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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________
to____________
Commission File Number 0-25056
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MAXCOR FINANCIAL GROUP INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-3262958
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One New York Plaza, 16th Floor, New York, NY 10292
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 748-7000
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
Preferred Stock Purchase Rights
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (assuming directors, executive officers and 5% stockholders
are affiliates), based on the Nasdaq Stock Market(R) last sales price of $6.05
on March 26, 2002, was approximately $28,395,000.
As of March 26, 2002, there were 7,028,229 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Those portions of registrant's
Proxy Statement for its 2002 Annual Meeting of Stockholders (which registrant
intends to file pursuant to Regulation 14A on or before April 30, 2002) that
contain information required to be included in Part III of this Form 10-K are
incorporated by reference into Part III hereof solely to the extent provided
therein.
MAXCOR FINANCIAL GROUP INC.
INDEX
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Page
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PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 23
Item 3. Legal Proceedings............................................... 23
Item 4. Submission of Matters to a Vote of Security-Holders............. 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 24
Item 6. Selected Financial Data......................................... 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 41
Item 8. Financial Statements and Supplementary Data..................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 44
Item 11. Executive Compensation.......................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................... 44
Item 13. Certain Relationships and Related Transactions.................. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..................................................... 45
Signatures............................................................... 46
Consolidated Financial Statements and Notes.............................. F-1
Index to Consolidated Financial Statements............................... F-2
Exhibit Index............................................................ X-1
2
[GRAPHIC OMITTED}
MAXF
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NASDAQ
LISTED
This report includes certain statements that are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Any statement in this report that is not a statement of historical fact
may be deemed to be a forward-looking statement. Because these forward-looking
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by these forward-looking statements. Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those discussed elsewhere in this report in the section entitled
"Cautionary Statements." For additional information about forward-looking
statements, see page 41.
References in this report to "we," "us," and "our" mean Maxcor
Financial Group Inc. and its subsidiaries and other businesses, unless the
context requires otherwise.
PART I
ITEM 1. BUSINESS
Overview
Maxcor Financial Group Inc. is a publicly-held financial services
holding company, incorporated in Delaware in August 1994. We maintain a web page
at www.maxf.com and our common stock is traded on The Nasdaq Stock
Market(R)under the symbol "MAXF."
In August 1996, we acquired Euro Brokers Investment Corporation, a
privately held domestic and international inter-dealer broker for a broad range
of financial instruments, having operational roots dating back to 1970.
Through the Euro Brokers division of our Maxcor Financial Inc.
subsidiary, a U.S. registered broker-dealer, and other of our subsidiaries and
businesses, including Euro Brokers Inc., we conduct our core business as a
domestic and international inter-dealer brokerage firm, specializing in (i) cash
deposits and other money market instruments, (ii) interest rate and other
derivatives, (iii) emerging market debt and related products, (iv) various fixed
income securities, including distressed corporate bonds, municipal securities,
convertible bonds and federal agency bonds, and (v) U.S. Treasury and federal
agency repurchase agreements.
We also maintain certain specialty subsidiaries. Tradesoft
Technologies, Inc. ("Tradesoft"), acquired by us in August 2000, is a software
developer and technology provider that specializes in designing trading systems
and broker platforms for automating or enhancing order entry and tracking, price
and information distribution, order matching and straight through processing.
Maxcor Financial Asset Management Inc., an investment adviser registered with
the Securities and Exchange Commission ("SEC"), is engaged in securities lending
through its Euro Brokers Securities Lending division. Maxcor Information Inc. is
charged with packaging and exploiting the data and other information generated
by our inter-dealer brokerage businesses.
3
We have approximately 500 employees worldwide and conduct our
businesses through principal offices in New York, London and Tokyo, other
offices in Stamford (CT), York (PA), Nyon (Switzerland) and Mexico City, and
correspondent relationships with other brokers throughout the world.
Except as described below, we operate in each financial center through
wholly-owned subsidiaries. In London, as of January 1, 1999, we formed Euro
Brokers Finacor Ltd. ("EBFL"), a 50/50 equity venture with the European broker,
Finacor, that combined our respective London-based capital market operations, as
well as Finacor's Paris-based capital markets operations. Our other London
operations, primarily comprised of securities businesses, are wholly owned. In
Tokyo, since 1994, we have had a controlling financial interest in a brokerage
venture conducting yen and dollar denominated derivative businesses (the "Tokyo
Venture"). Since July 1, 2001, we have had a 57.25% interest in the Tokyo
Venture, with Nittan Capital Group ("Nittan") holding the other 42.75%.
Previously, from January 1, 2000, we and Nittan respectively held 40% and 30%
interests in the Tokyo Venture, with Yagi Euro Nittan ("Yagi Euro"), in which we
also held a 15% minority interest, holding the other 30% interest. Prior to
2000, we and Yagi Euro were the sole partners in the Tokyo Venture, each holding
a 50% interest.
September 11th Terrorist Attacks
On September 11, 2001, our New York headquarters on the 84th floor of
Two World Trade Center were destroyed when two commercial jet planes hijacked by
terrorists crashed into the World Trade Center towers. As a result of the
attacks, 61 of our employees and staff members were killed, out of a New York
work force of approximately 300. We also lost all of our property and
technological infrastructure maintained on site.
Beginning September 18th, we began to relocate our New York based
operations to temporary facilities in lower Manhattan provided by Prudential
Securities, the parent company of one of our clearing firms. By mid-October, we
had successfully established a working infrastructure for all of our operations,
restored our critical records, and hired a significant number of new employees.
The pace of this recovery was and remains nothing short of remarkable, and is a
testament to the dedication and effort of our employees and the support and
loyalty of our clients and friends. We also benefited from having strong offsite
backup of our financial and trading records and our proprietary operating
systems and software, as well as deep and broad business insurance coverage.
We believe that our property casualty and business interruption
insurance, both of which are underwritten by Kemper Insurance Companies, will
adequately fund our physical rebuilding efforts and compensate us for lost
income during the period prior to our full restoration of operations in a
permanent location. Currently, we expect to choose a permanent location and
4
relocate there by late 2002. Our property casualty insurance provides us with
the full cost of replacement assets and has an aggregate limit of approximately
$14 million. Our business interruption insurance provides for recovery of lost
revenues (net of saved expenses) and additional expenditures incurred to restore
operations or minimize the period and total cost of disruption to operations and
has a separate aggregate limit of approximately $21 million. Since September
11th, we have received $15 million in cash advances under these policies.
Our lost employees are and always will remain in our thoughts. We have
established The Euro Brokers Relief Fund, Inc., a 501(c)(3) tax-exempt
corporation (http://relief.ebi.com), to provide charitable aid to their
families, in addition to life insurance we maintained for them that is paying
four times their last twelve months of earnings (including bonuses), up to a
maximum of $1 million per employee. On March 11, 2002, the six month anniversary
of the attacks, our New York, London, Mexico City and Stamford offices held a
"charity day" in which all brokerage revenues were pledged to the Fund. More
than $1 million was raised in this effort, and we are planning additional
fund-raising events.
Numerous uncertainties nonetheless remain in connection with our
recovery from the attacks of September 11th. Although we currently believe that
our scope and amount of insurance coverage is adequate, it is possible that our
rebuilding costs and/or lost revenues may exceed the policy limits. In addition,
our insurer may dispute or disagree with us about the scope of coverage with
respect to our specific claims when they are submitted, meaning we may incur
rebuilding costs or lost revenues for which reimbursement under the policies is
delayed or not fully made, even if the policy limits have not been exceeded.
In addition, although we are committed to rebuilding our revenues and
operations to levels matching or exceeding those existing prior to September
11th and believe that most of our restored operations are already functioning
and producing at levels close or comparable to pre-September 11th levels, the
longer-term effects on our business and employees of the dislocation and
rebuilding efforts and the coping with the trauma of the attacks and the death
of so many of our colleagues are simply unknown.
Inter-Dealer Brokerage Businesses
In our inter-dealer brokerage businesses, we function primarily as an
intermediary, matching up the trading needs of our institutional client base,
which is primarily comprised of well-capitalized banks, investment banks,
broker-dealers and other financial institutions, but also includes various funds
and corporations. We assist our clients in executing trades by identifying
counterparties with reciprocal interests. We provide our services through an
international network of brokers who service direct phone lines to most of our
clients and through proprietary screen systems and other delivery systems that
provide clients with real-time bids, offers and pricing information in our
various products.
5
Clients use our services for several reasons. First, a client can
benefit from the broader access and liquidity provided by our worldwide broker
and telecommunications network, which communicates with and services most of the
largest banks and securities firms. The result is typically better pricing and
faster execution than the client could achieve acting unilaterally. Second, we
provide clients with anonymity, both as to their identity and, depending on the
product, the size of their proposed trade, thereby enhancing their flexibility
and ability to act without signaling their intentions to the marketplace. Third,
because of our network, we can provide high-quality pricing and market
information, as well as sophisticated analytics and trading and arbitrage
opportunities.
Our inter-dealer brokerage transactions are principally of two types:
(i) "name give-up" transactions, in which we act only as an introducing broker,
and (ii) transactions in which we act as a "matched riskless principal." In the
first type of transaction, primarily involving money market instruments and
derivative products, the trades are arranged while preserving the clients'
anonymity, but executed at the last instant on a name give-up basis and settled
directly between the counterparties. In these transactions we act solely as an
introducing broker who brings the two counterparties together, and not as a
counterparty ourselves. Consummation of the transaction may then remain subject
to the actual counterparties who have been matched by us accepting the credit of
each other. In the second type of transaction, primarily securities
transactions, we act as a matched riskless principal, connecting the buyer and
seller for the transaction on a fully anonymous basis by acting as the
counterparty for each in matching, reciprocal back-to-back trades. This type of
transaction is then settled through one of various clearing institutions with
which we have contractual arrangements, and who will have previously reviewed
and approved the credit of the participating counterparties.
Products
Our inter-dealer brokerage businesses generally fall into the brokerage
of three broad groups of products: (i) money market products, (ii) derivative
products and (iii) securities products.
Money Market Products
In general, money market products take the form of cash deposits or
other negotiable instruments placed by one financial institution with another,
at an agreed-upon rate of interest, for a fixed period of time. Money market
products primarily include offshore deposits (i.e., deposits placed outside the
country of denomination), onshore deposits (i.e., deposits placed within the
country of denomination), certificates of deposit and short-term commercial
paper. U.S. dollars continue to be the most actively traded offshore currency
deposit. Other offshore currency deposits may be denominated in Japanese yen,
British pounds sterling, Swiss francs, Canadian dollars or the euro. Examples of
onshore deposits include term and overnight U.S. federal funds. We broker money
market products predominantly to multinational banks.
6
Derivative Products
A derivative products transaction generally is an agreement entered
into by two parties, in which each commits to a series of payments based upon
the price performance of an underlying financial instrument or commodity for a
specified period of time. This category includes a broad range of sophisticated
financial instruments employed by multinational banks, financial institutions,
securities dealers and corporations. Some of the types of derivatives we most
frequently broker are interest rate swaps, interest rate options and forward
rate agreements, in each case conducted in a multitude of different currencies
and localized primarily by office. In the latter part of 2001 we also began to
broker credit derivatives in the form of default swaps.
In an interest rate swap transaction, two parties agree to exchange
interest rate payment obligations on a notional principal amount over the term
of the swap. No principal is exchanged, and market risk for the parties is
limited to differences in the interest payments. The usual format for swaps
involves the exchange of fixed rate payments based on the term of the swap for a
series of floating rate payments based on a shorter-term rate.
Interest rate options, which include "cap," "floor" and "swaption"
transactions, are transactions in which one party grants the other the right
(but not the obligation) to receive a payment equal to the amount by which an
interest rate either exceeds (for call options) or is less than (for put
options) a specified strike rate.
Forward rate agreements ("FRAs") are over-the-counter, off-balance
sheet instruments designed to give the counterparties protection against a
future shift in interest rates for time deposits. The buyer, or borrower, of a
FRA agrees to pay the seller, or lender, at some specified future settlement
date, an amount of interest based on a notional principal at a fixed rate for a
specified period of time. The seller agrees to pay the buyer, on the same future
settlement date, an amount of interest based on the same amount of notional
principal and the same period of time, but based on the then-prevailing market
rate for the time period. No actual principal is exchanged. On the settlement
date, the buyer and the seller calculate the present value of the net interest
owed, and one party pays the other accordingly.
In a default swap transaction, a counterparty who is seeking to buy
credit protection pays a periodic fee or premium to the other counterparty (or
seller of protection) in order to transfer or hedge credit risk with respect to
a particular issuer or security. If the reference issuer suffers a specified
credit event within the term of the swap, such as an event of default under its
loan agreements or indentures, then the seller of protection pays the loss on
the reference security to the buyer, generally either by buying bonds or loans
of the issuer from the buyer at par or making a cash payment to the buyer based
on the difference between such par amount and the market value of the reference
security at the time of default.
We broker most of our derivative products predominantly to
multinational banks and investment banks.
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Securities Products
Products that we broker in this category consist primarily of a variety
of debt obligations issued by governments, government agencies, banks and
corporations. We broker transactions in emerging market debt, municipal
securities, U.S. Treasury and federal agency repurchase agreements, federal
agency bonds, distressed corporate bonds, U.S. domestic convertible bonds,
floating rate notes and other corporate securities.
Emerging market debt, including Brady bonds, global bonds, Eurobonds,
local issues and loans, as well as options on the foregoing, continues to
constitute the largest area within the securities products category, and is
brokered by specialized teams located in New York, London and Mexico City and
through a correspondent broker relationship in Buenos Aires. The market coverage
of the teams from these locations is worldwide. Our brokerage of emerging market
debt utilizes direct communication phone lines and provides real-time pricing
through proprietary, computerized screen systems located in clients' offices or
through direct digital feeds. In most emerging markets transactions, we act as
matched riskless principal and settle trades through a clearing firm, although
we broker some transactions on a name give-up basis.
Repurchase agreements are contractual obligations entered into by two
counterparties, first to sell securities and then to repurchase those same
securities (or the reverse in the case of a buyer) at an agreed upon future date
and price. We act as an intermediary primarily for the U.S. primary government
dealer community (banks and dealers licensed to participate in auctions of U.S.
Treasury securities), as well as for a number of U.S. regional banks and
dealers, in the negotiation and execution of U.S. Treasury, mortgaged-backed and
federal agency repurchase agreements. As is the case with emerging markets, we
disseminate repurchase agreement market information via our proprietary,
computerized screens and digital data feeds. Most of the repurchase agreements
that we execute for dealers are cleared through the Government Securities
Clearing Corporation, in which our broker-dealer subsidiary, Maxcor Financial
Inc., is a member, although some transactions are brokered on a name give-up
basis.
Our brokerage of federal agency debt is also generally conducted on a
riskless principal basis and with the same client base that participates in U.S.
Treasury and federal agency repurchase agreements. Dissemination of federal
agency debt market information to clients also relies on our proprietary screen
system and digital data feeds. We also use a proprietary front-end broker
interface developed by Tradesoft to monitor and manage trading activity and
market information, which has the capability of providing fully-automated client
execution capability if and when client demand for it grows.
We broker municipal securities on a matched riskless principal basis,
and also use an allocation of our capital to support limited inventory
positions. U.S. convertible bonds are generally brokered on a name give-up
basis.
8
We broker securities products to a broad institutional client base, but
mostly to banks, investment banks, broker-dealers and other financial
institutions.
Communications Network and Information and Related Systems
We conduct our inter-dealer brokerage businesses through a global
communications network and sophisticated computerized information systems over
which we receive and transmit current market information. Our proprietary screen
system and digital data feeds display to all screen-based clients real-time bid,
offer and transaction information for various products offered on the system.
To ensure rapid and timely access to the most current market bids and
offers, the majority of our clients are connected to our brokers and information
feeds via dedicated, "always on," point to point telephone and data lines around
the world. For products that are screen-brokered, such as emerging market debt
and related options, federal agency bonds, repurchase agreements, banker's
acceptances and commercial paper, we maintain an extensive private network to
connect our offices and the specific clients who trade in these products. In
this way, all such clients have the simultaneous ability to view and act upon
market bids and offers. We also have developed and deployed an Internet
real-time distribution capability for both our emerging markets and repurchase
agreement screen information, which has allowed access to clients in more remote
or unproven brokerage locations without incurring the infrastructure costs
associated with expanding our private network. This capability also has been
essential in our post-September 11th rebuilding, as our temporary facilities in
New York initially had no direct telephone or data lines and still have far
fewer direct lines than we had in the World Trade Center, although the number is
continuously increasing.
On certain brokerage desks, the Tradesoft(R) system is used to provide
a sophisticated and automated broker station, enhancing brokers' ability to
monitor trading activity and relevant market information efficiently and
communicate analysis and transaction details to their clients. If and when
client demand for it in our products grows, the Tradesoft(R) system also retains
the capability of being deployed to display real-time bid, offer and transaction
information to clients so that they can initiate bids, offers and trades
directly through a dedicated keypad at their workstations, with or without
contacting one of our voice brokers, using the system's proprietary matching
engine.
Our proprietary middle-office trade processing system (the "MEB
System"), which incorporates an electronic touchpad blotter system for
post-trade data input, is integrated with and captures transactions effected
through either our proprietary screen system or the Tradesoft(R) system, and
thereafter hands through those transactions for back office processing. The MEB
System has effectively replaced paper blotters on most securities desks and, by
automating a number of manually-intensive processes, has introduced numerous
efficiencies to our trade processing and handling, including the ability to
handle significantly increased trading volumes, identify unbalanced trade
conditions as they occur, impose tighter security and provide clients with more
certain and rapid check-outs of their transactions.
9
We maintain teams of computer and communications specialists to provide
technological support to the network. We are continually upgrading our
technological facilities in order to access and collate market information and
redistribute it virtually instantaneously throughout the network. Through the
continued development and use of proprietary software, computerized screen
displays, digital networks and interactive capabilities, we strive to keep our
communication, technology and information systems as current as possible.
Although we continue to explore whether more of our inter-dealer
brokerage businesses should become screen-based or incorporate a higher degree
of automation, we believe that our clients' diverse needs in each of our
products require us to remain flexible in our approaches. Currently, we believe
that a hybrid approach to servicing our clients, by providing both quality voice
brokering and advanced screen system and other technology, including the front
end Tradesoft(R) broker station and straight through processing, will best
enable us to build liquidity, maintain a satisfied employee base and retain
client loyalty.
Revenues and Expenses
Our revenues currently are derived primarily from commissions related
to our inter-dealer brokerage businesses. Generally, we receive a commission
from both counterparties in a trade, although in trades of certain products only
one party pays a commission. The dollar amount of the average transaction
generating a commission varies significantly by the type of product and the
duration of the transaction. Similarly, the applicable commission will vary
according to product and services required and may also reflect discounts for
high transaction volumes or other client rebates.
Other sources of revenues include (1) profits (or losses) from the
Tokyo Venture, (2) interest income, derived primarily from cash and cash
equivalents, deposits with clearing organizations and interest associated with
municipal securities positions, (3) trading gains and losses on securities
transactions (primarily in connection with our municipal securities business,
but also from our firm investment account), (4) income from the sale of data and
financial information generated from our brokerage businesses, and (5) foreign
exchange gains and losses.
The largest single component of our expenses is compensation paid to
our brokers. Attracting and retaining qualified brokerage personnel with strong
client relationships is a prerequisite in our business and in the brokerage
business in general. Brokers are generally compensated by a combination of fixed
salary and incentive payments based on commissions generated by them or on the
net profitability of their respective departments. For this reason, compensation
expense frequently will increase or decrease in rough proportion to revenues,
although the fixed salary component can skew the correlation in businesses with
declining revenues by causing decreases in compensation to lag behind decreases
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in revenues, and starting bonuses for new hires in businesses for which revenue
growth is sought can increase compensation expenses in advance of realizing the
anticipated revenue growth. To manage this area, we include performance-based
salary adjustment provisions in substantially all of our broker contracts and
closely track revenues and compensation expenses (as well as other direct costs)
by department (which may involve one or more products) and by broker, at each
location.
Most of the markets in which we operate are highly efficient, offering
participants immediate access and enormous liquidity. Some markets are subject
to a high degree of volatility. Even the slightest variation in price can make
the difference between missing or executing a transaction. Consequently, many of
our businesses depend heavily on the use of direct line voice communications,
advanced telephone equipment, real-time computerized screen systems and digital
feeds and proprietary pricing software in order to ensure rapid trade executions
and timely analyses for our clients. For this reason, we continually need to
expend significant resources on the maintenance, expansion and enhancement of
our communication and information system networks. After payroll, such costs
have historically represented our second largest item of expenditure.
The costs of maintaining sophisticated trading room environments and a
worldwide data and communications network comprise another significant portion
of the Company's expenses, and, with the usage of electronic execution and
matching systems, the need to invest in new technology and Internet deployment
strategies has also increased. Our ability to compete effectively is
significantly dependent on our ability to maintain a high level of client
service, through our proprietary software, computerized screen displays and
digital networks, the Tradesoft(R) systems, the MEB System and our provision of
whatever additional systems are demanded by clients at any given time. It is
this infrastructure and technological commitment that enables us to support our
existing client base and product lines, as well as provide a platform for
offering brokerage or other services in additional or newly developing financial
instruments. Although we maintain sizeable management information services and
communications departments, we will also license technology or outsource
infrastructure or technology projects, where practical and consistent with our
business goals, in order to manage our fixed costs in these areas.
Direct client contact, including entertainment, is also an integral
part of our marketing program and represents another significant component of
our expenses. We have made it a priority to manage these expenditures in a more
focused and coordinated fashion, and have had reasonable success in reducing
their levels over each of the last three years.
To grow revenues and stay competitive, we constantly need to analyze
and pursue growth opportunities in both new and existing product lines. Product
expansion, when undertaken, however, generally leads to an increase in the
number of brokerage personnel, and therefore in compensation expense, since the
markets usually require brokers to specialize in a single product or group of
related products, rather than function as market generalists. Product expansion,
and the effort to grow market share, also typically results in increased
entertainment expenses and the increased infrastructure and communication costs
associated with configuring a new desk and delivering its product to the
necessary client base.
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Other Businesses
Through the Euro Brokers Securities Lending division of our
SEC-registered investment adviser, Maxcor Financial Asset Management Inc., we
conduct a securities lending business. In securities lending, we arrange for the
lending of securities held in our clients' portfolios to securities dealers and
other market participants who need them to manage their own positions. In
exchange for such loaned securities, which are primarily U.S. Treasury and
federal agency securities and U.S. corporate bonds (but also non-dollar
government securities and corporate bonds), we arrange for our clients or their
custodians to receive either (i) cash collateral, for which we then direct the
reinvestment to earn a spread over the rebate rate the client is required to pay
in connection with the underlying loan, or (ii) non-cash collateral plus fee
income from the borrower. Our securities lending activities are executed solely
on an agency basis, so that collateral and cash funds of clients are never
received or held by us.
Maxcor Financial Services Inc. is a non-regulated subsidiary through
which we from time to time develop and initially conduct various new business
efforts unrelated to inter-dealer brokerage. It is also charged with managing
our firm's investment account.
Our information and data subsidiary, Maxcor Information Inc., is
charged with exploiting the data generated by our inter-dealer brokerage
businesses, including licensing such data to third party vendors.
Capital Structure History
Our initial public offering occurred in December 1994, and we issued a
total of 3,583,333 units, each comprised of one share of common stock, $.001 par
value, and two redeemable common stock purchase warrants. The offering raised
net proceeds of approximately $20 million.
In our August 1996 acquisition of Euro Brokers Investment Corporation,
we issued aggregate consideration consisting of approximately $22 million in
cash, 4,505,666 shares of common stock and 7,566,625 Series B redeemable common
stock purchase warrants, economically identical in their terms to the initial
public offering warrants.
In November 1997, we consummated an exchange offer, on the basis of
0.1667 of a share of common stock for each warrant of either series (the
"Exchange Offer"), pursuant to which we issued an aggregate of 2,380,975 shares
of common stock in exchange for 14,283,296 (or approximately 95.1%) of the
then-outstanding warrants. As a result of the Exchange Offer, the warrants (and
any remaining, related units) were delisted from trading on The Nasdaq Stock
Market(R) and deregistered under the Securities Exchange Act of 1934, as
amended.
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Although delisted and deregistered, each warrant remaining outstanding
continues to entitle the holder thereof to purchase from us one share of Common
Stock at an exercise price of $5.00 per share. Each warrant is also redeemable
by us at a price of $.01 if the last sales price of the common stock has been at
least $8.50 per share for 20 consecutive trading days. The warrants were
originally due to expire on November 30, 2001, but in connection with our
finalizing a related registration statement, we have several times extended
their expiration date, most recently until April 12, 2002.
In October 1998, we issued 2,000 shares of a newly created Series B
cumulative redeemable preferred stock to our 15% equity affiliate, Yagi Euro,
for an aggregate purchase price of $2 million. The preferred stock paid a
quarterly cumulative dividend, in arrears, at an annual rate of 2%, and was
subject to optional redemption by us at any time, and to mandatory redemption on
the tenth anniversary of its issue. The preferred stock did not have conversion
rights or, unless there was a payment default, voting rights. In June 2001, upon
the sale of our investment in Yagi Euro, we redeemed the preferred stock at its
stated value, together with accrued and unpaid dividends thereon.
In June 1999, we repurchased 2,986,345 shares of common stock from
various partnerships of the venture capital firm, Welsh, Carson, Anderson &
Stowe. The aggregate purchase price was approximately $5.23 million, or $1.75
per share. The shares repurchased represented approximately 26.4% of the shares
of common stock then outstanding.
In May 2000, our Board of Directors authorized a repurchase program for
up to 10% of our then outstanding common stock, or 833,744 shares, with
purchases to be made from time to time as market and business conditions
warranted, in open market, negotiated or block transactions. In January 2001, we
completed this repurchase program for an aggregate purchase price of $1,187,650,
or $1.42 per share, and our Board authorized an additional repurchase of up to
787,869 shares, or 10% of the then outstanding common stock. In July 2001, this
repurchase program was completed for an aggregate purchase price of $1,907,660,
or $2.42 per share, and our Board authorized an additional repurchase of up to
709,082 shares, or 10% of the then outstanding common stock. In the week after
the September 11th terrorist attacks, this authorization was further expanded by
490,918 shares, to 1,200,000 shares. Through December 31, 2001, we had purchased
214,000 shares under this expanded authorization at an aggregate purchase price
of $810,725, or $3.79 per share.
In August 2000, we issued from treasury 375,000 shares of common stock
as part of the consideration for our acquisition of Tradesoft. In August 2001,
we received 22,528 of these shares back into treasury as part of a post-closing
adjustment in our favor of approximately $82,000.
13
During 2001, 220,500 shares of common stock were issued pursuant to
options exercised under our 1996 Stock Option Plan. In connection with certain
of these exercises, we received 48,567 shares into treasury as consideration for
exercise prices aggregating $220,000.
At December 31, 2001, we had outstanding 7,026,229 shares of common
stock and 734,980 warrants.
Personnel
As of February 28, 2002, we and our businesses employed 361 brokers
(including trainees), plus an additional administrative staff, including
officers and senior managers, of 122 persons, for a total employee headcount of
483. Of the brokers, 181 were located in the U.S., 123 were located in Europe,
and 39 were located in Japan, with the balance distributed among our other
office locations. None of our employees are covered by a collective bargaining
agreement. We consider our relations with employees to be good and regard
compensation and employee benefits to be competitive with those offered by other
inter-dealer brokerage firms.
Segment and Geographic Data
Note 25 to the Consolidated Financial Statements contains summary
financial information, for each year of the three-year period ended December 31,
2001, with respect to each of our reportable operating segments, which are based
upon the countries in which they operate.
Competition
The inter-dealer brokerage industry is highly competitive, with the
success of a company within the industry dependent on a variety of key factors.
These factors include:
o the experience of and extent of client networks developed by the
firm and its personnel;
o the range of products and value-added services offered;
o commission rates;
o the quality, speed and reliability of service;
o proficiency in and ability to implement current technology,
including electronic execution and straight through processing;
o salaries and other cost structures; and
o capital resources and perceived creditworthiness.
While there are not many large international inter-dealer brokers and
entry into the industry is costly, we encounter intense competition in all
aspects of our businesses from a number of companies which have significantly
greater resources than us. Recent consolidations in the industry have narrowed
the field of competition somewhat, but have also produced combined entities with
even greater resources. Moreover, with the recent advent of electronic brokerage
14
in non-equity markets, new potential competitors have emerged that do not have
traditional inter-dealer brokerage roots, such as the BrokerTec Global
consortium formed by a number of the leading investment banks. In addition,
dealer firms within a consortium could elect to conduct a disproportionate or
increased share of their business between other member firms, or even to deal
directly with each other, thus reducing liquidity in the traditional
inter-dealer markets and potentially eroding our market shares.
The recent pace of consolidation in the banking and financial services
community continues to reduce the number of clients in the marketplace and,
accordingly, has further increased the competition among inter-dealer brokers
and potentially the downward pressure on already low commission rates. As a
result, increases in market volumes do not necessarily result in proportionate
increases in brokerage commissions and revenues.
During the last several years, the industry has seen an acceleration of
the development of electronic execution systems that claim to provide fully
automated trade matching. The electronic system first deployed by eSpeed, Inc.
in late 1999 successfully garnered liquidity in the U.S. Treasury markets, and
continues to do so even after the horrendous losses that firm suffered as a
result of the September 11th attacks. Other well-financed competitors, such as
ICAP plc, have also deployed, or announced plans to deploy, their own systems in
various markets. In practice, these systems so far have proved most viable in
markets involving very standardized products, such as Treasuries, spot foreign
exchange, commodities and U.S. equities. We believe that more complex financial
vehicles, in particular derivatives, are less amenable to fully electronic
matching, and that clients in these markets are not inclined to forego talking
to voice brokers for information and execution. However, it can be expected that
significant efforts and resources will continue to be devoted by our competitors
and others to trying to increase the number and penetration of such automated
trading platforms across all profitable brokerage markets.
The further development and successful deployment of such electronic
systems could negatively affect our market shares and ultimately have material
adverse effects on our businesses. Although we are devoting substantial
financial and other resources to ensure the success of our electronic brokerage
and technology initiatives (described above under "Communications Network and
Information and Related Systems"), our ability to execute successfully thereon
is subject to a number of uncertainties, not all of which are within our
control. These include, but are not necessarily limited to, the speed, capacity
and interfaces of systems performing acceptably under both normal and stress
conditions, the availability of sufficient funds to develop, refine and promote
further the systems, the retention of sufficient training and maintenance
resources, the desire for and acceptance of the systems by clients, both at the
trader and the information technology department levels, the internal broker
support for the systems, the timing and success of deployment of competitive
systems, and market conditions at the time of deployment.
We are inherently reliant on relationships with clients that develop
over time, and certain of our brokers have established long-term associations
with clients. Our success depends to a significant extent on these relationships
15
and the service we provide our clients. The loss of one or more of our key
employees, who are often the target of aggressive recruitment efforts by
competitors within the industry, could have a material adverse effect on us.
Moreover, the highly competitive hiring environment by itself creates upward
pressures on broker compensation that can reduce profit margins. While we have
entered into employment agreements with, and granted stock options to, many of
our key employees, there can be no assurance that such employment agreements or
stock-based compensation will be effective in retaining such persons' services
or that other key personnel will remain with us indefinitely. Nor can there be
any guarantee that we will be able to attract and retain qualified, experienced
individuals, whether to replace current personnel or as a result of expansion,
because competition in the brokerage industry for such individuals is intense.
Regulation
Our businesses are subject to extensive regulation at international,
federal and state levels by various regulatory bodies which are charged with
safeguarding the integrity of the securities and other financial markets and
protecting the interests of clients participating in those markets.
Our subsidiary, Maxcor Financial Inc. ("MFI"), formerly known as Euro
Brokers Maxcor Inc., is registered as a broker-dealer with the SEC, all
applicable states, and is a member of the National Association of Securities
Dealers, Inc. ("NASD"). Broker-dealers are subject to regulations that cover all
aspects of the securities business, including initial licensing requirements,
sales and trading practices, safekeeping of clients' funds and securities,
capital structure, record-keeping and the conduct of directors, officers and
employees. The SEC, other governmental regulatory authorities, including state
securities commissions and self-regulatory organizations, such as NASD
Regulation, Inc. ("NASDR") in the case of MFI, have broad oversight powers,
including the ability to institute administrative proceedings that can result in
censure, fine, the issuance of cease-and-desist orders, the suspension or
expulsion of a broker-dealer, its officers or employees or other similar
consequences.
At the end of 2001, MFI established a new London branch office in order
to conduct certain securities businesses that were previously being conducted in
a separate, London-based subsidiary. As a result, these operations of MFI,
although primarily overseen by NASDR, are also subject to oversight by the
London-based regulatory body, the Financial Services Authority.
MFI is also a member of the Government Securities Clearing Corporation
("GSCC") for the purpose of clearing certain U.S. Treasury and federal agency
repurchase agreements and other U.S. Treasury securities, as well as federal
agency securities. Such membership requires MFI to maintain minimum net capital
of $10,000,000, including a minimum deposit with GSCC of $5,000,000.
16
MFI is also registered with the Commodity Futures Trading Commission as
a futures commission merchant and is a member of the National Futures
Association. As such, any business activities by MFI in the futures and
options-on-futures markets would be subject to regulation by these bodies.
Our subsidiary, Maxcor Financial Asset Management Inc. ("MFAM"), is a
SEC-registered investment adviser, pursuant to its securities lending
activities. As a result, MFAM's investment advisory business is subject to
various federal and state laws and regulations that generally grant supervisory
agencies and bodies broad administrative powers, including the power to limit or
restrict MFAM from carrying on its investment advisory business in the event
that it fails to comply with such laws and regulations and/or to impose other
censures and fines.
Our businesses are also subject to extensive regulation by various
non-U.S. governments and regulatory bodies, including: (i) for EBFL in the
United Kingdom, the Financial Services Authority; (ii) in Japan, the Bank of
Japan and the Japanese Ministry of Finance, and (iii) in Mexico, the Banking and
Securities National Commission. The compliance requirements of these different
overseer bodies may include, but are not limited to, net capital or
stockholders' equity requirements.
We are also subject to SEC rules regarding the regulation of
alternative trading systems ("Regulation ATS"). Regulation ATS imposes
significant reporting and recordkeeping requirements on so-called "alternative
trading systems" and phases in certain substantive requirements, primarily
depending upon the scope of coverage and market share of the alternative trading
system. Such requirements may include maintaining transparency of certain
pricing information, providing fair and equal access to the system, and taking
necessary steps to ensure the capacity, integrity and security of the system. A
number of our brokerage businesses are subject to Regulation ATS and its
requirements.
Additional legislation and regulations, changes in rules promulgated by
the SEC or other U.S. federal and state governmental regulatory authorities,
self-regulatory organizations or clearing organizations, as well as non-U.S.
governments or governmental regulatory agencies, or changes in the
interpretation or enforcement of laws and rules, may directly affect our manner
of operation and profitability. In addition, any expansion of our activities
into new areas may subject us to additional regulatory requirements that could
similarly affect such operation and profitability.
17
Cautionary Statements
As provided under the Private Securities Litigation Reform Act of 1995,
we wish to caution investors that the following factors, among others (including
the factors discussed above under the "September 11th Terrorist Attacks,"
"Revenues and Expenses," "Competition" and "Regulation" headings, and the
factors discussed below under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A, "Quantitative and
Qualitative Disclosures about Market Risk"), could affect our results of
operations and cause such results to differ materially from those anticipated in
forward-looking statements made in this report and elsewhere by us or on our
behalf to the public. Please also refer to "Forward-Looking Statements" below,
at page 41.
Adverse changes in economic and market conditions after the September 11th
terrorist attacks could negatively impact our business.
Our brokerage businesses and profitability are affected by many
factors, including the volatility of the securities markets, the volume, size
and timing of securities transactions, the level and volatility of interest
rates, legislation affecting the business and financial communities, and the
economy in general. Particularly in the aftermath of the September 11th
terrorist attacks, there is an increased uncertainty in the performance of the
financial markets and the economy as a whole, as well as specifically in the New
York financial community. Any additional terrorist acts, and governments'
military and economic responses to them, could further affect the financial
markets and the economy, and exacerbate anxieties. To the extent we experience
lower trading volumes in the instruments we broker as a result, we are likely to
have reduced revenues, which would generally negatively impact our profitability
because a portion of our costs is fixed.
Unanticipated system or technology failures could negatively impact our business
or financial results.
To remain competitive in our industry, we continuously need to expend
significant resources on the maintenance, expansion and enhancement of our
communication networks, information systems and other technology, and our
business is highly reliant on these systems. It is an ongoing risk that the
systems we currently have or in the future implement, or the software underlying
these systems, will fail in some fashion or be inadequate to the task. During
the Asian and Latin American debt crisis that occurred in late October 1997, our
then-existing trade processing system for emerging market debt was unable to
handle smoothly the extraordinary spike in trading volume that occurred for a
sustained five-day trading period. As a result, we experienced significant
delays and backlogs in the processing and settlement of such trades and a higher
than usual incidence of disputed trades, all of which negatively impacted 1997
fourth quarter earnings. Although we believe that a subsequent significant
upgrade to our trade processing systems, together with periodic stress-testing
and monitoring, has reduced the likelihood of a similar recurrence, there can be
no assurance that there will not be other, unanticipated system or technology
failures that could negatively impact our business or financial results.
18
Moreover, our temporary status at our current New York headquarters limits our
ability to rebuild our infrastructure and install and test our technology
solutions to the degree that we will be able to do so once we have relocated to
permanent headquarters, which, in turn, currently may make us more susceptible
to the possibility of such failures.
An increase in the occurrence of "out trades" could have a material adverse
effect on our financial condition or results.
Our core inter-dealer brokerage business primarily involves one or more
of our subsidiaries acting as an intermediary, matching the trading needs of our
predominantly institutional client base by providing specialized services. Some
of these transactions are executed on a name give-up basis, that is, once the
specific economic terms of a proposed transaction are agreed, the names of the
individual counterparties are disclosed and, subject to acceptance of the
credit, the transaction is completed directly by both counterparties. Other
transactions are completed with our broker-dealer subsidiary acting as a matched
riskless principal, with the respective parties to the transaction knowing the
subsidiary as the counterparty. The transactions are then settled through one of
the clearing firms or organizations with which the subsidiary has a contractual
relationship. In the process of executing brokerage transactions, from time to
time in the fast moving markets in which our subsidiaries and brokers operate,
miscommunications or other errors can arise whereby transactions are completed
with only one counterparty ("out trades"), thereby creating a potential
liability for our subsidiary. If the out trade is promptly discovered, thereby
allowing prompt disposition of the unmatched position at or around the same
price, the risk to our subsidiary is usually limited. If discovery is delayed,
the risk is heightened by the increased possibility of intervening market price
movements prior to such disposition. Although out trades usually become known at
the time of or later on the day of the trade, on occasion they are not
discovered until later in the settlement process. When out trades occur and are
discovered, our policy is to have the unmatched position disposed of promptly.
Accordingly, the cost of individual out trades can vary widely, although on an
aggregate basis in each of our last three fiscal years they have approximated
only 1% of total commission income. The occurrence of out trades generally rises
with increases in the volatility of the market and, depending on their number
and amount, have the potential to have a material adverse effect on our
financial condition or results of operations.
If any of our clearing agents terminate our contracts with them, our business
could suffer.
Our broker-dealer subsidiary, Maxcor Financial Inc., has contractual
arrangements with a variety of clearing firms and organizations for purposes of
clearing and settling the various securities transactions it brokers. Each
clearing firm or organization typically handles only a single category of
securities for MFI. Thus, one firm clears its emerging market debt transactions,
another clears its municipal securities and corporate bond transactions and
another two collectively clear different aspects of its U.S. Treasury repurchase
agreement and federal agency bond transactions. Without the capital resources
and services of these firms, which typically step in and clear as
19
fully-disclosed principal in substitution for MFI, MFI's business, and our
financial results, could be materially adversely impacted. Although most of the
clearing contractual arrangements have existed for some time, they are generally
terminable by the clearing firm upon reasonably short notice. We believe that in
each category of securities there are alternative clearing firms or arrangements
that could be put into place, but not necessarily with immediate effect or upon
as favorable terms. Accordingly, if any of our existing clearing agreements were
to be terminated, and we were unable to establish in timely fashion a new
clearing arrangement with another clearing firm or organization on financial and
other terms acceptable to MFI, we might suffer an interruption in or not be able
to continue brokering the particular product that was the subject of the
terminated clearing arrangement, and we could suffer a material adverse effect
on our results of operations and financial condition.
The securities settlement process exposes MFI to credit and other risks that can
negatively impact our business and profitability.
The securities settlement process for matched riskless principal trades
brokered by MFI exposes MFI to various risks that individually or in combination
could have a negative impact on its business, profitability and results of
operations. Credit risk exists because there is always the possibility that a
counterparty that was solvent or believed to be solvent on trade date has become
insolvent and incapable of performing by the time of settlement. This risk is
mitigated in part, but not fully, by short settlement cycles, the predominantly
institutional nature of MFI's client base, and the fact that some (but not all)
of MFI's clearing agreements provide for the relevant clearing firm or
organization to assume all counterparty risk, including credit risk, once the
parties to and the terms of the trade have been confirmed on trade date by the
clearing firm or matched through its related settlement facilities. Financing
risk exists because if the trade does not settle timely, either because it is
not matched immediately or, even if matched, one party fails to deliver the cash
or securities it is obligated to, the resulting unbalanced position may need to
be financed, either directly by MFI or through one of its clearing firms at
MFI's expense. These charges may be recoverable by claiming interest from the
failing counterparty, but sometimes are not. Finally, in instances where the
unmatched position or failure to deliver is prolonged, there may also be
regulatory capital charges required to be taken by MFI, which depending on their
size and duration, can limit MFI's business flexibility or even force the
curtailment of those portions of MFI's business requiring higher levels of
capital.
Events that negatively impact our overseas business partners may negatively
affect our operations.
Many of our overseas brokerage operations are conducted in conjunction
with independent business partners, such as Finacor in London, Nittan Capital
Group in Tokyo and a correspondent broker, Delsur, in Buenos Aires. Some of our
partners compete with us in other products, and their business interests may not
always coincide with ours. Although such brokerage operations are generally
subject to detailed governing documents, any event which negatively affects the
20
financial condition or management of any of our partners, or their willingness
otherwise to conduct such brokerage operations in conjunction with us (or vice
versa), may have a negative impact on our operations.
We may be subject to litigation and arbitration, which could limit our
profitability.
Many aspects of our businesses involve varying risks of liability. Over
the years, participants in the inter-dealer brokerage industry have been parties
to or otherwise involved in numerous litigations, arbitrations, claims and
investigations, including employee claims alleging discrimination or defamation
in connection with terminations, client claims alleging the occurrence of out
trades or other errors in the handling of trade orders, clearing firm claims for
financing charges or other liabilities associated with out trades or settlement
problems, and competitor claims alleging theft of trade secrets, unfair
competition or tortious interference in connection with new employee or desk
hires or intellectual property infringement in connection with new product
launches. To the extent we become subject to any such claims or actions that are
significant, a settlement or judgment related thereto could have a material
adverse effect on our financial condition or results of operations.
We have market risk exposure from inventory positions held in our municipal
securities business.
We allocate a small portion of our available capital to MFI's municipal
securities brokerage operations to support limited inventory positions in
municipal securities. The positions are generally intended to be held short term
and for the purpose of facilitating anticipated client needs. They are also
generally financed on margin of up to 85% provided by MFI's clearing firm for
municipal securities. As a result, we have market risk exposure on these
securities, varying based on the size of the overall positions, the terms of the
securities themselves, and the number of days the positions are held. The
aggregate market value of such positions is recorded on the "securities owned,
held at clearing firm" line of our balance sheet. Although such positions are
marked to market and carefully monitored on a daily basis, with associated
interest rate risks sometimes hedged by financial futures contracts, resulting
trading gains and losses from such positions can on occasion have a
disproportionate effect, positive or negative, on our results of operations for
any particular reporting period. In addition, from time to time we hold small
amounts of various securities in the firm's investment account, which can create
similar risk exposures and effects.
Our future revenues from the sale of financial information and other data are
likely to decline.
In 1999, our information subsidiary, Maxcor Information Inc., signed a
three year non-exclusive agreement with Telerate, Inc. for the sale to Telerate
subscribers of an indicative feed based on information sourced from our emerging
market debt inter-dealer brokerage business. Telerate's bankruptcy filing in
early 2001 and subsequent sale of many of its assets to Reuters America Inc. and
Moneyline Network Inc. has effectively terminated this agreement, under which we
21
received $1.3 million in 1999, $2.0 million in 2000 and $1.6 million in 2001.
Although we currently are in negotiations to replace this agreement with an
agreement to provide similar financial data to another vendor, we are aware that
the financial terms of a new agreement, if completed, will provide for
significantly lower overall payments. More generally, we believe that the
opportunity for inter-dealer brokers to profit from the third-party sale of the
pricing information and other data generated by their businesses has diminished
in recent years as the number of information vendors, and their willingness to
pay guaranteed amounts for such data, has decreased. Accordingly, we expect our
2002 revenues from the sale of financial information to decline by a material
amount, which, in turn, could have a negative impact on our profitability.
The lack of diversification in our business could negatively affect our
financial condition or results of operations.
From a revenue perspective, our inter-dealer brokerage businesses
account for substantially all of our revenues denoted as "commission income" in
our consolidated statements of operations. Accordingly, the prospects for our
performance and the market prices for our common stock are highly dependent upon
the performance of the inter-dealer brokerage businesses. Although we are
continuously seeking to strengthen and improve the inter-dealer brokerage
businesses, we are also constantly exploring various options for diversifying
our businesses and sources of revenue and for strengthening our capital base.
There can be no assurances, however, that we will be successful in achieving
these goals or others related to diversification or, if achieved, whether they
will positively or negatively affect our financial condition or results of
operations.
22
ITEM 2. PROPERTIES
We have offices in each of the following locations: New York, New York;
London, England; Tokyo, Japan; Stamford, Connecticut; Nyon, Switzerland (with a
registered office in Geneva); York, Pennsylvania; and Mexico City, Mexico. We
lease all of our office space and have material lease obligations with respect
to our London premises. In New York, we currently occupy an aggregate of
approximately 36,000 square feet of space in a temporary facility provided by
Prudential Securities, the parent company of one of our clearing firms, on the
16th floor at One New York Plaza in lower Manhattan. We are using this space
while we complete our search for and build-out of permanent U.S. headquarters in
the aftermath of the September 11th destruction of our prior U.S. headquarters
on the 84th floor at 2 World Trade Center. In London, we occupy approximately
36,000 square feet of space in London's financial center, The City, under a
lease expiring in 2018 (with a lease break provision in 2003). In September
1998, we subleased approximately one-third of our London premises to a co-tenant
in the building, for a term expiring at the end of 2002.
Although our current temporary facilities in New York do not possess
the optimal infrastructure for our businesses, we believe that under the
circumstances, these facilities are sufficient until a build-out of a permanent
U.S. headquarters is completed, which is anticipated for late 2002. We believe
that all of our other facilities are suitable and adequate for their present and
anticipated purposes. See Note 20 to the Consolidated Financial Statements for
further information regarding future minimum rental commitments under our
existing leases.
ITEM 3. LEGAL PROCEEDINGS
Our businesses are subject to various legal proceedings, arbitrations
and claims that generally arise in the ordinary course. Although the results of
such matters cannot be predicted with certainty, based on available information
and advice of counsel, management believes that resolving any currently known
matters, after taking into account reserves already established, will not have a
material adverse impact on our consolidated financial condition (although they
may be material to our results of operations for any particular period). For
additional discussion of certain pending matters and reserve levels, see Note 21
to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2001.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock currently trades on The Nasdaq Stock Market(R) under
the symbol "MAXF."
The following table sets forth the range of high and low sales prices
for our common stock, as reported by The Nasdaq Stock Market(R), for our last
two fiscal years.
Common Stock: High Low
---------- ----------
Year Ended December 31, 2001
----------------------------
First Quarter .......................... $ 2.063 $ 0.906
Second Quarter ......................... 3.030 1.750
Third Quarter .......................... 4.740 2.380
Fourth Quarter ......................... 5.880 2.650
Year Ended December 31, 2000
----------------------------
First Quarter .......................... $ 3.000 $ 2.000
Second Quarter ......................... 2.500 1.469
Third Quarter .......................... 2.375 1.250
Fourth Quarter ......................... 2.000 0.813
As of March 26, 2002 there were 51 holders of record of our common
stock. We are aware that certain holders of record hold a substantial number of
shares of common stock as nominees for a significant number of beneficial
owners. Based on a preliminary broker-dealer inquiry made by our transfer agent
in March 2002, we believe there are approximately 1300 beneficial owners of our
common stock.
We have never declared any cash dividends on our common stock, nor do
we currently anticipate declaring any cash dividends in the foreseeable future.
However, as described above in Item 1 of this report, under the caption "Capital
Structure History," we have over the past two years repurchased significant
amounts of our common stock, both in privately-negotiated transactions and
through an open market repurchase program.
24
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," each included elsewhere in this report. Statement of Operations
data presented below includes reclassifications of certain revenue and expense
items which are not directly associated with operations. Such reclassifications
include interest income, interest expenses, amortization of intangible assets
(including goodwill), foreign exchange effects and other non-operating items. We
have restated the presentation of the Statement of Operations data presented
below for each of the four years in the period ended December 31, 2000 to
deconsolidate the revenues and expenses associated with the operations of the
Tokyo Venture. This change in presentation has had and will have no effect on
our earnings, cash flows or stockholders' equity for any prior or future period.
For additional discussion, see Note 26 to the Consolidated Financial Statements.
25
Year Ended December 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
(Restated) (Restated) (Restated) (Restated)
Statement of Operations
Commission Income $ 143,207,877 $ 123,747,559 $ 132,892,282 $ 126,120,712 $ 140,602,080
Insurance recoveries 4,498,144
Trading gains on securities
transactions 3,728,069 1,493,264 1,215,233 954,249 696,004
Other income (1) 922,741 2,527,483 1,600,990 3,283,403 3,533,966
------------- ------------- ------------- ------------- -------------
152,356,831 127,768,306 135,708,505 130,358,364 144,832,050
------------- ------------- ------------- ------------- -------------
Operating costs:
Payroll and related costs 106,619,297 92,061,672 93,392,948 87,511,455 94,952,440
Communication costs 10,465,852 11,643,857 13,613,656 13,258,756 14,610,663
Travel and entertainment 6,493,462 6,620,974 6,797,740 7,763,109 9,323,274
Occupancy costs 4,404,994 4,406,215 5,061,370 5,776,416 5,746,131
Depreciation and amortization 2,962,582 3,501,373 3,955,500 4,594,622 4,908,979
Clearing fees 3,511,712 3,307,802 3,005,785 4,588,170 6,165,264
General and administrative 5,784,107 4,769,444 5,516,349 5,140,885 6,991,695
------------- ------------- ------------- ------------- -------------
140,242,006 126,311,337 131,343,348 128,633,413 142,698,446
------------- ------------- ------------- ------------- -------------
Operating profit 12,114,825 1,456,969 4,365,157 1,724,951 2,133,604
------------- ------------- ------------- ------------- -------------
Other (expenses) income:
Interest expense (666,387) (594,957) (833,935) (1,079,147) (840,584)
Amortization of intangible assets (635,998) (507,564) (410,004) (410,004) (410,004)
Non-operating expenses (1,050,472) (477,000) (1,141,356)
Non-operating income 1,638,506 2,235,511 527,018 494,082
Restructuring costs (541,961) (321,000)
Costs related to World Trade Center
attack (1,590,060)
Income (loss) from equity affiliates 9,992 135,890 (1,576,644) (19,925) 191,771
Interest income 2,306,044 1,823,285 1,879,500 1,737,403 1,709,968
Foreign exchange (loss) gain (229,390) (21,579) (282,536) (164,860) 137,926
------------- ------------- ------------- ------------- -------------
(217,765) 2,051,625 (1,017,601) (1,077,889) 1,283,159
------------- ------------- ------------- ------------- -------------
Income before provision for income
taxes and minority interest 11,897,060 3,508,594 3,347,556 647,062 3,416,763
Provision for income taxes 2,174,673 2,710,482 545,216 1,922,212 3,685,755
------------- ------------- ------------- ------------- -------------
Income (loss) before minority interest 9,722,387 798,112 2,802,340 (1,275,150) (268,992)
Minority interest (683,985) 1,203,987 (270,128)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 9,038,402 $ 2,002,099 $ 2,532,212 ($ 1,275,150) ($ 268,992)
============= ============= ============= ============= =============
Year Ended December 31,
-----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
Total assets $ 281,101,197 $ 71,799,793 $ 72,467,958 $ 75,269,665 $ 86,531,513
Obligations under capitalized
leases 204,252 335,635 493,367 751,747 974,186
Notes payable 447,978 1,723,169 1,799,870 3,824,842 6,261,839
Loan payable 674,282
Total liabilities 242,805,003 38,151,244 38,162,466 43,476,151 54,928,268
Minority interest 3,979,291 3,407,628 4,885,896
Redeemable preferred stock 2,000,000 2,000,000 2,000,000
Stockholders' equity 34,316,903 28,240,921 27,419,596 29,793,514 31,603,245
Per Share Information
Net income (loss) - basic $1.23 $ .23 $ .26 $(.11) $(.03)
Net income (loss) - diluted 1.16 .23 .25 (.11) (.03)
Book value 4.88 3.48 3.29 2.63 2.79
Weighted average common shares
outstanding - basic 7,357,017 8,374,166 9,711,974 11,327,741 9,243,201
Weighted average common shares
outstanding - diluted 7,764,667 8,374,166 9,846,257 11,327,741 9,243,201
(1) Includes non-equity earnings (loss) from contractual arrangement (Tokyo
Venture) and information sales revenue (since 1999).
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As more fully described in Note 26 to the Consolidated Financial
Statements, we have restated the presentation of our consolidated statements of
operations for each of the two years in the period ended December 31, 2000, in
order to deconsolidate the revenues and expenses associated with the operations
of the Tokyo Venture. This change in presentation has had and will have no
effect on our earnings, cash flows or stockholders' equity for any prior or
future period. The following discussion gives effect to the restatement.
Year Ended December 31, 2001
We will long remember the year ended December 31, 2001. It was a year
in which we made significant strides in improving our profitability and
financial strength; but it was also a year in which the September 11th attacks
on the World Trade Center killed 61 of our valued employees and staff, as well
as many of our friends working elsewhere in the buildings. The attacks also
completely destroyed our headquarters on the 84th floor of 2 World Trade Center,
together with all of our property and technological infrastructure located on
site.
Our lost personnel and friends will forever be in our memory. Their
loss, together with the destruction of the twin towers, was a devastating blow
to our business in New York. But through the incredible dedication and effort of
our employees, and with remarkable help and support from our clients, vendors
and friends, we were able to begin relocating to temporary facilities in lower
Manhattan barely a week after the attacks and have since re-established a
working infrastructure, hired new employees and resumed substantially all of our
pre-September 11th New York-based operations. Generally, most of our restored
operations are now functioning and producing at levels comparable to how they
performed prior to the attacks, although a perfect comparison is elusive because
of infrastructure limitations at our temporary facilities and different staffing
levels and market conditions pre and post-September 11th.
Our business insurance policies, which are underwritten by Kemper
Insurance Companies, include property casualty coverage with an aggregate limit
of approximately $14 million, which provides us with the full cost of
replacement assets, and business interruption coverage with a separate aggregate
limit of approximately $21 million, which provides for recovery of lost revenues
(net of saved expenses) and additional expenditures incurred to restore
operations or minimize the period and total cost of disruption to operations.
Since September 11th, we have received $15 million in cash advances under these
policies. Although uncertainties remain, we believe that these coverages will
adequately fund our physical rebuilding efforts and compensate us for lost
income during the period prior to our full restoration of operations in a
permanent location. Currently, we expect to choose a permanent location and
relocate there by late 2002.
27
The seeds for a financially successful 2001, in which we reported
record earnings for each of our first two quarters and, for the full year, over
$9 million, or $1.16 per share, in net income on revenue growth of 17%, were
planted by a number of management initiatives undertaken in 2000. These
initiatives included solidifying or improving our market position in various of
our existing products, such as U.S. Treasury repurchase agreements and U.S.
dollar derivatives, through strategic hires of new brokers, reducing or
eliminating unprofitable brokerage desks, such as energy-related derivatives,
closing our under-performing offices in Toronto and Paris, and preparing for the
expansion of our brokerage products to include federal agency bonds.
Much of 2001 saw strong levels of trading activity in the fixed income
and derivatives markets in which we are active. With new hires helping to
maintain or increase our market shares, we were able to benefit from this
increased activity and generate improved performance across most of our
brokerage desks in New York. In particular, revenues in certificates of
deposits, interest rate swaps, interest rate options, municipal securities and
U.S. Treasury repurchase agreements all increased significantly as compared with
2000, notwithstanding the disruptions from the September 11th attacks, and cash
deposits revenues were on track to do so prior to September 11th. Emerging
market debt revenues also improved on a year-to-year basis, although trading
volumes slowed in the fourth quarter following Argentina's currency devaluation.
London also realized significant improvement in its performance over
the previous year, reflecting increased revenues on most of its brokerage desks,
including U.S. dollar swaps, euro currency swaps, interest rate options and
emerging market debt, and success in controlling and reducing its operating
costs. London's performance also benefited from the closure of its loss-making
Paris branch at the end 2000.
In Tokyo, the derivatives market activity suffered from Japan's
continued economic malaise and low interest rate environment. In addition,
consolidation in the Japanese banking system has resulted in significantly fewer
market participants. As a result, the Tokyo Venture continues to perform below
our expectations. However, Tokyo remains an important financial center, and we
think our 2001 second quarter restructuring of the venture's operations has
re-positioned it for future growth.
The restructuring consisted of us selling our minority interest in Yagi
Euro to its other shareholder for approximately $2 million, applying the
proceeds to redeem the $2 million in principal amount of our preferred stock
held by Yagi Euro, and reconstituting the Tokyo Venture with Nittan Capital as
the operator and ourselves as a 57.25% partner having management control. The
overall transaction permitted us to strengthen our relationship with Nittan
Capital, which has a strong financial presence throughout Asia, while also
simplifying our capital structure and recognizing a significant one-time second
quarter after-tax gain of almost $400,000.
28
We commenced our brokerage of federal agency bonds in February 2001,
after having successfully hired a team of experienced brokers to staff the new
department. With the reduction in issuances of U.S. Treasury bonds, federal
agency bonds have grown in popularity as a benchmark and hedging tool. The
product also complements several of our other products, such as interest rate
derivatives, repurchase agreements and cash deposits. The new department
performed well from the outset and has been a significant contributor to our
2001 financial performance.
In late 2001 we began brokering credit derivatives in the form of
default swaps. Although this effort is still in a building phase, we are
encouraged by initial results and believe the desk is likely to provide a
positive contribution to our results.
We also recognized a significant increase during 2001 in the amount of
trading gains from our municipal securities brokerage business, reflecting,
among other things, strong research efforts and the benefits of a declining
interest rate environment. We also saw gains on securities positions held and
traded in our firm investment account.
Revenues from information sales of $1.6 million in 2001 were down
slightly from revenues of $2.0 million in 2000, reflecting the bankruptcy filing
of Telerate, Inc. during the first quarter of 2001, which effectively terminated
our information distribution agreement with them pursuant to which we provided
an indicative feed of prices derived from our emerging market debt brokerage
data. As a result, we expect our 2002 revenues from the sale of financial
information to decline significantly, although we are attempting to replace a
portion of this revenue stream through a sale of similar and other data to
alternative vendors.
In addition to the redemption in 2001 of our sole series of outstanding
preferred stock for approximately $2 million, we also continued and expanded our
common stock repurchase program. In total, we purchased 1,244,011 shares of our
common stock in 2001, at an average cost of $2.42 per share. These repurchases
followed purchases of 591,602 shares in 2000, at an average cost of $1.51 per
share, and a negotiated purchase of 2,986,345 shares in 1999, at an average cost
of $1.75 per share. Management recommended, and our Board authorized, these
repurchases in the belief that our common stock, at the market values that have
prevailed over the last several years, represented an attractive long-term
investment for us that would increase value for our remaining stockholders. We
also viewed our repurchases as an intelligent way to manage potential dilution
from stock option exercises or other stock issuances. As a result of our 2001
earnings and share repurchases, our book value per share at December 31, 2001
was $4.88, a 40% increase from our book value per share of $3.48 at December 31,
2000.
Currently, we have remaining repurchase authorization for up to 986,000
shares of common stock. This authorization stems from July 2001, when our Board
authorized the repurchase of up to an additional 709,082 shares (representing
10% of the shares of common stock then outstanding). Following the events of
September 11th, our Board expanded this authorization by an additional 490,918
shares in order to bring the total authorization up to 1,200,000 shares. At year
29
end 2001, and as of the date of this report, we had purchased 214,000 shares
under this expanded authorization. As has been the case with each of our
repurchase program authorizations, all purchases of shares are subject to the
availability of shares at prices which are acceptable to us, as well as to our
assessment of prevailing market and business conditions, and, accordingly, there
is no guarantee as to the timing or number of shares to be repurchased.
We also used our strong cash flow from operations in 2001 to continue
to pay down our already low level of debt, ending the year with notes and loans
payable at a historically low level of $450,000, down from $1.7 million at 2000
year end and $2.5 million at 1999 year end.
In 2001 we continued our efforts to integrate advanced technology and
sophisticated software systems and resources into our provision of brokerage
services, with the goals of providing the best tools to our brokers, better
managing execution and settlement risks, and giving the highest level of service
to our clients. Initiatives in this area included utilizing Tradesoft's
technology and software to automate the broker interface on our new federal
agencies desk. Tradesoft also created a paperless ticket system for our cash
deposits desk that generates automatic e-mail and fax trade confirmations to our
clients and provides direct electronic transmission of the trade data to our
back office.
We believe that, in the products we broker, the best use of the
Tradesoft(R) system is as an adjunct to our voice brokers. Our experience from
our initial deployment of the Tradesoft(R) system for Brady bonds in 2000, which
has since been suspended, as well as the experience of many of our competitors,
suggests that the effort to migrate all voice brokered products to fully
electronic execution platforms has slowed, as garnering sufficient liquidity in
many products has proved elusive. Our goal now is to capture the best of both
worlds, capitalizing on the efficiency and speed of electronic brokering
features, such as automated order entry, price and information distribution and
straight through processing, while preserving the flexibility and unique
services of the human broker. We believe that this hybrid approach will offer us
the best opportunity to grow revenues by allowing us to reach and service a
wider client base more efficiently, both without cannibalizing our existing
liquidity and while maintaining the high level of service and quality of
execution that is our hallmark.
In recognition that, for our products, the business climate and
receptivity to fully automated electronic brokerage platforms has changed, we
wrote off at the end of the year approximately $1.1 million, on an after-tax
basis, in goodwill, other intangibles and certain other assets associated with
our August 2000 acquisition of Tradesoft.
A discussion of technology would be incomplete without recounting its
critical role in our recovery from September 11th. As part of our contingency
planning, learned both from our preparation for Y2K and our experiences from the
1993 World Trade Center bombing, we regularly backed up offsite all of our
important financial and computer records, including our daily brokerage
activity, as well as maintained offsite copies of our proprietary operating
30
software. These precautionary measures were essential to our ability to
re-establish our operations quickly once Prudential Securities, the parent
company of one of our clearing firms, offered us space in their building in
lower Manhattan the weekend after the attacks.
Our employees were remarkable in this effort. Notwithstanding the
terrible trauma they had experienced, and even while attending numerous funerals
and memorial services stretching over several months, they rallied together to
rebuild our New York operations. With incredible support from our clients,
vendors and friends, as well as help from our London office, we recommenced
operations barely a week after the attacks. Initially, we had only 50 outside
telephone lines for the entire New York operations, which had previously
operated with approximately 1,200 direct phone lines. Each day our
infrastructure improved, and gradually more and more employees came back to
work. By the end of September, our New York offices had been rebuilt
sufficiently to once again begin to resemble a trading room. There were trading
turrets at most positions with flat panel screens and Bloomberg terminals. We
gradually received more outside phone lines and within a short time began to
reorder direct lines into our clients. Our key brokerage desks, all of which had
been restored, at least preliminarily, by mid-October, made new hires and all of
our employees continued working extraordinarily hard.
As a result, October 2001 operating revenues for New York were
approximately 81% of their average monthly level for the first eight months of
2001. Compared to the same eight month average, November 2001 operating revenues
were at an approximately 87% level and December 2001 operating revenues were at
an approximately 77% level. Preliminary results indicate that January 2002
operating revenues for New York were at approximately 103% of this eight month
average, with February 2002 operating revenues at an approximately 80% level.
We believe these results also reflect strong levels of market activity
during October, November and January in the markets in which our inter-dealer
brokerage businesses operate, offset by the fact that our rebuilding efforts are
not yet complete (and are not expected to be prior to our relocation to
permanent headquarters). The slight decline in revenues in December and February
is consistent with historical patterns of lower market activity and fewer
trading days in these months (for example, December 2000 revenues in New York
were approximately 86% of their average monthly level for the first eleven
months of 2000; February 2001 revenues in New York were approximately 87% of
their monthly average for the first eight months of 2001).
Nothing will ever diminish the sadness, anger and loss we feel from the
senseless murder of 61 of our colleagues. But we take great pride in our
decision to honor them and help support their families by continuing and not
abandoning our business, and in being able to report that, even as we continue
with our rebuilding, our New York operations have regained market share and are
performing well.
31
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Commission income for 2001 increased $19,460,318 to $143,207,877,
compared to $123,747,559 for 2000, due to increased brokerage in New York and
London. In New York, the increase principally reflected brokerage from our newly
hired federal agency bonds brokerage team and increased brokerage of municipal
bonds and interest rate derivatives, offset in part by a significant reduction
in brokerage from the disruption to operations caused by the September 11th
attack. In London, the increase resulted primarily from improved brokerage on
interest rate derivatives and emerging market debt securities, offset in part by
the currency effects of translating weakened British pound sterling amounts to
U.S dollars.
Insurance recoveries of $4,498,144 for 2001 represents the portion of
our lost revenues (net of saved expenses) through September 30, 2001 recoverable
under our business interruption and extra expense policy for which we believe
there are no contingencies that would have a material impact. Additional amounts
for lost revenues (net of saved expenses) through December 31, 2001 are expected
to be recorded in future periods as the contingencies relating to such amounts
are resolved.
Trading gains on securities transactions increased $2,234,805 to
$3,728,069 for 2001, compared to $1,493,264 for 2000, due to an increase in
trading gains on municipal securities transactions and gains generated in our
firm investment account.
Interest income for 2001 increased $482,759 to $2,306,044, compared to
$1,823,285 for 2000, primarily reflecting an increase in the average inventory
of municipal securities held.
Other income for 2001 decreased $3,657,984 to $1,083,431, compared to
$4,741,415 for 2000, primarily due to a gain of approximately $2.2 million
recognized in 2000 related to the partial sale of our interest in the Tokyo
Venture, a loss of approximately $694,000 on our interest in the Tokyo Venture
in 2001 compared to earnings of approximately $525,000 in 2000, revenue of
approximately $1.6 million in 2001 compared to approximately $2.0 million in
2000 from the sale of brokerage information licensing agreement with Telerate
(reflecting the 2001 bankruptcy of Telerate), and an increase in foreign
exchange losses. These decreases were offset in part by an approximate $390,000
gain recognized during 2001 on the sale of our 15% equity interest in Yagi Euro.
Compensation and related costs increased $14,557,625 to $106,619,297
for 2001, compared to $92,061,672 for 2000. This increase was primarily the
result of increased employment costs in New York, primarily reflective of
increased revenue levels. Partially offsetting this increase was decreased
employment costs in London reflecting the net effect of cost reduction efforts,
the currency effects of translating weakened British pound sterling amounts to
U.S. dollars and improved brokerage. As a percentage of operating revenues
(commission income, trading gains and information sales revenue) and insurance
recoveries combined, compensation and related costs decreased to 70% for 2001,
as compared to 72% for 2000.
32
Communication costs for 2001 decreased $1,178,005 to $10,465,852,
compared to $11,643,857 for 2000, primarily reflective of cost reduction efforts
in London, the currency effects of translating weakened British pound sterling
amounts to U.S. dollars and decreased costs in New York resulting from the
destruction of our New York headquarters on September 11th.
Travel and entertainment costs for 2001 decreased $127,512 to
$6,493,462, compared to $6,620,974 for 2000. As a percentage of operating
revenues, travel and entertainment costs decreased to 4.4% for 2001, compared to
5.2% for 2000.
Depreciation and amortization expense consists principally of
depreciation of communication and computer equipment and leased automobiles and
amortization of leasehold improvements, software, goodwill and other intangible
assets. In 2001, these costs decreased $410,357 to $3,598,580, compared to
$4,008,937 for 2000, primarily as a result of a reduction in depreciable fixed
assets in London and the discontinuance of depreciation in New York on assets
destroyed in the September 11th attack. These decreases were offset in part by
an increase in the amortization of software, goodwill and other intangible
assets obtained in the August 2000 acquisition of Tradesoft.
Clearing fees are fees for transactions settlements and credit
enhancements, which generally are charged by our clearing firms in transactions
where we act as a riskless principal on a fully matched basis. In 2001, these
expenses increased $203,910 to $3,511,712, compared to $3,307,802 for 2000,
primarily as a result of an increase in cleared emerging market debt
transactions.
Occupancy costs represent expenses incurred in connection with various
operating leases for our various office premises and include base rent and
related escalations, maintenance, electricity and real estate taxes. In 2001,
these costs decreased $1,249,647 to $3,156,568, compared to $4,406,215 for 2000,
primarily as a result of a decrease in occupancy accruals associated with the
World Trade Center lease. $411,000 of this decrease resulted from the decision
prior to September 11th to let an early termination option expire, instead of
exercising the option and paying a lease break cost. $837,000 of this decrease
reflects the post-September 11th elimination of an accrual established in order
to straight-line the average rent costs over the life of the lease.
In 2001, we recorded $1,590,060 of costs as a direct result of the
September 11th attack on the World Trade Center, reflecting gross expenses
incurred of $2,187,281 reduced by the portion of these expenses, $597,221, we
currently believe is probable of recovery and reasonably estimable. These costs
include the use of outside professionals, recruitment fees, interest on failed
securities settlements, meals and lodging for employees during the rebuilding
process, additional compensation for existing employees for their extraordinary
efforts in rebuilding our business, and benefits for deceased employees.
33
Interest expense for 2001 increased $71,430 to $666,387, compared to
$594,957 for 2000, primarily due to an increase in average margin borrowings to
finance municipal securities positions, offset in part by a decrease associated
with a lesser amount of debt (loan, notes and capitalized lease obligations
payable) outstanding.
General, administrative and other expenses include such expenses as
corporate insurance, office supplies and expenses, professional fees, food costs
and dues to various industry associations. In 2001, these costs increased
$1,588,135 to $6,834,579, compared to $5,246,444 for 2000, primarily as a result
of the write-off of goodwill, identifiable intangibles and certain other assets
obtained in the Tradesoft acquisition approximating $1.1 million, and increases
in consumption taxes in Europe, rental expense for leased equipment and other
general, administrative and other expenses. These increases were offset by a
one-time charge of $477,000 in 2000 attributable to Tradesoft's in-process
research and development initiatives ongoing at the date of acquisition.
Income (loss) from equity affiliate represents our 15% share of the
profits and losses of Yagi Euro. For 2001, we recognized income from this
investment of $9,992 as compared to income of $135,890 in 2000. The decrease in
this amount primarily represents our approximate $86,000 share of a one-time
gain realized by Yagi Euro in 2000 relating to its restructuring activities and
the fact that this investment was sold on June 30, 2001.
Provision for income taxes for 2001 decreased $535,809 to $2,174,673,
compared to $2,710,482 for 2000. This decrease occurred, despite a significant
increase in income before provision for taxes and minority interest, primarily
because of an approximately $3 million adjustment during 2001 to reduce income
tax reserves as a result of obtaining a favorable resolution to certain
contingencies, but also because of tax planning strategies applied to gains we
earned on the sale of Yagi Euro and other investments.
For 2001, minority interest in consolidated subsidiaries resulted in a
reduction of net income from such subsidiaries of $683,985, as compared to a
reduction of net losses from such subsidiaries of $1,203,987 for 2000, primarily
reflecting the improved profitability of EBFL.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Commission income for 2000 decreased $9,144,723 to $123,747,559,
compared to $132,892,282 for 1999. The decrease resulted primarily from the
combined effect of decreased brokerage in London and Switzerland, offset in part
by the combined effect of increased brokerage in New York and Mexico. The
reduction in London primarily resulted from decreased brokerage of interest rate
derivatives and the currency effect of translating weakened British pound
sterling amounts to U.S. dollars, offset in part by increased brokerage of
emerging market debt securities. The decline in Switzerland was primarily the
result of a reduction in brokerage staff and the transfer of some customer
relationships to the London office. In New York, the increase reflected the net
34
effects of an increase in brokerage of repurchase agreements as a result of the
hiring of a new brokerage team during the fourth quarter of 1999, an increase in
brokerage of interest rate derivative products, a decrease in brokerage relating
to the discontinuance of certain operations in late 1999 and 2000, including
parts of our energy-related derivatives operations, and a decrease in brokerage
of emerging market debt securities reflecting reduced market activity. The
increase in Mexico primarily resulted from improved market conditions for local
market debt.
Trading gains on securities transactions increased $278,031 to
$1,493,264 for 2000, compared to $1,215,233 for 1999, due to an increase in
trading gains on municipal securities transactions.
Interest income for 2000 decreased $56,215 to $1,823,285, compared to
$1,879,500 for 1999, primarily reflecting a reduction in the average inventory
of municipal securities held.
Other income for 2000 increased $3,422,961 to $4,741,415, compared to
$1,318,454 for 1999, primarily due to a one-time gain on the partial sale of our
interest in the Tokyo Venture approximating $2.2 million, revenue of
approximately $2.0 million in 2000 compared to approximately $1.4 million in
1999 from our sale of brokerage information under our licensing agreement with
Telerate, which commenced in May 1999, earnings of approximately $524,000 in
2000 compared to earnings of approximately $235,000 in 1999 on the Company's
interest in the Tokyo Venture and a decrease in foreign exchange losses.
Compensation and related costs for 2000 decreased $1,331,276 to
$92,061,672, compared to $93,392,948 for 1999. The decrease was primarily the
result of decreased employment costs in London and Switzerland, reflecting
decreased commission income and the currency effects of translating weakened
British pound sterling amounts to U.S. dollars. This decrease was partially
offset by increased employment costs in New York and Mexico, reflecting
increased revenue levels and improved profitability in certain areas. As a
percentage of operating revenues, compensation and related costs increased to
72% for 2000 as compared to 69% for 1999, primarily reflecting fixed salary
costs in certain derivatives brokerage groups in London that experienced reduced
brokerage.
Communication costs for 2000 decreased $1,969,799 to $11,643,857,
compared to $13,613,656 for 1999, primarily as a result of cost reduction
efforts in New York throughout 1999 and into 2000.
Travel and entertainment costs for 2000 decreased $176,766 to
$6,620,974, compared to $6,797,740 for 1999. As a percentage of operating
revenues, travel and entertainment costs increased to 5.2% for 2000, compared to
5.0% for 1999.
Depreciation and amortization expense for 2000 decreased $356,567 to
$4,008,937, compared to $4,365,504 for 1999, primarily as a result of a
reduction in depreciable equipment, offset in part by the increase in the
amortization of software, goodwill and other intangible assets obtained in the
Tradesoft acquisition.
35
Clearing fees increased $302,017 to $3,307,802 for 2000, as compared to
$3,005,785 for 1999, primarily due to an increase in the number of cleared
repurchase agreements transactions and an increase in the number of cleared
emerging market debt transactions in London, offset in part by a decrease
associated with a reduction in the number of cleared emerging market debt
transactions in New York.
Occupancy costs decreased $128,137 to $4,406,215 for 2000, as compared
to $4,534,352 for 1999, primarily reflecting the combined effect of a reduction
in leased space in Stamford, Connecticut as a result of the closing of certain
departments within the energy-related derivatives group and a reduction in rent
tax rates in London. These decreases were offset in part by the effect of a
reassessment and reduction to our accrual for an early termination option on the
World Trade Center lease approximating $527,000.
Interest expense for 2000 decreased $238,978 to $594,957, compared to
$833,935 for 1999, primarily as a result of the combined effect of a lesser
average aggregate amount of debt outstanding and a decrease in the average
margin borrowings to finance municipal securities.
Restructuring costs of $541,961 were incurred during 2000 as compared
to $321,000 during 1999. In 2000, these costs related to the ceasing of
operations by our Toronto-based subsidiary in June 2000 and the notice given in
December 2000 to close EBFL's branch operations in Paris effective January 5,
2001. A portion of the business previously conducted in Toronto has been
relocated to New York. The restructuring costs in 1999 were incurred in
connection with the closing of certain departments within the energy-related
derivatives group. Included in these costs for 2000 and 1999 were employee
severance, the disposal/write-off of fixed assets and occupancy related costs.
General, administrative and other expenses for 2000 decreased $269,905
to $5,246,444, compared to $5,516,349 for 1999, primarily as a result of a
reduction in consumption taxes in Europe and reductions in various other
general, administrative and other expenses, offset in part by an increase in
professional fees and a one-time charge of $477,000 attributable to Tradesoft's
in-process research and development initiatives ongoing at the date of
acquisition.
For the year ended December 31, 2000, we had income from our 15% equity
interest in Yagi Euro of $135,890, as opposed to a loss of $1,576,644 for 1999.
Yagi Euro experienced significant restructuring activities in late 1999 and
early 2000 relating to Nittan's admission to the Tokyo Venture and the combining
of Yagi Euro's money market and forward foreign exchange businesses with those
of Nittan in a separate joint venture. In 2000, our share of a gain realized by
Yagi Euro on its restructuring activities was approximately $86,000. In 1999,
our share of expenses incurred by Yagi Euro on its restructuring activities
approximated $1,031,000.
36
Provision for income taxes for 2000 increased $2,165,266 to $2,710,482,
compared to $545,216 for 1999. This increase was primarily reflective of a
$1,200,000 adjustment during 1999 to reduce income tax reserves as a result of
obtaining a favorable resolution to certain contingencies and a reduction of
approximately $972,000 during 1999 to the deferred asset valuation allowance due
to tax planning strategies derived from the Nittan transaction and improved
profitability in certain subsidiaries.
For 2000, minority interest in consolidated subsidiaries resulted in a
reduction of net losses from such subsidiaries of $1,203,987, as compared to a
reduction of income from such subsidiaries of $270,128 for 1999, primarily as a
result of reduced brokerage activity in EBFL.
Liquidity and Capital Resources
Operating Activities
A substantial portion of our assets, similar to other brokerage firms,
is liquid, consisting of cash, cash equivalents and assets readily convertible
into cash, such as receivables from broker-dealers and customers, and securities
owned, held at clearing firm.
Securities owned, held at clearing firm principally reflect municipal
security positions taken in connection with our brokerage of municipal
securities business. Positions are generally intended to be held for short
periods of time and for the purpose of facilitating anticipated client needs and
are currently financed by margin borrowings from a broker-dealer that clears
these transactions on our behalf on a fully-disclosed basis. At year-end 2001,
as reflected on the Consolidated Statements of Financial Condition, we had net
assets relating to our municipal securities business of approximately $4.2
million, reflecting securities owned of approximately $10.9 million, financed by
a payable to the clearing broker of approximately $6.6 million. Also reflected
in securities owned, held at clearing firm at year-end 2001 were approximately
$1.2 million of fully paid securities in our firm investment account.
MFI is a member of the GSCC for the purpose of clearing certain U.S.
Treasury and federal agency repurchase agreements and other U.S. Treasury
securities, as well as federal agency securities. Pursuant to such membership,
MFI is required to maintain excess regulatory net capital of $10,000,000, and a
pledge of $5,000,000 in U.S. Treasury securities, which has been reflected as
deposits with clearing organizations on the Consolidated Statements of Financial
Condition.
At December 31, 2001, we had securities failed-to-deliver and
securities failed-to-receive approximating $184.8 million and $183.6 million,
respectively, in connection with the settlement of matched riskless principal
federal agency bond transactions that did not compare at GSCC on trade date. The
failed-to-receives represented uncompared transactions where the sellers or GSCC
could not make timely delivery to MFI's bank clearance account. These
failed-to-receives resulted in offsetting failed-to-delivers to the buyers or
37
GSCC. The difference in these two amounts was primarily due to mark-to-market
payments made on failed-to-delivers to GSCC that are repaid to us upon delivery
of the securities. All fails outstanding at December 31, 2001 were properly
received/delivered in January 2002.
Net cash provided by operations for 2001 was approximately $32.5
million. This increase in cash was the result of net income of approximately
$9.0 million adjusted to reflect the net effect of approximately $6.3 million of
non-cash items, primarily consisting of depreciation and amortization, the
write-off of intangible assets, minority interest in the net earnings of
consolidated subsidiaries and the change in deferred tax items, and the net
positive effects of other working capital items, principally increased accounts
payable and accrued liabilities exceeding $15 million. The increase in accounts
payable and accrued liabilities is primarily due to the portion of advances
received under our insurance policies that is currently unrecognized and other
effects of the September 11th attacks.
Net cash provided by operations for 2000 was approximately $6.8
million. This increase in cash was the result of net income of approximately
$2.0 million adjusted to reflect the net effect of approximately $2.4 million of
non-cash items, primarily consisting of depreciation and amortization, the gain
on the partial sale of our interest in the Tokyo Venture, minority interest in
the loss of consolidated subsidiaries and the change in deferred tax items, and
the net positive effects of other working capital items, principally increased
accrued compensation and decreased prepaid expenses and other assets.
Net cash provided by operations for 1999 was approximately $9.8
million. This increase in cash was the combined result of net income of
approximately $2.5 million adjusted to reflect the net effect of approximately
$5.8 million of non-cash items, primarily consisting of depreciation and
amortization, unreimbursed losses of unconsolidated equity affiliates and
contractual arrangements and the change in deferred tax items, and the net
positive effects of other working capital items, principally reduced receivable
balances.
In the ordinary course of our businesses, we are subject to extensive
regulation at international, federal and state levels by various regulatory
bodies which are charged with safeguarding the integrity of the securities and
other financial markets and protecting the interest of customers. The compliance
requirements of these different regulatory bodies may include, but are not
limited to, net capital or stockholders' equity requirements.
We believe that all of our ongoing liquidity needs will be met in
timely fashion from our cash and cash equivalents or other of our resources.
Moreover, we have historically met regulatory net capital and stockholders'
equity requirements and believe we will continue to do so in the future.
38
Investing Activities
Investing activities in 2001 resulted in an increase to cash of
approximately $1.60 million, reflecting the net effects of insurance proceeds
recognized for destroyed fixed assets approximating $1.52 million, proceeds from
the sale of our 15% interest in Yagi Euro approximating $1.94 million and net
cash used for fixed asset purchases/sales approximating $1.86 million. Investing
activities for 2000 and 1999 reflect net cash used of approximately $1.96
million and $.97 million, respectively. In 2000, the cash used primarily
reflected the net effect of fixed asset purchases/sales approximating $2.23
million, the cash portion of the Tradesoft acquisition approximating $2.13
million and the proceeds received on the partial sale of our interest in the
Tokyo Venture approximating $2.40 million. In 1999, the cash used primarily
reflected fixed asset purchases/sales.
In addition to purchasing fixed assets, we from time-to-time use
operating leases to finance the upgrading of communications and information
systems necessary to sustain our commitment to maintaining current technology.
We expect significant cash outlays in the upcoming year associated with
the build-out of our new permanent headquarters in New York, with preliminary
estimates suggesting costs in excess of $10 million. We believe our property
casualty insurance coverage, which provides for replacement costs for fixed
assets destroyed in the September 11th attacks with a limit of approximately $14
million, will provide sufficient liquidity for these costs. To date, our insurer
has provided us with cash advances, relating to both our property casualty and
business interruption policies, of $15 million.
Financing Activities
At December 31, 2001, we did not have a loan outstanding under our
revolving credit facility with General Electric Capital Corporation ("GECC").
The facility provides for borrowings of up to $5 million, expires on June 17,
2004 and is secured by substantially all the assets of Euro Brokers Inc.
("EBI"), a U.S. subsidiary. The borrowing availability under the facility (which
approximated $3.5 million at December 31, 2001) is determined based upon the
level and condition of the billed accounts receivable of EBI. The agreement with
GECC contains certain covenants, which require EBI separately, and our entire
company as a whole, to maintain certain financial ratios and conditions.
Notes payable at December 31, 2001 represents the remaining
approximately $448,000 due on a fixed rate note issued to GECC in December 1997.
This note was secured by all owned equipment of EBI and was payable in monthly
installments through December 2002. As a result of the September 11th attacks on
the World Trade Center, the equipment securing this note was destroyed. Pursuant
to the terms of the note, we intend to use proceeds due under the property
casualty insurance coverage to retire the note early in 2002 without penalty.
Net cash used in financing activities for 2001 was approximately $6.3
million, primarily reflective of the net effect of cash of approximately $3.0
million used to acquire treasury stock, cash used of $2.0 million for the
redemption of preferred stock, the repayment of notes payable and obligations
under capitalized leases aggregating approximately $1.5 million and proceeds
received from the exercise of stock options of approximately $222,000.
Net cash used in financing activities for 2000 was approximately $2.6
million, primarily reflective of cash of approximately $894,000 used to acquire
treasury stock, the repayment of notes payable and obligations under capitalized
leases aggregating approximately $1.2 million and the net repayment of
borrowings under the revolving credit facility of approximately $674,000.
39
Net cash used in financing activities for 1999 was approximately $4.0
million, primarily reflective of the net effect of cash of approximately $4.2
million used to acquire treasury stock, the repayment of notes payable and
obligations under capitalized leases aggregating approximately $3.4 million, the
cash contribution from minority interest, net of dividends paid to minority
interest, of approximately $3.1 million, and net borrowings under the revolving
credit facility of approximately $674,000.
In July 2001, our Board of Directors continued our common stock
repurchase program by authorizing the purchase of up to an additional 709,082
shares, or 10% of the then outstanding shares. In the immediate aftermath of the
September 11th attack, the Board further expanded this authorization by an
additional 490,918 shares in order to bring the total authorization up to
1,200,000 shares. As of December 31, 2001, we had purchased 214,000 shares under
this expanded program. As has been the case with each of our repurchase program
authorizations, all purchases of shares are subject to the availability of
shares at prices which are acceptable to us, as well as to our assessment of
prevailing market and business conditions, and, accordingly, there is no
guarantee as to the timing or number of shares to be repurchased. All purchases
are anticipated to be funded using our existing cash resources, including
available borrowings under the revolving facility with GECC.
Effects of Inflation
Because our assets are to a large extent liquid in nature, they are not
significantly affected by inflation. However, increases in certain of our
expenses due to inflation, such as employee compensation, travel and
entertainment and occupancy and communication costs may not be readily
recoverable in the price of our services, particularly for operations domiciled
outside the United States where there are increased inflationary pressures. In
addition, to the extent inflation increases or decreases volatility in the
securities markets, our brokerage business is likely to be affected by
corresponding increases or decreases in brokerage transaction volumes.
40
Forward-Looking Statements
Certain statements contained in this Item 7 and elsewhere in this
report, as well as other oral and written statements made by us to the public,
contain and incorporate by reference forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Wherever possible, we have identified these forward-looking
statements by words such as "believes," "anticipates," "expects," "may,"
"intends" and similar phrases. Such forward-looking statements, which describe
our current beliefs concerning future business conditions and the outlook for
our company and business, are subject to significant uncertainties, many of
which are beyond our control. Actual results or performance could differ
materially from that we expect. Uncertainties include factors such as market and
economic conditions, the ability of the New York financial community, in
general, and ourselves, specifically, to recover from the World Trade Center
terrorist attacks, the effects of any additional terrorist acts and governments'
military and other responses to them, the scope and timing of our insurance
recoveries from our business insurance carriers, the success of technology
development and deployment, the status of relationships with employees, clients,
business partners, vendors and clearing firms, possible third-party litigations
or other unanticipated contingencies, the actions of competitors, and government
regulatory changes. For a fuller description of these and additional
uncertainties, reference is made to the "September 11th Terrorist Attacks,"
"Competition," "Regulation" and "Cautionary Statements" captions of Item 1 of
this report, the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" caption of Item 7 of this report and the
"Quantitative and Qualitative Disclosures about Market Risk" caption of Item 7A
of this report. The forward-looking statements made herein are only made as of
the date of this report and we undertake no obligation to publicly update such
forward-looking statements to reflect new information or subsequent events or
circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are actively involved in the evaluation of risks associated with
certain financial instruments and will from time to time reduce other risks
inherent in our businesses through the use of financial instruments.
We reduce market risk related to our municipal securities positions by
limiting both the size of our overall positions and the number of days positions
are held. In addition, we from time to time sell interest rate sensitive
financial futures contracts as a means of managing market risk on our municipal
securities positions. We closely monitor our municipal securities positions on a
daily basis through a review by management of daily activity and position
reports prepared by operations staff. These reports detail all executed
transactions, the resulting trading gains and sales commissions and, using
independently verified market prices where possible, the closing positions.
41
In the process of executing brokerage transactions, we sometimes
experience "out trades" or other errors in which we may have liability for the
resulting unmatched position. Out trades generally increase with increases in
the volatility of the market. If an out trade is promptly discovered, thereby
allowing prompt disposition of the unmatched position, our risk is usually
limited. If discovery (or disposition) is delayed, the risk is heightened by the
increased possibility of intervening market movements prior to such disposition.
We believe that our electronic blotter system, because of its ability to
identify unbalanced trade conditions as they occur, serves to help limit the
market risk exposure when out trades or other errors occur. To limit our
exposure further in such situations, our policy is to dispose of any resulting
unmatched positions promptly after their discovery.
We have various foreign exchange rate exposures, including commission
income earned in a currency other than the functional currency and foreign
income streams which are eventually distributed. Our strategies to reduce these
risks include the use of foreign currency forward contracts. As a result of the
adoption of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, changes in the
portion of the fair value of foreign currency forward contracts used to hedge
commission income earned in a currency other than the functional currency deemed
highly effective are deferred from recognition into earnings until the
forecasted revenue streams are realized. As of year-end 2001 and 2000, we have
postponed our hedging practice with respect to anticipated dividends from the
Tokyo Venture, awaiting a time when we can better predict the income streams
therefrom. Gains and losses on foreign currency forward contracts used to hedge
these anticipated dividends are included in current operations even though the
offsetting gains and losses are not recognized until realized.
We do not consider our exposure to fixed interest rates significant at
December 31, 2001 due to the low level of notes payable outstanding. Any
borrowings under the facility with GECC bear interest at variable rates. We will
continue to monitor the level of borrowings under this facility as well as the
interest rate environment to determine the necessity of a hedging strategy to
guard against increases in market interest rates.
The tables below provide information, at each of December 31, 2001 and
December 31, 2000, about our financial instruments that are used either for
trading purposes or other than trading purposes and that are sensitive to either
changes in interest rates or changes in foreign exchange rates. Except as noted
above, our market risk analysis at December 31, 2001 did not materially change
from the market risk analysis at December 31, 2000. For loan and notes payable
and preferred stock the table presents principal and redemption cash flows with
expected maturity dates. For foreign currency forward contracts, the table
presents notional amounts with expected maturity dates. For municipal securities
and corporate bonds, the table presents the aggregate par values with maturity
dates and the weighted average interest rate based upon the par amount of bonds
held.
42
As of December 31, 2001:
- ------------------------
After Fair
2002 2006 Total Value
---------- ---------- ---------- ----------
Other than trading:
- ------------------
Interest rate sensitivity:
Loan payable $ $ $ $
7.9% note secured by
certain equipment 447,978 447,978 447,978
Trading:
- -------
Interest rate sensitivity:
Municipal securities 12,135,000 12,135,000 10,860,649
(weighted average
interest rate - 6.4%)
Corporate bonds 1,000,000 1,000,000 870,625
(weighted average
interest rate - 13.5%)
As of December 31, 2000:
- ------------------------
After Fair
2001 2002 2006 Total Value
---------- ---------- ---------- ---------- ----------
Other than trading:
- ------------------
Interest rate sensitivity:
Loan payable $ $ $ $ $
7.9% note secured by
certain equipment 511,312 316,057 827,369 827,369
Subordinated notes issued
to minority shareholder 895,800 895,800 895,800
2% Redemmable Preferred
Stock 2,000,000 2,000,000 2,000,000
Exchange rate sensitivity:
Forward currency
forward contacts:
Sell U.S. dollars/buy
British pounds sterling 9,600,000 9,600,000 46,177
Trading:
- -------
Interest rate sensitivity:
Municipal securities 12,040,000 12,040,000 10,720,211
(weighted average
interest rate - 7.1%)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this
report. See Item 14 and the F-pages that follow.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
This Item 9 is not applicable.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to our definitive proxy statement for our upcoming 2002 Annual Meeting of
Stockholders (the "Proxy Statement"). We intend to file the Proxy Statement with
the SEC on or prior to April 30, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the Proxy Statement, except that such incorporation by reference shall not be
deemed to specifically incorporate by reference the information referred to in
Item 402(a)(9) of Regulation S-K. We intend to file the Proxy Statement with the
SEC on or prior to April 30, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the Proxy Statement. We intend to file the Proxy Statement with the SEC on or
prior to April 30, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the Proxy Statement. We intend to file the Proxy Statement with the SEC on or
prior to April 30, 2002.
Nothing in this Part III, or elsewhere in this report, shall be deemed
to specifically incorporate by reference any of the information required by Item
306 of Regulation S-K or referred to in Item 402(a)(9) of Regulation S-K.
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Listed on page F-2 of the Consolidated Financial Statements included in
this report.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements.
(a)(3) Exhibits
Listed in the Exhibit Index appearing at page X-1 of this report.
(b) Reports on Form 8-K
During the fourth quarter of our fiscal year ended December 31, 2001,
we filed one current report on Form 8-K, dated October 26, 2001. The
report attached two press releases that we issued respectively on
September 18, 2001, and October 22, 2001. The September release
described (i) our securing of new temporary office space at One New
York Plaza in lower Manhattan following the September 11th attacks,
(ii) the initial resumption of our New York business operations on a
limited basis and (iii) an increase in our previously announced share
repurchase program. The October release described (x) the resumption of
all of our key New York-based brokerage operations and (y) the scope of
our property and business interruption insurance coverages.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MAXCOR FINANCIAL GROUP INC.
By: /s/ GILBERT D. SCHARF
--------------------------------
Gilbert D. Scharf,
Chairman of the Board, President
and Chief Executive Officer
Dated: March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ GILBERT D. SCHARF Chairman of the Board, President March 26, 2002
- ----------------------------- and Chief Executive Officer
Gilbert D. Scharf (Principal Executive Officer)
/s/ KEITH E. REIHL Chief Operating Officer and March 26, 2002
- ----------------------------- Director
Keith E. Reihl
/s/ STEVEN R. VIGLIOTTI Chief Financial Officer and March 26, 2002
- ----------------------------- Treasurer (Principal Financial
Steven R. Vigliotti and Accounting Officer)
/s/ LARRY S. KOPP Director March 26, 2002
- -----------------------------
Larry S. Kopp
/s/ MICHAEL J. SCHARF Director March 26, 2002
- -----------------------------
Michael J. Scharf
Director March 26, 2002
- -----------------------------
James W. Stevens
/s/ FREDERICK B. WHITTEMORE Director March 26, 2002
- -----------------------------
Frederick B. Whittemore
/s/ WILLIAM B. WIGTON Director March 26, 2002
- -----------------------------
William B. Wigton
/s/ OSCAR M. LEWISOHN Director March 26, 2002
- -----------------------------
Oscar M. Lewisohn
/s/ ROBIN A. CLARK Director March 26, 2002
- -----------------------------
Robin A. Clark
46
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
F-1
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
Contents Page
- -------------------------------------------------------------------------------
Report of Independent Accountants F-3
Consolidated Financial Statements:
Consolidated Statements of Financial Condition F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Changes in Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to the Consolidated Financial Statements F-10
F-2
[Letterhead of PricewaterhouseCoopers LLP]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
and Stockholders of
Maxcor Financial Group Inc.
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Maxcor Financial Group Inc. and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As further described in Note 26, the presentation of the consolidated statements
of operations for each of the two years in the period ended December 31, 2000
has been restated.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 26, 2002
F-3
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
December 31, December 31,
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 49,565,284 $ 21,465,004
Deposits with clearing organizations 6,336,080 6,334,093
Receivable from broker-dealers and customers 18,035,532 15,553,303
Securities failed-to-deliver 184,768,776
Securities owned, held at clearing firm 12,090,074 10,720,211
Prepaid expenses and other assets 3,504,000 5,078,271
Deferred tax asset 2,005,017 2,116,581
Equity in affiliated company 1,552,757
Fixed assets 4,796,434 7,400,494
Intangible assets 1,579,079
------------ ------------
Total assets $281,101,197 $ 71,799,793
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(Continued)
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
- ------------------------------------ ------------- -------------
Liabilities:
Payable to broker-dealer $ 6,638,824 $ 7,116,240
Securities failed-to-receive 183,649,730
Accounts payable and accrued liabilities 27,467,826 12,004,494
Accrued compensation payable 21,187,513 15,778,214
Income taxes payable 1,010,907 114,732
Deferred taxes payable 2,197,973 1,078,760
Obligations under capitalized leases 204,252 335,635
Notes payable 447,978 1,723,169
------------- -------------
242,805,003 38,151,244
------------- -------------
Minority interest in consolidated subsidiary 3,979,291 3,407,628
------------- -------------
Commitments and contingencies (Notes 20 and 21)
Redeemable preferred stock:
Series B, 2% cumulative, stated value $1,000,
2,000 shares issued at December 31, 2000 2,000,000
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized; 2,000 shares of Series B issued at
December 31, 2000, as reported above
Common stock, $.001 par value, 30,000,000 shares
authorized; 11,612,769 and 11,392,269 shares issued
at December 31, 2001 and 2000, respectively 11,613 11,392
Additional paid-in capital 33,731,266 33,187,415
Treasury stock at cost; 4,586,540 and 3,271,434 shares of
common stock held at December 31, 2001 and
December 31, 2000, respectively (8,992,281) (5,679,008)
Retained earnings (accumulated deficit) 8,195,155 (823,247)
Accumulated other comprehensive income:
Foreign translation adjustments 1,371,150 1,494,319
Deferred hedging gains 50,050
------------- -------------
Total stockholders' equity 34,316,903 28,240,921
------------- -------------
Total liabilities and stockholders' equity $ 281,101,197 $ 71,799,793
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------- ------------- -------------
(Restated) (Restated)
Revenue:
Commission income $ 143,207,877 $ 123,747,559 $ 132,892,282
Insurance recoveries 4,498,144
Trading gains on securities transactions 3,728,069 1,493,264 1,215,233
Interest income 2,306,044 1,823,285 1,879,500
Other income 1,083,431 4,741,415 1,318,454
------------- ------------- -------------
154,823,565 131,805,523 137,305,469
------------- ------------- -------------
Costs and expenses:
Compensation and related costs 106,619,297 92,061,672 93,392,948
Communication costs 10,465,852 11,643,857 13,613,656
Travel and entertainment 6,493,462 6,620,974 6,797,740
Depreciation and amortization 3,598,580 4,008,937 4,365,504
Clearing fees 3,511,712 3,307,802 3,005,785
Occupancy costs 3,156,568 4,406,215 4,534,352
Costs related to World Trade Center attack 1,590,060
Interest expense 666,387 594,957 833,935
Restructuring costs 541,961 321,000
General, administrative and other expenses 6,834,579 5,246,444 5,516,349
------------- ------------- -------------
142,936,497 128,432,819 132,381,269
------------- ------------- -------------
Subtotal 11,887,068 3,372,704 4,924,200
Income (loss) from equity affiliate 9,992 135,890 (1,576,644)
------------- ------------- -------------
Income before provision for income taxes and
minority interest 11,897,060 3,508,594 3,347,556
Provision for income taxes 2,174,673 2,710,482 545,216
------------- ------------- -------------
Income before minority interest 9,722,387 798,112 2,802,340
Minority interest in (income) loss of consolidated
subsidiaries (683,985) 1,203,987 (270,128)
------------- ------------- -------------
Net income $ 9,038,402 $ 2,002,099 $ 2,532,212
============= ============= =============
Weighted average common shares outstanding - basic 7,357,017 8,374,166 9,711,974
Weighted average common shares outstanding - diluted 7,764,667 8,374,166 9,846,257
Basic earnings per share $ 1.23 $ .23 $ .26
Diluted earnings per share $ 1.16 $ .23 $ .25
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------
Additional
Comprehensive Common Paid-in Treasury
Income Stock Capital Stock
------------ ------------ ------------ ------------
Balance at December 31, 1998 $ 11,392 $ 33,187,415 $ (227,932)
Comprehensive income
Net income for the year ended
December 31, 1999 $ 2,532,212
Foreign translation adjustment
(inclusive of income tax
benefit of $111,648) 359,974
------------
Comprehensive income $ 2,892,186
============
Acquisition of treasury stock (5,226,104)
Redeemable preferred stock dividends
------------ ------------ ------------
Balance at December 31, 1999 11,392 33,187,415 (5,454,036)
Comprehensive income
Net income for the
year ended December 31, 2000 $ 2,002,099
Foreign translation
adjustment (net of
income tax benefit
of $171,940) (788,517)
Deferred hedging gain (net of
income tax expense of $12,519) 50,050
------------
Comprehensive income $ 1,263,632
============
Acquisition of treasury stock (894,494)
Issuance of shares from treasury
stock 669,522
Redeemable preferred stock dividends
------------ ------------ ------------
Balance at December 31, 2000 11,392 33,187,415 (5,679,008)
Comprehensive income
Net income for the
year ended December 31, 2001 $ 9,038,402
Foreign translation
adjustment (inclusive of
income tax expense
of $882) (123,169)
Deferred hedging
Reclassification to earnings
(net of income tax benefit
of $12,519) (50,050)
------------
Comprehensive income $ 8,865,183
============
Exercise of stock options
including tax benefit
of $101,822 221 543,851 (220,000)
Acquisition of treasury stock (3,093,273)
Redeemable preferred stock dividends
------------ ------------ ------------
Balance at December 31, 2001 $ 11,613 $ 33,731,266 $( 8,992,281)
============ ============ ============
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------
(Continued)
Retained Accumulated
Earnings Other
(Accumulated Comprehensive
Deficit) Income Total
------------ ------------ ------------
Balance at December 31, 1998 $ (5,100,223) $ 1,922,862 $ 29,793,514
Comprehensive income
Net income for the year ended
December 31, 1999 2,532,212 2,532,212
Foreign translation adjustment
(inclusive of income tax
benefit of $111,648) 359,974 359,974
Comprehensive income
Acquisition of treasury stock (5,226,104)
Redeemable preferred stock dividends (40,000) (40,000)
------------ ------------ ------------
Balance at December 31, 1999 (2,608,011) 2,282,836 27,419,596
Comprehensive income
Net income for the
year ended December 31, 2000 2,002,099 2,002,099
Foreign translation
adjustment (net of
income tax benefit
of $171,940) (788,517) (788,517)
Deferred hedging gain (net of
income tax expense of $12,519) 50,050 50,050
Comprehensive income
Acquisition of treasury stock (894,494)
Issuance of shares from treasury
stock (177,335) 492,187
Redeemable preferred stock dividends (40,000) (40,000)
------------ ------------ ------------
Balance at December 31, 2000 (823,247) 1,544,369 28,240,921
Comprehensive income
Net income for the
year ended December 31, 2001 9,038,402 9,038,402
Foreign translation
adjustment (inclusive of
income tax expense
of $882) (123,169) (123,169)
Deferred hedging
Reclassification to earnings
(net of income tax benefit
of $12,519) (50,050) (50,050)
Comprehensive income
Exercise of stock options
including tax benefit
of $101,822 324,072
Acquisition of treasury stock (3,093,273)
Redeemable preferred stock dividends (20,000) (20,000)
------------ ------------ ------------
Balance at December 31, 2001 $ 8,195,155 $ 1,371,150 $ 34,316,903
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 9,038,402 $ 2,002,099 $ 2,532,212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,598,580 4,008,937 4,365,504
Write-off of intangible assets 943,080
Provision for doubtful accounts (43,794) (50,635) (8,492)
Gain on sale of equity affiliate (390,081)
Gain on partial sale of interest in the Tokyo Venture (2,235,511)
In-process research and development from acquisition 477,000
Net loss on disposal of fixed assets 38,717 79,420 173,635
Unreimbursed losses (undistributed earnings) of equity
affiliates and contractual arrangements 331,080 (373,737) 2,271,382
Minority interest in net earnings (loss) of consolidated
subsidiaries 683,985 (1,203,987) 270,128
Imputed interest expense 28,035
Deferred hedging (50,050) 50,050
Deferred income taxes 1,238,353 1,666,251 (1,295,768)
Change in assets and liabilities, net of effect from
purchase of subsidiary:
(Increase) decrease in deposits with clearing organizations (1,987) 466,297 320,643
(Increase) decrease in receivable from broker-dealers and
customers (2,593,297) 52,248 2,253,197
Increase in securities failed-to-deliver (184,768,776)
(Increase) decrease in securities owned, held at
clearing firm (1,369,863) (1,240,517) 2,098,821
Decrease in prepaid expenses and other assets 978,592 1,793,188 432,242
(Decrease) increase in payable to broker-dealer (477,416) 1,138,311 (1,867,561)
Increase in securities failed-to-receive 183,649,730
Increase (decrease) in accounts payable and accrued liabilities 15,202,441 (2,516,711) (241,843)
Increase (decrease) in accrued compensation payable 5,566,282 3,305,835 (1,868,251)
Increase (decrease) in income taxes payable 890,786 (652,977) 360,883
------------- ------------- -------------
Net cash provided by operating activities $ 32,464,764 $ 6,765,561 $ 9,824,767
------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (2,108,112) (2,493,760) (1,299,408)
Proceeds from the sale of fixed assets 244,525 266,745 295,062
Insurance proceeds recognized for destroyed fixed assets 1,524,124
Proceeds from sale of equity affiliate 1,939,516
Dividends received from equity affiliates 38,511
Proceeds from partial sale of interest in the Tokyo Venture 2,399,002
Purchase of subsidiary, net of cash acquired (2,131,896)
------------- ------------- -------------
Net cash provided by (used in) in investing activities $ 1,600,053 $ (1,959,909) $ (965,835)
------------- ------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
For the Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Cash flows from financing activities:
Cash contribution from minority interest 40,000 3,691,972
Proceeds from exercise of options 222,250
Dividend paid to minority interest (614,726)
Issuance of note payable to minority shareholder 149,300
Net (repayments) borrowings under revolving credit
facility (674,282) 674,282
Repayment of notes payable (1,252,151) (972,501) (3,026,697)
Redemption of preferred stock (2,000,000)
Redeemable preferred stock dividends (20,000) (40,000) (40,000)
Repayment of obligations under capitalized leases (260,527) (223,774) (421,081)
Acquisition of treasury stock (3,011,540) (894,494) (4,226,104)
------------ ------------ ------------
Net cash used in financing activities (6,321,968) (2,615,751) (3,962,354)
------------ ------------ ------------
Effect of exchange rate changes on cash 357,431 (779,172) 7,401
------------ ------------ ------------
Net increase in cash and cash
equivalents 28,100,280 1,410,729 4,903,979
Cash and cash equivalents at beginning of year 21,465,004 20,054,275 15,150,296
------------ ------------ ------------
Cash and cash equivalents at end of year $ 49,565,284 $ 21,465,004 $ 20,054,275
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 733,922 $ 622,080 $ 894,147
Income taxes paid 3,413,784 1,103,001 934,184
Non-cash financing activities:
Capital lease obligations incurred 138,375 97,762 180,591
Contribution of non-cash assets from minority
interest 1,962,886
Assumption of liabilities of minority interest 247,508
Issuance of notes payable to acquire treasury stock 1,000,000
Conversion of account payable to note payable 737,700
Issuance of shares from treasury stock to acquire
subsidiary 492,187
Receipt of shares in treasury for exercise price
of stock options 220,000
Receipt of shares in treasury for receivable due 81,733
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
MAXCOR FINANCIAL GROUP INC.
---------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
DECEMBER 31, 2001, 2000 AND 1999
--------------------------------
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
- -----------------------------------------------
Maxcor Financial Group Inc. ("MFGI") is a publicly-held financial services
holding company that was incorporated in Delaware in 1994. In August 1996, MFGI
acquired Euro Brokers Investment Corporation ("EBIC"), a privately held
international and domestic inter-dealer broker.
EBIC, incorporated in December 1986 in connection with a management buyout of
predecessor operations dating to 1970, through its subsidiaries and businesses
is primarily an inter-dealer broker of money market instruments, derivative
products and selected securities, with principal offices in New York, London and
Tokyo, and other offices in Switzerland and Mexico, as well as correspondent
relationships with other brokers throughout the world.
The consolidated financial statements include the accounts of MFGI and its
majority-owned subsidiaries and other entities over which it exercises control
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated. Investments in unconsolidated affiliates
where the Company may exercise significant influence over operating and
financial policies have been accounted for using the equity method.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------
Revenue recognition:
- -------------------
Commission income and related expenses are recognized on a trade date basis.
Revenue from the sale of pricing and volume data sourced from the Company's
brokerage business is included in other income and is recognized on a pro-rata
basis over the terms of the respective agreements. Any payments received in
advance are deferred and are included in accounts payable and accrued
liabilities.
Securities transactions:
- -----------------------
Securities transactions are recorded on a trade date basis.
Securities owned, held at clearing firm, are carried at market value, generally
based upon quoted prices. To the extent quoted prices are not available,
securities are valued at fair value as determined by management generally based
upon quoted prices of securities with similar characteristics.
Cash and cash equivalents:
- -------------------------
The Company considers all short-term investments with an initial maturity of
three months or less to be cash equivalents.
Allowance for doubtful accounts:
- -------------------------------
The Company maintains an allowance for doubtful accounts to reduce its billed
receivables on name give-up brokerage transactions to the amount expected to be
collected on such receivables.
F-10
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------
Fixed assets:
- ------------
Depreciation and amortization of furniture, equipment and software is computed
on a straight-line basis using estimated useful lives of 3 to 5 years. Leasehold
improvements are amortized over the lesser of the terms of the related leases or
the estimated useful lives of the improvements.
Foreign currency translation:
- ----------------------------
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars using exchange rates at the end of the year; revenues and expenses are
translated at average monthly rates during the year.
Gains and losses on foreign currency translation of the financial statements of
foreign operations whose functional currency is other than the U.S. dollar,
together with related hedges and tax effects and the effect of exchange rate
changes on intercompany transactions of a long-term investment nature, are
reflected as foreign translation adjustments in the accumulated other
comprehensive income section of stockholders' equity. Foreign currency exchange
gains and losses from transactions and balances denominated in a currency other
than the related foreign operation's functional currency are recorded in
operations.
Fair value of financial instruments:
- -----------------------------------
The financial instruments of the Company are reported in the consolidated
statements of financial condition at market or fair values, or at carrying
amounts that management estimates approximate fair values as such financial
instruments are short-term in nature or bear interest at rates approximating
current market.
Income taxes:
- ------------
Income taxes are accounted for using the asset and liability method. Deferred
taxes are recognized for the tax consequences of temporary differences between
the recognition of tax effects for financial statement purposes and income tax
reporting purposes by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. A valuation allowance is recorded
to reduce the deferred tax asset to only that portion that is judged more likely
than not to be realized.
Use of estimates:
- ----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 dates of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
F-11
NOTE 3 - ATTACK ON WORLD TRADE CENTER:
- -------------------------------------
On September 11, 2001, the Company's headquarters on the 84th Floor of Two World
Trade Center in downtown New York were destroyed when two commercial jet planes
hijacked by terrorists crashed into the World Trade Center towers. As a result
of this attack, 61 employees and staff members, out of a New York work force
approximating 300, were killed. The Company also lost all of the property and
technological infrastructure maintained at Two World Trade Center and
experienced a total disruption of its New York based operations. On September
18, 2001, the Company relocated its entire New York-based operations to
temporary facilities provided by Prudential Securities, the parent company of
one of the Company's clearing firms, at One New York Plaza in lower Manhattan.
The Company's insurance provides coverage for damage to property destroyed and
losses from interruption of business operations, including profit recovery and
extra expenses incurred to restore operations and minimize the period and total
cost of disruption to operations. The Company continues to evaluate its
potential insurance recoveries principally in two areas:
Property Damage:
- ---------------
The Company's property casualty insurance, underwritten by Kemper Insurance
Companies ("Kemper"), has an aggregate limit of approximately $14 million. In
September 2001, the Company reduced fixed assets by approximately $1.5 million
reflecting the net book value of all property destroyed in the September 11th
attack and recorded an offsetting receivable from Kemper. Since the proceeds
from claims relating to this property damage are based upon full replacement
cost of assets replaced, such amounts are expected to exceed the net book value
of the property written off. The anticipated gain will be recorded as the claims
are settled and proceeds are received.
Business Interruption and Extra Expense:
- ---------------------------------------
The Company's business interruption and extra expense insurance, also
underwritten by Kemper, has an aggregate limit of approximately $21 million.
Included in revenues is $4,498,144, representing the portion of the Company's
lost revenues (net of saved expenses) through September 30, 2001 recoverable
under the policy for which management believes there are no contingencies that
would have a material impact. Additional amounts for lost revenues (net of saved
expenses) through December 31, 2001 are expected to be recorded in future
periods as the contingencies relating to such amounts are resolved.
Costs related to World Trade Center attack of $1,590,060 are expenses incurred
by the Company as a direct result of the September 11th attack, such as the use
of outside professionals, recruitment fees, interest on failed securities
settlements, meals and lodging for existing employees during the rebuilding
process and benefits for deceased employees. The gross amount of these expenses
of $2,187,281 has been reduced by $597,221, representing the portion of these
expenses that management currently believes is probable of recovery and can be
reasonably estimated.
As of December 31, 2001, the Company received cash advances from Kemper under
the policies totaling $15 million. Included in accounts payable and accrued
liabilities at December 31, 2001 is the portion of these advances, approximately
$8.4 million, that has not yet been recognized as recoverable for destroyed
fixed assets, business interruption or extra expense.
F-12
NOTE 4 - ACQUISITION OF TRADESOFT TECHNOLOGIES, INC.:
- ----------------------------------------------------
On August 11, 2000, the Company acquired Tradesoft Technologies, Inc.
("Tradesoft"), a privately held software developer and technology provider in a
transaction accounted for as a purchase, for approximately $2.1 million in cash
and the issuance of 375,000 shares of MFGI stock from treasury. As a result of
the acquisition, approximately $988,000 in goodwill was recorded by the Company,
which reflects the adjustments necessary to allocate the purchase price to the
fair value of assets acquired (including certain identifiable intangibles) and
includes an amount approximating $738,000, offset by an equal amount in deferred
taxes payable, to account for the differences between these assigned values and
their respective tax bases. The Company also recorded a one-time charge of
$477,000 relating to Tradesoft's in-process research and development initiatives
ongoing at the date of acquisition. This one-time charge was included in
general, administrative and other expenses during the year ended December 31,
2000. As a result of a recent change in the business climate for interactive
brokerage for the Company's product base, the Company has determined that the
goodwill, identifiable intangibles and certain other assets obtained in the
Tradesoft acquisition no longer have ongoing value. Accordingly, the Company
included in general, administrative and other expenses, a one-time charge of
approximately $1.1 million during 2001 related to the write-off of these assets.
The following details the unaudited pro forma consolidated revenues, net income
and earnings per share of the Company for the years ended December 31, 2000 and
1999 assuming the Tradesoft acquisition occurred on January 1, 1999.
For the Year Ended
December 31, 2000 December 31, 1999
----------------- -----------------
Revenues (restated) $ 131,898,654 $ 137,628,177
Net income 1,763,224 2,202,990
Earnings per share:
Basic $ .21 $ .22
Diluted $ .21 $ .22
These results reflect Tradesoft's actual results during 1999 and for the 2000
interim period up to the date of acquisition with certain adjustments to
eliminate software development fees between the Company and Tradesoft and the
costs incurred by Tradesoft to develop such software, to depreciate and amortize
Tradesoft's assets (including intangibles) based upon the fair values assigned
in recording the combination, to record incremental interest on the additional
revolving debt needed to finance the acquisition and to eliminate the one-time
charge for in-process research and development. These results do not necessarily
represent results which would have occurred if the acquisition had taken place
on the basis noted above, nor are they indicative of future combined operations.
F-13
NOTE 5 - EARNINGS PER SHARE:
- ---------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years ended December
31, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Numerator (basic and diluted calculation):
Net income $ 9,038,402 $ 2,002,099 $ 2,532,212
Less redeemable preferred stock dividends (20,000) (40,000) (40,000)
----------- ----------- -----------
Net income available to common stockholders 9,018,402 1,962,099 2,492,212
Denominator:
Weighted average common shares outstanding -
basic calculation 7,357,017 8,374,166 9,711,974
Dilutive effect of stock options 407,650 134,283
----------- ----------- -----------
Weighted average common shares outstanding -
diluted calculation 7,764,667 8,374,166 9,846,257
Earnings per share:
Basic $1.23 $ .23 $ .26
Diluted $1.16 $ .23 $ .25
Antidilutive common stock equivalents:
Options 1,755,000 85,000
Warrants 734,980 734,980
NOTE 6 - DEPOSITS WITH CLEARING ORGANIZATIONS:
- ---------------------------------------------
Deposits with clearing organizations at December 31, 2001 and 2000 consist of
the following:
December 31, 2001 December 31, 2000
----------------- -----------------
Cash $ 429,209 $ 414,687
U.S. Treasury obligations 5,906,871 5,919,406
----------------- -----------------
$ 6,336,080 $ 6,334,093
================= =================
Pursuant to its membership in the Government Securities Clearing Corporation
("GSCC"), Maxcor Financial Inc. ("MFI"), the Company's U.S. broker-dealer
subsidiary, is required to maintain a minimum deposit of $5,000,000. The balance
of the deposits is required pursuant to MFI's clearing firm relationships.
NOTE 7 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CUSTOMERS:
- --------------------------------------------------------------------
At December 31, 2001 and 2000, receivable from and payable to broker-dealers and
customers consists of the following:
December 31, 2001 December 31, 2000
-------------------------- --------------------------
Receivable Payable Receivable Payable
----------- ----------- ----------- -----------
Commissions receivable $16,384,225 $ $14,109,772 $
Receivable from clearing firms 1,651,307 1,443,531
Payable to clearing firm 6,638,824 7,116,240
----------- ----------- ----------- -----------
$18,035,532 $ 6,638,824 $15,553,303 $ 7,116,240
=========== =========== =========== ===========
The Company clears its matched riskless principal brokerage transactions and its
municipal securities sales and trading transactions through other broker-dealers
on a fully-disclosed basis pursuant to clearing agreements.
F-14
NOTE 7 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CUSTOMERS
- --------------------------------------------------------------------
(Continued):
The receivable from clearing firms primarily represents commissions due on
matched riskless principal brokerage transactions, net of transaction fees,
while the payable to clearing firm represents the net amount owed for financing
the Company's municipal securities positions. This clearing firm provides
borrowing availability on the Company's municipal securities positions it holds
generally equal to 85% of the market value of such securities. Commissions
receivable represent amounts billed on the Company's name give-up brokerage
transactions, net of allowances for doubtful accounts of approximately $599,000
and $647,000 at December 31, 2001 and 2000 respectively.
NOTE 8 - SECURITIES OWNED, HELD AT CLEARING FIRM:
- ------------------------------------------------
Securities owned, held at clearing firm at December 31, 2001 and 2000 consist of
trading and investment securities as follows:
December 31, 2001 December 31, 2000
----------------- -----------------
Municipal obligations $ 10,860,649 $ 10,720,211
Corporate bonds 870,625
Corporate stocks 358,800
----------------- -----------------
$ 12,090,074 $ 10,720,211
================= =================
Municipal securities positions are held by one of the Company's clearing firms
as a pledge against the amount owed (See Note 7) and may be rehypothecated by
this clearing firm.
NOTE 9 - SECURITIES FAILED-TO-DELIVER/RECEIVE:
- ---------------------------------------------
In connection with the Company's brokerage of federal agency bonds, the Company
is required to settle through its bank clearance account any side of a matched
riskless principal transaction that does not properly compare at GSCC on trade
date. At December 31, 2001, securities failed-to-receive represented uncompared
transactions where the sellers or GSCC could not make timely delivery of
securities. These failed-to-receives resulted in offsetting failed-to-delivers
to the buyers or GSCC. The difference between these two amounts was primarily
due to mark-to-market payments made on failed-to-delivers to GSCC that are
repaid to the Company upon delivery of the securities. All fails outstanding at
December 31, 2001 were properly received/delivered in January 2002.
NOTE 10 - EQUITY AFFILIATES AND MINORITY INTERESTS:
- --------------------------------------------------
Yagi Euro Nittan Corporation:
- ----------------------------
The Company's equity in affiliated company at December 31, 2000 consisted of its
15% interest in Yagi Euro Nittan Corporation ("Yagi Euro"), formerly Yagi Euro
Corporation. Due to the significant influence maintained by the Company over
Yagi Euro as a result of the presence of the Company's Chairman and Chief
Executive Officer on Yagi Euro's Board of Directors as Vice Chairman and the
control the Company maintained over a derivatives brokering venture (see Note
11) which represented a significant portion of Yagi Euro's results, the Company
accounted for this investment under the equity method. Effective January 1,
2000, Yagi Euro completed an agreement to contribute its money market and
forward foreign exchange businesses to a 50-50 joint venture with Nittan Capital
Group Limited ("Nittan"). In anticipation of this transaction, Yagi Euro
incurred significant employee severance costs and disposed of certain fixed
assets during the year ended December 31, 1999. Included in loss from equity
affiliate for the year ended December 31, 1999 is the Company's share of these
costs on an after-tax basis of approximately $1,031,000. Included in income from
equity affiliate for the year ended December 31, 2000 is the Company's
approximately $86,000 share of an
F-15
NOTE 10 - EQUITY AFFILIATES AND MINORITY INTERESTS (Continued):
- --------------------------------------------------------------
after-tax gain realized by Yagi Euro on its restructuring activities. Effective
June 30, 2001, the Company sold its 15% equity interest in Yagi Euro to Yagi
Euro's other shareholder, Yagi Tanshi Company, Limited, resulting in a gain of
approximately $390,000. This gain was determined by subtracting from the sale
price of approximately $1.94 million transaction fees of approximately $50,000
and the carrying value of the investment under the equity method of
approximately $1.5 million.
Euro Brokers Finacor Limited:
- ----------------------------
On January 1, 1999, Euro Brokers International Limited ("EBIL"), a U.K.
subsidiary, completed a Sale and Purchase Agreement with Monecor (London)
Limited ("Monecor"), issuing 50% of its share capital to Monecor in exchange for
net assets approximating $5.4 million, consisting of all the shares of Monecor's
subsidiary, Finacor Limited, and the assets and undertaking of its Finacor Peter
branch in Paris. This transaction combined the existing interest rate options,
U.S. dollar deposit and the euro, British pound sterling and Japanese yen swaps
operations of EBIL with the euro and Scandanavian swaps businesses of Finacor
Limited and the euro swaps business of Finacor Peter. Simultaneously, EBIL
changed its name to Euro Brokers Finacor Limited ("EBFL"). The Company is deemed
to have management control of EBFL because of the Company's mandated 3 to 2
majority on EBFL's Board of Directors and the fact that the day-to-day
operations of EBFL are principally run by the Chief Executive Officer of Euro
Brokers Holdings Ltd. ("EBHL"), the Company's U.K. based holding company.
Accordingly, the assets and liabilities and results of operations of EBFL are
consolidated in the Company's consolidated financial statements, with Monecor's
interest presented as minority interest.
NOTE 11 - TOKYO-BASED VENTURE:
- -----------------------------
Since 1994 the Company has held an interest in a Tokyo-based derivatives
brokering venture (the "Tokyo Venture"). Originally, the Company held a 50%
interest in a venture with Yagi Euro. This venture was structured under Japanese
law as a Tokumei Kumiai ("TK"). A TK is a contractual arrangement in which a TK
investor invests in a business of a TK operator by making a capital contribution
to the TK operator and, in return, becomes entitled to a specified percentage of
the profits of the business while also becoming obligated to fund a specified
percentage of the losses of the business. Effective January 1, 2000, the
operations of this venture were merged with the off-balance sheet operations of
Nittan. This transaction, which included a cash payment of approximately $2.4
million to the Company by Nittan, reduced the Company's direct interest in the
Tokyo Venture to 40% and Yagi Euro's interest to 30%, with Nittan acquiring the
remaining 30% interest. Included in other income for 2000 is a gain recognized
by the Company on this transaction of approximately $2.2 million, calculated by
subtracting from the cash proceeds received transaction costs of approximately
$125,000 and 20% of the Company's capital contribution, which approximated
$38,000. Effective June 30, 2001, this venture disbanded and a new,
substantially similar TK venture with Nittan was formed, in which the Company
has a 57.25% interest and Nittan a 42.75% interest. The interests maintained by
the Company and Nittan in the new venture are proportional to the direct
interest each held in the original venture, once Yagi Euro's 30% interest was
excluded. Although the operations of the Tokyo Venture have always been managed
and run by persons appointed by the Company, it does not operate in a legal
entity separately distinguishable from the TK operator, and accordingly, the
Company accounts for its share of the results of operations of the Tokyo Venture
in other income as non-equity earnings (losses) from a contractual arrangement
(See Note 26 for information relating to the restated presentation of the
results of the Tokyo Venture).
F-16
NOTE 11 - TOKYO-BASED VENTURE (Continued):
- -----------------------------------------
Summarized operating results of the Tokyo Venture for the years ended December
31, 2001, 2000 and 1999, along with the Company's share of those results, are
presented below:
2001 2000 1999
------------ ------------ ------------
Revenues $ 15,218,117 $ 20,310,361 $ 20,259,059
Expenses 16,670,071 19,001,101 19,790,235
------------ ------------ ------------
(Loss) earnings $ (1,451,954) $ 1,309,260 $ 468,824
============ ============ ============
Company's share $ (694,083) $ 523,704 $ 234,412
============ ============ ============
Expenses of the Tokyo Venture in 1999 include approximately $700,000 of
restructuring costs incurred in anticipation of the January 1, 2000 admission of
Nittan.
NOTE 12 - RESTRUCTURING COSTS:
- -----------------------------
During the years ended December 31, 2000 and 1999, the Company incurred certain
restructuring costs. During the year ended December 31, 2000, these costs
related to the ceasing of operations in June 2000 by the Company's Toronto-based
subsidiary and the notice given in December 2000 to close EBFL's branch
operations in Paris effective January 2001. A portion of the business previously
conducted in Toronto was relocated to New York. Restructuring costs incurred
during the year ended December 31, 1999 related to the closing of certain
departments within the energy-related derivatives brokerage group. Restructuring
costs for the years ended December 31, 2000 and 1999 are detailed as follows:
2000 1999
---- ----
(Restated)
Employee severance costs $ 441,021 $
Loss on disposal of fixed assets 77,992
Occupancy costs 17,750 171,000
Other 5,198 150,000
---------- ---------
$ 541,961 $ 321,000
========== =========
All of the amounts represent costs that are not associated with future revenues
and are either incremental or contractual with no economic benefit. The employee
severance costs for 2000 relate to the termination of nine employees.
Substantially all of the restructuring reserve outstanding at December 31, 1999
was paid during 2000. Approximately $72,000 of the restructuring reserve for
2000 costs remains outstanding at December 31, 2001, with such amount expected
to be paid in full during 2002.
NOTE 13 - FIXED ASSETS:
- ----------------------
Fixed assets at December 31, 2001 and 2000 are summarized below:
December 31, December 31,
2001 2000
------------ ------------
Furniture and telephone equipment $ 7,182,545 $ 13,029,307
Leasehold improvements 4,000,882 6,860,184
Computer and related equipment 5,235,150 11,132,689
Software 7,094,308 7,031,794
Automobiles 345,804 623,088
------------ ------------
23,858,689 38,677,062
Less - Accumulated depreciation
and amortization (19,062,255) (31,276,568)
------------ ------------
$ 4,796,434 $ 7,400,494
============ ============
F-17
NOTE 14 - OBLIGATIONS UNDER CAPITALIZED LEASES:
- ----------------------------------------------
The Company has purchased automobiles under capitalized leases. The lease terms
generally do not exceed three years. The following is a schedule of future
minimum lease payments under capitalized leases together with the present value
of the net minimum lease payments as of December 31, 2001:
For the Year Ending December 31,
2002 $ 75,397
2003 80,476
2004 87,258
---------
Total minimum lease payments 243,131
Less - Amount representing interest (38,879)
----------
Present value of total minimum lease payments $ 204,252
==========
The gross amounts of assets under capitalized leases are approximately $222,000
and $536,000 at December 31, 2001 and 2000, respectively. Such amounts are
included in fixed assets in the consolidated statements of financial condition.
The charges to income resulting from the amortization of assets recorded under
capitalized leases were approximately $80,000, $133,000 and $174,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
NOTE 15 - BORROWING ARRANGEMENTS:
- --------------------------------
Loan Payable:
- ------------
On June 17, 1999, Euro Brokers Inc. ("EBI"), a U.S. subsidiary, entered into a
Loan and Security Agreement with General Electric Capital Corporation ("GECC")
for a revolving credit facility of up to $5 million. The facility, which was not
drawn upon at December 31, 2001 or 2000, is secured by substantially all of
EBI's assets and expires on June 17, 2004. The borrowing availability under the
facility (which approximated $3.5 million at December 31, 2001) is determined
based upon the level and condition of EBI's billed accounts receivable. The
agreement contains certain covenants which require EBI separately, and the
Company as a whole, to maintain certain financial ratios and conditions.
Borrowings under the facility bear interest at a variable rate based upon the
published rate for 30-day dealer placed commercial paper plus a margin.
Commitment fees of .15% per annum are charged on the unused portion of the
facility.
Notes Payable:
- -------------
Notes payable at December 31, 2001 and 2000 consist of the following:
December 31, December 31,
2001 2000
------------ ------------
7.9% note secured by certain equipment $ 447,978 $ 827,369
Variable rate subordinated notes issued to
Monecor for regulatory capital
adequacy requirements
of EBFL 895,800
------------ ------------
$ 447,978 $ 1,723,169
============ ============
F-18
NOTE 15 - BORROWING ARRANGEMENTS (Continued):
- --------------------------------------------
The 7.9% note secured by certain equipment represents the remaining amount due
on a $2,140,000 note issued in December 1997 to GECC. The note was secured by
all owned equipment of EBI and was payable in monthly installments through
December 2002. As a result of the September 11th attack on the World Trade
Center, the equipment securing this note was destroyed. Pursuant to the terms of
the note, the Company intends to use proceeds due under the property casualty
insurance policy to retire the note early in 2002 without penalty.
The variable rate subordinated notes were issued by EBFL to Monecor (as well as
(pound)1 million of subordinated notes to EBHL, which are eliminated in
consolidation) for the purpose of maintaining the regulatory capital
requirements established by the Financial Services Authority, a U.K. regulatory
body. As a result of the profitable operations of EBFL in 2001, EBFL has
maintained excess regulatory capital and in December 2001 repaid the
subordinated notes held by both shareholders.
NOTE 16 - EMPLOYEE BENEFIT PLAN:
- -------------------------------
The Company maintains a 401(k) defined contribution plan for the Company's U.S.
operations covering substantially all salaried employees. The Company's
contributions to the 401(k) plan are, subject to a maximum limit, based upon a
percentage of employee contributions. Total 401(k) plan expense approximated
$230,000 for the year ended December 31, 2001 and $270,000 for each of the years
ended December 31, 2000 and 1999.
NOTE 17 - INCOME TAXES:
- ----------------------
Income before provision for income tax and minority interest was taxed under the
following jurisdictions:
For the Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(Restated) (Restated)
Domestic $ 8,206,885 $ 4,528,705 $ 3,215,299
Foreign 3,690,175 (1,020,111) 132,257
------------ ------------ ------------
Total $ 11,897,060 $ 3,508,594 $ 3,347,556
============ ============ ============
The components of the provision for income taxes are as follows:
For the Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Current (Restated) (Restated)
Federal $ 2,307,130 $ 1,012,798 $ 69,609
State and local (3,384,531) 75,190 (16,163)
Foreign 1,981,160 (139,143) 1,804,646
------------ ------------ ------------
Total 903,759 948,845 1,858,092
------------ ------------ ------------
Deferred
Federal 1,602,678 797,989 (867,118)
State and local (149,310) (49,643) (32,809)
Foreign (182,454) 1,013,291 (412,949)
------------ ------------ ------------
1,270,914 1,761,637 (1,312,876)
------------ ------------ ------------
Total $ 2,174,673 $ 2,710,482 $ 545,216
============ ============ ============
F-19
NOTE 17 - INCOME TAXES (Continued):
- ----------------------------------
Deferred tax assets (liabilities) are comprised of the following:
December 31, December 31,
2001 2000
------------ ------------
Assets
Bad debt reserve $ 187,077 $ 186,475
Occupancy reserves 121,488 620,416
Depreciation and amortization 1,029,962 1,495,924
Net operating losses ("NOLs") 853,921 707,093
Foreign tax credits 72,726 72,726
Unrealized losses 59,738
Capital loss carryforwards 615,132 1,001,936
Other 77,479 82,097
Deferred tax asset valuation allowance (952,768) (2,109,824)
------------ ------------
Gross deferred tax assets, after valuation
allowance $ 2,005,017 $ 2,116,581
============ ============
Liabilities
Differential on assigned values and tax
basis for acquired assets $ (457,752) $ (682,466)
Unrealized gains (1,395,016) (36,049)
Other (345,205) (360,245)
------------ ------------
Gross deferred tax liabilities $ (2,197,973) $ (1,078,760)
============ ============
The valuation allowance for deferred tax assets has been established for assets
arising from various timing differences to reduce the amounts to only that
portion that is judged more likely than not to be realized. Foreign tax credit
carryforwards of approximately $73,000 expire in 2005. Domestic state and local
NOLs approximating $1,413,000, $3,008,000, $494,000, $2,704,000 and $1,342,000
expire in 2012, 2018, 2019, 2020 and 2021, respectively. Foreign NOLs
approximating $509,000 and $238,000 expire in 2007 and 2008, respectively.
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pretax
income from continuing operations as a result of the following differences:
F-20
NOTE 17 - INCOME TAXES (Continued):
- ----------------------------------
For the Year Ended
December 31, December 31, December 31,
2001 2000 1999
----------- ----------- -----------
(Restated) (Restated)
Tax at U.S. statutory rate $ 4,045,000 $ 1,192,922 $ 1,138,169
Increase (decrease) in tax resulting from:
Higher effective rates on earnings
of foreign operations and tax
benefit of foreign losses not
recognized 279,954 436,195 960,505
Nondeductible meals and
entertainment 828,500 1,020,421 1,095,002
Nondeductible in-process research and
development 162,180
Nondeductible goodwill
amortization/write-off 310,663 25,189
Reduction of income tax reserves (2,359,511) (1,200,000)
Non-taxable interest income (228,378) (104,977) (86,618)
(Decrease) increase to deferred tax
asset valuation allowance (1,157,056) 153,958 (971,536)
State and local taxes, net 657,993 16,860 (49,022)
Other (202,492) (192,266) (341,284)
----------- ----------- -----------
$ 2,174,673 $ 2,710,482 $ 545,216
=========== =========== ===========
NOTE 18 - STOCKHOLDERS' EQUITY:
- ------------------------------
Preferred stock:
- ---------------
Pursuant to the Company's adoption of a shareholder rights plan (the "Plan") in
December 1996, the Company authorized the creation of Series A Junior
Participating Preferred Stock, par value $.001 per share ("Series A Preferred
Stock"), and reserved 300,000 shares thereof for issuance upon exercise of the
preferred stock purchase rights (each, a "Right") that, pursuant to the Plan,
were at the time dividended to holders of common stock on the basis of one
Right, expiring December 6, 2006, for each share of common stock. Each Right
will entitle the registered holder to purchase from the Company one
one-hundredth of a share of Series A Preferred Stock for $22.50, subject to
adjustment. The Rights, however, generally do not become exercisable until ten
days after a person or group acquires (or commences a tender or exchange offer
to acquire) 15% or more beneficial ownership of the common stock. Upon
occurrence of such event (subject to certain conditions and exceptions more
fully described in the Plan), and subject to the Rights no longer being
redeemable, each Right would entitle the holder thereof (other than the person
or group triggering such exercisability) to buy (with certain limited
exceptions) common stock of the Company (or, if the Company is acquired, common
shares of the surviving entity) having a market value equal to twice the
exercise price of the Right. The Rights may be redeemed by the Company,
generally at any time prior to the triggering events described above, at a price
of $.01 per Right.
On October 1, 1998 the Company issued 2,000 shares of a newly created Series B
Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") to Yagi Euro
at a purchase price of $1,000 per share ("Stated Value"), with cumulative
dividends at the annual rate of 2% of the Stated Value, payable quarterly in
arrears. In accordance with the terms of the Series B Preferred Stock, upon the
sale of the Company's investment in Yagi Euro in June 2001 (See Note 10 above),
the Company redeemed the Series B Preferred Stock from Yagi Euro at the Stated
Value, together with accrued and unpaid dividends thereon of $10,000.
F-21
NOTE 18 - STOCKHOLDERS' EQUITY (Continued):
- ------------------------------------------
Common stock and warrants:
- -------------------------
At December 31, 1998, the Company had outstanding 11,392,239 shares of common
stock and held 68,487 shares of common stock in treasury.
In June 1999, the Company repurchased 2,986,345 shares of its common stock from
investment partnerships managed by the venture capital group Welsh, Carson,
Anderson & Stowe for $5,226,104, or $1.75 per share.
In May 2000, the Company's Board of Directors authorized a repurchase program
for up to 10% of its then outstanding common stock, or 833,744 shares, with
purchases to be made from time to time as market and business conditions
warranted, in open market, negotiated or block transactions. Through December
31, 2000, the Company had purchased 591,602 shares of its common stock under
this program at an aggregate purchase price of $894,494.
On August 11, 2000, the Company issued 375,000 shares from treasury in
connection with the Tradesoft acquisition (see Note 4). This issuance resulted
in an increase in accumulated deficit of $177,335, equal to the difference
between the fair value of these shares on August 11, 2000 and the average cost
of shares in treasury on that date.
In January 2001, the Company purchased the remaining 242,142 shares under the
May 2000 authorization at an aggregate purchase price of $293,156, and the Board
of Directors authorized an additional repurchase of up to 787,869 shares, or 10%
of the then outstanding common stock, which was completed in July 2001 at an
aggregate purchase price of $1,907,660. In July 2001 the Board of Directors
authorized an additional repurchase of up to 709,082 shares, again representing
10% of the then outstanding common stock. This authorization was further
expanded by 490,918 shares, to 1,200,000 shares, by the Board of Directors in
late September 2001. Through December 31, 2001, the Company had purchased
214,000 shares under this expanded authorization at an aggregate purchase price
of $810,725.
In August 2001, the Company received 22,528 shares into treasury in settlement
of an $81,733 obligation owed the Company in connection with the settlement of
escrow arrangements related to the Company's acquisition of Tradesoft.
During the year ended December 31, 2001, 220,500 shares were issued pursuant to
options exercised under the Company's 1996 Stock Option Plan. In connection with
certain exercises, the Company received 48,567 shares into treasury as
consideration for exercise prices aggregating $220,000.
As a result of the foregoing activity, at December 31, 2001 and 2000, the
Company had outstanding 7,026,229 and 8,120,835 shares of common stock,
respectively, and held 4,586,540 and 3,271,434 shares of common stock in
treasury, respectively.
At December 31, 2001 and 2000, the Company had outstanding 685,948 redeemable
purchase warrants issued in connection with the Company's 1994 initial public
offering and 49,032 Series B redeemable common stock purchase warrants issued in
connection with the acquisition of EBIC (collectively, the "Warrants"). Both
series of Warrants entitle the holder to purchase from the Company one share of
common stock at an exercise price of $5.00 per share and are redeemable at a
price of $.01 per Warrant upon 30 days notice at any time, but only if the last
sale price of the common stock has been at least $8.50 per share for 20
consecutive trading days ending on the third day prior to the date on which
notice of redemption is given. In connection with finalizing a related
registration statement, the Company has extended the expiration of the Warrants
from November 30, 2001 to April 12, 2002.
F-22
NOTE 18 - STOCKHOLDERS' EQUITY (Continued):
- ------------------------------------------
At December 31, 2001, the Company had 734,980 shares of common stock reserved
for issuance upon exercise of the Warrants and an additional 1,579,500 shares
reserved for issuance upon exercise of options that are or may be granted
pursuant to the Company's 1996 Stock Option Plan (see Note 19).
NOTE 19 - STOCK OPTION PLAN:
- ---------------------------
The Company's 1996 Stock Option Plan, as amended (the "Plan"), provides for the
granting of stock options, in the form of incentive stock options ("ISOs") and
non-qualified stock options, to directors, executive officers and key employees
of the Company and its subsidiaries, generally as determined by the compensation
committee of the Company's Board of Directors. Options to purchase a maximum of
1,800,000 shares of common stock are available under the Plan. In the case of
ISOs, the duration of the option may not exceed ten years (five years for a 10%
or more stockholder) and the exercise price must be at least equal to the fair
market value of a share of common stock on the date of grant (110% of the fair
market value for a 10% or more stockholder). Employee options granted to date
for the most part are ISOs and vest and become exercisable in equal installments
on each anniversary of the date of the grant for periods of four or five years.
Non-employee director options granted to date are non-qualified stock options
and vest in equal 50% installments on the dates that are six and twelve months
following the date of grant. Upon a change in control of the Company, as defined
in the Plan, all unvested options automatically vest. Under the Plan, unless
otherwise determined by the compensation committee, options may only be
exercised during the period of employment or service with the Company or the
30-day period thereafter (or, in the case of death, disability or retirement,
the one-year period thereafter).
A summary of the Company's stock option activity follows:
December 31, 2001 December 31, 2000 December 31, 1999
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 1,755,000 2.14 1,670,000 2.03 1,650,000 2.00
Granted 335,000 2.88 335,000 2.61 85,000 2.46
Exercised (220,500) 2.01
Canceled (398,750) 2.28 (250,000) 2.02 (65,000) 2.00
--------- ---- --------- ---- --------- ----
Outstanding
at end of year 1,470,750 2.29 1,755,000 2.14 1,670,000 2.03
========= ==== ========= ==== ========= ====
Exercisable
at end of year 978,313 2.12 1,079,750 2.04 898,000 2.00
========= ==== ========= ==== ========= ====
Weighted average
fair value of
options granted
during the year $2.05 $1.83 $1.69
===== ===== =====
Options outstanding at December 31, 2001 had exercise prices ranging from $2.00
to $3.00 and a weighted-average remaining contractual life of approximately 6.6
years.
F-23
NOTE 19 - STOCK OPTION PLAN (Continued):
- ---------------------------------------
As allowed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company has elected to continue
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for the Plan. Accordingly, the Company has
not recognized any compensation cost associated with the Plan since the market
prices of the underlying stock on the option grant dates were not greater than
the option exercise prices. As required by SFAS 123, however, the Company has
disclosed below its estimated pro forma net income and earnings per share if
compensation costs under the Plan had been recognized using the fair value
method of SFAS 123. Because stock options under the Plan have characteristics
significantly different from those of traded options and because changes in
subjective assumptions can materially affect the fair value estimated, the
Company used the Black-Scholes pricing model for 2001, 2000 and 1999 with the
following weighted average assumptions: expected volatility of 89%, 83% and 81%,
respectively; risk free interest rate of 4.9%, 6.7% and 6.1%, respectively; and
an expected option life of five years.
For the Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Net income As reported $ 9,038,402 $ 2,002,099 $ 2,532,212
Pro forma 8,385,408 1,249,158 1,892,868
Basic earnings per share As reported $1.23 $ .23 $ .26
Pro forma 1.14 .14 .19
Diluted earnings per share As reported $1.16 $ .23 $ .25
Pro forma 1.08 .14 .19
NOTE 20 - COMMITMENTS:
- ---------------------
The Company is obligated under certain non-cancelable leases for office space,
equipment and telecommunication services.
The Company has executed various operating leases in respect of premises which
contain escalation clauses for base rent, maintenance, electricity and real
estate tax increases. The Company is currently subleasing portions of certain
leased premises. As a result of the September 11th attack on the World Trade
Center, the Company's lease for office space in New York was terminated, with
immediate effect.
Future minimum rental commitments for operating leases (exclusive of payments
post-dating lease-break options available to the Company), net of sublease
income, approximate the following:
Minimum Minimum
Rental Sub-Rental
Year Payments Income Net
---- ------------ ------------ ------------
2002 $ 6,636,804 $ 570,929 $ 6,065,875
2003 1,090,894 1,090,894
2004 152,117 152,117
2005 111,226 111,226
2006 26,275 26,275
------------ ------------ ------------
$ 8,017,316 $ 570,929 $ 7,446,387
============ ============ ============
F-24
NOTE 20 - COMMITMENTS (Continued):
- ---------------------------------
Rental expense, net of sub-rental income, amounted to approximately $3,416,000,
$2,878,000 and $3,309,000 in 2001, 2000 and 1999, respectively.
Equipment subject to operating leases was destroyed in the September 11th
attack. In accordance with the terms of the leases, the lessor is entitled to
payments under the property and casualty insurance policy based upon agreed upon
lease termination values aggregating approximately $1,000,000.
NOTE 21 - CONTINGENCIES:
- -----------------------
U.K. National Insurance:
- -----------------------
The Company has received demands from the Inland Revenue in the United Kingdom
for the employer portion of National Insurance Contributions ("NIC") related to
employee bonuses paid during the period from August 1994 to February 1998 in the
amount of approximately (pound)1.7 million (approximately $2.5 million at
December 31, 2001), plus interest estimated at approximately (pound)425,000
through December 31, 2001 (approximately $618,000). The Company has formally
challenged these demands as it feels the respective bonus payment methods used
did not require NIC payments under existing legislation. At December 31, 2001,
the Company had reserved approximately $2.3 million against this demand. Based
upon this level of reserves, management does not anticipate the ultimate outcome
of this matter will have a material adverse effect on its consolidated financial
condition or results of operations.
Counterparty Risk:
- -----------------
In the normal course of its business, certain securities transactions brokered
by the Company are introduced to and settled by the Company's clearing firms. In
the event of non-performance by a counterparty to such transactions, the Company
may be responsible to meet obligations incurred by such non-performance. The
Company and its clearing firms have a policy of reviewing, on an ongoing basis,
the credit standing of the Company's customers, which are primarily major
financial institutions.
September 11th Securities Settlements:
- -------------------------------------
The Company's clearing bank for U.S. Treasury and federal agency securities
brokerage transactions has informed the Company it incurred interest costs of
approximately $2.5 million in connection with financing securities positions it
accepted in the Company's account on September 11th after the collapse of the
World Trade Center towers. In March 2002, the Company received a claim from its
clearing bank for reimbursement of these interest costs. The Company believes it
has substantial defenses against this claim. In addition, the Company believes
it has recourse against its insurance company for all or a portion of any
ultimate liability. At December 31, 2001, the Company had reserved $700,000
relating to this claim.
NOTE 22 - DERIVATIVE FINANCIAL INSTRUMENTS USED FOR TRADING PURPOSES:
- --------------------------------------------------------------------
The Company, from time to time, sells financial futures contracts as a means of
managing market risk on municipal securities positions held. Financial futures
contracts are exchange traded contractual commitments to either receive
(purchase) or deliver (sell) a standard amount of a financial instrument at a
specified future date and price. Maintaining a financial futures contract
requires the Company to deposit margin with its clearing broker as security for
its obligations. Financial futures contracts provide for daily cash settlements,
with gains or losses based upon fluctuations in market value included in trading
gains on municipal securities transactions. Open equity in financial futures
contracts is recorded as receivable from and payable to broker-dealers and
customers as applicable. At December 31, 2001 and 2000 the Company had no
financial futures contracts outstanding.
F-25
NOTE 23 - DERIVATIVE FINANCIAL INSTRUMENTS USED FOR HEDGING ACTIVITIES:
- ----------------------------------------------------------------------
On July 1, 2000, the Company elected to early-adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended ("SFAS 133"). SFAS 133 requires that all derivative
instruments, including certain derivatives embedded in other contracts, be
recorded on the statement of financial condition at their fair value. Changes in
the fair value of derivatives are to be recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge transaction.
Since the Company did not have any outstanding unrecorded derivative instruments
or ongoing hedging activities at June 30, 2000, there was no transition
adjustment necessary as a result of the early adoption of SFAS 133.
From time to time, the Company utilizes foreign currency forward contracts to
reduce its exposure to exchange rate risk associated with anticipated
commissions on transactions denominated in a currency other than the functional
currency (foreign currency cash flow hedge). Pursuant to these foreign currency
forward contacts, the Company receives or pays the difference between the
contracted forward exchange rate (for the purchase or sale of one currency for
another) and the prevailing exchange rate at settlement date. In July 2000, the
Company entered into foreign currency forward contacts with equal notional
amounts maturing at successive month-end dates through December 31, 2001 based
upon a portion of such commission revenues the Company reasonably anticipated
realizing during this time period. In accordance with SFAS 133, the Company
excluded from its assessment of hedge effectiveness the portion of the fair
value of the foreign currency forward contracts attributable to the spot-forward
difference and has recorded the present value of the changes in such amounts in
earnings.
For the year ended December 31, 2001 and the six months ended December 31, 2000,
the changes in these excluded portions approximated $15,000 and $41,000,
respectively. Under SFAS 133, the fair value of these foreign currency forward
contracts attributable to the present value of the forecasted cash flows based
on the spot rate was considered a highly effective hedge. Therefore, in order to
coincide with the forecasted revenue streams, no amounts related to the changes
in these amounts were included in earnings until such contracts matured. These
deferred amounts were included in the accumulated other comprehensive income
section of stockholders' equity. At December 31, 2001, the Company had no
foreign currency forward contracts outstanding for hedging activities.
NOTE 24 - NET CAPITAL REQUIREMENTS:
- ----------------------------------
MFI, as a U.S. broker-dealer, is subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (rule 15c3-1), which requires the
maintenance of minimum regulatory net capital. MFI has elected to use the
alternative method, as permitted by the rule, which requires that MFI maintain
minimum regulatory net capital, as defined, equal to the greater of $250,000 or
2% of aggregate debit items arising from customer transactions, as defined; or
4% of the funds required to be segregated pursuant to the Commodity Exchange Act
and regulations thereunder. MFI's membership in GSCC requires it to maintain
minimum excess regulatory net capital of $10,000,000. In addition, a number of
other subsidiaries operating in various countries are subject to capital rules
and regulations issued by the designated regulatory authorities to which they
are subject. At December 31, 2001, MFI had regulatory net capital approximating
$13 million and a regulatory net capital requirement of $250,000.
NOTE 25 - SEGMENT REPORTING:
- ---------------------------
In accordance with Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), the Company is reporting certain information relating to its operating
segments. For the purpose of this disclosure, operating revenues include
commission income, trading gains and information sales revenue. The Company has
defined its operating segments based upon geographic
F-26
NOTE 25 - SEGMENT REPORTING (Continued):
- ---------------------------------------
location as such units are managed separately to reflect their unique market,
employment and regulatory environments. The reportable segments, as defined by
SFAS 131, consist of the United States, United Kingdom, Switzerland and Japan.
United States amounts are principally derived from the Company's New York
office, but include the balances for all its U.S. based operations. United
Kingdom amounts include the consolidated balances for EBFL, with net income
(loss) amounts net of Monecor's minority interest. Switzerland amounts are
derived from the Company's Swiss office. Japan amounts primarily reflect the
non-equity earnings (loss) from contractual arrangement (Tokyo Venture). See
Note 11 for additional disclosure of the revenues and expenses of the Tokyo
Venture. Other geographic segments which do not meet the SFAS 131 materiality
thresholds for reportable segments have been included in "All Other".
The accounting policies of the segments are the same as those described in
Note 2.
United United All
States Kingdom Switzerland Japan Other Total
------ ------- ----------- ----- ----- -----
2001
Operating revenues $ 93,295,842 $ 50,239,021 $ 1,479,737 $ $ 3,538,170 $ 148,552,770
Interest income 1,881,779 641,814 737 77 3,172 2,527,579
Interest expense 582,834 305,088 887,922
Depreciation and amortization 2,606,071 822,768 27,524 142,217 3,598,580
Provision (benefit) for
income taxes 420,636 1,723,759 12,067 (51,130) 69,341 2,174,673
Income from unconsolidated
affiliates 9,992 9,992
Non-equity loss from
contractual arrangement (694,083) (694,083)
Net income (loss) 7,762,756 1,711,372 163,013 (622,924) 24,185 9,038,402
Assets 273,014,704 23,293,091 1,016,935 7,106,600 1,596,115 306,027,445
Capital expenditures 1,715,285 325,660 67,167 2,108,112
United United All
States Kingdom Switzerland Japan Other Total
------ ------- ----------- ----- ----- -----
2000 (Restated)
Operating revenues $ 76,309,398 $ 46,669,303 $ 603,624 $ $ 3,662,277 $ 127,244,602
Interest income 1,578,110 541,475 1,030 208 8,576 2,129,399
Interest expense 528,406 333,484 39,181 901,071
Depreciation and amortization 2,722,509 1,061,304 62,210 162,914 4,008,937
Provision (benefit) for
income taxes 1,166,757 522,008 (2,221) 1,088,543 (64,605) 2,710,482
Income from unconsolidated
affiliates 135,890 135,890
Non-equity earnings from
contractual arrangement 523,704 523,704
Net income (loss) 1,745,148 (681,634) (508,509) 1,392,576 54,518 2,002,099
Assets 67,747,976 22,488,708 603,276 8,201,126 1,465,366 100,506,452
Capital expenditures 1,981,620 496,892 15,248 2,493,760
Investment in unconsolidated
affiliates 1,552,757 1,552,757
F-27
NOTE 25 - SEGMENT REPORTING (Continued):
- ---------------------------------------
1999 (Restated) United United All
States Kingdom Switzerland Japan Other Total
------ ------- ----------- ----- ----- -----
Operating revenues $ 74,947,902 $ 54,155,703 $ 3,180,648 $ $ 3,189,840 $ 135,474,093
Interest income 1,781,438 586,927 679 64,915 10,962 2,444,921
Interest expense 841,737 554,594 2,916 109 1,399,356
Depreciation and
amortization 2,824,531 1,240,339 69,501 231,133 4,365,504
(Benefit) provision for
income taxes (11,521) 783,623 64,718 (417,415) 125,811 545,216
Loss from unconsolidated
affiliates (1,576,644) (1,576,644)
Non-equity earnings from
contractual arrangement 234,412 234,412
Net income (loss) 1,769,869 (163,594) 494,433 766,622 (335,118) 2,532,212
Assets 67,032,170 25,184,192 1,109,637 8,270,218 2,094,876 103,691,093
Capital expenditures 741,064 500,969 57,375 1,299,408
Investment in
unconsolidated affiliates 1,595,852 1,595,852
Included below are reconciliations of reportable segment items to the Company's
consolidated totals as reported in the consolidated financial statements.
2001 2000 1999
------------- ------------- -------------
Interest income:
Total for reportable segments $ 2,524,407 $ 2,120,823 $ 2,433,959
Other interest 3,172 8,576 10,962
Elimination of intersegment interest
income (221,535) (306,114) (565,421)
------------- ------------- -------------
Consolidated total $ 2,306,044 $ 1,823,285 $ 1,879,500
============= ============= =============
Interest expense:
Total for reportable segments $ 887,922 $ 901,071 $ 1,399,247
Other interest 109
Elimination of intersegment interest
expense (221,535) (306,114) (565,421)
------------- ------------- -------------
Consolidated total $ 666,387 $ 594,957 $ 833,935
============= ============= =============
Assets:
Total for reportable segments $ 304,431,330 $ 99,041,086 $ 101,596,217
Other assets 1,596,115 1,465,366 2,094,876
Elimination of intersegment receivables (10,376,533) (12,968,505) (15,558,510)
Elimination of investments in
other segments (14,549,715) (15,738,154) (15,664,625)
------------- ------------- -------------
Consolidated total $ 281,101,197 $ 71,799,793 $ 72,467,958
============= ============= =============
F-28
NOTE 26 - RESTATEMENT:
- ---------------------
The Company has restated the presentation of the consolidated statements of
operations for each of the two years in the period ended December 31, 2000 to
deconsolidate the revenues and expenses associated with the operations of the
Tokyo Venture.
The Company has historically consolidated these amounts on the basis of its
effective control of the management of those operations. The effect of the
restatement is now to present the Company's share of the profits and losses of
the Tokyo Venture in other income as non-equity earnings (losses) from a
contractual arrangement. This treatment was determined to accord better with the
fact that under Japanese law, the Tokyo Venture is not viewed as a separate
legal entity, but solely as a contractual arrangement.
This change in presentation has had and will have no effect on the Company's
earnings, cash flows or stockholders' equity for any prior or future period.
The following table summarizes the impact of restatement on the Company's
consolidated statement of operations:
December 31, 2000 December 31, 1999
---------------------------- ----------------------------
Previously Previously
Reported Restated Reported Restated
-------- -------- -------- --------
Total revenues $151,592,180 $131,805,523 $157,300,116 $137,305,469
Total expenses 149,725,971 129,939,314 153,221,260 133,196,613
Net income
(unchanged) 2,002,099 2,002,099 2,532,212 2,532,212
F-29
NOTE 27 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
- --------------------------------------------------------
The following table reflects the unaudited quarterly results of operations of
the Company for 2001 and 2000 and gives effect to the restatement for previously
reported periods as described in Note 26.
For the Three Months Ended
2001 March 31 June 30 September 30 December 31
-------------------------- -------------------------- -------------------------- -----------
Previously Previously Previously
Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- --------
Total revenues $ 45,691,576 $ 40,891,633 $ 44,141,774 $ 40,528,176 $ 41,570,790 $ 37,681,166 $ 35,722,590
Total expenses 43,363,418 38,563,475 41,416,723 37,803,125 39,602,612 35,712,988 33,715,567
Income (loss) before
provision for income
taxes and minority
interest 4,508,342 4,482,372 4,142,787 4,586,390 2,744,076 2,848,953 (20,655)
Net income 2,344,282 2,344,282 2,718,919 2,718,919 1,968,178 1,968,178 2,007,023
Weighted average common
shares outstanding-basic 7,825,912 7,825,912 7,525,809 7,525,809 7,082,859 7,082,859 7,005,517
Weighted average common
shares outstanding-diluted 7,825,912 7,825,912 7,781,977 7,781,977 7,717,083 7,717,083 7,673,498
Basic earnings per share .30 $.30 .36 .36 .28 .28 .29
Diluted earnings per share .30 $.30 .35 .35 .26 .26 .26
For the Three Months Ended
2000 March 31 June 30 September 30 December 31
------------------------ ------------------------ ------------------------- ------------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues $43,688,220 $38,460,913 $36,228,004 $31,198,320 $35,076,656 $30,426,458 $36,599,300 $31,719,832
Total expenses 41,538,571 36,311,264 35,917,949 30,888,265 35,704,576 31,054,378 36,564,875 31,685,407
Income (loss) before
provision for
income taxes and
minority interest 3,587,546 3,580,387 660,249 460,231 (1,294,041) (1,138,525) 1,340,396 606,501
Net income (loss) 2,263,335 2,263,335 307,872 307,872 (624,945) (624,945) 55,837 55,837
Weighted average
common shares
outstanding-basic 8,337,437 8,337,437 8,317,488 8,317,488 8,461,820 8,461,820 8,378,903 8,378,903
Weighted average
common shares
outstanding-diluted 8,618,880 8,618,880 8,317,488 8,317,488 8,461,820 8,461,820 8,378,903 8,378,903
Basic earnings
(loss)per share .27 .27 .04 .04 (.08) (.08) .01 .01
Diluted earnings
(loss) per share .26 .26 .04 .04 (.08) (.08) .01 .01
F-30
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of March 8, 1996, as
amended, by and among the Registrant, EBIC Acquisition Corp.
and Euro Brokers Investment Corporation, without exhibits and
schedules (incorporated herein by reference to Exhibit 2.1 of
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996)
2.2 Sale and Purchase Agreement, dated 21 December 1998, by and
among Euro Brokers International Limited, Euro Brokers Holdings
Limited, Monecor (London) Limited and Finacor Peter, without
schedules (incorporated herein by reference to Exhibit 2.5 of
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "1998 Form 10-K"))
2.3 Stock Purchase Agreement, dated as of August 11, 2000, by and
between the Registrant and the stockholders of Tradesoft
Technologies, Inc., without exhibits and schedules
(incorporated herein by reference to Exhibit 2.6 of the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2000)
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (the "1999 Form 10-K"))
3.2 Amended and Restated Bylaws of the Registrant (incorporated
herein by reference to Exhibit 3.2 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
("1996 Form 10-K"))
4.1 Form of Common Stock Certificate (incorporated herein by
reference to Exhibit 4.1 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (No. 33-85346), dated
November 23, 1994 ("Amendment No. 1"))
4.2 Form of Redeemable Common Stock Purchase Warrant (incorporated
herein by reference to Exhibit 4.2 of Amendment No. 1)
4.3 Warrant Agreement, dated as of November 30, 1994, by and
between the Registrant and Continental Stock Transfer & Trust
Company (incorporated herein by reference to Exhibit 4.4 of
Amendment No.1)
4.4 Form of Series B Redeemable Common Stock Purchase Warrant
(incorporated herein by reference to Exhibit 4.5 of the
Registrant's Registration Statement on Form S-4 (No. 333-06753)
dated June 25, 1996) (the "Form S-4"))
X-1
4.5 Warrant Agreement, dated as of June 5, 1996, by and between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated herein by reference to Exhibit 4.3 of
the Form S-4)
4.6 Rights Agreement, dated as of December 6, 1996, between the
Registrant and Continental Stock Transfer & Trust Company, as
rights agent (the "Rights Agreement") (incorporated herein by
reference to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A, dated December 6, 1996)
4.7 Amendment No. 1, dated July 26, 2001, to the Rights Agreement
(incorporated herein by reference to Exhibit 4.6a to the
Registrant's Current Report on Form 8-K, dated July 27, 2001)
4.8 Agreement to furnish Debt Instruments*
10.1 Underlease of Premises, dated 28 May 1993, between Chestermount
Properties Limited and Euro Brokers Holdings Limited (the
"London Underlease") (incorporated herein by reference to
Exhibit 10.4 of the 1996 Form 10-K)
10.2 Supplemental Deed to the London Underlease, dated 28 May 1993
(incorporated by reference to Exhibit 10.5 of the 1998 Form
10-K)
10.3+ The Registrant's 1996 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.6 of the 1999
Form 10-K)
10.4+ Amended and Restated Employment Agreement, dated as of August
14, 1998, by and between the Registrant and Gilbert Scharf
(incorporated herein by reference to Exhibit 10.7 of the 1998
Form 10-K)
10.5+ Employment Agreement, dated as of August 14, 1998, by and
between the Registrant and Keith Reihl (incorporated herein by
reference to Exhibit 10.8 of the 1998 Form 10-K)
10.6+ Amended and Restated Employment Agreement, dated as of August
14, 1998, by and between the Registrant and Roger Schwed
(incorporated herein by reference to Exhibit 10.9 of the 1998
Form 10-K)
10.7+ Employment Agreement, dated 1 October 2000, by and between Euro
Brokers Finacor Limited and Robin Adrian Clark (incorporated
herein by reference to Exhibit 10.10 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
2000)
10.8+ Employment Agreement, dated as of May 4, 1998, by and between
Euro Brokers Inc. and Steven Vigliotti (incorporated herein by
reference to Exhibit 10.12 of the 1999 Form 10-K)
X-2
10.9 Agreement for Securities Clearance Services, dated as of March
20, 2000, by and between Wexford Clearance Services Corporation
and Maxcor Financial Inc. (incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000) (1)
21 Subsidiaries of the Registrant*
23 Consent of PricewaterhouseCoopers LLP*
- --------------------------
* Filed herewith
+ Connotes a management contract or compensatory plan or arrangement in which
a director or executive officer of the Registrant participates.
(1) Portions of this exhibit have been redacted and confidential treatment
granted pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.