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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, 2002
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
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Seaport Plaza, 19th Floor, New York, NY 10038
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (646) 346-7000
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (assuming directors, executive officers and 10% stockholders
are affiliates), based on the Nasdaq Stock Market(R) last sales price of $5.86
on June 28, 2002 (the last business day of the registrant's most recently
completed second fiscal quarter), was approximately $30,000,000.
As of March 27, 2003, there were 7,120,060 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Those portions of registrant's
Proxy Statement for its 2003 Annual Meeting of Stockholders (which registrant
intends to file pursuant to Regulation 14A on or before April 30, 2003) 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.......................................................... 1
Item 2. Properties........................................................ 20
Item 3. Legal Proceedings................................................. 20
Item 4. Submission of Matters to a Vote of Security-Holders............... 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 21
Item 6. Selected Financial Data........................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 40
Item 8. Financial Statements and Supplementary Data....................... 42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 42
PART III
Item 10. Directors and Executive Officers of the Registrant................ 42
Item 11. Executive Compensation............................................ 43
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters....................................... 43
Item 13. Certain Relationships and Related Transactions.................... 43
Item 14. Controls and Procedures........................................... 43
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K............................................................... 44
Signatures................................................................. 45
Certifications............................................................. 46
Consolidated Financial Statements and Notes................................ F-1
Index to Consolidated Financial Statements................................. F-2
Exhibit Index.............................................................. X-1
[GRAPHIC OMITTED]
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 40.
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." At our web page you can access free-of-charge our
current and historical filings with the Securities and Exchange Commission (the
"SEC").
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 our various Euro Brokers businesses, 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 credit derivatives, (iii) emerging market debt and related
products, (iv) various fixed income securities, including, convertible bonds,
U.S. Treasury securities and federal agency bonds, and (v) U.S. Treasury,
federal agency and mortgage-backed repurchase agreements. Maxcor Financial Inc.,
our U.S. registered broker-dealer subsidiary, also conducts institutional sales
and trading operations in municipal bonds, high-yield and distressed debt,
convertible securities and equities.
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 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.
We have approximately 500 employees worldwide and conduct our
businesses through principal offices in New York, London and Tokyo, other
offices in Stamford (CT), 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. In February 2003 we
purchased Finacor's 50% interest in EBFL (held by Finacor's subsidiary, Monecor
(London) Limited) at a 30% discount to the book value attributable to this
interest, measured as of December 2000, and renamed EBFL as Euro Brokers Limited
("EBL"). The purchase was triggered under the provisions of a shareholders'
agreement by the failure of Monecor to provide certain requested funding to EBFL
in late 2000. Our other London-based operations, primarily comprised of
securities businesses, have been and remain 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.
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. 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.
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,
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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.
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
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rate agreements, in each case conducted in a multitude of different currencies
and localized primarily by office. We also 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.
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, U.S. Treasury and
federal agency securities and repurchase agreements, U.S. domestic convertible
bonds, floating rate notes and other corporate securities.
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Emerging market debt, including Brady bonds, global bonds, Eurobonds,
local issues and loans, as well as options on the foregoing, 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 mainly 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, federal agency and
mortgaged-backed 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
Division of the Fixed Income Clearing Corporation ("GSD-FICC") 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 U.S. Treasury and federal agency securities 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. The
clearance of these transactions also occurs at GSD-FICC. Dissemination of market
information to clients for these securities similarly 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 securities products to a broad institutional client base, but
mostly to banks, investment banks, broker-dealers and other financial
institutions.
Sales and Trading Businesses
In our sales and trading businesses, we provide research and execution
to the institutional money management community, as well as to corporations with
publicly-traded securities and other institutional clients. In these businesses,
we specialize in municipal securities, high yield and distressed debt,
convertible securities and equities. Our research analysts provide valuable
trading ideas and market insights to our client base. We make this research
available by permissioning clients to access our research web links at
WWW.MAXF.COM and through other distribution methods. In addition, through the
communication and coordination among our sales and trading groups, we allow
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clients to take advantage of trading strategies across multiple asset classes.
Our execution services are designed to provide our clients with discreet
placement of client orders with minimal market impact.
We allocate a portion of our capital to support limited trading and
inventory positions in these businesses, most often for the purpose of
facilitating anticipated client needs. We manage the risks associated with these
positions by limiting their size and the number of days they are held. They are
marked-to-market and monitored on a daily basis. We also utilize a portion of
our capital for investment positions in municipal and other securities.
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, U.S. Treasury and federal agency securities, 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.
On many of our 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. The system now
also incorporates a paperless ticket and confirmation process, which captures
relevant trade details and then generates automatic e-mail or fax confirmations
to clients. If and when client demand for it in our products grows, the
Tradesoft(R) system also retains the ability to be 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
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thereafter transmits 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.
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, paperless confirmations 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) the net gains or losses from
sales and trading transactions and investment positions involving the assumption
of market risk for a period of time, (2) profits or losses from the Tokyo
Venture, (3) interest income, derived primarily from cash and cash equivalents,
deposits with clearing organizations and interest associated with securities
positions, (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
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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
in revenues, and starting salaries 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 controlling
their levels from year-to-year.
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
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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.
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 include U.S. Treasury and federal
agency securities, U.S. corporate bonds (but also non-dollar government
securities and corporate bonds) and equities, 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
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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.
Although delisted and deregistered, each warrant entitled the holder
thereof to purchase from us one share of Common Stock at an exercise price of
$5.00 per share. Each warrant was 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. During April 2002, 492,795 shares of common stock
were issued upon the exercise of a like number of warrants, for total proceeds
of $2,463,975. The remaining warrants expired on 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, 2002, we had purchased
589,507 shares under this expanded authorization at an aggregate purchase price
of $2,930,886, or $4.97 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 valued at approximately $82,000.
Through December 31, 2002, 347,500 shares of common stock were issued
pursuant to options exercised under our 1996 Stock Option Plan. The 1996 Stock
Option Plan provides for options to purchase a maximum of 1,800,000 shares. In
10
connection with certain of these exercises, we received 63,924 shares into
treasury as consideration for exercise prices aggregating $316,525. At the
Company's annual meeting in June 2002, the Company's stockholders approved the
Company's 2002 Stock Option Plan. The 2002 Stock Option Plan provides for
incentive awards in the form of stock options, stock appreciation rights,
restricted stock and bonus awards. A total of 1,500,000 shares were authorized
for awards under the 2002 Stock Option Plan.
In April 2002, the Company issued 500,000 common stock purchase
warrants to employees under a newly established warrant program to provide
inducements and incentives in connection with the formation of a new leveraged
finance department (the "Leveraged Finance Warrants"). The Leveraged Finance
Warrants issued have an exercise price of $5.875 and vest at the rate of 50% on
the second anniversary of the grant date and 25% on each of the third and fourth
anniversaries. This warrant program provides for the granting of up to an
additional 500,000 common stock purchase warrants, with the same four-year
vesting schedule, upon the achievement of specific performance goals. Exercise
prices of any such additional warrants (which will not be granted prior to
January 1, 2004), will be equal to the higher of the book value per share and
the fair market value per share of our common stock at the time of grant.
At December 31, 2002, we had outstanding 7,255,160 shares of common
stock, 1,700,000 employee stock options and 500,000 Leveraged Finance Warrants.
Personnel
As of February 28, 2003, we and our businesses employed 389 brokers
(including trainees), plus an additional administrative staff, including
officers and senior managers, of 125 persons, for a total employee headcount of
514. Of the brokers, 218 were located in the U.S., 126 were located in Europe,
and 30 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 23 to the Consolidated Financial Statements contains summary
financial information, for each year of the three-year period ended December 31,
2002, with respect to each of our reportable operating segments, which are based
upon the countries in which they operate.
11
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 that 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
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. Another well-financed competitor, ICAP
plc, has announced its plan to acquire BrokerTec. In practice, these systems so
far have proved most viable in markets involving very standardized products,
such as U.S. 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
12
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
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 broker-dealer subsidiary, Maxcor Financial Inc. ("MFI"), is
registered with the SEC, all applicable states, and is a member of 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 in the case of MFI,
have broad oversight powers, including the ability to institute administrative
13
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 NASD, are also subject to oversight by the
London-based regulatory body, the Financial Services Authority.
MFI is also a member of the GSD-FICC for the purpose of clearing
transactions in U.S. Treasury and federal agency securities and repurchase
agreements collateralized by such instruments. Such membership requires MFI to
maintain minimum net capital of $10,000,000, including a minimum deposit with
GSD-FICC of $5,000,000. In addition, as a result of the recent upgrading of
MFI's GSD-FICC membership to dealer status, MFI is required to maintain a
minimum net worth of $25 million.
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.
EBL is a Type D registered firm with the Financial Services Authority
in the U.K., required to maintain a financial resources requirement generally
equal to six weeks average expenditures ($3.9 million at December 31, 2002).
Our other foreign businesses are also subject to regulation by the
governments and regulatory bodies in their countries, including: (i) the Bank of
Japan and the Japanese Ministry of Finance in Japan and (ii) the Banking and
Securities National Commission in Mexico. 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 imposes 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
14
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.
The passage by Congress of the Sarbanes-Oxley Act of 2002 has imposed,
and required the promulgation by the SEC of, numerous rules and regulations
directly impacting the operation of public companies such as ourselves. These
include mandates for: the composition and member qualification of boards of
directors and audit committees, the enhanced independence of accounting firms
and the manner and content of their communications with audit committees,
rigorous certification procedures for financial statements and SEC filings, the
establishment and review of and the making of disclosures with respect to
internal controls and procedures, the use and reconciliation to generally
accepted accounting principles in the United States ("GAAP") of non-GAAP
financial information, internal and outside counsel reporting requirements
relating to evidence of material violations, disclosures with respect to the
adoption of or waivers under codes of ethics, and, generally, significantly
expanded, accelerated and more frequent public reporting and disclosure
requirements in SEC filings.
The foregoing requirements, and 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, including as a result
of the costs and management time required for compliance. In addition, any
expansion of our activities into new areas may subject us to additional
regulatory requirements that could similarly affect our manner of operation and
profitability.
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 "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 40.
We continue to face uncertainties from the September 11th terrorist attacks on
the World Trade Center, which destroyed our corporate headquarters and killed 61
of our employees.
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
15
work force of approximately 300. We also lost all of our property and
technological infrastructure maintained on site. We have since then accomplished
a remarkable recovery - both in human and financial terms - that is a testament
to the spirit and hard work of our employees and others, and have recently moved
into new, state-of-the-art, permanent headquarters at One Seaport Plaza in lower
Manhattan (see "Year Ended December 31, 2002" below under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations").
However, 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. Moreover, the
ongoing tension of current world events and the potential for additional
terrorist attacks adds another layer to these uncertainties.
Adverse changes in economic and market conditions in the current geopolitical
environment could negatively impact our business.
Our brokerage businesses and profitability are directly affected by
economic and market conditions, including the volatility of the securities
markets, the volume, size and timing of securities transactions, the level and
volatility of interest rates, and the economy in general. Our businesses
generally benefit if these factors cause trading volumes in the instruments we
broker to increase and, conversely, can suffer if they cause such trading
levels to decrease. In the current geopolitical environment 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.
Moreover, in the aftermath of September 11th, 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 internally or externally 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. Many of these systems are internal,
but others are provided by third-party suppliers over whom we have no control,
such as telephone companies, online data providers and software and hardware
vendors. 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 for our internal systems, there can be no
assurance that there will not be other, unanticipated system or technology
failures, internally or externally, that could negatively impact our business or
financial results.
16
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 confirmed to and 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, such as parties knowing different trade details or transactions being
completed with only one counterparty ("out trades"), thereby creating a
potential liability for us. If the out trade is promptly discovered, thereby
allowing prompt correction or disposition of the unmatched position at or around
the same price, the risk to us is usually limited. If discovery is delayed, the
risk is heightened by the increased possibility of intervening market price
movements prior to such correction or 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 resultant position corrected or
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 certain types of securities
for MFI. Thus, one firm clears its emerging market debt transactions, another
clears its municipal securities, corporate bond and equity transactions and
another two collectively clear different aspects of its transactions in U.S.
Treasury and federal agency securities and repurchase agreements collateralized
by such instruments. Without the capital resources and services of these firms
and organizations which generally step in and act as 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
17
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 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 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.
18
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.
Employee misconduct or errors can hurt our business
Although we have significant procedures and other checks and balances
in place designed to prevent and/or detect employee misconduct, including many
that are mandated by regulators, it is not always possible to deter employee
misconduct and our precautions may not always be effective. Misconduct by
employees could include hiding unauthorized activities, improper or unauthorized
activities on behalf of a client, or improper use of proprietary or confidential
information. Any of the foregoing types of misconduct could subject us to
financial losses, regulatory sanctions and/or harm our reputation, and thereby
hurt our results of operations and business. Similarly, employee errors,
including mistakes recording or executing transactions for clients, may cause us
to record transactions that clients later disavow and refuse to settle, exposing
us to risk of material loss until the errors in question are detected and
resolved. As with out trades, adverse movements in the prices of the instrument
involved in an error transaction before it is detected and unwound, reversed or
otherwise corrected can increase this risk.
We have market risk exposure from trading and inventory positions held in our
sales and trading businesses and in our firm investment account.
We allocate a small portion of our available capital to MFI's sales and
trading brokerage operations to support limited trading and inventory positions.
The positions are generally intended to be held short term, often for the
purpose of facilitating anticipated client needs. Where available, they are
financed by margin loans provided by MFI's clearing firms. 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
included in "securities held at clearing firm and trading contracts" line of our
Consolidated Statements of Financial Condition. Although such positions are
marked to market and carefully monitored on a daily basis, resulting principal
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. For example, see Note 20 to the Consolidated Financial
Statements, describing an anticipated 2003 loss associated with MFI's trading in
when-issued contracts for NTL, Inc. common stock. In addition, from time to time
we hold small amounts of municipal and other securities in the firm's investment
account, which can create similar risk exposures and effects.
The lack of diversification in our business could negatively affect our
financial condition or results of operations; conversely, managing our growth
effectively can be difficult.
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. This lack of
diversification could negatively affect our financial condition or results of
operations. As a result, we have spent considerable time, resources and efforts
in attempting to grow and diversify our business operations over the last few
years, including by building our sales and trading businesses. However, these
efforts place, and are expected to continue to place, strains on our management
and other personnel and resources and require timely and continued investment in
facilities, personnel and financial and management systems and controls.
Accordingly, there can be no assurances that our growth and diversification
efforts will be successful or, if achieved, whether they will positively or
negatively affect our financial condition or results of operations.
19
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); and Mexico City, Mexico. We lease all of our
office space and have material lease obligations with respect to our New York
and London premises. In New York, we occupy an aggregate of approximately 62,000
square feet on the 18th and 19th floors at One Seaport Plaza in lower Manhattan
under a lease expiring in 2014. In London, we occupy approximately 36,000 square
feet of space in London's financial center, The City, under a lease expiring in
2018.
We believe that all of our other facilities are suitable and adequate
for their present and anticipated purposes. See Note 19 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 20
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, 2002.
20
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, 2002
----------------------------
First Quarter ........................ $ 6.510 $ 5.000
Second Quarter ....................... 7.920 5.250
Third Quarter ........................ 6.300 3.850
Fourth Quarter ....................... 6.700 5.050
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
As of March 27, 2003 there were 42 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 2003, we believe there are approximately 1,000 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 several years repurchased significant
amounts of our common stock, both in privately-negotiated transactions and
through an open market repurchase program.
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.
21
Year Ended December 31,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Statement of Operations
Commission income $ 149,428,132 $ 138,003,085 $ 122,613,654 $ 132,892,282 $ 126,120,712
Insurance recoveries 11,098,135 4,498,144
Principal transactions 8,720,422 8,932,861 2,627,169 1,215,233 954,249
Other income (1) (922,300) 922,741 2,527,483 1,600,990 3,283,403
------------- ------------- ------------- ------------- -------------
168,324,389 152,356,831 127,768,306 135,708,505 130,358,364
------------- ------------- ------------- ------------- -------------
Operating costs:
Compensation and related costs 107,024,194 106,619,297 92,061,672 93,392,948 87,511,455
Communication costs 11,033,342 10,465,852 11,643,857 13,613,656 13,258,756
Travel and entertainment 7,406,116 6,493,462 6,620,974 6,797,740 7,763,109
Occupancy costs 4,054,140 4,404,994 4,406,215 5,061,370 5,776,416
Clearing and execution fees 3,311,759 3,511,712 3,307,802 3,005,785 4,588,170
Depreciation and amortization 2,405,834 2,962,582 3,501,373 3,955,500 4,594,622
Contributions to The Euro Brokers Relief Fund, Inc. 1,219,233
General and administrative 4,933,483 5,784,107 4,769,444 5,516,349 5,140,885
------------- ------------- ------------- ------------- -------------
141,388,101 140,242,006 126,311,337 131,343,348 128,633,413
------------- ------------- ------------- ------------- -------------
Operating profit 26,936,288 12,114,825 1,456,969 4,365,157 1,724,951
------------- ------------- ------------- ------------- -------------
Other (expenses) income:
Interest expense (299,079) (666,387) (594,957) (833,935) (1,079,147)
Amortization of intangible assets (635,998) (507,564) (410,004) (410,004)
Non-operating expenses (1,050,472) (477,000) (1,141,356)
Non-operating income 43,767 1,638,506 2,235,511 527,018
Restructuring costs (541,961) (321,000)
Costs related to World Trade Center attacks (3,204,468) (1,590,060)
Income (loss) from equity affiliate 9,992 135,890 (1,576,644) (19,925)
Interest income 2,147,274 2,306,044 1,823,285 1,879,500 1,737,403
Foreign exchange gain (loss) 35,391 (229,390) (21,579) (282,536) (164,860)
------------- ------------- ------------- ------------- -------------
(1,277,115) (217,765) 2,051,625 (1,017,601) (1,077,889)
------------- ------------- ------------- ------------- -------------
Income before provision for income taxes and
minority interest 25,659,173 11,897,060 3,508,594 3,347,556 647,062
Provision for income taxes 12,130,758 2,174,673 2,710,482 545,216 1,922,212
------------- ------------- ------------- ------------- -------------
Income (loss) before minority interest 13,528,415 9,722,387 798,112 2,802,340 (1,275,150)
Minority interest (981,791) (683,985) 1,203,987 (270,128)
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 12,546,624 $ 9,038,402 $ 2,002,099 $ 2,532,212 ($ 1,275,150)
============= ============= ============= ============= =============
Year Ended December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Total assets $123,477,959 $279,317,292 $ 70,906,347 $ 72,467,958 $ 75,269,665
Obligations under capitalized leases 842,399 204,252 335,635 493,367 751,747
Notes payable 447,978 1,723,169 1,799,870 3,824,842
Loan payable 674,282
Total liabilities 70,477,645 241,021,098 37,257,798 38,162,466 43,476,151
Minority interest 5,407,228 3,979,291 3,407,628 4,885,896
Redeemable preferred stock 2,000,000 2,000,000 2,000,000
Stockholders' equity 47,593,086 34,316,903 28,240,921 27,419,596 29,793,514
Per Share Information
Net income (loss) - basic $ 1.72 $ 1.23 $ .23 $ .26 $ (.11)
Net income (loss) - diluted 1.53 1.16 .23 .25 (.11)
Book value 6.56 4.88 3.48 3.29 2.63
Weighted average common shares
outstanding - basic 7,304,284 7,357,017 8,374,166 9,711,974 11,327,741
Weighted average common shares
outstanding - diluted 8,210,638 7,764,667 8,374,166 9,846,257 11,327,741
(1) Includes non-equity earnings (loss) from contractual arrangement (Tokyo
Venture) and information sales revenue (since 1999).
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Year Ended December 31, 2002
We are very proud of our performance during the year ended December 31,
2002. It was a year in which we continued a remarkable recovery from the
devastating effects of the September 11th terrorist attacks, while also
achieving solid financial results.
Our recovery took many forms. We hired new brokers. We improved the
performance of many of our established businesses and expanded into new business
lines. We selected new permanent headquarters in lower Manhattan, at One Seaport
Plaza, and signed a 12-year lease. We held a Charity Day on March 11, 2002 that
raised $1.2 million for The Euro Brokers Relief Fund, Inc. We obtained timely
cash advances from our insurance carrier throughout the year that provided
needed liquidity and then negotiated a final settlement of our September 11th
business interruption insurance claim that ensured the maintenance of our strong
financial base. We improved and expanded the application of our leading
technology solutions to our existing and new businesses. We won a significant
litigation in the United Kingdom that permitted us to acquire 100% ownership of
our London operations at a very favorable purchase price. We actively managed
our capital structure through the elimination of two series of outstanding
warrants, which upon exercise raised proceeds of $2.5 million, and the
continuation of our common stock repurchase program.
Through it all, the perseverance and hard work of our employees and
staff, the strength of the families of our lost employees, and the loyalty and
support of our clients lifted and energized us. Working out of sub-optimal,
temporary headquarters for the entire year, we experienced a remarkable bonding
and coming together of the Maxcor and Euro Brokers teams. Their performance
during 2002 is a testament to their spirit, energy and work ethic, as well as
their loyalty to our company and their desire to honor their 61 lost colleagues.
The result is what we ultimately believe to be a stronger company, both
financially and emotionally.
Our basic financial measures of performance, on a GAAP basis, were up
across the board in 2002 over 2001. Net income increased by more than 30%, to
$12.5 million, or $1.53 per share, from $9.0 million, or $1.16 per share.
Revenues increased 10%, to $170.6 million from $154.8 million. Overall
stockholders' equity jumped almost 40%, to $47.6 million (a per share book value
of $6.56) from $34.3 million (a per share book value of $4.88).
Continuing the pattern of 2001, much of 2002 saw strong levels of
trading activity in the fixed income and derivatives markets in which we are
active. We took advantage of these active markets by making judicious new hires
and focusing on client service to help us to maintain or increase our market
share in key products. As a result, our Euro Brokers operations generated
improved revenues and performance across many of our brokerage desks in New
York. In particular, we garnered improved revenues from each of our interest
rate swaps, interest rate options, U.S. Treasury, federal agency and
mortgage-backed repurchase agreements and federal agency bond desks. Revenues
23
from our cash deposits and money market desks, however, were down from 2001
levels, and our emerging market debt businesses continued to have to cope with
depressed trading volumes in that sector.
In New York, we launched a new U.S. Treasury brokerage desk in August
2002, believing that there was a market opportunity in this area for
well-focused voice broker services. We also viewed the desk as nicely
complementing a number of our existing businesses. We believe that the U.S.
Treasury's financing requirements will continue to increase and we are
optimistic that this new business will become successful with improved results
in 2003.
In London, we launched a new credit derivatives desk in 2002 on the
heels of our late 2001 launch of such a desk in New York. Both desks, but London
in particular, contributed positively to results in 2002. The New York desk
suffered near the end of the year as the result of the loss of several key
employees, but we have since made replacement hires. We believe credit
derivatives will continue to be a growth area.
Our London operations as a whole had a solid and profitable 2002, on a
level about equal with that of 2001, while also building what we believe will be
a stronger foundation for improved future results. In addition to the positive
results of the credit derivatives desk, we garnered continued strong performance
from our interest rate options, U.S. dollar swaps and euro currency swaps desks.
Emerging market debt products brokered out of London saw reduced revenues, but
still made an overall positive contribution to results.
Our Tokyo operations continued to struggle during 2002 in the midst of
an extended downturn in overall derivatives market activity there as a result of
extraordinarily low interest rates and very low volatilities. At the end of
2002, we began implementing an internal restructuring to attack our cost
structure. Brokers were migrated from high, guaranteed base salaries to lower
base salaries and higher performance-based payouts. We think this revised
incentive-based structure, which, as of the end of the first quarter in 2003,
has been substantially implemented, will protect our downside cost exposure
while allowing us to attract new hires and compete favorably in the marketplace
until overall economic and trading conditions in Tokyo improve.
Throughout 2002, in addition to focusing on our core inter-dealer
brokerage operations, we continued our diversification efforts by expanding our
sales and trading operations within our Maxcor Financial Inc. broker-dealer. In
April 2002, we hired a leveraged finance group to specialize in institutional
sales and trading operations in high-yield and distressed debt, supplemented by
quality research efforts. We followed this expansion with the launch mid-year of
an institutional equities sales and trading operation focused on providing top
quality service, research and order execution to the money management community.
The equity group's emphasis is on the less actively traded stocks, including
small cap stocks, value stocks and real estate investment trusts. In the fourth
quarter, we also started an institutional convertible securities operation,
aimed at providing clients with quality execution and arbitrage trading ideas.
24
The goal in these various new Maxcor initiatives, in addition to growth
and diversification, has been to establish businesses with institutional clients
in which we can offer research, trading strategies and execution services over
broad, but underserved, asset classes in a coordinated approach. All three new
groups - leveraged finance, equities and convertibles - contributed positively
to results in 2002.
We intend to continue to expand our sales and trading operations in
2003, with opportunistic additions when and where we believe we can hire the
right people and establish a meaningful presence. To this end, in late March
2003, we have contributed an additional $20 million in capital to our
broker-dealer - thereby raising its total capital to in excess of $50 million -
in order to be able to upgrade to dealer membership status with the Government
Securities Division of the Fixed Income Clearing Corporation. The new capital is
intended primarily to facilitate riskless principal transactions within our
sales and trading operations by enhancing our broker-dealer's credit status with
GSD-FICC. The additional capital is primarily being financed by a new $15
million, secured reducing credit facility (see Note 14 to the Consolidated
Financial Statements).
We continued in 2002 to allocate a small portion of our existing
capital to support principal transactions in which we assume market risk for a
period of time. This trading occurs primarily in our municipal securities and
leveraged finance businesses, where we will often hold inventory in anticipation
of client needs, but also in our firm investment account. For 2002, all three of
these areas contributed positively to results, with aggregate revenue from
trading gains approximately equal to 2001 levels, at $8.7 million. We expect,
however, to incur a significant loss in 2003 on our trading contracts in
when-issued shares of NTL, Inc. (see Note 20 to the Consolidated Financial
Statements). Looking forward, we will continue to use some of our existing
capital to support various trading and inventory positions, but do not currently
envision any significant expansion of that commitment.
On March 11, 2002, the six-month anniversary of the terrorist attacks,
we held our first annual charity day. With the full support of our clients and
our employees, who waived any entitlement to commissions from the revenues
generated that day, we were able to raise slightly over $1.2 million for our
Euro Brokers Relief Fund. We were very proud of these results and will be
holding another charity day, to benefit both the Fund and our newly-established
Maxcor Foundation, in May 2003.
In May 2002, we won an important lawsuit in London that entitled us to
obtain 100% ownership of our non-securities brokerage operations in London (Euro
Brokers Finacor Limited) by purchasing the 50% shareholdings therein of our
partner, Monecor (London) Limited, at a 30% discount to the net book value of
those holdings, measured as of late December 2000. The judgment enforced
specific contractual buy-out provisions in a shareholders' agreement between us
and Monecor (a subsidiary of Finacor, which was acquired by Viel & Cie in 2000)
that were triggered by the failure of Monecor, in late 2000, to provide certain
25
requested funding for the London operations. Monecor's appeal of the judgment
was dismissed unanimously by a three-member panel of the London Court of Appeals
in February 2003. The panel also refused Monecor's request to appeal further to
the House of Lords. As a result, Monecor was obligated to transfer its
shareholdings to us later that same month, and Euro Brokers Finacor Limited then
changed its name to Euro Brokers Limited (although Monecor has subsequently
petitioned the House of Lords directly for leave to appeal, it is not expected
that such leave will be granted or, if granted, that the appeal itself will be
successful).
Because of the discounted purchase price paid by us for Monecor's
shareholdings, we will recognize a one-time extraordinary gain of approximately
$3.0 million in the first quarter of 2003, which will have the effect of
increasing that period's after-tax net income by the same amount. The 100%
ownership also means that our future results of operations will no longer
exclude the income (or loss) allocable to Monecor's 50% interest. In 2002, for
example, approximately $1.0 million of income was allocated to this interest.
In August 2002, we signed a lease for new permanent headquarters in New
York at One Seaport Plaza, also known as 199 Water Street. The lease, which has
an initial duration of slightly over 12 years (until December 31, 2014),
signifies our long-term commitment both to our business and to lower Manhattan.
The leased premises are for the entire 18th and 19th floors and cover over
60,000 rentable square feet, providing us with room to grow over the lease's
term.
In connection with signing the lease, we accepted an incentive package
offer from New York State and New York City that provides us a with an initial
cash grant of $1.75 million for job retention and up to an additional $800,000
in grants for job growth. Payment of the initial grant is expected to be made in
April 2003. Because of contingent recapture provisions associated with the grant
in the event of future job losses or relocations, this amount (and any
additional grants for future growth) will only be recognized in earnings over
the term of the new lease.
Our 2002 cash flows were significantly helped by periodic advances we
obtained from Kemper Insurance Companies on our business insurance claims
relating to the September 11th terrorist attacks. In December 2002, we
negotiated a final settlement with Kemper of our claim under the coverage
portion of our policy providing for the 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. The settlement of $18.85
million generated a one-time 2002 fourth quarter after-tax net benefit of $3.9
million (or $.48 per share), reflecting additional lost income in excess of
amounts previously recognized, after application of the proceeds to cover both
new and previously-charged September 11th-related expenses.
The settlement did not resolve our property insurance claim under a
separate policy coverage with Kemper providing for, among other things, the full
replacement cost of assets destroyed in the attacks. As of year-end 2002, Kemper
had advanced us $8 million pursuant to this coverage, which has an aggregate
limit of approximately $14 million, pending completion and documentation of our
total expenditures in connection with our planned move to and build out at One
Seaport Plaza.
26
When our property claim is fully and finally settled or otherwise
resolved, we will record a significant one-time gain that, on a pre-tax basis,
will be equal to the amount by which the total proceeds under the coverage
exceed the net, depreciated book value of property destroyed in the attacks
(which was approximately $2.5 million). However, under GAAP, such gain will be
offset in earnings over time by the required expensing, over their respective
useful lives, of the replacement assets purchased with the property insurance
proceeds.
In February 2003, we completed our move to One Seaport Plaza, staggered
over the course of three weekends to maintain business continuity. After more
than 16 months in our temporary headquarters, our brokers and other employees
were delighted to have a permanent home again, complete with state-of-the-art
infrastructure and equipment and optimized desk configurations. Our new premises
now house all of our approximately 300 New York-based employees and staff.
We used the opportunity of a new build out at One Seaport Plaza to
re-think technology applications across all of our desks. Our goals have always
been to use technology to provide our brokers with the best tools, manage
execution and settlement risks and provide our clients with the highest possible
level of service. As a result, we used our Tradesoft(R) technology to automate
further the broker interfaces on many of our desks. We also expanded the
deployment of Tradesoft's paperless ticket system, which generates automatic
e-mail and fax trade confirmations to our clients and provides direct electronic
transmission of the trade data to our back office, to more of our businesses.
This deployment has most recently also encompassed our Tokyo office as well.
The year 2002 also saw the continuation of our common stock repurchase
program, as part of our overall effort to manage our capital structure and
increase value to stockholders. In total, we repurchased 375,507 shares in 2002,
at an aggregate cost of $2.1 million. These repurchases helped to offset
dilution from warrant and stock option exercises during 2002. On April 12, 2002,
we permitted the expiration of our two series of outstanding warrants issued in
connection with our 1994 initial public offering and our 1996 acquisition of the
Euro Brokers businesses. In the period just prior to that expiration, 492,795 of
these warrants were exercised at a price of $5.00 per share, resulting in the
issuance of a like number of shares and raising proceeds for us of approximately
$2.5 million. Option exercises during 2002 increased our shares outstanding by a
net total of 111,643 shares.
Repurchases to date in 2003 (through March 27, 2003) have totaled
160,100 shares, leaving us with remaining authorization under our repurchase
program for 450,393 shares. As has always been the case, 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.
27
Critical Accounting Policies
Note 2 to the Consolidated Financial Statements details the significant
accounting policies used in the preparation of those statements. There are
certain of these policies that are considered to be of particular importance
because they require difficult, complex or subjective judgments on matters that
are often inherently uncertain. The following is a discussion of these policies.
Securities and trading contracts are carried at fair values generally
based on quoted market prices. From time to time quoted market prices are not
available for certain municipal or other securities positions. For such
securities, we, with the assistance of independent pricing services, determine
fair values by analyzing securities with similar characteristics that have
quoted market prices. Consideration is given to the size of our individual
positions relative to the overall market activity in such positions when
determining the impact our sale would have on fair values. Since uncertainties
may exist as to the settlement of when-issued equity trading contracts, we defer
any gains resulting from adjusting the costs of these contracts to fair values
until uncertainties relating to settlement are resolved. The assumptions used in
valuing our securities and trading contracts may be incorrect and the actual
value realized upon disposition could be different from the current carrying
value.
Included in accounts payable and accrued liabilities are reserves for
certain contingencies to which we may have exposure, such as the employer
portion of National Insurance Contributions in the U.K., interest and claims on
securities settlement disputes and reserves for certain income tax
contingencies. The determination of the amounts of these reserves requires
significant judgment on our part. We consider many factors in determining the
amount of these reserves, such as legal precedent and case law and historic
experience. The assumptions used in determining the estimates of reserves may be
incorrect and the actual costs of resolution of these items could be greater or
less than the reserve amount.
Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued, including a
roll-forward of the entity's product warranty liabilities. We adopted the
disclosure provisions of FIN 45 effective December 31, 2002 and are presently
evaluating the recognition and measurement provisions of FIN 45 that are
required to be adopted in 2003.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148
amends Statement of Financial Accounting Standards No. 123, "Accounting for
28
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 effective December
31, 2002, and continue to follow the intrinsic value method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for
the purpose of recognizing compensation cost.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires
consolidation of a variable interest entity ("VIE") if we have variable
interests that give us a majority of the expected losses or a majority of the
expected residual returns of the entity. Prior to FIN 46, VIEs were commonly
referred to as special purpose entities. As we do not have any VIEs, the
adoption of this statement will not have an effect on our Consolidated Financial
Statements.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Commission income represents revenues generated on our brokerage
transactions conducted on an agency (including name give-up) or matched riskless
principal basis. For 2002, these revenues increased $11,425,047 to $149,428,132,
compared to $138,003,085 for 2001, due to increased brokerage in New York and
London. In New York, the increase principally reflected increased revenues from
repurchase agreements, federal agency bonds, credit derivatives and interest
rate derivatives, commissions derived from newly-started U.S. Treasury,
leveraged finance and institutional equity departments and reduced amounts in
2001 from the disruption to operations following the September 11th terrorist
attacks. Partially offsetting these increases were reduced revenues in emerging
market debt and money market instruments and the suspension or discontinuation
of certain operations after the September 11th attacks. The increase in London
reflected the net effects of revenues derived from our newly-started credit
derivatives department, the currency effect of translating strengthened British
pound sterling amounts to U.S. dollars and reduced revenues from emerging market
debt.
Insurance recoveries for 2002 represent the portions of the settlements
of claims under U.S. and U.K. business interruption insurance policies for
losses incurred in New York and London following the September 11th attacks
attributable to lost revenues (net of saved expenses). The balance of these
settlements is recorded as offsets to costs related to World Trade Center
attacks (see below). During 2002 we recorded $10.3 million in insurance
recoveries relating to the settlement of our U.S. claim against Kemper,
representing the $14.8 million portion of the $18.9 million total settlement
allocated to lost revenues (net of saved expenses), less the $4,498,144 amount
recorded in 2001. Also during 2002 we recorded an insurance recovery of $831,000
pursuant to the U.K. settlement of $1.2 million with Norwich Union, representing
the portion of that settlement allocated to lost revenues (net of saved
expenses). The $4,498,144 amount recorded in 2001 reflected the portion of lost
revenues (net of saved expenses) through September 30, 2001 under our U.S.
29
policy with Kemper for which we believed there were no contingencies that would
have a material impact. We anticipate a significant one-time gain in 2003 for
insurance recoveries upon the settlement of our property casualty insurance
policy with Kemper for the excess of replacement costs over the book values and
lease termination costs of assets destroyed in the September 11th attacks. Such
gain will be offset over time in future periods by increases to depreciation and
amortization expense of assets held and rental expense for assets leased
pursuant to sale-leaseback arrangements.
Principal transactions represent the net gains generated from our
securities transactions that involve the assumption of market risk for a period
of time, as well as the results of activities in our firm investment account.
For 2002, these revenues decreased $212,439 to $8,720,422, compared to
$8,932,861 for 2001, primarily due to reduced gains on municipal securities and
in our investment account, offset in part by gains from our newly-started
leveraged finance department, which conducts sales and trading of high yield and
distressed debt.
Interest income for 2002 decreased $158,770 to $2,147,274, compared to
$2,306,044 in 2001, reflecting the net effects of a lower interest rate
environment for our deposits and cash equivalents and an increase in the average
inventory of municipal securities held.
Other income items for 2002 resulted in a loss of $843,142, as compared
to income of $1,083,431 for 2001. This change resulted primarily from a loss of
$1,184,233 on our interest in the Tokyo Venture in 2002 as compared to a loss of
$694,083 during 2001, income of $262,000 during 2002 on the sale of financial
information derived from our brokerage business as compared to income of $1.6
million during 2001, a gain in 2001 of approximately $390,000 on the sale of our
15% interest in Yagi Euro and foreign exchange gains during 2002 as compared to
foreign exchange losses during 2001.
Compensation and related costs for 2002 increased $404,897 to
$107,024,194, as compared to $106,619,297 for 2001. This increase was primarily
the result of the increase for 2002 in operating revenues (commission income,
principal transactions and information sales revenue) and the impact of
translating strengthened British pound sterling amounts to U.S. dollars.
Limiting this increase were continued cost reduction efforts in New York and
London and compensation waived by employees on our 2002 charity day (see further
discussion on charity day below). As a percentage of operating revenues,
compensation and related costs decreased to 68% for 2002 as compared to 72% for
2001.
Communication costs for 2002 increased $567,490 to $11,033,342,
compared to $10,465,852 for 2001, primarily due to the suspension of certain
services in New York in the prior year following the September 11th attacks and
the impact of translating strengthened British pound sterling amounts to U.S.
dollars, offset in part by a $350,000 reduction to accruals in London during
2002 based upon settling claims with a vendor.
30
Travel and entertainment costs for 2002 increased $912,654 to
$7,406,116, compared to $6,493,462 for 2001. As a percentage of operating
revenues, travel and entertainment costs increased to 4.7% for 2002, compared to
4.4% for 2001.
Occupancy costs represent expenses incurred in connection with our
office premises and include base rent and related escalations, maintenance,
electricity and real estate taxes. For 2002 these costs increased $897,572 to
$4,054,140, compared to $3,156,568 for 2001, reflecting the net effects of
eliminating certain occupancy accruals associated with the World Trade Center
lease in the prior period and reduced costs in the current period for office
space in New York resulting from the use of temporary facilities following the
September 11th attacks. The prior period accruals consisted of a $411,000
accrual for the payment of a fee to exercise an early lease termination option,
which was eliminated due to our decision, prior to September 11th, to allow the
option to expire, and an $837,000 accrual established in order to straight-line
the average rent costs over the lease, which was eliminated due to the
destruction of the premises on September 11th.
Clearing and execution fees are fees paid to clearing firms for
transactions settlements and credit enhancements and to other broker-dealers
(including ECNs) for providing access to various markets and exchanges for
executing transactions. For 2002 these costs decreased $199,953 to $3,311,759,
compared to $3,511,712 for 2001, primarily as a result of a reduction in the
number of emerging market debt transactions, offset in part by clearing and
execution fees incurred by the newly started institutional equities desk.
During 2002 we recorded net costs of $3,204,468 as a result of the
September 11th attacks on the World Trade Center, reflecting gross costs
incurred of $7,020,331 reduced by the aggregate amount of the insurance
settlements with Kemper and Norwich Union allocated to extra expenses during
2002 of $3,815,863. During 2001 we recorded net costs related to the World Trade
Center attacks of $1,590,060, reflecting gross costs incurred of $2,187,281
reduced by the portion of those expenses considered probable of recovery during
2001 of $597,221. Included in gross costs during 2002 was the cost of foregoing
an extension of a sublease on additional space in our London premises that was
re-allocated for potential use by New York employees. This gross cost of $2.7
million ($2.4 million net after applying the portion of insurance proceeds from
Norwich Union allocable to this cost) was based upon our estimate of the length
of time it will take to generate replacement sublet income on this space and the
difference between the amount we believe we will then be able to achieve and our
cost associated with the space. Other gross extra expenses incurred during 2002
and 2001 include additional occupancy costs in New York, the purchase of
equipment solely compatible with our temporary facilities in New York, the use
of outside professionals, interest on failed securities settlements, recruitment
fees and benefits for the families of deceased employees.
Depreciation and amortization expense consists principally of
depreciation of communication and computer equipment and leased automobiles and
amortization of leasehold improvements, goodwill and other intangible assets.
These costs decreased $1,192,746 to $2,405,834 during 2002, compared to
$3,598,580 during 2001, primarily as a result of the discontinuance of
depreciation in New York on assets destroyed in the September 11th attacks and
31
the discontinuance of amortization of intangible assets that were either fully
amortized or written-off in late 2001. We anticipate increases to these costs in
2003 and forward as a result of having to depreciate and amortize replacement
costs of assets purchased from insurance proceeds and not leased pursuant to
sale-leaseback arrangements.
During 2002 we made a charitable contribution to The Euro Brokers
Relief Fund, Inc. of $1,219,233, an amount equal to all the revenue generated by
the New York, Stamford, Mexico, London and Switzerland offices on our 2002
charity day. All participating employees waived any entitlement to compensation
from such revenues. The Euro Brokers Relief Fund, Inc. is a 501(c)(3) tax-exempt
corporation (HTTP://RELIEF.EBI.COM), established to provide charitable aid to
the families and other financial dependents of the Company's 61 employees and
staff members killed as a result of the September 11th attacks.
Interest expense for 2002 decreased $367,308 to $299,079, compared to
$666,387 for 2001, primarily as result of using more of our cash and cash
equivalents to finance securities positions, thereby reducing the level of
margin borrowings, and a lower interest rate environment for such borrowings.
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 2002, these costs decreased
$1,901,096 to $4,933,483, compared to $6,834,579 in 2001, primarily as a result
of decreases during 2002 in professional fees and rental expense for leased
equipment and the write-off in 2001 of goodwill, identifiable intangibles and
certain other assets obtained in the August 2000 Tradesoft acquisition
approximating $1.1 million. These decreases were partially offset by an increase
during 2002 in insurance costs. We anticipate an increase in general,
administrative and other expenses during 2003 and forward associated with rental
expense for furniture and equipment acquired with insurance proceeds that we
will be leasing pursuant to sale-leaseback arrangements.
Provision for income taxes for 2002 increased $9,956,085 to
$12,130,758, compared to $2,174,673 for 2001, primarily due to the increase in
pre-tax income during 2002, the $3 million reduction to income tax reserves
during 2001 resulting from the favorable resolution to certain contingencies,
and tax planning strategies applied during 2001 to gains on the sale of Yagi
Euro and other investments.
For 2002, minority interest in consolidated subsidiaries resulted in a
reduction of net income from such subsidiaries of $981,791, as compared to a
reduction of net income from such subsidiaries of $683,985 during 2001. This
change was primarily the result of increased profitability of EBFL. We will no
longer record minority interest in the earnings (losses) of this subsidiary
after February 2003 as a result of the favorable ruling from the London Court of
Appeals enabling us to purchase the minority share of EBFL at a 30% discount to
the December 2000 book value of this interest.
32
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Commission income for 2001 increased $15,389,431 to $138,003,085,
compared to $122,613,654 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 bond brokerage team and increased brokerage of interest
rate derivatives, offset in part by a significant reduction in brokerage from
the disruption to operations caused by the September 11th attacks. 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
lost revenues (net of saved expenses) through September 30, 2001 recoverable
under the business interruption and extra expense policy for which we believed
no contingencies existed having a material impact. Additional amounts for lost
revenues (net of saved expenses) through December 31, 2001 were recorded in 2002
upon settlement of the claim.
Principal transactions increased $6,305,692 to $8,932,861 for 2001,
compared to $2,627,169 for 2000, due to increased gains on municipal securities
transactions and 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 $694,083 on our interest in the Tokyo Venture in 2001
compared to earnings of $523,704 in 2000, revenue of approximately $1.6 million
in 2001 compared to approximately $2.0 million in 2000 from the sale of
financial information derived from our brokerage business 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, principal transactions and information sales revenue),
compensation and related costs were 72% for both 2001 and 2000.
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
33
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.
Occupancy costs decreased $1,249,647 to $3,156,568 in 2001, compared to
$4,406,215 for 2000, primarily as a result of the decrease in occupancy accruals
associated with the World Trade Center lease during 2001 described above.
Clearing and execution fees increased $203,910 to $3,511,712 for 2001,
compared to $3,307,802 for 2000, primarily as a result of an increase in cleared
emerging market debt transactions.
In 2001, we recorded $1,590,060 of costs as a direct result of the
September 11th attacks on the World Trade Center, reflecting gross expenses
incurred of $2,187,281 reduced by the portion of these expenses, $597,221, we
believed probable of recovery and which were 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, and benefits for the families of deceased employees.
Depreciation and amortization expense decreased $410,357 to $3,598,580
for 2001, 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 attacks. 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.
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.
During 2000 we incurred restructuring costs of $541,961 relating to the
costs of ceasing the operations of 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 was relocated to New York.
General, administrative and other expenses increased $1,588,135 to
$6,834,579 for 2001, 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.
34
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.
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.
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
held at clearing firm and trading contracts.
Securities held at clearing firm and trading contracts reflect
securities positions taken in connection with our sales and trading brokerage
operations and in our investment account. Positions are financed either from our
cash resources or by margin borrowings (if available) from broker-dealers that
clear these transactions on our behalf on a fully-disclosed basis. At year-end
2002, as reflected on the Consolidated Statements of Financial Condition, we had
net assets relating to securities and trading contracts of approximately $12.0
million, reflecting a net position in securities and trading contracts of $29.4
million, financed by a payable to a clearing broker of approximately $17.3
million.
MFI is a member of the GSD-FICC for the purpose of clearing
transactions in U.S. Treasury and federal agency securities and repurchase
agreements collateralized by such instruments. 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. In addition, as a result of the recent upgrading of MFI's GSD-FICC
35
membership to dealer status, MFI is required to maintain a minimum net worth
(including subordinated borrowings) of $25 million. To the extent MFI conducts
transactions with non-netting members of GSD-FICC, MFI also will have to post
additional clearing deposits (which it would expect to satisfy in part through
the collection of margin deposits from such non-netting members).
EBL is a Type D registered firm of the Financial Services Authority in
the U.K., required to maintain a financial resources requirement generally equal
to six weeks average expenditures ($3.9 million at December 31, 2002).
Net cash provided by operations for 2002 was approximately $9.9
million. This increase in cash was the result of net income of approximately
$12.5 million adjusted to reflect the net effect of approximately $4.3 million
of non-cash items, primarily consisting of depreciation and amortization,
unreimbursed losses from our share of the Tokyo Venture and minority interest in
the net earnings of consolidated subsidiaries. These cash increases were reduced
by the effect of other working capital items, including increased net assets
relating to securities and trading contracts and decreased liabilities related
to insurance advances and other effects of the September 11th attacks, offset in
part by increased accrued compensation.
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.
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.
36
Investing Activities
Investing activities in 2002 reduced cash by approximately $7.6
million, primarily due to cash outlays associated with the build-out of our new
permanent headquarters at One Seaport Plaza in lower Manhattan. In 2001,
investing activities resulted in an increase to cash of approximately $1.6
million, reflecting the net effects of insurance proceeds recognized for
destroyed fixed assets approximating $1.5 million, proceeds from the sale of our
15% interest in Yagi Euro approximating $1.9 million and net cash used for fixed
asset purchases/sales approximating $1.9 million. Investing activities for 2000
reflects net cash used of approximately $2.0 million, primarily resulting from
the net effect of fixed asset purchases/sales approximating $2.2 million, the
cash portion of the Tradesoft acquisition approximating $2.1 million and the
proceeds received on the partial sale of our interest in the Tokyo Venture
approximating $2.4 million.
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.
In March 2003, we entered into various sale-leaseback transactions for equipment
and furniture approximating $5 million, resulting in operating leases under a
master lease agreement with General Electric Capital Corporation ("GECC") with
durations ranging from three to five years.
We expect additional cash outlays approximating $8.4 million in 2003
associated with the completion of the build-out of our new permanent
headquarters in New York. Such outlays would bring our total build-out costs
(inclusive of replaced furniture and equipment) to approximately $15.7 million.
We believe the final settlement of our property casualty insurance claim, which
we expect during the first half of 2003, will fund or reimburse a significant
portion of these costs. Our policy with Kemper provides a limit of approximately
$14 million in replacement costs. To date, Kemper has provided us with cash
advances relating to this claim of $8 million.
Financing Activities
At December 31, 2002 and 2001, we did not have a loan outstanding under
our revolving credit facility with 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 our Euro Brokers Inc. ("EBI") subsidiary. The borrowing
availability under the facility (which approximated $3.7 million and $3.5
million at December 31, 2002 and 2001, respectively) 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.
37
In March 2003 we terminated the facility with GECC and entered into a
new facility with The Bank of New York ("BONY") for a three-year revolving
credit facility of up to $15 million. This facility is secured by EBI's billed
accounts receivables and the stock issued by EBI to its direct parent and has
mandatory reductions to availability of $5 million on each of the eighteenth and
thirtieth months following the closing date. As with the GECC facility, the
agreement with BONY 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 represented 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 retired the note early in 2002 without penalty.
Net cash used in financing activities for 2002 was approximately
$15,000, primarily reflective of the net effect of cash of approximately $2.1
million used to acquire treasury stock, the repayment of the note payable to
GECC and obligations under capital leases aggregating approximately $586,000 and
proceeds received from the exercise of stock options and warrants of
approximately $2.7 million.
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 GECC 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, 2002, we had purchased 589,507 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 resources.
38
Contractual Obligations
We have contractual obligations to make future payments in connection
with operating and capital leases and information service contracts. The
following table sets forth these contractual payment commitments as of December
31, 2002. Additional disclosure relating to our commitments appears in Notes 13
and 19 to the Consolidated Financial Statements.
Payments due by period
Less than 1 3-5 More than
Total year 1-3 years years 5 years
----------- ----------- ----------- ----------- -----------
Operating leases $72,427,980 $ 7,394,164 $11,109,501 $10,193,318 $43,730,997
Information service contracts 3,517,485 2,800,568 716,917
Obligations under capitalized
leases 842,399 212,443 629,956
----------- ----------- ----------- ----------- -----------
Total contractual obligations $76,787,864 $10,407,175 $12,456,374 $10,193,318 $43,730,997
=========== =========== =========== =========== ===========
In March 2003, we entered into various sale-leaseback transactions for
equipment and furniture resulting in leases under a master lease agreement with
GECC. These leases contain options at the end of the terms to purchase the
assets at a percentage of their original cost or to return the assets and either
(1) pay GECC the amount by which our termination obligation exceeds the proceeds
on GECC's disposition of the assets or (2) receive the amount by which the
proceeds on GECC's disposition exceeds the cost of our purchase option. These
leases do not meet one or more of the criteria for capital lease treatment and,
accordingly, they are classified as operating leases. The following table sets
forth our contractual payment commitments pursuant to these leases.
Payments due by period
Less than 1 3-5 More than
Total year 1-3 years years 5 years
----------- ----------- ----------- ----------- -----------
March 2003 GECC leases $ 5,012,037 $ 1,476,807 $ 2,526,045 $ 1,009,185 $
Effects of Inflation
Because our assets are to a large extent liquid in nature, they are not
significantly affected by inflation, although the value of any longer-term
fixed-income securities held in inventory may decrease. However, to the extent
inflation increases certain of our operating expenses, such as employee
compensation, travel and entertainment, occupancy and communication costs, such
increases 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
39
or decreases volatility in the securities markets, our brokerage business is
likely to be affected by corresponding increases or decreases in brokerage
transaction volumes.
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 which we expect. Uncertainties include factors such as:
market and economic conditions, including the level of trading volumes in the
instruments we broker and interest rate volatilities; the effects of any
additional terrorist acts or acts of war and governments' military and other
responses to them; the scope of our recoveries from insurers; the success of our
technology development and deployment; the status of our relationships with
employees, clients, business partners, vendors and clearing firms; possible
third-party litigations or regulatory actions against us or other unanticipated
contingencies; the scope of our trading gains and losses; the actions of our
competitors; and government regulatory changes. For a fuller description of
these and additional uncertainties, reference is made to the "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 positions in our sales and trading
operations by limiting both the size of our overall positions and the number of
days positions are held. We closely monitor our 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 commissions and principal gains and losses and the closing
positions. The detail of closing positions includes their cost basis and
independently verified market prices.
40
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 correction or disposition of the unmatched position, our risk is
usually limited. If discovery (or correction or disposition) is delayed, the
risk is heightened by the increased possibility of intervening market movements
prior to such correction or disposition. We believe that both our paperless
confirmation system and our electronic blotter system, because of their ability
to confirm trade details rapidly and identify unbalanced trade conditions as
they occur, serve 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 correct or dispose of any resulting unmatched positions promptly after
their discovery.
We do not consider our exposure to fixed interest rates significant at
December 31, 2002, due to the low level of debt outstanding. Any borrowings
under the facility with GECC and in the future with BONY bear interest at
variable rates. We will monitor the level of borrowings under the new BONY
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, 2002 and
December 31, 2001, 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, 2002 did not materially change
from the market risk analysis at December 31, 2001. For loan and note payable
the table presents principal cash flows 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. Corporate bonds not making regularly scheduled
interest payments were assigned an interest rate of 0%.
As of December 31, 2002:
- -----------------------
2003 2004 2005 2006 2007 After 2007 Total Fair Value
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Other
- -----
than trading: $ $ $ $ $ $ $ $
- -----------
Interest
rate sensitivity:
Loan payable
Trading:
- -------
Interest
rate sensitivity:
Municipal
securities 50,000 90,000 470,000 22,305,000 22,915,000 22,350,511
(weighted average
interest rate-7.1%)
Corporate bonds 10,725,000 1,000,000 23,094,000 34,819,000 6,793,364
(weighted average
interest rate-3.1%)
41
As of December 31, 2001:
- -----------------------
Fair
2002 After 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%)
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.
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 2003 Annual Meeting of
Stockholders (the "Proxy Statement"). We intend to file the Proxy Statement with
the SEC on or prior to April 30, 2003.
42
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, 2003.
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, 2003.
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, 2003.
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.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this annual report, an evaluation
was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934, as amended). Based on this evaluation, our
management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to our company (including
our consolidated subsidiaries) required to be included in our periodic SEC
reports. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
43
PART IV
ITEM 15. 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, 2002,
we filed two current reports on Form 8-K, respectively dated November
14, 2002 and December 17, 2002. The earlier filed report furnished
certifications of our Chief Executive Officer and Chief Financial
Officer given pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
with respect to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002. The later filed report announced the settlement of
our business interruption insurance claim stemming from the September
11th terrorist attacks.
44
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 28, 2003
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 28, 2003
- --------------------------------- and Chief Executive Officer(1)
Gilbert D. Scharf (Principal Executive Officer)
/s/ KEITH E. REIHL Chief Operating Officer and March 28, 2003
- --------------------------------- Director
Keith E. Reihl
/s/ STEVEN R. VIGLIOTTI Chief Financial Officer(1) and March 28, 2003
- --------------------------------- Treasurer (Principal Financial and
Steven R. Vigliotti Accounting Officer)
/s/ LARRY S. KOPP Director March 28, 2003
- ---------------------------------
Larry S. Kopp
/s/ MICHAEL J. SCHARF Director March 28, 2003
- ---------------------------------
Michael J. Scharf
Director March 28, 2003
- ---------------------------------
James W. Stevens
/s/ FREDERICK B. WHITTEMORE Director March 28, 2003
- ---------------------------------
Frederick B. Whittemore
/s/ WILLIAM B. WIGTON Director March 28, 2003
- ---------------------------------
William B. Wigton
/s/ OSCAR M. LEWISOHN Director March 28, 2003
- ---------------------------------
Oscar M. Lewisohn
/s/ ROBIN A. CLARK Director March 28, 2003
- ---------------------------------
Robin A. Clark
(1) In connection with this annual report, each of these officers has separately
furnished the SEC with the certification required to be furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350).
45
CERTIFICATION
I, Gilbert D. Scharf, Chief Executive Officer of Maxcor Financial Group
Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b. evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ GILBERT D. SCHARF
-----------------------------------------
Gilbert D. Scharf,
Chief Executive Officer
46
CERTIFICATION
I, Steven R. Vigliotti, Chief Financial Officer of Maxcor Financial
Group Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the
Company;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b. evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ STEVEN R. VIGLIOTTI
-----------------------------------------
Steven R. Vigliotti,
Chief Financial Officer
47
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
F-1
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
Contents Page
================================================================================
Report of Independent Accountants F-3
Consolidated Financial Statements:
Consolidated Statements of Financial Condition F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-9
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 (the "Company") at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 21, 2003
F-3
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
December 31, December 31,
ASSETS 2002 2001
- ------ ------------ ------------
Cash and cash equivalents $ 52,781,616 $ 49,565,284
Deposits with clearing organizations 6,318,529 6,336,080
Receivable from broker-dealers and customers 19,523,426 18,035,532
Securities failed-to-deliver 184,768,776
Securities held at clearing firms and trading contracts 29,526,028 12,090,074
Prepaid expenses and other assets 4,085,934 3,504,000
Deferred tax asset 364,419 221,112
Fixed assets 10,878,007 4,796,434
------------ ------------
Total assets $123,477,959 $279,317,292
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Payable to broker-dealer $ 17,337,560 $ 6,638,824
Trading contracts 144,153
Securities failed-to-receive 183,649,730
Accounts payable and accrued liabilities 24,168,384 27,467,826
Accrued compensation payable 26,875,249 21,187,513
Income taxes payable 543,897 1,010,907
Deferred taxes payable 566,003 414,068
Obligations under capitalized leases 842,399 204,252
Note payable 447,978
------------ ------------
70,477,645 241,021,098
------------ ------------
Minority interest in consolidated subsidiary 5,407,228 3,979,291
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized;
none issued at December 31, 2002 and 2001
Common stock, $.001 par value, 30,000,000 shares authorized;
12,232,564 and 11,612,769 shares issued at December 31, 2002 and
2001, respectively 12,233 11,613
Additional paid-in capital 36,517,908 33,731,266
Treasury stock at cost; 4,977,404 and 4,586,540 shares of common
stock held at December 31, 2002 and 2001, respectively (11,208,967) (8,992,281)
Retained earnings 20,741,779 8,195,155
Accumulated other comprehensive income:
Foreign translation adjustments 1,530,133 1,371,150
------------ ------------
Total stockholders' equity 47,593,086 34,316,903
------------ ------------
Total liabilities and stockholders' equity $123,477,959 $279,317,292
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------- ------------- -------------
Revenue:
Commission income $ 149,428,132 $ 138,003,085 $ 122,613,654
Insurance recoveries 11,098,135 4,498,144
Principal transactions 8,720,422 8,932,861 2,627,169
Interest income 2,147,274 2,306,044 1,823,285
Other income (843,142) 1,083,431 4,741,415
------------- ------------- -------------
170,550,821 154,823,565 131,805,523
------------- ------------- -------------
Costs and expenses:
Compensation and related costs 107,024,194 106,619,297 92,061,672
Communication costs 11,033,342 10,465,852 11,643,857
Travel and entertainment 7,406,116 6,493,462 6,620,974
Occupancy costs 4,054,140 3,156,568 4,406,215
Clearing and execution fees 3,311,759 3,511,712 3,307,802
Costs related to World Trade Center attacks 3,204,468 1,590,060
Depreciation and amortization 2,405,834 3,598,580 4,008,937
Contribution to The Euro Brokers Relief Fund, Inc. 1,219,233
Interest expense 299,079 666,387 594,957
Restructuring costs 541,961
General, administrative and other expenses 4,933,483 6,834,579 5,246,444
------------- ------------- -------------
144,891,648 142,936,497 128,432,819
------------- ------------- -------------
Income before provision for income taxes, minority
interest and income from equity affiliate 25,659,173 11,887,068 3,372,704
Provision for income taxes 12,130,758 2,174,673 2,710,482
------------- ------------- -------------
Income before minority interest and income from
equity affiliate 13,528,415 9,712,395 662,222
Minority interest in (income) loss of consolidated
subsidiaries (981,791) (683,985) 1,203,987
Income from equity affiliate 9,992 135,890
------------- ------------- -------------
Net income $ 12,546,624 $ 9,038,402 $ 2,002,099
============= ============= =============
Weighted average common shares outstanding -
basic 7,304,284 7,357,017 8,374,166
Weighted average common shares outstanding -
diluted 8,210,638 7,764,667 8,374,166
Basic earnings per share $ 1.72 $ 1.23 $ .23
Diluted earnings per share $ 1.53 $ 1.16 $ .23
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
----------------------------------------------------
Retained Accumulated
Additional Earnings Other
Comprehensive Common Paid-in Treasury (Accumulated Comprehensive
Income Stock Capital Stock Deficit) Income Total
----------- -------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 1999 $ 11,392 $33,187,415 ($ 5,454,036) ($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 2,002,099
Foreign translation
adjustment (net of
income tax benefit
of $171,940) (788,517) (788,517) (788,517)
Deferred hedging gain (net of
income tax expense of $12,519) 50,050 50,050 50,050
-----------
Comprehensive income $ 1,263,632
===========
Acquisition of treasury stock (894,494) (894,494)
Issuance of shares from treasury
stock 669,522 (177,335) 492,187
Redeemable preferred
stock dividends (40,000) (40,000)
-------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 2000 11,392 33,187,415 (5,679,008) (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 9,038,402
Foreign translation
adjustment (inclusive of
income tax expense
of $882) (123,169) (123,169) (123,169)
Deferred hedging
Reclassification to earnings
(net of income tax benefit
of $12,519) (50,050) (50,050) (50,050)
-----------
Comprehensive income $ 8,865,183
===========
Exercise of stock options,
including tax benefit of
$101,822 221 543,851 (220,000) 324,072
Acquisition of treasury stock (3,093,273) (3,093,273)
Redeemable preferred
stock dividends (20,000) (20,000)
-------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 2001 11,613 33,731,266 (8,992,281) 8,195,155 1,371,150 34,316,903
Comprehensive income
Net income for the
year ended December 31, 2002 $12,546,624 12,546,624 12,546,624
Foreign translation
adjustment (inclusive of
income tax benefit
of $148,909) 158,983 158,983 158,983
-----------
Comprehensive income $12,705,607
===========
Exercise of common stock
purchase warrants 493 2,463,482 2,463,975
Exercise of stock options,
including tax benefit of
$53,749 127 323,160 (96,525) 226,762
Acquisition of treasury stock (2,120,161) (2,120,161)
-------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 2002 $ 12,233 $36,517,908 ($ 11,208,967) $20,741,779 $ 1,530,133 $47,593,086
======== =========== ============ =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 12,546,624 $ 9,038,402 $ 2,002,099
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,405,834 3,598,580 4,008,937
Write-off of intangible assets 943,080
Provision for doubtful accounts (77,136) (43,794) (50,635)
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
Unreimbursed losses (undistributed earnings) of equity
affiliates and contractual arrangements 1,001,552 331,080 (373,737)
Minority interest in net earnings (loss) of consolidated
subsidiaries 981,791 683,985 (1,203,987)
Deferred hedging (50,050) 50,050
Deferred income taxes (22,517) 1,238,353 1,666,251
Change in assets and liabilities, net of effect from
purchase of subsidiary:
Decrease (increase) in deposits with clearing organizations 17,551 (1,987) 466,297
(Increase) decrease in receivable from broker-dealers and
customers (807,736) (2,593,297) 52,248
Decrease (increase) in securities failed-to-deliver 184,768,776 (184,768,776)
Increase in securities held at clearing firm and trading
contracts (17,287,342) (1,369,863) (1,240,517)
(Increase) decrease in prepaid expenses and other assets (418,766) 978,592 1,793,188
Increase (decrease) in payable to broker-dealer 10,698,736 (477,416) 1,138,311
(Decrease) increase in securities failed-to-receive (183,649,730) 183,649,730
(Decrease) increase in accounts payable and accrued liabilities (4,413,181) 15,202,441 (2,516,711)
Increase in accrued compensation payable 4,631,660 5,566,282 3,305,835
Increase (decrease) in income taxes payable (511,862) 890,786 (652,977)
------------- ------------- -------------
Net cash provided by operating activities 9,864,254 32,464,764 6,765,561
------------- ------------- -------------
Cash flows from investing activities:
Purchase of fixed assets (7,611,516) (2,108,112) (2,493,760)
Proceeds from the sale of fixed assets 244,525 266,745
Insurance proceeds recognized for destroyed fixed assets 1,524,124
Proceeds from sale of equity affiliate 1,939,516
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 (used in) provided by investing activities (7,611,516) 1,600,053 (1,959,909)
------------- ------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Continued)
For the Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------- ------------- -------------
Cash flows from financing activities:
Cash contribution from minority interest 40,000
Proceeds from exercise of options 226,762 222,250
Proceeds from the exercise of warrants 2,463,975
Issuance of note payable to minority shareholder 149,300
Net repayments under revolving credit facility (674,282)
Repayment of notes payable (447,978) (1,252,151) (972,501)
Redemption of preferred stock (2,000,000)
Redeemable preferred stock dividends (20,000) (40,000)
Repayment of obligations under capitalized
leases (137,559) (260,527) (223,774)
Acquisition of treasury stock (2,120,161) (3,011,540) (894,494)
------------- ------------- -------------
Net cash used in financing activities (14,961) (6,321,968) (2,615,751)
------------- ------------- -------------
Effect of exchange rate changes on cash 978,555 357,431 (779,172)
------------- ------------- -------------
Net increase in cash and cash
equivalents 3,216,332 28,100,280 1,410,729
Cash and cash equivalents at beginning of year 49,565,284 21,465,004 20,054,275
------------- ------------- -------------
Cash and cash equivalents at end of year $ 52,781,616 $ 49,565,284 $ 21,465,004
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 229,750 $ 733,922 $ 622,080
Income taxes paid 10,639,955 3,413,784 1,103,001
Non-cash financing activities:
Capital lease obligations incurred 706,094 138,375 97,762
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 96,525 220,000
Receipt of shares in treasury for receivable
due 81,733
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
MAXCOR FINANCIAL GROUP INC.
---------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
DECEMBER 31, 2002, 2001 AND 2000
--------------------------------
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 Stamford (CT), Switzerland and Mexico, as well as
correspondent relationships with other brokers throughout the world. Maxcor
Financial Inc. ("MFI"), a U.S. registered broker-dealer subsidiary, also
conducts institutional sales and trading brokerage operations in municipal
bonds, high-yield and distressed debt, equities and convertible securities.
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. Certain
reclassifications have been made to the 2001 and 2000 balances to conform to the
current year presentation.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------
Revenue recognition:
- -------------------
Commission income, principal transactions and related expenses are recorded 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 and trading contracts:
- --------------------------------
Transactions in securities and trading contracts are recorded on a trade date
basis.
Securities 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.
When-issued equity trading contracts are reflected in the statement of financial
condition as assets or liabilities based upon the difference between the
contract price and the quoted market price. If the difference between the
contract price and the quoted market price results in a gain and the completion
of the contract is not assured beyond a reasonable doubt, such gain is deferred
from revenue until the uncertainty is eliminated.
Principal transactions represent the net gains generated from the Company's
securities transactions that involve the assumption of market risk for a period
of time and include mark-to-market gains and losses on positions held. Revenues
derived from matched riskless principal transactions are included in commission
income.
F-9
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------
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.
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.
F-10
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------
Stock-based compensation:
- ------------------------
The Company accounts for stock-based compensation using the intrinsic value
method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Accordingly, the Company has not
recognized any compensation cost associated with stock-based compensation since
the market prices of the underlying stock on the option and warrant grant dates
were not greater than the exercise prices.
The following table presents net income and earnings per share, as reported and
on a pro forma basis as if the fair value accounting provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") had been applied to all stock-based compensation
granted since the standard's effective date:
2002 2001 2000
------------ ------------ ------------
Net income, as reported $ 12,546,624 $ 9,038,402 $ 2,002,099
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects 813,362 652,994 752,941
------------ ------------ ------------
Pro forma net income $ 11,733,262 $ 8,385,408 $ 1,249,158
============ ============ ============
Earnings per share:
Basic, as reported $ 1.72 $ 1.23 $ 0.23
Basic, pro forma $ 1.61 $ 1.14 $ 0.14
Diluted, as reported $ 1.53 $ 1.16 $ 0.23
Diluted, pro forma $ 1.43 $ 1.08 $ 0.14
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.
Recently issued accounting standards:
- ------------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that a liability be recorded in the guarantor's balance sheet
upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued, including a rollforward of the entity's
product warranty liabilities. The Company adopted the disclosure provisions of
FIN 45 effective December 31, 2002 and is presently evaluating the recognition
and measurement provisions of FIN 45 that are required to be adopted in 2003.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of FASB Statement No. 123" ("SFAS 148").
F-11
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------
SFAS 148 amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 effective December 31, 2002,
and continues to follow APB 25 for the purpose of recognizing compensation cost.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires consolidation of a
variable interest entity ("VIE") if the Company has variable interests that give
it a majority of the expected losses or a majority of the expected residual
returns of the entity. Prior to FIN 46, VIEs were commonly referred to as
special purpose entities. As the Company does not have any VIEs, the adoption of
this statement will not have an effect on the consolidated financial statements.
NOTE 3 - ATTACKS 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 these attacks, 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.
During 2002 the Company made a charitable contribution to The Euro Brokers
Relief Fund, Inc. of $1,219,233, an amount equal to all the revenue generated by
the New York, Stamford, Mexico, London and Switzerland offices of the Company on
its 2002 charity day. All participating brokerage employees waived any
entitlement to commissions from such revenues. The Euro Brokers Relief Fund,
Inc. is a 501(c)(3) tax-exempt corporation (HTTP://RELIEF.EBI.COM), established
to provide charitable aid to the families and other financial dependents of the
Company's 61 employees and staff members killed as a result of the September
11th attacks.
The Company maintained insurance coverages that mitigated the financial impacts
of the attacks. Its U.S. insurance policies, underwritten by Kemper Insurance
Companies ("Kemper"), covered replacement costs of destroyed property and losses
from interruption of business operations, including lost revenues (net of saved
expenses) and extra expenses incurred in New York. Its U.K. policy, underwritten
by Norwich Union ("Norwich"), covered lost revenues (net of saved expenses) and
extra expenses incurred in London.
During 2002 the Company settled its claims against Kemper and Norwich for lost
revenues (net of saved expenses) and extra expenses incurred for an aggregate
amount of $20 million. The portion of these settlements relating to lost
revenues (net of saved expenses) is reflected on the statement of operations in
revenues as insurance recoveries. In 2002, the amount recorded as insurance
recoveries of $11,098,135 represents the gross settlements relating to lost
revenues (net of saved expenses) of $15,596,279, less the $4,498,144 amount
recorded in 2001.
The portion of the settlements relating to extra expenses incurred has been
reflected on the statement of operations in 2002 and 2001 as reductions to costs
related to World Trade Center attacks. These offsets are recordable as the extra
expenses are incurred and the related recovery is considered probable or has
been recovered. The gross amount of the extra expenses in 2002 and 2001 of
$7,020,331 and $2,187,281, respectively, have been reduced by offsets of
$3,815,863 and $597,221, respectively, resulting in net charges in 2002 and 2001
of $3,204,468 and $1,590,060, respectively. Included in gross costs during 2002
was the cost of foregoing an extension of a sublease on additional space in
London that was re-allocated for potential use by New York employees. This gross
cost of $2.7 million ($2.4 million net after applying the portion of insurance
proceeds from Norwich Union allocable to this cost) was based upon management's
estimate of the length of time it will take to generate sublet income on this
space and the difference between the amount management believes it will then be
able to sublet the space for and the Company's cost associated with the space.
F-12
NOTE 3 - ATTACKS ON WORLD TRADE CENTER (Continued):
- --------------------------------------------------
Other gross extra expenses incurred include additional occupancy costs in New
York, the purchase of equipment solely compatible with the Company's temporary
facilities in New York, the use of outside professionals, interest on failed
securities settlements, recruitment fees and benefits for the families of
deceased employees.
The Company's U.S. property casualty insurance policy with Kemper has an
aggregate limit of approximately $14 million. The Company has recorded
receivables against this policy of $1.5 million in 2001 for the net book value
of property owned by the Company destroyed in the attacks and of $1.0 million in
2002 for the termination costs associated with operating leases of equipment
destroyed in the attacks. 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 aggregate amount of the net book value of the
property written off and lease termination costs. The anticipated gain will be
recorded as the claim is settled or otherwise resolved. Included in accounts
payable and accrued liabilities at December 31, 2002 is $5.5 million,
representing the portion of the $8 million of cash advances received from Kemper
under the property casualty policy not yet recognized.
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 charge was included in general,
administrative and other expenses during the year ended December 31, 2000. As a
result of a changes in the business climate for interactive brokerage for the
Company's product base, the Company 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 during 2001, a charge of approximately $1.1
million 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 year ended December 31, 2000
assuming the Tradesoft acquisition occurred on January 1, 2000.
For the Year Ended
December 31, 2000
-----------------
Revenues $ 131,898,654
Net income 1,763,224
Earnings per share:
Basic .21
Diluted .21
These results reflect Tradesoft's actual results during 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, 2002, 2001 and 2000:
2002 2001 2000
----------- ----------- -----------
Numerator (basic and diluted calculation):
Net income $12,546,624 $ 9,038,402 $ 2,002,099
Less redeemable preferred stock dividends (20,000) (40,000)
----------- ----------- -----------
Net income available to common
stockholders 12,546,624 9,018,402 1,962,099
Denominator:
Weighted average common shares
outstanding - basic calculation 7,304,284 7,357,017 8,374,166
Dilutive effect of stock options and warrants 906,354 407,650
----------- ----------- -----------
Weighted average common shares
outstanding - diluted calculation 8,210,638 7,764,667 8,374,166
Earnings per share:
Basic 1.72 1.23 .23
Diluted 1.53 1.16 .23
Antidilutive common stock equivalents:
Options 270,000 240,000 1,755,000
Warrants 734,980 734,980
NOTE 6 - DEPOSITS WITH CLEARING ORGANIZATIONS:
- ---------------------------------------------
Deposits with clearing organizations at December 31, 2002 and 2001 consist of
the following:
December 31, December 31,
2002 2001
------------ ------------
Cash $ 407,197 $ 429,209
U.S. Treasury obligations 5,911,332 5,906,871
------------ ------------
$ 6,318,529 $ 6,336,080
============ ============
Pursuant to its membership in the Government Securities Division of the Fixed
Income Clearing Corporation ("GSD-FICC"), MFI 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, 2002 and 2001, receivable from and payable to broker-dealers and
customers consists of the following:
December 31, 2002 December 31, 2001
--------------------------- ---------------------------
Receivable Payable Receivable Payable
------------ ------------ ------------ ------------
Commissions receivable $ 17,273,968 $ $ 16,384,225 $
Receivable from clearing firms 2,249,458 1,651,307
Payable to clearing firm 17,337,560 6,638,824
------------ ------------ ------------ ------------
$ 19,523,426 $ 17,337,560 $ 18,035,532 $ 6,638,824
============ ============ ============ ============
The Company clears its matched riskless principal brokerage transactions and its
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 securities positions. This clearing firm provides a range of
borrowing availability on securities positions from 0% for certain corporate
bonds to 85% for municipal securities. Commissions receivable represent amounts
billed on the Company's name give-up brokerage transactions, net of allowances
for doubtful accounts of approximately $531,000 and $599,000 at December 31,
2002 and 2001 respectively.
NOTE 8 - SECURITIES HELD AT CLEARING FIRMS AND TRADING CONTRACTS:
- ----------------------------------------------------------------
Securities held at clearing firms and trading contracts at December 31, 2002 and
2001 consist of the following:
December 31, 2002 December 31, 2001
----------------- -----------------
Assets Liabilities Assets
------------ ------------ ------------
Municipal obligations $ 22,350,511 $ $ 10,860,649
Corporate bonds 6,793,364 870,625
Corporate stocks 57,500 358,800
When-issued equity
trading contracts 324,653 144,153
------------ ------------ ------------
$ 29,526,028 $ 144,153 $ 12,090,074
============ ============ ============
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 - 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"). 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 10) 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"). Included in income from equity affiliate for the year ended December
31, 2000 is the Company's approximately $86,000 share of an 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
F-15
NOTE 9 - EQUITY AFFILIATES AND MINORITY INTERESTS (Continued):
- -------------------------------------------------------------
consolidated in the Company's consolidated financial statements, with Monecor's
interest presented as minority interest.
In February 2003, the London Court of Appeals upheld the May 2002 judgment of
the London High Court of Justice enabling EBHL to purchase Monecor's 50%
shareholding in EBFL at a 30% discount to the book value attributable to this
shareholding as of December 2000 and refused Monecor's request for leave to
appeal further to the House of Lords. The Company sought this judgment under the
terms of the EBFL shareholders agreement as a result of Monecor's failure to
provide certain requested funding to EBFL in late 2000. As a result, in February
2003 the Company acquired Monecor's shareholding at the discounted price and
recorded a one-time extraordinary gain of approximately (pound)1.8 million ($3.0
million), the excess of the amount recorded for Monecor's interest in EBFL over
the purchase price.
NOTE 10 - 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.
Summarized operating results of the Tokyo Venture for the years ended December
31, 2002, 2001 and 2000, along with the Company's share of those results, are
presented below:
2002 2001 2000
------------ ------------ ------------
Revenues $ 10,405,376 $ 15,218,117 $ 20,310,361
Expenses 12,473,906 16,670,071 19,001,101
------------ ------------ ------------
(Loss) earnings ($ 2,068,530) ($ 1,451,954) $ 1,309,260
============ ============ ============
Company's share ($ 1,184,233) ($ 694,083) $ 523,704
============ ============ ============
F-16
NOTE 11 - RESTRUCTURING COSTS:
- -----------------------------
During the year ended December 31, 2000, the Company incurred certain
restructuring costs detailed below. 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.
2000
--------
Employee severance costs $441,021
Loss on disposal of fixed assets 77,992
Occupancy costs 17,750
Other 5,198
--------
$541,961
========
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. All of the
restructuring reserve outstanding at December 31, 2000 was paid as of December
31, 2002.
NOTE 12 - FIXED ASSETS:
- ----------------------
Fixed assets at December 31, 2002 and 2001 are summarized below:
December 31, December 31,
2002 2001
------------ ------------
Furniture and telephone equipment $ 9,458,109 $ 7,182,545
Leasehold improvements 8,318,899 4,000,882
Computer and related equipment 7,122,245 5,235,150
Software 7,664,033 7,094,308
Automobiles 1,192,485 345,804
------------ ------------
33,755,771 23,858,689
Less - Accumulated depreciation
and amortization (22,877,764) (19,062,255)
------------ ------------
$ 10,878,007 $ 4,796,434
============ ============
NOTE 13 - OBLIGATIONS UNDER CAPITALIZED LEASES:
- ----------------------------------------------
The Company, primarily in the U.K., 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, 2002:
For the Year Ending December 31,
2003 $ 290,550
2004 297,878
2005 438,807
-----------
Total minimum lease payments 1,027,235
Less - Amount representing interest (184,836)
-----------
Present value of total minimum lease payments $ 842,399
===========
The gross amounts of assets under capitalized leases are approximately
$1,040,000 and $222,000 at December 31, 2002 and 2001, 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 $219,000, $80,000 and
$133,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
F-17
NOTE 14 - BORROWING ARRANGEMENTS:
- --------------------------------
Loan Payable:
- ------------
In June 1999, Euro Brokers Inc. ("EBI"), a U.S. subsidiary, entered into a Loan
and Security Agreement with General Electric Capital Corporation ("GECC") for a
five year revolving credit facility of up to $5 million. This facility, which
was not drawn upon at December 31, 2002 or 2001, is secured by substantially all
of EBI's assets. The borrowing availability under this facility (which
approximated $3.7 million at December 31, 2002) is determined based upon the
level and condition of EBI's billed accounts receivable. Interest is charged on
borrowings under this facility at variable rates based upon the published rate
for commercial paper plus a margin. Commitment fees of .15% per annum are
charged on the unused portion of this facility.
In March 2003, EBI terminated the facility with GECC and entered into a Credit
Agreement with The Bank of New York for a three year revolving credit facility
of up to $15 million. This facility is secured by EBI's receivables and the
stock issued by EBI to its direct parent and has mandatory reductions to
availability of $5 million on each of the eighteenth and thirtieth months
following the closing date. This agreement contains certain covenants which
require EBI separately, and the Company as a whole, to maintain certain
financial ratios and conditions. Borrowings under this facility bear interest at
a variable rate based upon two types of borrowing options, (1) an Alternate Base
Rate option which incurs interest at the Prime Rate plus a margin or (2) a
Eurodollar option which incurs interest at rates quoted in the London interbank
market plus a margin. Commitment fees of .35% per annum are charged on the
unused portion of this new facility.
Note Payable:
- ------------
At December 31, 2001, the Company had outstanding $447,978 of a 7.9% note
secured by certain equipment representing 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 attacks on the World Trade Center, the
equipment securing this note was destroyed. Pursuant to the terms of the note,
the Company retired the note early in 2002 without penalty.
NOTE 15 - 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
$213,000, $230,000 and $270,000 for the years ended December 31, 2002, 2001 and
2000.
NOTE 16 - INCOME TAXES:
- ----------------------
Income before provision for income tax, minority interest and income from equity
affiliate is subject to tax under the following jurisdictions:
For the Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Domestic $ 22,801,450 $ 8,196,893 $ 4,392,815
Foreign 2,857,723 3,690,175 (1,020,111)
------------ ------------ ------------
Total $ 25,659,173 $ 11,887,068 $ 3,372,704
============ ============ ============
F-18
NOTE 16 - INCOME TAXES (Continued):
- ----------------------------------
The components of the provision for income taxes are as follows:
For the Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Current
Federal $ 7,980,966 $ 2,307,130 $ 1,012,798
State and local 2,291,478 (3,384,531) 75,190
Foreign 1,880,831 1,981,160 (139,143)
------------ ------------ ------------
Total 12,153,275 903,759 948,845
------------ ------------ ------------
Deferred
Federal (746,432) 1,602,678 797,989
State and local 906,825 (149,310) (49,643)
Foreign (182,910) (182,454) 1,013,291
------------ ------------ ------------
(22,517) 1,270,914 1,761,637
------------ ------------ ------------
Total $ 12,130,758 $ 2,174,673 $ 2,710,482
============ ============ ============
Deferred tax assets (liabilities) are comprised of the following:
December 31, December 31,
2002 2001
------------ ------------
Assets
Bad debt reserve $ 164,510 $ 187,077
Occupancy reserves 53,888 121,488
Depreciation and amortization 898,574 1,029,962
Net operating losses ("NOLs") 255,715 853,921
Foreign tax credits 96,517 72,726
Capital loss carryforwards 627,446 615,132
Other 107,918 77,479
Deferred tax asset valuation allowance (979,678) (952,768)
------------ ------------
Gross deferred tax asset, after valuation
allowance 1,224,890 2,005,017
Jurisdictional deferred taxes payable offset (860,471) (1,783,905)
------------ ------------
Deferred tax asset $ 364,419 $ 221,112
============ ============
Liabilities
Differential on assigned values and tax
basis for acquired assets ($ 331,474) ($ 457,752)
Unrealized gains (766,390) (1,395,016)
Other (328,610) (345,205)
------------ ------------
Gross deferred taxes payable (1,426,474) (2,197,973)
Jurisdictional deferred tax asset offset 860,471 1,783,905
------------ ------------
Deferred taxes payable ($ 566,003) ($ 414,068)
============ ============
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 and $24,000 expire in 2005 and 2007,
respectively. Foreign NOLs approximating $509,000, $238,000 and $958,000 expire
in 2007, 2008 and 2009, respectively.
F-19
NOTE 16 - INCOME TAXES (Continued):
- ----------------------------------
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:
For the Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Tax at U.S. statutory rate $ 8,724,119 $ 4,041,603 $ 1,146,719
Increase (decrease) in tax resulting from:
Higher effective rates on earnings
of foreign operations and tax
benefit of foreign losses not
recognized 610,115 283,351 482,398
Nondeductible meals and
entertainment 955,536 828,500 1,020,421
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)
Non-taxable interest income (336,974) (228,378) (104,977)
(Decrease) increase to deferred tax
asset valuation allowance (1,157,056) 153,958
State and local taxes, net 2,110,880 657,993 16,860
Other 67,082 (202,492) (192,266)
------------ ------------ ------------
$ 12,130,758 $ 2,174,673 $ 2,710,482
============ ============ ============
NOTE 17 - 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 9 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-20
NOTE 17 - STOCKHOLDERS' EQUITY (Continued):
- ------------------------------------------
Common stock and warrants:
- -------------------------
At December 31, 1999, the Company had outstanding 8,337,437 shares of common
stock and held 3,054,832 shares of common stock in treasury.
At December 31, 1999, the Company also had outstanding 685,948 redeemable
purchase warrants issued in connection with the Company's 1994 initial public
offering (the "IPO Warrants") and 49,032 Series B redeemable common stock
purchase warrants issued in connection with the acquisition of EBIC (the
"Acquisition Warrants"). Both series of Warrants entitled the holder to purchase
from the Company one share of common stock at an exercise price of $5.00 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.
During the year ended December 31, 2002, the Company purchased an additional
375,507 shares under its repurchase program at an aggregate purchase price of
$2,120,161 and issued 127,000 shares pursuant to options exercised under the
Company's 1996 Stock Option Plan. In connection with certain exercises, the
Company received 15,357 shares into treasury as consideration for exercise
prices aggregating $96,525.
During April 2002, the Company issued 492,795 shares of common stock upon the
exercise of an aggregate like number of IPO Warrants and Acquisition Warrants
and received total proceeds of $2,463,975. The remaining IPO Warrants and
Acquisition Warrants expired on April 12, 2002.
As a result of the foregoing activity, at December 31, 2002 and 2001, the
Company had outstanding 7,255,160 and 7,026,229 shares of common stock,
respectively, and held 4,977,404 and 4,586,540 shares of common stock in
treasury, respectively.
F-21
NOTE 17 - STOCKHOLDERS' EQUITY (Continued):
- ------------------------------------------
At December 31, 2002, the Company had 1,452,500 shares of common stock reserved
for issuance upon exercise of options pursuant to the Company's 1996 Stock
Option Plan, 1,500,000 shares reserved for issuance in connection with awards
pursuant to the 2002 Stock Option Plan and 1,000,000 shares reserved in treasury
for the exercise of warrants pursuant to a warrant program established to
provide inducements and incentives in connection with the formation of a new
leveraged finance department.
NOTE 18 - STOCK OPTION AND WARRANT PLANS:
- ----------------------------------------
Stock Options:
- -------------
The Company's 1996 Stock Option Plan, as amended, provides for the granting of
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 1996 Stock Option Plan. The
Company's 2002 Stock Option Plan (together with the 1996 Stock Option Plan, the
"Plans") provides for incentive awards to directors, officers, employees and
consultants of the Company and its subsidiaries, including the granting of stock
options, stock appreciation rights, restricted stock and stock bonus awards as
determined by the compensation committee of the Company's Board of Directors. A
total of 1,500,000 shares were authorized for awards under the 2002 Stock Option
Plan. Options under the Plans may be in the form of incentive stock options
("ISOs") and non-qualified stock options. In the case of ISOs, the duration of
the option may not exceed 10 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 vest and become
exercisable in equal installments on each anniversary of the date of grant for
periods of four or five years. Non-employee director grants granted to date 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
Plans, all unvested options automatically vest. Under the Plans, 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, 2002 December 31, 2001 December 31, 2000
------------------------ ------------------------ ------------------------
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 1,470,750 $ 2.29 1,755,000 $ 2.14 1,670,000 $ 2.03
Granted 426,250 5.79 335,000 2.88 335,000 2.61
Exercised (127,000) 2.12 (220,500) 2.01
Canceled (70,000) 3.23 (398,750) 2.28 (250,000) 2.02
---------- ---------- ---------- ---------- ---------- ----------
Outstanding
at end of year 1,700,000 $ 3.14 1,470,750 $ 2.29 1,755,000 $ 2.14
========== ========== ========== ========== ========== ==========
Exercisable
at end of year 1,030,625 $ 2.20 978,313 $ 2.12 1,079,750 $ 2.04
========== ========== ========== ========== ========== ==========
Weighted average
fair value of
options granted
during the year $ 4.47 $ 2.05 $ 1.83
========== ========== ==========
F-22
NOTE 18 - STOCK OPTION AND WARRANT PLANS (Continued):
- ----------------------------------------------------
At December 31, 2002 there were 1,293,750 options outstanding with exercise
prices ranging from $2.00 to $3.00 and 406,250 options outstanding with exercise
prices ranging from $5.14 to $6.00. The weighted-average remaining contractual
life of all options outstanding approximates 6.5 years.
During 2002, the Company issued 500,000 common stock purchase warrants to
employees under a newly established warrant program to provide inducements and
incentives in connection with the formation of a new leveraged finance
department (the "Leveraged Finance Warrants"). The Leveraged Finance Warrants
issued have an exercise price of $5.875 and vest at the rate of 50% on the
second anniversary of the grant date and 25% on each of the third and fourth
anniversaries. This warrant program provides for the granting of up to an
additional 500,000 common stock purchase warrants upon the achievement of
specific performance goals, with the same vesting schedule and with exercise
prices equal to the higher of book value per share or the fair market value per
share of the Company's common stock at the time of grant.
The Company has elected to continue to follow APB 25 in accounting for the Plans
and the Leveraged Finance Warrants. Accordingly, the Company has not recognized
any compensation cost associated with the Plans and the Leveraged Finance
Warrants since the market prices of the underlying stock on the option and
warrant 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 Plans
and the Leveraged Finance Warrants had been recognized using the fair value
method of SFAS 123. Because stock options under the Plans and the Leveraged
Finance Warrants have characteristics significantly different from those of
traded options and warrants and because changes in subjective assumptions can
materially affect the fair value estimated, the Company used the Black-Scholes
pricing model for 2002, 2001 and 2000 with the following weighted average
assumptions: expected volatility of 101%, 89% and 83%, respectively; risk free
interest rate of 4.5%, 4.9% and 6.7%, respectively; and an expected option life
of five years.
For the Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Net income As reported $ 12,546,624 $ 9,038,402 $ 2,002,099
Pro forma 11,733,262 8,385,408 1,249,158
Basic earnings per share As reported 1.72 1.23 .23
Pro forma 1.61 1.14 .14
Diluted earnings per share As reported 1.53 1.16 .23
Pro forma 1.43 1.08 .14
NOTE 19 - COMMITMENTS:
- ---------------------
The Company is obligated under certain non-cancelable leases for office space
and equipment and under telecommunication services contracts.
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.
F-23
NOTE 19 - COMMITMENTS (Continued):
- ---------------------------------
Future minimum rental commitments for operating leases that have initial or
remaining terms in excess of one year approximate the following:
Year
----
2003 $ 10,194,732
2004 6,267,970
2005 5,558,448
2006 5,141,433
2007 5,051,885
Thereafter 43,730,997
------------
Total $ 75,945,465
============
Rental expense, net of sub-rental income, amounted to approximately $3,642,000,
$3,416,000 and $2,878,000 in 2002, 2001 and 2000, respectively.
In March 2003, EBI entered into various sale-leaseback transactions for
equipment and furniture under a master lease agreement with GECC. These leases
contain options at the end of the terms to purchase the assets at a percentage
of their original cost or to return the assets and either (1) pay GECC the
amount by which EBI's termination obligation exceeds the proceeds on GECC's
disposition of the assets or (2) receive the amount by which the proceeds on
GECC's disposition exceeds the cost of EBI's purchase option. Since these leases
do not meet one or more of the criteria for capital lease treatment, they are
classified as operating leases and will not be recorded on the statement of
financial condition. The future minimum rental commitments for these leases,
including the maximum amounts owed at the end of the lease terms if the
underlying assets are returned, are as follows:
Year
2003 $ 1,476,807
2004 1,546,932
2005 979,113
2006 1,009,185
------------
$ 5,012,037
============
NOTE 20 - CONTINGENCIES:
- -----------------------
Counterparty Risk and Guarantees:
- --------------------------------
The Company clears certain of its securities transactions through clearing firms
on a fully disclosed basis. Pursuant to the terms of the agreements between the
Company and the clearing firms, the clearing firms generally have the right to
charge the Company for losses that result from a counterparty's failure to
fulfill its contractual obligations. As there is no contractual limitation on
these charges, the Company believes there is no maximum amount assignable to
this risk. At December 31, 2002, the Company has recorded no liabilities with
regards to this risk. During 2002, the Company made no payments to its clearing
firms related to these rights.
The Company has the right to pursue collection or performance from
counterparties who do not perform under their contractual obligations. The
Company and its clearing firms have a policy of reviewing, on an ongoing basis,
the credit standing of the Company's counterparties, which are institutions.
F-24
NOTE 20 - CONTINGENCIES (Continued):
- -----------------------------------
When-issued Equity Trading Contracts:
- ------------------------------------
When-issued equity trading contracts represent a contract between two parties to
receive (purchase) and deliver (sell) a specified amount of equity securities
that have not yet been issued for an agreed upon price. Such contracts subject
the Company to credit risk and market risk. Credit risk is limited to the
unrealized market valuation gains recorded as assets in the statement of
financial condition, offset by any deferral accruals for completion
uncertainties. Market risk is substantially dependent upon the perceived
volatility of the future issue.
At December 31, 2002, the Company had outstanding when-issued equity trading
contracts for the common stock of NTL Inc. ("NTL"), at the time a Chapter 11
debtor, with notional values of $2.0 million of sales and $1.0 million of
purchases. Since these contracts were not assured of settling as of December 31,
2002, the net mark-to-market gain of $180,499 was deferred from revenue.
In early January 2003 (prior to NTL's emergence from bankruptcy), the Company
entered into additional when-issued equity trading contracts for NTL common
stock with notional values of $2.1 million of sales and $150,000 of purchases,
for a total of $4.1 million notional sales values and $1.2 million notional
purchases values. On January 10, 2003, NTL emerged from bankruptcy under a plan
of reorganization providing for the issuance of one-fourth the number of shares
as was previously contemplated. The Company and other participants in the
when-issued trading market expected the settlement of these trades would be
adjusted to reflect a one-for-four reverse stock split. A number of buyers of
NTL when-issued shares, seizing upon a Nasdaq advisory issued on January 14,
2003 that Nasdaq would not cancel the when-issued trades for NTL common stock,
are demanding (or because of certain automated settlement processes have
received) full delivery of the shares at the original contract price.
On January 16, 2003, the Company sought and obtained from the Bankruptcy Court
handling NTL's case a temporary order that required and caused many of the
Company's when-issued trades to settle on an adjusted basis reflecting a
one-for-four reverse stock split. Because the relief was temporary and not all
of the trades settled on this basis, the Company has subsequently filed a suit
in the Supreme Court of the State of New York, naming all of its counterparties
to its NTL when-issued trades, that seeks a permanent and uniform adjusted
settlement of these trades. Similar proceedings, some seeking settlement on an
adjusted basis, others on an unadjusted basis, have been commenced by other
parties to NTL when-issued trades against their counterparties, including the
Company, in both of these Courts, as well as before NASD.
If all of the Company's when-issued trades were required to settle on an
unadjusted basis, the Company estimates it would incur a 2003 after-tax loss
relating to this matter in the neighborhood of $4 million. However, this
exposure could be higher to the extent that any of the proceedings above require
the Company, as a purchaser of NTL when-issued shares, to accept their delivery
on a one-for-four adjusted basis, but, as a seller of such shares, to make their
delivery on a fully unadjusted basis. Conversely, the exposure could also be
lower to the extent that the Company prevails in its suit.
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 $2.8 million at
December 31, 2002), plus interest estimated at approximately (pound)481,000
through December 31, 2002 (approximately $774,000). 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, 2002,
the Company had reserved approximately $2.7 million against this demand and
future demands from the Inland Revenue for NIC related to employee bonuses paid
after February 1998. Based upon this level of reserves, management does not
anticipate the ultimate outcome of this or future NIC matters will have a
material adverse effect on its consolidated financial condition or results of
operations.
F-25
NOTE 21 - 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, 2002 and 2001, the Company had
no foreign currency forward contracts outstanding for hedging activities.
NOTE 22 - 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 GSD-FICC requires it to maintain
minimum excess regulatory net capital of $10,000,000. In addition, as a result
of the upgrade of MFI's GSD-FICC membership to dealer status in March 2003, MFI
is required to maintain combined stockholder's equity and subordinated borrowing
equal to $25 million. At December 31, 2002, MFI had regulatory net capital of
$23.9 million, a regulatory net capital requirement of $250,000 and combined
stockholder's equity and subordinated borrowing of $31.9 million. EBFL is a Type
D registered firm of the Financial Services Authority ("FSA"), required to
maintain a financial resources requirement equal to six weeks average
expenditures. At December 31, 2002, EBFL had financial resources in accordance
with FSA's rules of (pound)5.1 million ($8.3 million) and a financial resources
requirement of (pound)2.4 million ($3.9 million).
NOTE 23 - 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, principal transactions and information sales revenue. The
Company has defined its operating segments based upon geographic 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
F-26
NOTE 23 - SEGMENT REPORTING (Continued):
- ---------------------------------------
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 10 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
------------ ------------ ------------ ------------ ------------ ------------
2002
Operating revenues $101,096,048 $ 52,717,957 $ 1,076,945 $ $ 3,519,537 $158,410,487
Interest income 1,781,994 411,917 1,446 18 391 2,195,766
Interest expense 292,237 55,334 347,571
Depreciation and
amortization 1,413,595 905,006 8,635 78,598 2,405,834
Provision for income
taxes 10,432,832 1,549,168 13,558 135,200 12,130,758
Non-equity loss from
contractual arrangement (1,184,233) (1,184,233)
Net income (loss) 12,368,617 1,064,250 226,240 (1,287,064) 174,581 12,546,624
Assets 113,025,397 28,297,516 1,417,682 196,825 1,363,614 144,301,034
Capital expenditures 6,839,528 664,444 8,987 98,557 7,611,516
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 271,556,251 22,967,639 1,016,935 7,106,600 1,596,115 304,243,540
Capital expenditures 1,715,285 325,660 67,167 2,108,112
F-27
NOTE 23 - SEGMENT REPORTING (Continued):
- ---------------------------------------
United United All
States Kingdom Switzerland Japan Other Total
------------ ------------ ------------ ------------ ------------ ------------
2000
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 67,029,462 22,313,776 603,276 8,201,126 1,465,366 99,613,006
Capital expenditures 1,981,620 496,892 15,248 2,493,760
Investment in
unconsolidated affiliates 1,552,757 1,552,757
Included below are reconciliations of reportable segment items to the Company's
consolidated totals as reported in the consolidated financial statements.
2002 2001 2000
------------- ------------- -------------
Interest income:
Total for reportable segments $ 2,195,375 $ 2,524,407 $ 2,120,823
Other interest 391 3,172 8,576
Elimination of intersegment
interest income (48,492) (221,535) (306,114)
------------- ------------- -------------
Consolidated total $ 2,147,274 $ 2,306,044 $ 1,823,285
============= ============= =============
Interest expense:
Total for reportable segments $ 347,571 $ 887,922 $ 901,071
Elimination of intersegment
interest expense (48,492) (221,535) (306,114)
------------- ------------- -------------
Consolidated total $ 299,079 $ 666,387 $ 594,957
============= ============= =============
Assets:
Total for reportable segments $ 142,937,420 $ 302,647,425 $ 98,147,640
Other assets 1,363,614 1,596,115 1,465,366
Elimination of intersegment
receivables (6,273,360) (10,376,533) (12,968,505)
Elimination of investments in
other segments (14,549,715) (14,549,715) (15,738,154)
------------- ------------- -------------
Consolidated total $ 123,477,959 $ 279,317,292 $ 70,906,347
============= ============= =============
F-28
NOTE 24 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
- -------------------------------------------------------
The following table reflects the unaudited quarterly results of operations of
the Company for 2002 and 2001.
For the Three Months Ended
2002 March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Total revenues $ 37,518,213 $ 38,505,003 $ 44,544,692 $ 49,982,913
Total expenses 36,151,014 36,395,593 41,434,491 44,023,099
Income before provision for
income taxes and
minority interest 3,029,011 4,551,390 6,123,460 11,955,312
Net income 1,367,199 2,109,410 3,110,201 5,959,814
Weighted average common
shares outstanding-basic 7,026,385 7,472,870 7,425,138 7,288,535
Weighted average common
shares outstanding-diluted 7,959,720 8,447,869 8,268,393 8,159,599
Basic earnings per share .19 .28 .42 .82
Diluted earnings per share .17 .25 .38 .73
2001
Total revenues $ 40,891,633 $ 40,528,176 $ 37,681,166 $ 35,722,590
Total expenses 38,563,475 37,803,125 35,712,988 33,715,567
Income (loss) before
provision for income
taxes, minority
interest and income from
equity affiliate 4,482,372 4,586,390 2,848,953 (20,655)
Net income 2,344,282 2,718,919 1,968,178 2,007,023
Weighted average common
shares outstanding-basic 7,825,912 7,525,809 7,082,859 7,005,517
Weighted average common
shares outstanding-diluted 7,825,912 7,781,977 7,717,083 7,673,498
Basic earnings per share .30 .36 .28 .29
Diluted earnings per share .30 .35 .26 .26
F-29
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 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
(the "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)
4.2 Warrant Agreement, dated as of April 19, 2002, by and between the
Registrant and certain employees (incorporated herein by
reference to Exhibit 4.1 of the Registrant's Current Report on
Form 8-K, dated April 23, 2003)
4.3 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 of the Registrant's Registration Statement
on Form 8-A, dated December 6, 1996)
4.4 Amendment No. 1, dated July 26, 2001, to the Rights Agreement
(incorporated herein by reference to Exhibit 4.6a of the
Registrant's Current Report on Form 8-K, dated July 27, 2001)
X-1
10.1 Sublease Agreement, dated as of August 1, 2002, by and between
Prudential Securities Incorporated, as sublessor, and Euro
Brokers Inc., as sublessee (without exhibits) (incorporated
herein by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2002 (the "September 2002 Form 10-Q"))
10.2 Subordination, Recognition and Attornment Agreement, dated as of
August 16, 2002, by and among Resnick Seaport, LLC, as landlord,
Prudential Securities Incorporated, as sublandlord, and Euro
Brokers Inc., as subtenant (incorporated herein by reference to
Exhibit 10.2 of the September 2002 Form 10-Q)
10.3 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)
10.4 Supplemental Deed to the London Underlease, dated 28 May 1993
(incorporated herein by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998)
10.5+ Maxcor Financial Group Inc. 1996 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.6 of the 1999
Form 10-K)
10.6+ Maxcor Financial Group Inc. 2002 Stock Option Plan (incorporated
herein by reference to Appendix A of the Registrant's Definitive
Proxy Statement on Schedule 14A, dated April 30, 2002 (the "Proxy
Statement"))
10.7+ Maxcor Financial Group Inc. Key Executive Incentive Bonus Plan
(incorporated herein by reference to Appendix B of the Proxy
Statement)
10.8+ Amended and Restated Employment Agreement, dated as of October 1,
2002, by and between the Registrant and Gilbert Scharf*
10.9+ Amended and Restated Employment Agreement, dated as of October 1,
2002, by and between the Registrant and Keith Reihl*
10.10+ Amended and Restated Employment Agreement, dated as of October 1,
2002, by and between the Registrant and Roger Schwed*
10.11+ Employment Agreement, dated as of October 1, 2002, by and between
the Registrant and Steven Vigliotti*
10.12+ Employment Agreement, dated 1 October 2000, by and between Euro
Brokers Finacor Limited and Robin Adrian Clark (the "Clark
Employment Agreement") (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)
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10.13+ Amendment, dated 1 October 2002, to the Clark Employment
Agreement*
10.14+ Change in Control Severance Agreement, dated as of October 1,
2002, by and between the Registrant and Robin Adrian Clark*
10.15 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)
10.16 Securities Clearance Agreement, dated as of August 15, 2002,
between Maxcor Financial Inc. and The Bank of New York
(incorporated herein by reference to Exhibit 10.3 to the
September 2002 Form 10-Q) (1)
21 Subsidiaries of the Registrant*
23 Consent of PricewaterhouseCoopers LLP*
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* 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.
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