand deposits held in banks and certain highly liquid investments with maturities of 90 days or less other than those held for sale in the ordinary course of business to be cash equivalents. GOODWILL Goodwill is amortized on a straight line basis over periods from five to 25 years and is periodically evaluated for impairment on an undiscounted cash flow basis. RECLASSIFICATIONS Certain amounts in prior periods have been reclassified to conform to the current presentation. 3. ACQUISITION OF EBI SECURITIES CORPORATION In May 1998, the Company acquired all of the outstanding common stock of Cohig & Associates, Inc., a Denver, Colorado based investment banking and brokerage firm, in exchange for 445,000 unregistered shares of the Company's common stock and an agreement to advance $1,500,000 in additional working capital. Following the acquisition, the Company changed the name of Cohig & Associates, Inc. to EBI Securities Corporation ("EBI Securities"). The Company intends to develop EBI Securities as the foundation to expand its U.S. based investment banking and brokerage presence and anticipates that EBI Securities will be the first in a series of possible acquisitions targeting other successful medium size investment banking and brokerage firms both domestically and internationally. Eastbrokers International believes that its current organizational structure as an entrepreneurial, well-capitalized, and international publicly traded company will be particularly appealing to potential acquisition candidates. EBI Securities is a full service brokerage firm specializing in providing investment advice and counsel to individuals and small to middle market institutions. At the present time, EBI Securities has approximately 180 licensed representatives. EBI Securities provides its brokerage clients with a broad range of traditional - 10 - EASTBROKERS INTERNATIONAL INCORPORATED (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 3. ACQUISITION OF EBI SECURITIES CORPORATION (CONTINUED) investment products and services. EBI Securities also strives to differentiate itself in the minds of investors and corporate finance clients through its commitment to a professional but personalized service, which not only sets it apart from the large firms, but also serves to develop long-term client relationships. Its trading department makes a market in approximately 150 securities which include its investment banking clients and those securities that its research department has identified as promising, small to middle-market, potentially high growth companies. EBI Securities' investment banking department operates with a single goal in mind: to enhance and develop the capital structures of small to middle market emerging growth companies through private placements, bridge financing, and public offerings which serves to enable the firm's corporate finance clients to capitalize on promising business opportunities, favorable market conditions, and/or late stage product development. EBI Securities is registered as a broker-dealer with the SEC and is licensed in 50 states and the District of Columbia. It is also a member of the National Association of Securities Dealers ("NASD") and the Securities Investor Protection Corporation ("SIPC"). Customer accounts are insured to $25 million under the SIPC excess insurance program. EBI Securities operates pursuant to the exemptive provisions of SEC Rule 15c3-3 (k)(2)(ii) and clears all transactions with and for customers on a fully disclosed basis. EBI Securities maintains its clearing arrangement with Fiserv Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ: FISV). Fiserv provides EBI Securities with back office support, transaction processing services on all the principal national securities exchanges and access to many other financial services and products. This arrangement enables EBI Securities to offer its clients a broad range of products and services that is typically only offered by firms that are larger and/or have a larger capital base. 4. SHORT-TERM BORROWINGS The Company meets its short-term financing needs through lines of credit with financial institutions, advances from affiliates, and by entering into repurchase agreements whereby securities are sold with a commitment to repurchase at a future date. On November 25, 1998, in order to increase its working capital, the Company sold 10 newly issued units in a private placement consisting in the aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C Warrants to purchase 125,000 shares of Common Stock. The Company has the right to redeem the Convertible Debentures on or before March 24, 1999, at 115% of the aggregate price or $1,265,000. The Company intends to redeem the Convertible Debentures in full. Lines of Credit These lines of credit carry interest rates between 7.00 percent and 12.00 percent as computed on an annual basis. Advances from Affiliated Companies Periodically, the Company's subsidiaries and affiliates will provide operating advances to other members in the affiliated group. These advances are generally due on demand and are not subject to interest charges. - 11 - EASTBROKERS INTERNATIONAL INCORPORATED (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 5. SALE OF INTERESTS IN SUBSIDIARIES In June 1998, the Company sold 73.55 percent of its interest in Eastbrokers Prague a.s. for 15 million Austrian Schillings (approximately $1,180,000 USD at the then current exchange rates). The Company recognized a gain on the sale of this interest in Eastbrokers Prague a.s. before taxes of approximately $1,312,000, at the then current exchange rates. This amount is reflected in the revenue section under the caption, "Gain on sale of interest in subsidiary". In December 1998, the Company sold its entire interest in its subsidiary, Eastbrokers Budapest Rt. for 217,000,000 HUF (approximately $1,000,000 USD at the then current exchange rates). The sale of Eastbrokers Budapest is not reflected in the December 31, 1998, financial statements, since these financial statements reflect the European operations for the quarter and nine months ended September 30, 1998. The sale of Eastbrokers Budapest will be reflected in the Company's March 31, 1999 financial statements. As of the date of this filing, the Company has not yet determined the effect of this transaction to the financial statements. 6. COMMITMENTS AND CONTINGENCIES LEASES AND RELATED COMMITMENTS The Company occupies office space under leases which expire at various dates through 2003. These leases contain provisions for periodic escalations to the extent of increases in certain operating and other costs. The Company's subsidiaries occupy office space under various operating leases which generally contain cancellation clauses whereby the Company may cancel the lease with thirty to ninety days written notice. 7. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement was adopted by the Company beginning with the fiscal year ended March 31, 1999 and the appropriate prior periods have been restated. Due to the nature of the items reflected in the Statement of Comprehensive Operations, no effect for income taxes has been recognized. Foreign currency translation adjustments are primarily related to the investment in the Company's foreign operations. Unrealized holding losses are related to securities received in the sale of the Hotel Fortuna. As noted in the consolidated financial statements for the year ended March 31, 1998 included herein, the Company has substantial net operating loss carryforwards which it may or may not be able to utilize prior to their expiration. Accordingly, no tax effect for these additional projected losses has been reflected in these financial statements. 8. SUBSEQUENT EVENTS In December 1998, the Company sold its subsidiary, Eastbrokers Budapest Rt. for HUF 217,000,000 (approximately $1,000,000 USD at the then current exchange rates). The sale of Eastbrokers Budapest is not reflected in the December 31, 1998, financial statements, since these financial statements reflect the European operations for the quarter and nine months ended September 30, 1998. The sale of Eastbrokers Budapest will be reflected in the Company's March 31, 1999, financial statements. The Company continues to have a working relationship with the buyer and maintains a presence in Budapest through its relationship with the buyer. - 12 - EASTBROKERS INTERNATIONAL INCORPORATED (A DELAWARE CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) FOR THE QUARTERLY PERIOD AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 8. SUBSEQUENT EVENTS (CONTINUED) In December 1998, the Company entered into a non-binding letter agreement pursuant to which it intended to acquire Lloyd Wade Securities, Inc. ("Lloyd Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd Wade is a full service securities firm. The acquisition was contingent upon, among other things, receipt of any necessary corporate and stockholder approvals, all necessary governmental approvals, completion of business, legal and financial due diligence and other customary conditions. Since the signing of the non-binding letter of intent, the Company has been unable to come to terms with Financial Services, Inc. On February 12, 1999, the Company abandoned its effort to acquire Lloyd Wade. In January, 1999, the Company sold 125,000 restricted shares of its common stock in a private placement to a private investor for $4.00 per share. The Company also issued 7,500 shares of its common stock to a broker at EBI Securities Corporation as a commission in connection with this transaction. In a subsequent event, in February, 1998, the Company's Austrian subsidiary WMP Bank AG, purchased a forty-nine (49%) percent equity interest in Stratego Invest a.s. Prague, a Czech securities and investment firm. The purchase price was valued at approximately $2.9 million USD at the then current exchange rates. The book value of Stratego Invest at the time of purchase was approximately 190 million Czech koruna, or approximately $6.1 million USD at the then current exchange rates. Stratego Invest is one of the leading Czech securities and investment firms. The current management of Stratego Invest has a proven record of profitability and they have well positioned the firm in order to expand into the international securities marketplace. The partnership with Stratego Invest will give the Company a strong partner in the Czech marketplace, and at the same time, will provide Stratego Invest access to the international marketplace through the Company's operations in Europe and the US. In February, 1999, the Company filed a registration statement on Form SB-2 covering the resale of certain securities held by various selling stockholders. - 13 - PART I -- FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Certain information set forth in this report under this caption Item 2. "Management's Discussion and Analysis or Plan of Operation" includes "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, from time to time, the Company may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospectus, projected ventures, new products, anticipated market performance and similar matters. Readers are cautioned not to place undue reliance on these forward looking statements, which are made as of the date hereof. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost of doing business, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and related impact on securities markets, (viii) competition from existing financial institutions and other new participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry, (x) changes in federal and state tax laws which could affect the popularity of products sold by the Company and (xi) the risks and uncertainties set forth under the caption "Risk Factors" which appears in Item 1 of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998 and dated October 30, 1998. Eastbrokers International Incorporated undertakes no obligation to release publicly any revisions to the forward looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments. Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. This Form 10-QSB for the quarterly period ended December 31, 1998, makes reference to the Company's Annual Report on Form 10-KSB as amended dated October 30, 1998 ("Report"). The Report includes information necessary or useful to an understanding of the Company's businesses and financial statement presentations. The Company will furnish a copy of this Report upon request made directly to the Company's headquarters at 15245 Shady Grove Road, Suite 340, Rockville, Maryland 20850, telephone number (301) 527-1110 and facsimile number (301) 527-1112. The earnings of the Company are subject to wide fluctuations since many factors over which the Company has little or no control, particularly the overall volume of trading and the volatility and general level of market prices, may significantly affect its operations. PLAN OF OPERATION GENERAL OVERVIEW Prior to August, 1996, the Company engaged in the purchase and sale of newly privatized businesses in the Czech Republic. In August, 1996, the Company entered the Central and Eastern European investment banking and securities business through its acquisition of Eastbrokers Beteiligungs AG, an Austrian holding company providing financial services in Eastern and Central Europe through its network of subsidiaries. The acquisition of Eastbrokers AG was intended to not only provide an earnings stream from brokerage activities, but also position the Company to provide investment banking and corporate finance services throughout Central and Eastern Europe. In March, 1997, the Company expanded its operations into the brokerage business in the United States through its acquisition of an existing New York-based broker dealer. In May, 1998, the Company continued the expansion of its U.S. operations through the acquisition of Cohig & Associates ("EBI Securities") a Denver, Colorado based investment banking and brokerage firm. - 14 - The Company currently operates a highly diversified investment banking and securities network, with 20 US offices and 12 international branches and affiliates located in the following countries: Austria; Czech Republic; Poland; Hungary; Slovakia; Kazakhstan; Bulgaria; Croatia; Slovenia and; Azerbaijan. The Company's mission is to build, through acquisitions and strategic alliances, a highly successful, global, middle market, investment banking and securities firm. EUROPEAN OPERATIONS Since the acquisition of Eastbrokers AG, in August, 1996, the Company's business strategy for its European operations was to utilize its emerging market expertise in the areas of merchant banking, corporate finance, privatization and trading, in order to expand throughout Central and Eastern Europe. However, during 1998, the Company had to modify its business strategy in Europe, in response to an overall economic downturn that covered much of Central and Eastern Europe. This market downturn was further exacerbated by the global financial crisis, which peaked in the Summer of 1998, and was caused in part by the devaluation in the Russian Ruble. This devaluation led to sharp decreases in stock markets worldwide, particularly in Central and Eastern Europe. In addition to falling prices, liquidity in much of the region was significantly reduced. In order to minimize the negative effects on the Company's financial operations, the Company reduced its work force in Austria and has eliminated much of its workforce in Romania, Turkey, Russia and Bulgaria. In Poland, Slovenia, Croatia, Kazakhstan and Slovakia, the Company is reevaluating its operations for additional cost savings. In the Czech Republic and Hungary, the Company sold its operations (see dispositions), however, the Company maintains an affiliate relationship with the management in Hungary. The Company has re-entered the Czech Republic through the purchase of a minority interest in Stratego Invest a.s. Prague (see subsequent events). The Company has also organized an office in Baku, Azerbaijan. Based upon further changes in market conditions, the Company may close, sell or merge with third parties, other European operations as it deems necessary. Despite the negative sentiment in emerging markets during 1998, the Company believes that Central and Eastern Europe's ultimate unification into the European Economic and Monetary Union, will lead to a significant increase in investor interest in the region. This potential increase in the emerging market interest will benefit those firms that have had existing operations in the region. The Company intends to maintain solid long term involvement in the region and to continue to provide its clients with quality brokerage and investment banking services. Since the Company's acquisition of EBI Securities in May 1998, the Company's European subsidiaries now have direct access to the US securities marketplace. The Company expects that during 1999, its two main subsidiaries, EBI Securities and WMP Bank, will cross market to their respective retail and institutional clientele, their research, corporate finance and trading capabilities. The Company believes that it is possible to significantly increase the overall revenue of the Company, if EBI Securities, through WMP Bank, is successful in marketing US securities to Western European institutional clientele, and vice-versa. While investing in the emerging markets of Central and Eastern Europe involves risk considerations not typically associated with investing in securities of U.S. issuers, the Company believes that such considerations are outweighed by the benefits of diversification and potentially superior returns. Among the considerations involved in investing in emerging markets, such as Central and Eastern Europe, is that less information may be available about foreign companies than about domestic companies. Foreign companies are also not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic companies. In addition, unlike investing in U.S. companies, securities of non-U.S. companies are generally denominated in foreign currencies, thereby subjecting each security to changes in value when the underlying foreign currency strengthens or weakens against the U.S. dollar. Currency exchange rates can also be affected unpredictably by intervention of U.S. or foreign governments or central banks or by currency controls or political developments in the U.S. and abroad. The value of international fixed income products also responds to interest rate changes in the U.S. and abroad. In general, the value of such products will rise when interest rates fall, and fall when interest rates rise. However, interest rates in each foreign country and the U.S. may change independently of each other. Debt and equity securities in emerging markets such as Central and Eastern Europe may also not be as liquid as U.S. securities and their markets. Securities of some foreign companies may involve greater risk than securities of - 15 - U.S companies. Investing in Central and Eastern European securities may further result in higher expenses than investing in domestic securities because of costs associated with converting foreign currencies to U.S. dollars and expenses related to foreign custody procedures. Investment in Central and Eastern European securities may also be subject to local economic or political risks, including instability of some foreign governments, inadequate market controls, the possibility of currency blockage or the imposition of withholding taxes on dividend or interest payments and the potential for expropriation, re-nationalization or confiscatory taxation and limitations on the use or repatriation of funds or other assets. United States Operations Subsequent to the acquisition of Eastbrokers AG, the Company commenced expansion of its brokerage operations in the United States. The Company's goal was to build a strong US brokerage presence that would enable it to distribute European middle market, corporate finance product in the US and also to provide its European operations access to US corporate finance product, trading and research capabilities. In the Spring of 1997, the Company purchased a U.S. based broker-dealer, Eastbrokers North America, Inc. During the process of establishing Eastbrokers North America, the Company was approached by numerous U.S. based broker-dealers interested in being acquired by the Company. Management believes that consolidation within the securities industry, particularly in the United States, is inevitable. This consolidation can be attributed to the current volatility prevailing in the financial markets, the higher degree of capital needed to maintain solid brokerage functions and the increased regulatory environment. The Company decided that as a well-capitalized, entrepreneurially managed, international, publicly-traded, investment banking firm, it would be particularly appealing to the sellers of medium size brokerage firms. In addition, the Company believes that the purchase and roll-up of complementary securities businesses both in the United States and in Europe, can be financed by the issuance of its Common Stock. In May 1998, the Company made a significant step in its roll-up strategy in the United States. The Company acquired all of the outstanding common stock of Cohig & Associates, Inc., a Denver, Colorado based investment banking and brokerage firm, in exchange for 445,000 unregistered shares of the Common Stock and an agreement to advance $1,500,000 in additional working capital to Cohig & Associates. Following the acquisition, the Company changed the name of Cohig & Associates, Inc. to EBI Securities Corporation ("EBI Securities"). The Company intends to develop EBI Securities as the foundation to expand its U.S. based investment banking and brokerage presence and anticipates that EBI Securities will be the first in a series of acquisitions targeting other successful medium size investment banking and brokerage firms. EBI Securities is a full service brokerage firm specializing in providing investment advice and counsel to individuals and small to middle market institutions. At the present time, EBI Securities has approximately 180 licensed representatives. EBI Securities provides its brokerage clients with a broad range of traditional investment products and services. EBI Securities also strives to establish itself with investors and corporate finance clients through its commitment to a professional but personalized service. Its trading department makes a market in approximately 150 securities which include its investment banking clients and those securities that its research department has identified as promising, small to middle-market, potentially high growth companies. EBI Securities' investment banking department operates with a single goal in mind: to enhance and develop the capital structures of small to middle market emerging growth companies through private placements, bridge financing, and public offerings in order to enable the firm's corporate finance clients to capitalize on promising business opportunities, favorable market conditions, and/or late stage product development. The office space previously occupied by Eastbrokers North America, has been converted into a branch office of EBI Securities. EBI Securities is registered as a broker-dealer with the SEC and is licensed in 50 states and the District of Columbia. It is also a member of the NASD and the Securities Investor Protection Corporation ("SIPC"). Customer accounts are insured to $25 million under the SIPC excess insurance program. EBI Securities operates pursuant to the exemptive provisions of SEC Rule 15c3-3 (k)(2)(ii) and clears all transactions with and for customers on a fully disclosed basis. EBI Securities maintains its clearing arrangement with Fiserv Correspondent Services, Inc. ("Fiserv"), a subsidiary of Fiserv, Inc. (NASDAQ: FISV). Fiserv provides EBI Securities with back office support, - 16 - transaction processing services on all the principal national securities exchanges and access to many other financial services and products. This arrangement enables EBI Securities to offer its clients a broad range of products and services that is typically only offered by firms that are larger and/or have a larger capital base. Fiserv has advised the Company that it is aware of the year 2000 computer issue and is working to mitigate the effect of the year 2000 issue on its operations. See Item 2 "Management's Discussion and Analysis or Plan of Operation - Impact of the Year 2000". In December 1998, the Company entered into a non-binding letter agreement pursuant to which it intended to acquire Lloyd Wade Securities, Inc. ("Lloyd Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd Wade is a full service securities firm. The acquisition was contingent upon, among other things, receipt of any necessary corporate and stockholder approvals, all necessary governmental approvals, completion of business, legal and financial due diligence and other customary conditions. Since the signing of the non-binding letter of intent, the Company has been unable to come to terms with Financial Services, Inc. On February 12, 1999, the Company abandoned its effort to acquire Lloyd Wade. Results of Operations See Note 1 of the Notes to Consolidated Financial Statements for the Quarterly Period and Nine Months Ended December 31, 1998, for an explanation of the basis of presentation of the financial statements. For the quarterly period ended December 31, 1998, the Company generated consolidated revenues in the amount of $6,683,867, compared to $1,374,823, for the quarterly period ended December 31, 1997. For the nine month period ended December 31, 1998, the Company generated consolidated revenues in the amount of $17,028,864, compared to $5,476,043, for the nine month period ended December 31, 1997. Total revenues for the three and nine month periods ended December 31, 1998, are significantly higher than the previous periods due to the acquisition of EBI Securities, which contributed approximately $4,933,232, and $9,300,016, for the quarterly and nine month periods, respectively (the nine month numbers are reported from May 14, 1998, the date of acquisition of EBI Securities - see Note 3 to the Financial Statements). Total revenue for the nine months was also effected from the sale of Eastbrokers Prague a.s. The Company recognized a gain on the sale of its interest in Eastbrokers Prague a.s of approximately $1,312,000 before taxes. This amount is reflected in the revenue section under the caption "Gain on sale of interest in subsidiary." The Company incurred total consolidated costs and expenses of $7,016,482, for the quarterly period ended December 31, 1998, and $19,587,978, for the nine month period ended December 31, 1998, compared to $1,705,031, for the quarterly period ended December 31, 1997, and $7,005,302, for the nine month period ended December 31, 1997. Total costs and expenses for the three month and nine month periods ended December 31, 1998, are significantly higher than the previous periods due to the acquisition of EBI Securities, which contributed approximately $5,073,382, for the three month period and $11,703,382, for the nine month period, respectively (the nine month numbers are reported from May 14, 1998, the date of acquisition of EBI Securities- see Note 3 to the Financial Statements). The Company's loss before provision for income taxes and minority interest in earnings of subsidiaries was $332,615, for the quarterly period ended December 31, 1998, and $2,559,114, for the nine month period ended December 31, 1998, compared to a loss of $330,208, for the quarterly period ended December 31, 1997, and $1,529,259, for the nine month period ended December 31, 1997. The Company's provision for income taxes and minority interest in earnings of subsidiaries for the quarterly and nine month periods, are attributed solely to the Company's European operations, and are primarily related to WMP Bank AG and Eastbrokers Budapest Rt. The Company reported consolidated net income of $13,378, for the quarterly period ended December 31, 1998, and a consolidated net loss of $3,051,354, for the nine month period ended December 31, 1998, compared to a consolidated net loss of $101,260 for the quarterly period ended December 31, 1997, and a consolidated net loss of $1,198,507, for the nine month period ended December 31, 1997. The Company's slight net profit for the quarter ended December 31, 1998, was attributable to several factors. First, in Europe, the Company's operations were impacted by the global financial crisis that occurred during the Summer of 1998. Since the Company's financial statements for the period ended December 31, 1998, include the Company's European operations for the period ended September 30, 1998, this period of financial market volatility is reflected in the Company's quarter ended December 31, 1999. Specifically, during this period, the - 17 - Company's European operations experienced a slowdown in its commission, trading and corporate finance business. Second, the Company's European operations incurred costs related to the reduction of the workforce in several of its European offices. Third, in the US, EBI Securities incurred higher costs associated with the expansion of its operations in New York, California and Colorado. In addition, EBI Securities experienced a continued slowdown in its gross commission revenue through October. However, revenue at EBI Securities increased significantly in November and December. And fourth, the Company continued to incur higher than expected legal and consulting fees through October, mainly due to costs associated with the completion of its audit for the fiscal year ended March 31, 1998, which was completed on October 30, 1998. On December 31, 1998, the Company had total assets of $61,912,849, and total liabilities of $34,097,742, compared to $40,424,733, and $14,833,076, respectively, on December 31, 1997. As of the date of this filing, the Company believes that it has adequate liquidity to meet its current obligations. However, no assurances can be made as to the Company's ability to meet its cash requirements in connection with any expansion of the Company's operations or any possible business combinations. On November 25, 1998, in order to increase its working capital, the Company sold 10 newly issued units in a private placement consisting in the aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C Warrants to purchase 125,000 shares of Common Stock. The Company has the right to redeem the Convertible Debentures on or before March 24, 1999, at 115% of the aggregate price or $1,265,000. The Company intends to redeem the Convertible Debentures in full. In January, 1999, the Company sold 125,000 restricted shares of its common stock in a private placement to a private investor for $4.00 per share. The Company also issued 7,500 shares of its common stock to a broker at EBI Securities Corporation as a commission in connection with this transaction. The cash flows for the nine month period ended December 31, 1998, reflect the volatile nature of the securities industry and the reallocation of the Company's assets indicative of a growing organization. The change in the foreign currency translation adjustment is primarily related to the fluctuations in the Company's functional currencies to the U.S. dollar. The U.S. dollar and its unexpected strength coupled with the unexpected weakness of the European currencies (including the German Deutchmarke) have negatively impacted the Company's overall earnings as well as the cumulative translation adjustment. The primary functional currencies affecting the Company are as follows: U.S. Dollar, Austrian Schilling, Czech Koruna, Hungarian Forint, Slovak Koruna and the Polish Zloty. As a broker/dealer in securities, the Company will periodically acquire positions in securities on behalf of its clients. As disclosed in "Note 2 Financial Instruments", the Company has title to various financial instruments in the countries in which it operates. Certain of these investments may be characterized as relatively illiquid and potentially subject to rapid fluctuations in liquidity. Those securities are classified as "available for sale securities". ACQUISITIONS AND DISPOSITIONS In June 1998, the Company sold 73.55 percent of its interest in Eastbrokers Prague a.s. for 15 million Austrian Schillings. The Company recognized a profit from the sale of Prague of approximately $1,312,000, at the then current exchange rates. This amount is reflected in the revenue section under gain on sale of interest in subsidiary. In December 1998, the Company sold its subsidiary, Eastbrokers Budapest Rt. for HUF 217,000,000 (approximately $1,000,000 USD at the then current exchange rates). The Company continues to have a working relationship with the buyer and maintains a presence in Budapest through its relationship with the buyer. In December 1998, the Company entered into a non-binding letter agreement pursuant to which it intends to acquire Lloyd Wade Securities, Inc. ("Lloyd Wade"), a wholly owned subsidiary of Financial Services, Inc. Lloyd Wade is a full service securities firm. The acquisition is contingent upon, among other things, receipt of any necessary corporate and stockholder approvals, all necessary governmental approvals, completion of business, legal and financial due diligence and other customary conditions. Since the signing of the non-binding - 18 - letter of intent, the Company has been unable to come to terms with Lloyd Wade. On February 12, 1999, the Company abandoned its effort to acquire Lloyd Wade. In a subsequent event, in February, 1998, the Company's Austrian subsidiary WMP Bank AG, purchased a forty-nine (49%) percent equity interest in Stratego Invest a.s. Prague, a Czech securities and investment firm. The purchase price was valued at approximately $2.9 million USD at the then current exchange rates. The book value of Stratego Invest at the time of purchase was approximately 190 million Czech koruna, or approximately $6.1 million USD at the then current exchange rates. Stratego Invest is one of the leading Czech securities and investment firms. The current management of Stratego Invest has a proven record of profitability and they have well positioned the firm in order to expand into the international securities marketplace. The partnership with Stratego Invest will give the Company a strong partner in the Czech marketplace, and at the same time, will provide Stratego Invest access to the international marketplace through the Company's operations in Europe and the US. EMPLOYEES At February 16, 1999, the Company currently has approximately 400 full-time employees and 40 part-time employees. The reduction of employees from the prior period is mainly due to the sale of Eastbrokers Budapest Rt. No employees are covered by collective bargaining agreements and the Company believes its relations are good with both its employees and its independent contractors and consultants. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128. The new standard replaces primary and fully diluted earnings per share with basic and diluted earnings per share. SFAS No. 128 was adopted by the Company beginning with the interim reporting period ended December 31, 1997. The adoption did not impact previously reported earnings per share amounts. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This statement was adopted by the Company beginning with the fiscal year ended March 31, 1999. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim financial reports issued to stockholders. This statement will be effective for the Company's annual report for the fiscal year ended March 31, 1999. In the initial year of application, comparative information for earlier years is to be restated. At this time, the Company does not believe that this statement will have a significant impact on the Company. In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. At this time, the Company does not believe that this statement will have a significant impact on the Company. IMPACT OF THE YEAR 2000 Many of the world's computer systems (including those in non-information technology equipment and systems) currently record years in a two-digit format. If not addressed, such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions in the U.S. and internationally (the "Year 2000" issue). The potential costs and uncertainties associated with the Year 2000 issue will depend on a number of factors, including software, hardware and the nature of the industry in which a company operates. Additionally, companies must coordinate with other entities with which they electronically interact. - 19 - The Company is currently in the process of a systems upgrade unrelated to the Year 2000 issue. In conjunction with this upgrade, the Company is in the process of establishing a program to address issues associated with the Year 2000. To ensure that the Company's computer systems are Year 2000 compliant, the Company has been reviewing its systems and programs to identify those that contain two-digit year codes, and the Company intends to replace them in conjunction with the systems upgrade provided by the Baan Corporate Office Solutions. In addition, the Company is in the process of contacting its major external counterparties and suppliers to assess their compliance and remediation efforts and the Company's exposure to them. In addressing the Year 2000 issue, the Company has divided its program into six phases: (1) the Inventory phase, involving the identification of items that may be affected by Year 2000 compliance issues, including facilities and related non-information technology systems (embedded technology), computer systems, hardware, and services and products provided by third parties; (2) the Assessment phase, involving the evaluation of items identified in the Inventory phase to determine which will function properly with the change to the new century, and the prioritizing of items which will need remediation based on their potential impact to the Company; (3) the Remediation phase, involving the analysis of the items that are affected by Year 2000, the identification of problem areas and the replacement of non-compliant items; (4) the Testing phase involving the testing of all proposed repairs, including forward date testing which simulates dates in the Year 2000; (5) the Implementation phase consists of placing all items that have been remediated and successfully tested into operation; and (6) the Integration phase, involving the testing of the Company's business critical systems in a future time environment with external entities. As of February 16, 1999, the Company had substantially completed the Inventory phase and was also conducting the procedures associated with the Assessment, Remediation, Testing and Implementation phases. The Company expects to complete the Inventory and Assessment phase in the first calendar quarter of 1999. The Remediation and Testing phases with respect to business critical applications are expected to be completed by the end of the first calendar quarter of 1999. The Implementation phase is expected to be completed by the end of the second calendar quarter of 1999. The Integration phase commenced in January 1999, and will continue through 1999. In addition, the Company will identify the major business relationships of the Company by the end of the first calendar quarter of 1999, and many of them will be tested as soon thereafter as practicable. The Company will continue to survey and communicate with counterparties, intermediaries and vendors with whom it has important financial and operational relationships to determine the extent to which they are vulnerable to Year 2000 issues. As of February 16, 1998, the Company has not yet received sufficient information from all parties about their remediation plans to predict the outcomes of their efforts. In particular, Management believes the level of awareness and remediation efforts relating to the Year 2000 issue is less advanced in the Eastern and Central European markets in which the Company conducts business than in the United States. There are many risks associated with the Year 2000 issue, including the possibility of a failure of the Company's computer and non-information technology systems. Such failures could have a material adverse effect on the Company and may cause systems malfunctions, incorrect or incomplete transaction processing resulting in failed trade settlements, the inability to reconcile accounting books and records, the inability to reconcile trading positions and balances with counterparties, inaccurate information to manage the Company's exposure to trading risks and disruptions of funding requirements. In addition, even if the Company successfully remediates its Year - 20 - 2000 issues, it can be materially and adversely affected by failures of third parties to remediate their own Year 2000 issues. The failure of third parties with which the Company has financial or operational relationships such as securities exchanges, clearing organizations, depositories, regulatory agencies, banks, clients, counterparties, vendors and utilities, to remediate their computer and non-information technology systems issues in a timely manner could result in a material financial risk to the Company. If the above mentioned risks are not remedied, the Company may experience business interruption or shutdown, financial loss, regulatory actions, damage to the Company's global franchise and legal liability. The Company is currently unable to quantify the adverse effect such risks impose, but management believes that if the Year 2000 issue is not remedied there could be a material adverse effect on the Company's financial position and results of operation. The Company does not have business continuity plans in place that cover the Year 2000 issue. The Company intends to evaluate Year 2000 specific contingency plans during 1999 as part of its Year 2000 risk mitigation efforts. Based upon current information, the Company estimates that the total cost of implementing its Year 2000 initiative will be between $750,000 and $1,500,000, including the cost of its general systems upgrade. The Year 2000 costs include all activities undertaken on Year 2000 related matters across the Company, including, but not limited to, remediation, testing (internal and external), third party review, risk mitigation and contingency planning. Through December 31, 1998, the Company estimates that it has expended approximately $400,000 on the Year 2000 project. These costs have been and will continue to be funded through operating cash flow and are expensed in the period in which they are incurred. The Company's expectations about future costs and the timely completion of its Year 2000 modifications are subject to uncertainties that could cause actual results to differ materially from what has been discussed above. Factors that could influence the amount of future costs and the effective timing of remediation efforts include the success of the Company in identifying computer programs and non-information technology systems that contain two-digit year codes, the nature and amount of programming and testing required to upgrade or replace each of the affected programs and systems, the nature and amount of testing, verification and reporting required by the Company's regulators around the world, including securities exchanges, central banks and various governmental regulatory bodies, the rate and magnitude of related labor and consulting costs, and the success of the Company's external counterparties and suppliers, as well as worldwide exchanges, clearing organizations and depositories, in addressing the Year 2000 issue. IMPACT OF THE EURO The Euro issue is the result of the Economic and Monetary Union (the "EMU") which came into effect on January 1, 1999 and the conversion of member states to a single currency known as the Euro. The introduction of the Euro is expected to be one of the most important changes in the economic landscape of Europe in the next few years. The single currency is expected to contribute significantly to further market integration throughout the member countries. Prices will be easier to compare which should increase market transparency. As businesses recognize that they will no longer be exposed to foreign currency exchange rate risks and the related costs of currency conversion, cross-border transactions within the EMU are expected to become more attractive. The introduction of the Euro may also result in unintended consequences. During the transition period, companies will be required to use two different currency units. Confusion may result from financial information being reported in both the Euro and the national currency units. Another potential problem is that companies will be required to report financial information in either the Euro or the national currency unit or in some cases both currencies. Further adding to potential problems is a requirement that historical financial information must be converted to the Euro unit. - 21 - The Company is currently in the process of a systems upgrade unrelated to the Year 2000 or Euro issues. In the course of this upgrade and addressing the Year 2000 issue, the Company will be installing new software that is Euro capable and will evaluate any potential problems identified that could be related to the Euro issue. The Company is also monitoring the compliance of its software suppliers in addressing this issue. Based on a recent evaluation, the Company has determined that material costs and resources will not be required to permit its computer systems to properly handle Euro reporting and transactions. - 22 - PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 25, 1998, in order to increase its working capital, the Company sold 10 newly issued units in a private placement consisting in the aggregate of $1,100,000 in 7 percent Convertible Debentures and Series C Warrants to purchase 125,000 shares of Common Stock. The Company has the right to redeem the Convertible Debentures on or before March 24, 1999, at 115% of the aggregate price or $1,265,000. The Company intends to redeem the Convertible Debentures in full. The Company has reserved 385,000 shares of its common stock underlying the Convertible Debentures. In January, 1999, the Company sold 125,000 restricted shares of its common stock in a private placement to a private investor for $4.00 per share. The Company also issued 7,500 shares of its common stock to a broker at EBI Securities Corporation as a commission in connection with this transaction. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits required by Item 601 of Regulation S-B Exhibit No. Description ----------- ----------------------- (27.1) Financial Data Schedule (Electronic Filing Only). b. No reports on Form 8-K were filed during the three month period ended December 31, 1998. - 23 - SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EASTBROKERS INTERNATIONAL INCORPORATED (Registrant) By /s/ Kevin D. McNeil ---------------------------------------------- Kevin D. McNeil Executive Vice President, Treasurer, Secretary and Chief Financial Officer Dated: February 16, 1999 - 24 - INDEX TO EXHIBITS Exhibit No. Description ----------- ----------------------- (27.1) Financial Data Schedule (Electronic Filing Only). - 25 - EX-27 2 FDS -- 12/31/98 10-QSB
5 9-MOS MAR-31-1999 APR-01-1998 DEC-31-1998 2,553,876 24,072,726 25,134,742 0 0 51,859,596 2,659,554 1,039,936 61,912,849 24,710,028 9,387,714 0 0 238,388 17,473,578 61,912,849 0 17,028,864 0 19,587,978 0 0 335,116 (2,559,114) (218,757) (3,051,534) 0 0 0 (3,051,534) (0.66) (0.66)
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