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, 2003 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
MAXCOR FINANCIAL GROUP INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-3262958
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(State or other jurisdiction of (I.R.S. Employer 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 $10.10
on June 30, 2003 (the last business day of the registrant's most recently
completed second fiscal quarter), was approximately $47 million.
As of March 29, 2004, there were 7,166,973 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Those portions of registrant's
Proxy Statement for its 2004 Annual Meeting of Stockholders (which registrant
intends to file pursuant to Regulation 14A on or before April 29, 2004) 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.
[GRAPHIC OMITTED]
MAXCOR FINANCIAL GROUP INC.
INDEX
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PAGE
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PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 21
Item 3. Legal Proceedings............................................ 21
Item 4. Submission of Matters to a Vote
of Security-Holders.......................................... 21
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................. 22
Item 6. Selected Financial Data...................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 24
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
Item 9A. Controls and Procedures...................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant........... 42
Item 11. Executive Compensation....................................... 42
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. Principal Accountant Fees and Services....................... 43
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...................................... 43
Signatures................................................................ 45
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 39.
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
filings with the Securities and Exchange Commission (the "SEC"), which are
posted there as soon as reasonably practicable after they are made.
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 other 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, corporate bonds, convertible
securities and equities, as well as institutional securities financing
operations.
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, trade capture 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.
In each financial center other than Tokyo, we currently operate through
wholly-owned subsidiaries. With respect to our London capital markets
operations, housed in Euro Brokers Limited, this 100% ownership has been the
case since February 2003, when we purchased, at a discounted purchase price
pursuant to a favorable litigation result, the 50% interest that had been held
by Monecor (London) Limited ("Monecor") in those operations since January 1,
1999 (see Note 10 to the Consolidated Financial Statements). In Tokyo, since
July 1, 2001 we have had a controlling 57.25% financial interest in a brokerage
venture conducting yen and dollar denominated derivative businesses (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 (see Note 11
to the Consolidated Financial Statements).
INTER-DEALER BROKERAGE BUSINESSES
In our Euro Brokers 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,
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'
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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 primarily out of our New York and
London centers, to a client base consisting predominantly of 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
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
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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 derivative products out of all of our financial centers. Our
client base for most of these products is predominantly 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.
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.
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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.
INSTITUTIONAL SALES AND TRADING BUSINESSES
In our Maxcor institutional 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, corporate
bonds (including high grade and high yield), 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 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 trading and inventory
positions in these businesses, often for the purpose of facilitating anticipated
client needs. We manage the risks associated with these positions by placing
trading guidelines on their size, rating and number of days held and with
certain hedging requirements. They are marked-to-market and monitored on a real
time basis. We also utilize a portion of our capital for investment positions in
municipal and other securities.
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INSTITUTIONAL SECURITIES FINANCING
In our Maxcor institutional securities financing business, we operate a
matched-book of offsetting securities purchased under agreements to resell
("reverse repurchase agreements") and securities sold under agreements to
repurchase ("repurchase agreements"). In this business, we enable institutional
customers to finance U.S. Treasury, federal agency and mortgage-backed
securities in their portfolios and to borrow such securities to make deliveries
on short sales. We also enable institutions with available cash to earn interest
through an investment in a secured financing arrangement. In reverse repurchase
agreements, we receive collateral in the form of securities and lend cash on
which we earn interest. The securities received as collateral are then used as
collateral to secure repurchase agreements whereby we borrow funds from another
institution and incur interest. A significant portion of our interest revenues
and our interest expense from securities indebtedness results from this
activity. We monitor the fair value of the securities received and delivered
under these agreements and obtain additional collateral or return excess
collateral when appropriate.
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.
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.
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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 and floating rate notes, 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 a real-time
distribution capability for our data feeds through both the Internet and
Bloomberg terminals, which permits us to customize data delivery in accordance
with our clients' desires and which also has allowed us to access a broader
range of clients without incurring the infrastructure costs associated with
expanding our private network.
We maintain teams of computer and communications specialists to provide
technological support to our network. We are continually upgrading our
technological facilities in order to access and collate market information and
redistribute it virtually instantaneously throughout our network or these
alternative delivery systems. Through the continued development and use of
proprietary software, computerized screen displays, vendor relationships,
digital networks and interactive capabilities, we strive to keep our
communication, technology and information systems as current as possible.
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 blotter system for post-trade data
input, is integrated with and captures transactions effected through either our
proprietary screen system or the Tradesoft(R) system, and thereafter 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.
Most recently we have developed and begun to deploy an integrated
straight through processing system (the "STP System") that uses Tradesoft(R)
technology to capture data from the MEB System and enables clients to
electronically access transaction details for paperless updating of front-office
position-keeping (risk management) and back-office settlement systems.
Consistent with our vision of and commitment to a hybrid approach to servicing
our clients, the STP System is intended to enable us to provide the same trade
processing services as an electronic trading platform, but without foregoing the
front-end execution services of a voice broker. We believe that this is an
important service and efficiency desired by our largest and most active clients
and provides the enhanced functionality now required in ever-increasing
electronic communications.
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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. As mentioned above, we
currently believe that a hybrid approach, in which we provide both quality voice
brokering and advanced screen system and other technology, including the front
end Tradesoft(R) broker station, paperless confirmations and the STP System,
will best enable us to build liquidity, maintain a satisfied employee base and
provide current technology solutions to meet the requirements of our most active
clients.
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. We also generate commissions
on sales and trading transactions executed on an agency or matched riskless
principal basis.
Other sources of revenues include (1) the net principal gains or losses
from transactions in our sales and trading businesses involving the assumption
of market risk for a period of time and from investment positions, (2) profits
or losses from the Tokyo Venture, (3) interest income, derived primarily from
reverse repurchase agreements, securities positions, cash and cash equivalents
and deposits with clearing organizations, (4) income from the sale of data and
financial information generated from our brokerage businesses, and (5) foreign
exchange gains and losses.
Interest expense on securities indebtedness, primarily on repurchase
agreements and margin borrowings, is deducted from gross revenues to arrive at
net revenues.
The largest single component of our expenses is compensation paid to
our brokerage personnel (which includes traders and sales persons in our
institutional sales and trading businesses). Attracting and retaining qualified
brokerage personnel with strong client relationships is a prerequisite in our
business and in the brokerage business in general. Brokerage personnel are
generally compensated by a combination of fixed salary and incentive payments
based on commissions or credits generated by them or on the net profitability of
their respective departments. For this reason, compensation expense frequently
will increase or decrease in rough proportion to revenues, although the fixed
salary component can skew the correlation in businesses with declining revenues
by causing decreases in compensation to lag behind decreases 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 individual, at each
location.
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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 compensation, 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 our expenses, and, with the advent of electronic execution and matching
systems, the need to invest in new technology 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, the STP
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 from others, 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 continuously monitor and make it a priority to manage these
expenditures in a focused and coordinated fashion.
To grow revenues and stay competitive, we constantly need to analyze
and pursue growth opportunities in both new and existing product lines. Product
expansion, when undertaken, however, generally leads to an increase in the
number of brokerage personnel, and therefore in compensation expense, since the
markets usually require brokerage personnel 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.
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.
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In our August 1996 acquisition of Euro Brokers Investment Corporation,
we issued aggregate consideration consisting of approximately $22 million in
cash, 4,505,666 shares of common stock and 7,566,625 Series B redeemable common
stock purchase warrants, economically identical in their terms to the initial
public offering warrants.
In November 1997, we consummated an exchange offer, on the basis of
0.1667 of a share of common stock for each warrant of either series (the
"Exchange Offer"), pursuant to which we issued an aggregate of 2,380,975 shares
of common stock in exchange for 14,283,296 (or approximately 95.1%) of the
then-outstanding warrants. As a result of the Exchange Offer, the warrants (and
any remaining, related units) were delisted from trading on The Nasdaq Stock
Market(R) and deregistered under the Securities Exchange Act of 1934, as
amended.
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 expanded by 490,918
shares, to a total of 1,200,000 shares, followed by a further expansion in 2003
of 700,000 shares, to a total of 1,900,000 shares. Through December 31, 2003, we
had purchased 1,205,807 shares under this expanded repurchase program at an
aggregate purchase price of $7,667,187, or $6.36 per share.
10
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, 2003, 909,562 shares of common stock were issued
pursuant to options exercised under our 1996 Stock Option Plan and our 2002
Stock Option Plan. The 1996 Stock Option Plan provides for options to purchase a
maximum of 1,800,000 shares. 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 connection with certain of these option
exercises, we received 126,123 shares into treasury as consideration for
exercise prices aggregating $1,142,828.
In April 2002, we 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 had an exercise price of $5.875 with vesting at the rate of 50% on the
second anniversary of the grant date and 25% on each of the third and fourth
anniversaries. In March 2003, 75,000 of the Leveraged Finance Warrants were
cancelled, and the remaining 425,000 were cancelled in January 2004.
During 2003, we declared and paid our first two quarterly common stock
dividends, each at the rate of $.0625 per share ($.25 per share on an annualized
basis).
At December 31, 2003, we had outstanding 7,138,723 shares of common
stock, 1,547,938 stock options and 425,000 Leveraged Finance Warrants.
PERSONNEL
As of February 29, 2004, we and our businesses employed 387 brokerage
personnel (including trainees), plus an additional administrative staff,
including officers and senior managers, of 117 persons, for a total employee
headcount of 504. Of the brokerage personnel, 230 were located in the U.S., 135
were located in Europe, and 22 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 22 to the Consolidated Financial Statements contains summary
financial information, for each year of the three-year period ended December 31,
2003, 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 brokerage
firms 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. In addition, dealer firms within a
consortium platform 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 brokerage
firms 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 acquired BrokerTec, an inter-dealer electronic brokerage exchange
formerly owned by a consortium formed by the leading investment banks. 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, various competitors continue to
pursue electronic execution platforms for a variety of derivative products, and
it can be expected that significant efforts and resources will continue to
12
be devoted by these 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 brokerage
personnel 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 brokerage personnel 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 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
proceedings that can result in censure, fine, the issuance of cease-and-desist
13
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 upgrading of MFI's
GSD-FICC membership to dealer status in 2003, MFI is required to maintain a
minimum net worth (including subordinated borrowing) 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.
Our London capital markets subsidiary, Euro Brokers Limited ("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 plus the amount of less liquid assets on hand (a $5.7
million requirement at December 31, 2003).
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
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.
14
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 Nasdaq Stock Market(R), in the wake of the
Sarbanes-Oxley Act of 2002 and these SEC actions, also has promulgated
significant revisions to its listing standards to encompass many additional
requirements related to corporate governance and other matters.
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 39.
15
Adverse changes in economic and market conditions 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. Lower trading volumes are likely to reduce our revenues, which
would generally negatively impact our profitability because a portion of our
costs is fixed.
Market and economic uncertainties are heightened in the current geopolitical
environment.
In the current geopolitical environment following the September 11th
terrorist attacks, there is an increased uncertainty in the performance of the
financial markets and the economy as a whole, as well as specifically in the New
York financial community. Any additional terrorist acts, or the prospect
thereof, and governments' military and economic responses to them, may
significantly affect the financial markets and the economy, as well as resulting
trading volumes.
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 vendors 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. Although we believe that ongoing upgrades
to our trade processing systems, together with periodic stress-testing and
monitoring, reduces the likelihood of a material failure of our internal
systems, there can be no assurance that there will not be unanticipated system
or technology failures, internally or externally, that could negatively impact
our business or financial results. Moreover, to the extent we deploy
technologies, such as straight through processing, that are relied upon by our
clients and incorporated into their internal systems, the business reputation
and other risks to us of a technology failure may be exacerbated.
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
16
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
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 principal trades brokered by MFI
and for its institutional securities financing operations exposes MFI to various
risks that individually or in combination could have a negative impact on its
17
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
correspondent brokers, such as Delsur S.A. in Buenos Aires and Codebel S.A. in
Nyon. Some of these entities may 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 arrangements, any event
which negatively affects the financial condition or management of any of our
partners or correspondent brokers, or their willingness otherwise to conduct
such brokerage operations in conjunction with us (or vice versa), may have a
negative impact on our operations.
We may be subject to litigation and arbitration, which could limit our
profitability.
Many aspects of our businesses involve varying risks of liability. Over
the years, participants in the inter-dealer and institutional 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.
18
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 and on
our matched book of reverse repurchase agreements and repurchase agreements.
We allocate a portion of our available capital to our institutional
sales and trading operations to support 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 our 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
the "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 real-time 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 a 2003 loss recorded 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.
We also have market risk exposure in our institutional securities financing
business during the period in which a reverse repurchase agreement matures prior
to or after the maturity of an offsetting repurchase agreement if we have failed
to match these maturity dates precisely.
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
19
years, including by building our institutional sales and trading businesses and
our institutional securities financing business. 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.
20
ITEM 2. PROPERTIES
We and our businesses maintain 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. Our subsidiaries lease all of their office space, and we 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, 2003.
21
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, 2003
----------------------------
First Quarter................................ $ 8.090 $ 6.000
Second Quarter............................... 10.660 6.680
Third Quarter................................ 14.500 9.120
Fourth Quarter............................... 16.350 11.930
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
As of March 29, 2004, there were 35 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 March 2004 inquiry made by ADP, we believe there currently
are approximately 1450 beneficial owners of our common stock.
In 2003, we declared and paid our first two quarterly dividends, each
at a rate of $.0625 per share ($.25 per share on an annualized basis). It is our
current intention to continue this dividend policy in 2004. In addition, 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.
22
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS
Revenue:
Commission income $ 176,497,549 $ 149,428,132 $ 138,003,085 $ 122,613,654 $ 132,892,282
Insurance recoveries 11,106,063 11,098,135 4,498,144
Interest income 6,280,695 2,147,274 2,306,044 1,823,285 1,879,500
Principal transactions 6,122,442 8,720,422 8,932,861 2,627,169 1,215,233
Other income ( 1,140,241) ( 843,142) 1,083,431 4,741,415 1,318,454
------------- ------------- ------------- ------------- -------------
Gross revenue 198,866,508 170,550,821 154,823,565 131,805,523 137,305,469
Interest expense on securities indebtedness 4,117,319 147,865 444,174 329,919 497,773
------------- ------------- ------------- ------------- -------------
Net revenue 194,749,189 170,402,956 154,379,391 131,475,604 136,807,696
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Compensation and related costs 126,323,608 107,024,194 106,619,297 92,061,672 93,392,948
Communication costs 12,989,853 10,597,126 9,870,217 11,007,091 13,193,446
Travel and entertainment 9,833,755 7,406,116 6,493,462 6,620,974 6,797,740
Occupancy and equipment rental 6,623,731 4,490,356 3,967,255 5,127,875 4,963,755
Clearing and execution fees 3,865,514 3,311,759 3,511,712 3,307,802 3,005,785
Depreciation and amortization 3,220,577 2,405,834 3,598,580 4,008,937 4,365,504
Charity Day contributions 982,300 1,219,233
Other interest expense 406,772 151,214 222,213 265,038 336,162
Costs related to World Trade Center
attacks 3,204,468 1,590,060
Restructuring costs 541,961 321,000
General, administrative and other expenses 7,220,567 4,933,483 6,619,527 5,161,550 5,507,156
------------- ------------- ------------- ------------- -------------
171,466,677 144,743,783 142,492,323 128,102,900 131,883,496
------------- ------------- ------------- ------------- -------------
Income before provision for income taxes,
minority interest, income from equity
affiliate and extraordinary item 23,282,512 25,659,173 11,887,068 3,372,704 4,924,200
Provision for income taxes 9,749,282 12,130,758 2,174,673 2,710,482 545,216
------------- ------------- ------------- ------------- -------------
Income before minority interest, income
from equity affiliate and extraordinary
item 13,533,230 13,528,415 9,712,395 662,222 4,378,984
Minority interest ( 175,985) ( 981,791) ( 683,985) 1,203,987 ( 270,128)
Income (loss) from equity affiliate 9,992 135,890 ( 1,576,644)
------------- ------------- ------------- ------------- -------------
Income before extraordinary item 13,357,245 12,546,624 9,038,402 2,002,099 2,532,212
Extraordinary item 2,957,547
------------- ------------- ------------- ------------- -------------
Net income $ 16,314,792 $ 12,546,624 $ 9,038,402 $ 2,002,099 $ 2,532,212
============= ============= ============= ============= =============
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Total assets $1,663,126,636 $ 123,477,959 $ 279,317,292 $ 70,906,347 $ 72,467,958
Obligations under capitalized leases 703,944 842,399 204,252 335,635 493,367
Notes payable 447,978 1,723,169 1,799,870
Revolving credit facility 7,500,000 674,282
Total liabilities 1,603,082,134 70,477,645 241,021,098 37,257,798 38,162,466
Minority interest 5,407,228 3,979,291 3,407,628 4,885,896
Redeemable preferred stock 2,000,000 2,000,000
Stockholders' equity 60,044,502 47,593,086 34,316,903 28,240,921 27,419,596
PER SHARE INFORMATION
Income before extraordinary item -- basic $ 1.91 $ 1.72 $ 1.23 $ .23 $ .26
Extraordinary item -- basic .42
Net income -- basic 2.33 1.72 1.23 .23 .26
Income before extraordinary item -- diluted 1.62 1.53 1.16 .23 .25
Extraordinary item -- diluted .36
Net income -- diluted 1.98 1.53 1.16 .23 .25
Book value 8.41 6.56 4.88 3.48 3.29
Weighted average common shares
outstanding -- basic 6,987,415 7,304,284 7,357,017 8,374,166 9,711,974
Weighted average common shares
outstanding -- diluted 8,228,599 8,210,638 7,764,667 8,374,166 9,846,257
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
We are proud to report that 2003 was another year of record financial
performance for us, on the heels of a 2002 that, until this year, had been our
best performing year ever.
Our basic measures of financial performance were up across the board in
2003 over 2002. On a GAAP basis, net income increased by 30%, to $16.3 million,
or $1.98 per share, from $12.5 million, or $1.53 per share. Net revenues
increased by 14%, to $195 million from $170 million in 2002. Overall
stockholders' equity surged 26%, to $60.0 million (a per share book value of
$8.41) from $47.6 million (a per share book value of $6.56).
Because we settled our September 11th-related property damage insurance
claim in 2003 and our September 11th-related business interruption insurance
claim in 2002, both years' results included significant one-time benefits
related to these settlements. For 2003, this after-tax benefit (net of September
11th-related expenses) was $6.0 million, or $.72 per share, principally recorded
during our third quarter. For 2002, this net after-tax benefit was $3.8 million,
or $.46 per share, principally recorded during our fourth quarter.
Reflecting the overall strength of our 2003 financial performance, as
well as the change in the tax treatment of corporate dividends, we declared and
paid our first ever quarterly dividends in the third and fourth quarters of 2003
- - at a rate of $.0625 per share - for an anticipated annual dividend of $.25 per
share.
Our goal as a company is to maintain and build on our track record over
the last three years of consistent profitability, quarter in and quarter out,
and build up stockholders' equity, while at the same time providing our
stockholders with a meaningful, tax-efficient current return through our
dividend policy. We also recognize that the nature of the markets in which we
participate is likely to cause significant fluctuations up or down in our
financial results for any given quarter. Thus, although every quarter in 2003
was profitable - extending a run of thirteen consecutive quarters of
profitability - our financial performance was strongest during our first three
quarters and flattened out somewhat during our fourth quarter.
Historically, because of fewer trading days and often quieter markets,
the fourth quarter is usually our biggest challenge. The performance of our core
Euro Brokers inter-dealer brokerage businesses is highly dependent on the
volumes of trading activity in the various products that we broker. For example,
volatility in interest rates, and a steeper yield curve, are usually positives
for generating more trading activity, regardless of whether the interest rate
trend is up or down.
Continuing the pattern of recent years, most of 2003 saw reasonably
strong levels of trading activity in the fixed income and derivatives markets in
which we are active. Through an emphasis on retaining our key employees with the
strongest client relationships, we generally were able to maintain or build our
24
market share in key products, with one or two exceptions. As a result, our Euro
Brokers businesses, overall, continued to perform well. In New York, our largest
departments - cash deposits, interest rate derivatives and repurchase agreements
- - all produced solid returns, and our new effort in the brokerage of U.S.
Treasuries, started in late 2002, continued to grow and improve in performance.
London was a particular bright spot. There, we were able to increase
revenues on nearly all of our inter-dealer brokerage desks, as well as improve
our market position in several as well. We also benefited from owning 100% of
those operations from late-February 2003 forward, the result of winning a
lawsuit against our former partner there that permitted us to buy their 50%
shareholdings at a significant discount to book value. Overall, revenues in
London increased by more than 30% (inclusive of the impact of exchange rates),
and net income (not including the extraordinary gain from this discounted
acquisition) almost quadrupled.
Our Tokyo operations, on the other hand, continued to struggle, as a
restructuring that attempted to switch our brokers there to higher incentive
payouts and lower base salaries failed to gain traction, even as derivatives
market activity in Japan began to pick up. In late 2003, we assigned a new
full-time manager to the operations and moved the overall supervision to our
London center, where the time zone is more closely aligned to Tokyo's. We also
recently upgraded the office's infrastructure, including the installation of new
telephone equipment. Although these operations have not yet returned to
profitability, we saw their losses narrow by more than 50% during our fourth
quarter, and that improvement is continuing so far into early 2004.
In addition to tending to and continuously seeking to improve our Euro
Brokers inter-dealer brokerage businesses, we focused strongly in 2003 on
building and expanding our Maxcor institutional sales and trading businesses. In
our equity group, we added our first research analysts in order to complement a
sales and trading operation that was consistently top-ranked in 2003 for
execution quality. Our municipal securities group, which has been operating
successfully since 1997, maintained its strong performance by focusing on
special situations and providing top-quality research, particularly in the
hospital and healthcare arena. Our institutional convertible securities
operation, started at the very end of 2002, settled in and performed steadily,
although it still needs to gain critical mass. We also added an institutional
securities financing operation in mid-2003, pursuant to which we operate a
matched book of repurchase agreements. This business not only provides an
opportunity to generate net spread revenue, but also provides us with the
capability to reduce the costs of processing and financing securities positions
from our other sales and trading businesses.
Our most uneven performer among the Maxcor businesses was our leveraged
finance group, which specialized in high-yield and distressed debt. While
showing pockets of strength, this group suffered the whole year under the cloud
of taking more than $5 million in first quarter losses on its when-issued
trading contracts in the equity of NTL, Inc. ("NTL"), at the time a Chapter 11
debtor. As described more fully in Note 20 to the Consolidated Financial
Statements, in January 2003 NTL emerged from bankruptcy under a plan of
reorganization providing for the issuance of one-fourth the number of shares
that had previously been contemplated during the when-issued trading period. Our
traders, and other participants in the when-issued trading market, expected the
settlement of their NTL trades would be adjusted to reflect what NTL had
intended to be a neutral transaction, with the same effects as a 1-for-4 reverse
25
stock split. However, a number of buyers of NTL when-issued shares either
retained delivery of the full, unadjusted number of shares or, alternatively,
demanded compensation for the remaining unadjusted number of shares not
delivered to them.
In February 2003, we initiated litigation in New York State Supreme
Court, naming all of our NTL trading counterparties as defendants, in order to
try to force an adjusted and uniform settlement of our NTL when-issued trades
that would be permanent (we had previously obtained temporary relief, on an
emergency application, from the Bankruptcy Court administering NTL's
reorganization). Following our lead, two parallel NTL-related suits were also
filed in this Court, bringing to almost fifty the number of counterparties
before the Court seeking a resolution of this dispute. We then moved for summary
judgment in our case, with many of the parties in our suit and the two related
suits joining in our motion.
Very recently, on March 15, 2004, the Court granted our summary
judgment motion in this matter, holding that all NTL trades should settle as we
believed to be correct, that is, on an adjusted and uniform basis. That
decision, however, remains subject to the entry of a final order implementing
its terms and possible appeal. Accordingly, we do not intend to reverse any of
the losses previously taken except to the extent that we achieve a final
resolution, whether by mutual consent, appeal or otherwise, with any of the
counterparties with whom we traded. Since the Court's decision, one such final
resolution has already been achieved, and will result in our recording a
$625,000 pre-tax benefit in the first quarter of 2004.
Below-expected performance, combined with the tensions generated by the
NTL matter, contributed to the departure of the key members of our leveraged
finance group in early January 2004. As a result, the remaining Leveraged
Finance Warrants were cancelled. We took the opportunity to restructure the
group entirely, and brought in a new manager. Going forward, our focus will be
more on corporate bond sales and trading, with a high-grade bond effort added to
our previous high-yield presence. To date in 2004, we have rapidly ramped up
this area, hiring more than a dozen new traders and salespersons. We intend to
keep growing this area aggressively, with the expectation that it will begin
covering its costs and making a positive contribution to profit by the second
half of 2004.
Although we are now incurring initial higher costs associated with its
growth, we believe that the Maxcor institutional sales and trading businesses
provide some important diversity to our overall mix of operations. In
particular, we are looking to these businesses both to create positive
contributions to revenues and earnings and to expand our client base beyond that
of our Euro Brokers businesses.
We continued in 2003 to allocate portions of our capital to support
principal transactions in which we assume market risk for a period of time. This
trading occurred primarily in our Maxcor municipal securities and leveraged
finance groups, but also in our firm investment account. In 2004, it will also
occur in our restructured corporate bond businesses, and generally will include
hedging the corporate bond positions with Treasuries or other bonds to minimize
our risk exposure.
To support our Maxcor sales and trading operations in 2003, we
contributed an additional $20 million in capital to our broker-dealer - thereby
raising its total capital to in excess of $50 million. This strengthening
26
enabled us to upgrade to dealer membership status with GSD-FICC and facilitated
our ability to deploy risk capital selectively as opportunities arose.
The additional capital was primarily financed by a new $15 million,
secured reducing credit facility obtained from The Bank of New York ("BONY") in
March 2003, which replaced an existing $5 million line with General Electric
Capital Corporation ("GECC"). In November 2003, the BONY facility was converted
at our request into a fixed $10 million credit facility (see Note 14 to the
Consolidated Financial Statements). We also increased our available cash and
capital earlier in the year by financing with GECC, through various sale and
leaseback arrangements that are treated as operating leases, approximately $5
million in various phone and computer equipment purchased to outfit our new
headquarters in New York.
Our move in February 2003 to those new headquarters, on two floors at
One Seaport Plaza in lower Manhattan, was a huge step forward for our business
and our employees. After more than 16 months in temporary headquarters following
the September 11th terrorist attacks, we once again had a permanent home.
Moreover, the move and rebuilding of our office space provided us with an
opportunity to deploy state-of-the-art infrastructure and equipment, while also
building in ample room for expansion. For example, the offices contain the
latest in telecommunications and networking equipment, making it easy and
cost-effective to add new, or expand existing, brokerage and trading desks. We
believe this is a clear competitive advantage in recruiting new employees and
business groups.
Our build-out at our new premises was substantially funded by our
property insurance coverage, underwritten by Kemper Insurance Companies
("Kemper"), which ultimately paid us the policy's full aggregate limit of
approximately $14 million. Our claim under that coverage was fully settled in
late 2003, resulting in a one-time after-tax net gain, as mentioned above, of
approximately $6.0 million.
After experiencing September 11th and its aftermath, we as a firm are
firmly convinced that "doing good," while doing well, is an essential part of
who we are, as well as an important motivational force for our employees.
Accordingly, in May 2003 we established the Maxcor Foundation, to serve as our
broader charitable giving arm, in supplementation of our Euro Brokers Relief
Fund, whose charter was limited to providing aid to our families who lost loved
ones in the terrorist attacks. On May 12, 2003, we held our second annual
Charity Day, in which all of our brokerage revenues are donated to these two
entities. With the full support of our customers and our employees, who waived
any entitlement to commissions from the revenues generated that day, we were
able to raise almost $1 million. We are very proud of these results and will be
holding our third annual Charity Day this year on April 19th. Organizations that
will be funded by the Maxcor Foundation this year include the Marine Corps-Law
Enforcement Foundation, Columbia University's College of Physicians and
Surgeons, Duke University's Fuqua/Coach K Center for Leadership and Ethics, and
The Royal Marsden Hospital in London.
The year 2003 also saw the continuation of our common stock repurchase
program, which, in addition to the initiation of our dividend policy, is a key
component of our overall effort to increase value to stockholders and
intelligently manage our capital structure. In total, we repurchased 616,300
shares in 2003, at an aggregate cost of $4.7 million. These repurchases more
27
than offset dilution from stock option exercises during the year, which, net of
shares delivered in connection with such exercises, resulted in the issuance of
499,863 shares (See Note 17 to the Consolidated Financial Statements).
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, such as the NTL matter, 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. The
adoption of FIN 45 did not have a material impact on our Consolidated Financial
Statements.
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
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
28
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 April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 149 is effective for derivative contracts entered into after June 30, 2003.
The adoption of SFAS 149 did not have a material impact on our Consolidated
Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
imposes certain additional disclosure requirements. The provisions of SFAS 150
are effective for financial instruments entered into or modified after May 31,
2003 and must be applied to all financial instruments at the beginning of the
third quarter of 2003. The adoption of SFAS 150 did not affect our Consolidated
Financial Statements.
In December 2003, the FASB issued FASB Interpretation No. 46(R),
"Consolidation of Variable Interest Entities" ("FIN 46(R)"). FIN 46(R) addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through a means other than voting rights and accordingly
should consolidate the entity. FIN 46(R) replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which was issued in January 2003.
Prior to FIN 46, variable interest entities were commonly referred to as special
purpose entities. The adoption of FIN 46(R) will not affect our Consolidated
Financial Statements.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Commission income represents revenue generated on our brokerage
transactions conducted on an agency (including name give-up) or matched riskless
principal basis. For 2003, these revenues increased $27,069,417 to $176,497,549,
compared to $149,428,132 for 2002, primarily reflecting increased brokerage in
New York and London. The increase in New York was attributable to increased
commissions generated by the institutional sales and trading operations started
during 2002 (leveraged finance - high-yield and distressed debt, convertible
securities and equities) and increased commissions generated by our inter-dealer
brokerage operations. In London, the increase was attributable to increased
revenues from our inter-dealer brokerage operations, commissions generated by
our newly-started sales and trading operations and the currency effects of
translating strengthened British pound sterling amounts to U.S. dollars.
29
During 2003, we recognized a net gain of $11,106,063 on the settlement
of our property insurance claim against Kemper for losses incurred for destroyed
property as a result of the September 11, 2001 terrorist attacks on the World
Trade Center, where we were formerly headquartered. This net gain reflected the
gross insurance proceeds received since the attacks of $13,868,210, less
$2,762,147, representing the aggregate of the net book value of owned property
destroyed in the attacks, termination costs associated with operating leases of
equipment destroyed in the attacks and claim-related expenses. During 2002, we
recorded insurance recoveries of $11,098,135, representing the portions of the
settlements of claims under our U.S. business interruption insurance policy with
Kemper ($10.3 million) and our U.K. business interruption insurance policy with
Norwich Union ($831,000) for losses incurred in New York and London following
the September 11th attacks attributable to lost revenues (net of saved
expenses).
Interest income for 2003 increased $4,133,421 to $6,280,695, compared
to $2,147,274 for 2002, primarily reflecting financing income earned on reverse
repurchase agreements in connection with our newly-started institutional
securities financing operations and an increase in the average inventory of
securities held.
Principal transactions represent the net gains or losses generated from
securities transactions involving the assumption of market risk for a period of
time. For 2003, these activities resulted in a gain of $6,122,442, compared to a
gain of $8,720,422 for 2002. This change primarily reflected a net loss of $5.1
million recorded by MFI during 2003 on the disputed settlement of its NTL
when-issued equity trades. As discussed in Note 20 to the Consolidated Financial
Statements, the recording of this $5.1 million net loss includes the estimated
damages payable if the NTL-related legal proceedings conclude that all of MFI's
NTL when-issued trades, other than permanently adjusted settlements by mutual
agreement, should have settled on an unadjusted basis. However, the final net
loss could be materially higher or lower based on the ultimate outcome of such
proceedings. This net loss in principal transactions was partially offset by
improved results in our firm investment account and by an increase in gains on
municipal securities.
Other items for 2003 resulted in a loss of $1,140,241, as compared to a
loss of $843,142 for 2002. The increase in this loss resulted from the loss of
$1,560,281 on our interest in the Tokyo Venture for 2003, as compared to a loss
of $1,184,233 for 2002, offset in part by income of $292,000 during 2003 from
the licensing of financial information derived from our inter-dealer brokerage
business, as compared to $262,000 during 2002, and an increase in foreign
exchange gains during 2003.
For 2003, interest expense on securities indebtedness increased
$3,969,454 to $4,117,319, compared to $147,865 for 2002, primarily as a result
of interest expense incurred on repurchase agreements in connection with our
newly-started institutional securities financing operations discussed above. The
other type of interest expense included in this classification, interest expense
incurred on margin borrowings to finance securities positions, decreased
slightly.
30
Compensation and related costs for 2003 increased $19,299,414 to
$126,323,608, compared to $107,024,194 for 2002, primarily as a result of
increased brokerage personnel in connection with the expansion of products in
New York, the overall increase in operating revenues (commission income,
principal transactions and information sales revenue), which results in higher
commission-based payouts, and the currency effects of translating strengthened
British pound sterling amounts to U.S. dollars. As a percentage of operating
revenues, compensation and related costs increased slightly to 69% for 2003, as
compared to 68% for 2002 (but decreased slightly, to 67% for 2003, if operating
revenues are adjusted to add back in the $5.1 million NTL loss recorded in
2003).
Communication costs for 2003 increased $2,392,727 to $12,989,853,
compared to $10,597,126 for 2002, primarily as a result of the expansion of
products and customers in New York and London and the currency effects of
translating strengthened British pound sterling amounts to U.S. dollars.
Travel and entertainment costs for 2003 increased $2,427,639 to
$9,833,755, compared to $7,406,116 for 2002, reflective in part of the expansion
efforts in New York and London and the overall increase in operating revenues.
As a percentage of operating revenues, travel and entertainment costs increased
to 5.4% for 2003 (or 5.2% if operating revenues are adjusted for the NTL loss),
compared to 4.7% for 2002.
Occupancy and equipment rental represents expenses incurred in
connection with our office premises, including base rent and related
escalations, maintenance, electricity and real estate taxes, as well as rental
costs for equipment under operating leases. For 2003, these costs increased
$2,133,375 to $6,623,731, compared to $4,490,356 for 2002, primarily due to
increased costs for office space associated with our new headquarters at One
Seaport Plaza in lower Manhattan, increased costs for office space in London and
rental costs on new equipment in New York leased from GECC.
Clearing and execution fees are fees paid to clearing organizations for
transaction settlements and credit enhancements and to other broker-dealers
(including ECNs) for providing access to various markets and exchanges for
executing transactions. For 2003, these costs increased $553,755 to $3,865,514,
compared to $3,311,759 for 2002, primarily as a result of the increase in
transaction volumes from our institutional equities desk and other areas
commenced in 2002.
Depreciation and amortization expense consists principally of
depreciation of communication and computer equipment and automobiles under
capitalized leases and amortization of leasehold improvements and software. For
2003, depreciation and amortization increased $814,743 to $3,220,577, compared
to $2,405,834 for 2002, principally as a result of the depreciation and
amortization in New York of furniture and leasehold improvements purchased
primarily with insurance proceeds for our new headquarters.
All the revenues generated on our Charity Days by our New York,
Stamford, Mexico, London and Switzerland offices are donated to designated
charities. All participating brokerage personnel waive any entitlement from such
revenues. The proceeds of $982,300 raised on our May 12, 2003 Charity Day were
designated for The Euro Brokers Relief Fund, Inc., which provides charitable aid
31
to the families and other financial dependents of our 61 employees and staff
members killed as a result of the September 11th attacks, and our Maxcor
Foundation, Inc. The Maxcor Foundation, Inc. in turn designated three principal
recipients: Marine Corps-Law Enforcement Foundation, Inc., Columbia University
College of Physicians & Surgeons and The Great Ormond Street Hospital for
Children in London. Our March 11, 2002 Charity Day resulted in a contribution of
$1,219,233 entirely to The Euro Brokers Relief Fund, Inc.
Other interest expense represents interest costs incurred on
non-securities related indebtedness, such as revolving credit facilities and
capital lease obligations. For 2003, these costs increased $255,558 to $406,772,
compared to $151,214 for 2002, primarily as a result of increased costs
associated with larger balances outstanding under our new revolving credit
facility with BONY.
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. For 2003, these expenses increased
$2,287,084 to $7,220,567, compared to $4,933,483 for 2002, primarily as a result
of professional fees of $700,000 incurred in connection with the NTL when-issued
equity trade disputes previously discussed, an increase to the reserve for the
employer portion of National Insurance Contributions in the U.K. of $465,000,
increased costs for corporate insurance coverage and increase in other general,
administrative and other expenses.
Provision for income taxes for 2003 decreased $2,381,476 to $9,749,282,
compared to $12,130,758 for 2002, notwithstanding higher net income in 2003 than
2002, primarily as a result of a decrease in income before provision for income
taxes, minority interest, income from equity affiliate and extraordinary item,
and a reduction of $500,000 to income tax reserves as the result of the
favorable resolution to certain contingencies.
For 2003, minority interest in consolidated subsidiaries resulted in a
reduction of the net income from such subsidiaries of $175,985, as compared to a
reduction of $981,791 for 2002. The decrease is the result of our February 2003
purchase of the minority interest in EBL (formerly Euro Brokers Finacor Limited
("EBFL")).
During 2003 we recorded an extraordinary gain of $2,957,547 on the
purchase of the 50% shareholding held by Monecor in EBFL. This purchase resulted
from a ruling by the London Court of Appeals in February 2003 that dismissed
Monecor's appeal of the May 2002 judgment of the London High Court of Justice.
That judgment permitted Euro Brokers Holdings Limited ("EBHL"), our top U.K.
holding company, to purchase Monecor's interest at a 30% discount to the book
value attributable to this shareholding as of December 2000. EBHL obtained the
May 2002 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.
This discounted purchase price resulted in a gain of $2,957,547, equal to the
excess of the amount recorded for Monecor's interest in EBFL of $5,570,703 over
the purchase price of $2,613,156.
32
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Commission income for 2002 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
our inter-dealer brokerage operations (including the commencement of a U.S.
Treasury bond department) and from newly started institutional sales and trading
operations (leveraged finance, convertible securities and equities). Reduced
commissions in 2001 from the disruption to operations following the September
11th terrorist attacks also contributed to the year-over-year increase.
Partially offsetting this increase was the permanent discontinuance in 2002 of
certain inter-dealer brokerage operations suspended after the September 11th
attacks. The increase in London principally reflected increased revenues from
our inter-dealer brokerage operations (including the commencement of a credit
derivatives department) and the currency effect of translating strengthened
British pound sterling amounts to U.S. dollars.
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 included as an offset 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.
policy with Kemper for which we believed there were no contingencies that would
have a material impact.
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.
Principal transactions for 2002 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 then
newly-started leveraged finance group.
Other 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 inter-dealer 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.
For 2003, interest expense on securities indebtedness decreased
$296,309 to $147,865, compared to $444,174 for 2002, reflecting the increased
use of our cash resources to finance securities positions, thereby reducing the
level of margin borrowings, and a lower interest rate environment for such
borrowings.
33
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 in operating revenues (commission income, principal
transactions and information sales revenues), resulting in higher
commission-based payouts, 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. 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 $726,909 to $10,597,126,
compared to $9,870,217 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.
Travel and entertainment costs for 2002 increased $912,654 to
$7,406,116, compared to $6,493,462 for 2001, reflective in part of the expansion
efforts in New York and London and the overall increase in operating revenues.
As a percentage of operating revenues, travel and entertainment costs increased
to 4.7% for 2002, compared to 4.4% for 2001.
Occupancy and equipment rental for 2002 increased $523,101 to
$4,490,356, compared to $3,967,255 for 2001, reflecting the net effects of
eliminating certain occupancy accruals associated with the World Trade Center
lease in 2001, offset in part by reduced costs in 2002 for office space in New
York resulting from the use of temporary facilities following the September 11th
attacks and a decrease in rental expense on leased equipment in New York
destroyed in the attacks. The occupancy accruals eliminated in 2001 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 for 2002 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 then newly-started institutional equities desk.
Depreciation and amortization expense for 2002 decreased $1,192,746 to
$2,405,834, compared to $3,598,580 for 2001, primarily as a result of the
discontinuance of depreciation in New York on assets destroyed in the September
11th attacks and the discontinuance of amortization of intangible assets that
were either fully amortized or written-off in late 2001.
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 March 11,
2002 Charity Day, the first time that we held such a function. All participating
employees waived any entitlement to compensation from such revenues.
34
Other interest expense for 2002 decreased $70,999 to $151,214, compared
to $222,213 for 2001, primarily as result of decreased costs associated with the
GECC revolving facility.
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 included 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.
General, administrative and other expenses for 2002 decreased
$1,686,044 to $4,933,483, compared to $6,619,527 in 2001, primarily as a result
of a decrease during 2002 in professional fees 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.
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.
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.
U.S. Treasury and federal agency securities purchased under agreements
to resell (reverse repurchase agreements) and U.S. Treasury and federal agency
35
securities sold under agreements to repurchase (repurchase agreements) are
collateralized financings on which we seek to earn an interest spread. The
balances recorded on these transactions, reflected on the Consolidated
Statements of Financial Condition respectively as "securities purchased under
agreements to resell" and "securities sold under agreements to repurchase," are
the contracted amounts, plus accrued interest. We monitor the fair value of the
securities purchased and sold under these agreements and obtain additional
collateral or return excess collateral where appropriate. In the ordinary course
of settling these transactions and other transactions involving these
securities, we have securities failed-to-deliver and failed-to-receive
obligations. These fails are generally resolved shortly afterwards through
proper receipt and delivery. At December 31, 2003, the Consolidated Statements
of Financial Condition include reverse repurchase agreements of $1,447 million,
repurchase agreements of $1,470 million, securities failed-to-deliver of $91
million and securities failed-to-receive of $67 million.
Securities held at clearing firms and trading contracts reflect
securities positions taken in connection with our sales and trading 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 2003,
as reflected on the Consolidated Statements of Financial Condition, we had a
fully paid net position in securities of approximately $6.7 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
minimum net worth (including subordinated borrowing) of $25 million. In
addition, MFI is required to maintain a clearing deposit with GSD-FICC based
upon its level of trading activity (with a minimum deposit of $5,000,000), which
has been reflected as deposits with clearing organizations on the Consolidated
Statements of Financial Condition.
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 plus the amount of less liquid assets on hand
(a $5.7 million requirement at December 31, 2003).
Net cash provided by operations for 2003 (including the remaining cash
collection on our property damage insurance claim) was $18.1 million. This
increase in cash was the result of net income of approximately $16.3 million
adjusted to reflect the net effect of $5.7 million of non-cash items, primarily
consisting of depreciation and amortization, unreimbursed losses from our share
of the Tokyo Venture and deferred income taxes. These cash increases were
reduced by the net effect of other working capital items, including an increase
in deposits with clearing organizations, an increase in receivable from
broker-dealers and customers and a reduction in accrued liabilities, offset in
part by a reduction in net assets related to securities positions.
Net cash provided by operations for 2002 was $9.9 million. This
increase in cash was the result of net income of $12.5 million adjusted to
reflect the net effect of $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 related to securities positions
and decreased liabilities
36
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 $32.5 million. This
increase in cash was the result of net income of $9.0 million adjusted to
reflect the net effect of $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 deferred income
taxes, 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 was primarily due to the
portion of advances received under our insurance policies that was currently
unrecognized and other effects of the September 11th attacks.
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.
Investing Activities
Investing activities in 2003 reduced cash by $12.4 million, due to cash
outlays of $9.7 million for fixed asset purchases, primarily associated with the
completion of the build-out of our new permanent headquarters at One Seaport
Plaza in lower Manhattan and the discounted $2.6 million purchase of Monecor's
minority interest in EBFL. Investing activities in 2002 reduced cash by $7.6
million, primarily due to cash outlays associated with the initial build-out of
our One Seaport Plaza headquarters. In 2001, investing activities resulted in an
increase to cash of $1.6 million, reflecting the net effects of insurance
proceeds recognized for destroyed fixed assets of $1.5 million, proceeds of $1.9
million from the sale of our 15% interest in Yagi Euro and net cash used for
fixed asset purchases/sales of $1.9 million.
A significant portion of the cash outlays for building out our new
headquarters were funded by insurance proceeds from our property casualty policy
with Kemper, which covered losses we incurred on September 11, 2001 from the
destruction of our former headquarters on the 84th floor of Two World Trade
Center. From late 2001 through the third quarter of 2003, we received total
proceeds under this policy of $13.9 million, in full settlement of our claim.
Financing Activities
At December 31, 2003, we had $7,500,000 outstanding under a three-year
revolving credit facility entered into by Euro Brokers Inc. ("EBI"), a U.S.
subsidiary, with BONY in March 2003. This facility, as subsequently amended in
November 2003, provides for borrowings of up to $10 million and is secured by
37
EBI's receivables and the stock issued by EBI to its direct parent. The
agreement with BONY contains certain covenants which require EBI separately, and
us as a whole, to maintain certain financial ratios and conditions. Upon
entering into the agreement with BONY, we terminated our $5 million revolving
facility with GECC (which was not drawn upon at December 31, 2002).
Net cash provided by financing activities for 2003 was $7.5 million,
primarily reflecting the net effects of net borrowings of $7.5 million under the
revolving facility with BONY, proceeds of $5.2 million received from GECC under
sale-leaseback transactions and proceeds of $612,000 received from the exercise
of options, reduced by cash used of $4.7 million to acquire treasury stock,
obligations repaid under capitalized leases of $208,000 and an initial two
common stock dividends paid (at a quarterly rate of $.0625 per share)
aggregating to $878,000.
Net cash used in financing activities for 2002 was approximately
$69,000, primarily reflective of the net effect of cash of $2.1 million used to
acquire treasury stock, the repayment of the note payable to GECC and
obligations under capital leases aggregating $586,000 and proceeds received from
the exercise of stock options and warrants of $2.6 million.
Net cash used in financing activities for 2001 was $6.3 million,
primarily reflective of the net effect of cash of $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 $1.5 million and proceeds of $222,000 received from the exercise of
stock options.
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 our then-outstanding shares. In the immediate aftermath of the
September 11th attacks, the Board further expanded this authorization by an
additional 490,918 shares, to bring the total authorization up to 1,200,000
shares. In 2003, the Board added another 700,000 shares to the authorization,
for a total repurchase program of 1,900,000 shares. As of December 31, 2003, we
had purchased 1,205,807 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.
CONTRACTUAL OBLIGATIONS
We have contractual obligations to make future payments in connection
with operating and capital leases and information service contracts. The
38
following table sets forth these contractual payment commitments as of December
31, 2003. Additional disclosure relating to our commitments appears in Notes 13
and 19 to the Consolidated Financial Statements.
Payments due by period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ----------- ----------- -----------
Operating leases $72,161,226 $ 7,331,601 $12,613,912 $10,686,434 $41,529,279
Information service contracts 5,821,780 5,195,523 626,257
Obligations under capitalized leases 818,364 349,234 469,130
----------- ----------- ----------- ----------- -----------
Total contractual obligations $78,801,370 $12,876,358 $13,709,299 $10,686,434 $41,529,279
=========== =========== =========== =========== ===========
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
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 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.
39
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 institutional sales
and trading operations by placing guidelines on their size, rating and number of
days held and with certain hedging requirements. We closely monitor our
securities positions on a real-time basis, including comparisons to
independently verified market values. We perform daily reviews of activity
reports for all sales and trading operations which detail all executed
transactions and resulting commissions and principal gains and losses. We reduce
market risk in our institutional securities financing business by placing
guidelines on the matching of maturity dates for offsetting reverse repurchase
agreements and repurchase agreements. We review reports daily detailing all
outstanding reverse repurchase agreements and repurchase agreements, including
the collateral securing the financing, the counterparty, interest rate, start
date and maturity date.
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.
For our non-trading activities we do not consider our exposure to fixed
interest rates significant at December 31, 2003, due to the low level of debt
outstanding. Any borrowings under the facility with BONY bear interest at
variable rates. We will monitor the level of borrowings under the 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, 2003 and
December 31, 2002, 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, 2003 did not materially change
from the market risk analysis at December 31, 2002. For the revolving credit
facility, 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. Bonds not making regularly scheduled interest
payments were assigned an interest rate of 0%.
40
As of December 31, 2003:
2004 2005 2006 2007 2008 After 2008 Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Other than trading:
Interest rate sensitivity:
Revolving credit facility $7,500,000 $ $ $ $ $ $ 7,500,000 $ 7,500,000
(variable interest rate)
Trading:
Interest rate sensitivity:
Municipal securities 7,315,000 2,575,000 9,890,000 6,028,680
(weighted average
interest rate-5.8%)
Foreign sovereign debt 2,122,500 2,122,500 551,850
(weighted average
interest rate-0%)
As of December 31, 2002:
2003 2004 2005 2006 2007 After 2007 Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Other than trading:
Interest rate sensitivity:
Revolving credit facility $ $ $ $ $ $ $ $
(variable interest rate)
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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this
report. See Item 15 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.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2003. Our disclosure controls and procedures
are designed to provide reasonable assurance that the information required to be
disclosed in our periodic SEC reports has been appropriately recorded,
processed, summarized and reported. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective at the reasonable assurance
level.
Our management, including our Chief Executive Officer and Chief
Financial Officer, has evaluated any changes in our internal control over
financial reporting that occurred during the quarterly period ended December 31,
2003, and has concluded that there was no change during this quarterly period
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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 2004 Annual Meeting of
Stockholders (the "Proxy Statement"). We intend to file the Proxy Statement with
the SEC on or prior to April 29, 2004.
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 29, 2004.
42
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 29, 2004.
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 29, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference
to the Proxy Statement. We intend to file the Proxy Statement with the SEC on or
prior to April 29, 2004.
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.
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.
43
(b) Reports on Form 8-K
During the fourth quarter of our fiscal year ended December 31, 2003,
we filed one current report on Form 8-K, on November 12, 2003. The
report attached two press releases that we issued respectively on
November 7, 2003 and November 12, 2003. The November 7 release
announced our unaudited earnings results for the third quarter and nine
months ended September 30, 2003. The November 12 release described the
declaration by our Board of Directors of a cash dividend of $.0625 per
share of common stock for our third quarter.
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 29, 2004
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 29, 2004
- ---------------------------------- and Chief Executive Officer
Gilbert D. Scharf (Principal Executive Officer)
/s/ KEITH E. REIHL Chief Operating Officer and March 29, 2004
- ---------------------------------- Director
Keith E. Reihl
/s/ STEVEN R. VIGLIOTTI Chief Financial Officer and March 29, 2004
- ---------------------------------- Treasurer (Principal Financial and
Steven R. Vigliotti Accounting Officer)
/s/ LARRY S. KOPP Director March 29, 2004
- ----------------------------------
Larry S. Kopp
/s/ MICHAEL J. SCHARF Director March 29, 2004
- ----------------------------------
Michael J. Scharf
/s/ JAMES W. STEVENS Director March 29, 2004
- ----------------------------------
James W. Stevens
/s/ FREDERICK B. WHITTEMORE Director March 29, 2004
- ----------------------------------
Frederick B. Whittemore
/s/ MARC S. COOPER Director March 29, 2004
- ----------------------------------
Marc S. Cooper
/s/ OSCAR M. LEWISOHN Director March 29, 2004
- ----------------------------------
Oscar M. Lewisohn
/s/ ROBIN A. CLARK Director March 29, 2004
- ----------------------------------
Robin A. Clark
45
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2003, 2002 AND 2001
--------------------------------
F-1
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2003, 2002 AND 2001
--------------------------------
Contents Page
- --------------------------------------------------------------------------------
Report of Independent Auditors 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 Auditors
------------------------------
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, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003, 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 audit 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 26, 2004
F-3
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS December 31, 2003 December 31, 2002
- ------ ----------------- -----------------
Cash and cash equivalents $ 67,170,247 $ 52,781,616
Securities purchased under agreements to resell 1,446,677,977
Deposits with clearing organizations 8,848,729 6,318,529
Receivable from broker-dealers and customers 22,324,106 19,523,426
Securities failed-to-deliver 90,669,388
Securities held at clearing firms and trading contracts 6,687,124 29,526,028
Prepaid expenses and other assets 7,003,794 4,085,934
Deferred tax asset 734,408 364,419
Fixed assets 13,010,863 10,878,007
--------------- ---------------
Total assets $ 1,663,126,636 $ 123,477,959
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold under agreements to repurchase $ 1,470,461,908 $
Payable to broker-dealers and customers 17,337,560
Securities failed-to-receive 66,544,835
Securities sold, not yet purchased and trading contracts 22,428 144,153
Accounts payable and accrued liabilities 21,137,048 24,168,384
Accrued compensation payable 30,198,757 26,875,249
Income taxes payable 1,469,456 543,897
Deferred taxes payable 5,043,758 566,003
Obligations under capitalized leases 703,944 842,399
Revolving credit facility 7,500,000
--------------- ---------------
1,603,082,134 70,477,645
--------------- ---------------
Minority interest in consolidated subsidiary 5,407,228
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized;
none issued at December 31, 2003 and December 31, 2002
Common stock, $.001 par value, 30,000,000 shares authorized;
12,794,626 and 12,232,564 shares issued at December 31,
2003 and December 31, 2002, respectively 12,795 12,233
Additional paid-in capital 38,718,445 36,517,908
Treasury stock at cost; 5,655,903 and 4,977,404 shares of
common stock held at December 31, 2003 and December 31,
2002, respectively ( 16,771,571) ( 11,208,967)
Retained earnings 36,178,583 20,741,779
Accumulated other comprehensive income:
Foreign currency translation adjustments 1,906,250 1,530,133
--------------- ---------------
Total stockholders' equity 60,044,502 47,593,086
--------------- ---------------
Total liabilities and stockholders' equity $ 1,663,126,636 $ 123,477,959
=============== ===============
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,
2003 2002 2001
------------- ------------- -------------
Revenue:
Commission income $ 176,497,549 $ 149,428,132 $ 138,003,085
Insurance recoveries 11,106,063 11,098,135 4,498,144
Interest income 6,280,695 2,147,274 2,306,044
Principal transactions 6,122,442 8,720,422 8,932,861
Other ( 1,140,241) ( 843,142) 1,083,431
------------- ------------- -------------
Gross revenue 198,866,508 170,550,821 154,823,565
Interest expense on securities indebtedness 4,117,319 147,865 444,174
------------- ------------- -------------
Net revenue 194,749,189 170,402,956 154,379,391
------------- ------------- -------------
Costs and expenses:
Compensation and related costs 126,323,608 107,024,194 106,619,297
Communication costs 12,989,853 10,597,126 9,870,217
Travel and entertainment 9,833,755 7,406,116 6,493,462
Occupancy and equipment rental 6,623,731 4,490,356 3,967,255
Clearing and execution fees 3,865,514 3,311,759 3,511,712
Depreciation and amortization 3,220,577 2,405,834 3,598,580
Charity Day contributions 982,300 1,219,233
Other interest expense 406,772 151,214 222,213
Costs related to World Trade Center attacks 3,204,468 1,590,060
General, administrative and other expenses 7,220,567 4,933,483 6,619,527
------------- ------------- -------------
171,466,677 144,743,783 142,492,323
------------- ------------- -------------
Income before provision for income taxes, minority
interest, income from equity affiliate and
extraordinary item 23,282,512 25,659,173 11,887,068
Provision for income taxes 9,749,282 12,130,758 2,174,673
------------- ------------- -------------
Income before minority interest, income from equity
affiliate and extraordinary item 13,533,230 13,528,415 9,712,395
Minority interest in income of consolidated subsidiary ( 175,985) ( 981,791) ( 683,985)
Income from equity affiliate 9,992
------------- ------------- -------------
Income before extraordinary item 13,357,245 12,546,624 9,038,402
Extraordinary gain on purchase of minority interest 2,957,547
------------- ------------- -------------
Net income $ 16,314,792 $ 12,546,624 $ 9,038,402
============= ============= =============
Basic earnings per share:
Income before extraordinary item $ 1.91 $ 1.72 $ 1.23
Extraordinary gain on purchase of minority interest .42
------------- ------------- -------------
Net income $ 2.33 $ 1.72 $ 1.23
============= ============= =============
Diluted earnings per share:
Income before extraordinary item $ 1.62 $ 1.53 $ 1.16
Extraordinary gain on purchase of minority interest .36
------------- ------------- -------------
Net income $ 1.98 $ 1.53 $ 1.16
============= ============= =============
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, 2003, 2002 AND 2001
----------------------------------------------------
Retained Accumulated
Additional Earnings Other
Comprehensive Common Paid-in Treasury (Accumulated Comprehensive
Income Stock Capital Stock Deficit) Income Total
------------- --------- ------------ ------------ ------------ ------------- ------------
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 currency 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 currency 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
Comprehensive income
Net income for the
year ended December 31, 2003 $ 16,314,792 16,314,792 16,314,792
Foreign currency translation
adjustment (inclusive of
income tax benefit of
$2,712) 376,117 376,117 376,117
------------
Comprehensive income $ 16,690,909
============
Exercise of stock options,
including tax benefit of
$763,293 562 2,200,537 ( 826,303) 1,374,796
Acquisition of treasury
stock ( 4,736,301) ( 4,736,301)
Common stock dividends ( 877,988) ( 877,988)
--------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 $ 12,795 $ 38,718,445 ($16,771,571) $ 36,178,583 $ 1,906,250 $ 60,044,502
========= ============ ============ ============ ============ ============
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,
2003 2002 2001
--------------- --------------- ---------------
Cash flows from operating activities:
Net income $ 16,314,792 $ 12,546,624 $ 9,038,402
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,220,577 2,405,834 3,598,580
Write-off of intangible assets 943,080
Provision for doubtful accounts ( 63,348) ( 77,136) ( 43,794)
Gain on sale of equity affiliate ( 390,081)
Gain on purchase of minority interest ( 2,957,547)
Net loss on disposal of fixed assets 38,717
Unreimbursed losses of equity affiliates and contractual
arrangements
1,030,933 1,001,552 331,080
Minority interest in net earnings of consolidated
subsidiaries 175,985 981,791 683,985
Deferred hedging ( 50,050)
Deferred income taxes 4,303,936 ( 22,517) 1,238,353
Change in assets and liabilities:
Increase in securities purchased under agreements to resell ( 1,446,677,977)
(Increase) decrease in deposits with clearing organizations ( 2,530,200) 17,551 ( 1,987)
Increase in receivable from broker-dealers and customers ( 2,086,906) ( 807,736) ( 2,593,297)
(Increase) decrease in securities failed-to-deliver ( 90,669,388) 184,768,776 ( 184,768,776)
Decrease (increase) in securities held at clearing firms and
trading contracts 22,847,012 ( 17,431,495) ( 1,369,863)
(Increase) decrease in prepaid expenses and other assets ( 2,574,640) ( 418,766) 978,592
Increase in securities sold under agreements to repurchase 1,470,461,908
(Decrease) increase in payable to broker-dealer ( 17,337,560) 10,698,736 ( 477,416)
Increase (decrease) in securities failed-to-receive 66,544,835 ( 183,649,730) 183,649,730
(Decrease) increase in securities sold, not yet purchased
and trading contracts ( 121,725) 144,153
(Decrease) increase in accounts payable and accrued
liabilities ( 5,303,226) ( 4,413,181) 15,202,441
Increase in accrued compensation payable 1,943,438 4,631,660 5,566,282
Increase (decrease) in income taxes payable 1,558,150 ( 458,113) 890,786
--------------- --------------- ---------------
Net cash provided by operating activities 18,079,049 9,918,003 32,464,764
--------------- --------------- ---------------
Cash flows from investing activities:
Purchase of fixed assets ( 9,742,244) ( 7,611,516) ( 2,108,112)
Purchase of minority interest ( 2,613,156)
Proceeds from the sale of fixed assets 244,525
Insurance proceeds recognized for destroyed fixed assets 1,524,124
Proceeds from sale of equity affiliate 1,939,516
--------------- --------------- ---------------
Net cash (used in) provided by investing activities ( 12,355,400) ( 7,611,516) 1,600,053
--------------- --------------- ---------------
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,
2003 2002 2001
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options 611,503 173,013 222,250
Proceeds from exercise of warrants 2,463,975
Common stock dividends ( 877,988)
Borrowings under revolving credit facility, net 7,500,000
Repayment of notes payable ( 447,978) ( 1,252,151)
Redemption of preferred stock ( 2,000,000)
Redeemable preferred stock dividends ( 20,000)
Proceeds from asset sales under sale-leaseback
transactions 5,220,658
Repayment of obligations under capitalized leases ( 208,276) ( 137,559) ( 260,527)
Acquisition of treasury stock ( 4,736,301) ( 2,120,161) ( 3,011,540)
------------ ------------ ------------
Net cash provided by (used in) financing
activities 7,509,596 ( 68,710) ( 6,321,968)
------------ ------------ ------------
Effect of exchange rate changes on cash 1,155,386 978,555 357,431
------------ ------------ ------------
Net increase in cash and cash
equivalents 14,388,631 3,216,332 28,100,280
Cash and cash equivalents at beginning of year 52,781,616 49,565,284 21,465,004
------------ ------------ ------------
Cash and cash equivalents at end of year $ 67,170,247 $ 52,781,616 $ 49,565,284
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 4,456,755 $ 229,750 $ 733,922
Income taxes paid 5,309,227 10,639,955 3,413,784
Income tax benefit on option exercises 763,293 53,749 101,822
Non-cash financing activities:
Capital lease obligations incurred 706,094 138,375
Receipt of shares in treasury for exercise
price of stock options 826,303 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, 2003, 2002 AND 2001
--------------------------------
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, 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 operations in various fixed income and
equity securities and institutional securities financing operations.
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 2002 and 2001 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.
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.
F-10
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------
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:
2003 2002 2001
-------------- -------------- --------------
Net income, as reported $ 16,314,792 $ 12,546,624 $ 9,038,402
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects 956,048 813,362 652,994
-------------- -------------- --------------
Pro forma net income $ 15,358,744 $ 11,733,262 $ 8,385,408
============== ============== ==============
Earnings per share:
Basic, as reported $ 2.33 $ 1.72 $ 1.23
Basic, pro forma $ 2.20 $ 1.61 1.14
Diluted, as reported $ 1.98 $ 1.53 $ 1.16
Diluted, pro forma $ 1.87 $ 1.43 $ 1.08
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. The adoption of FIN 45 did not have a
material impact on the Company's consolidated financial statements.
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 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 the
intrinsic value method of APB 25 for the purpose of recognizing compensation
cost.
F-11
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- ----------------------------------------------------
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 149 is effective
for derivative contracts entered into after June 30, 2003. The adoption of SFAS
149 did not have a material impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity, and imposes certain additional
disclosure requirements. The provisions of SFAS 150 are effective for financial
instruments entered into or modified after May 31, 2003 and must be applied to
all financial instruments at the beginning of the third quarter of 2003. The
adoption of SFAS 150 did not affect the Company's consolidated financial
statements.
In December 2003, the FASB issued FASB Interpretation No. 46(R), "Consolidation
of Variable Interest Entities" ("FIN 46(R)"). FIN 46(R) addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through a means other than voting rights and accordingly should
consolidate the entity. FIN 46(R) replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which was issued in
January 2003. Prior to FIN 46, variable interest entities were commonly referred
to as special purpose entities. The adoption of FIN 46(R) will not affect the
Company's 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.
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 consolidated statements 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 described above 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
F-12
NOTE 3 - ATTACKS ON WORLD TRADE CENTER (Continued):
- --------------------------------------------------
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. 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.
During 2003, the Company settled in full its property insurance claim against
Kemper resulting in a net gain recognized of $11,106,063, which is reflected on
the consolidated statements of operations in revenues as insurance recoveries.
This net gain reflected the gross insurance proceeds of $13,868,210 received for
the property claim since the September 11th attacks, less $2,762,147,
representing the aggregate of the net book value of owned property destroyed in
the attacks, termination costs associated with operating leases of equipment
destroyed in the attacks and claim-related expenses.
NOTE 4 - CHARITY DAY CONTRIBUTIONS:
- ----------------------------------
During 2003 and 2002, the Company held Charity Days for which all the revenues
generated by the New York, Stamford, London, Switzerland and Mexico offices were
donated to designated charities. All participating brokerage employees waived
any entitlement to commissions from such revenues. The proceeds of $982,300
raised on the 2003 Charity Day were designated for The Euro Brokers Relief Fund,
Inc., which provides 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, and the firm's Maxcor Foundation Inc. The Maxcor
Foundation Inc. in turn designated three principal recipients: Marine Corps-Law
Enforcement Foundation, Inc., Columbia University, College of Physicians &
Surgeons and The Great Ormond Street Hospital for Children in London. The 2002
Charity Day resulted in a contribution of $1,219,233 entirely to The Euro
Brokers Relief Fund, Inc.
NOTE 5 - REPURCHASE AND REVERSE REPURCHASE AGREEMENTS:
- -----------------------------------------------------
Transactions involving the purchase of U.S. Treasury and federal agency
securities under agreements to resell (reverse repurchase agreements) and the
sale of U.S. Treasury and federal agency securities under agreements to
repurchase (repurchase agreements) are treated as collateralized financings and
are recorded at contracted amounts, plus accrued interest. These amounts are
presented on a net-by-counterparty basis when the requirements of Financial
Accounting Standards Board (FASB) Interpretation No. 41 are satisfied. Income
and expense on these agreements are recognized as interest over the life of the
transaction.
The Company monitors the fair value of the securities purchased and sold under
these agreements daily and obtains additional collateral or returns excess
collateral when appropriate. Securities received as collateral for reverse
repurchase agreements are used to secure repurchase agreements. As of December
31, 2003, the fair value of securities pledged as collateral under reverse
repurchase agreements of $1,618 million was repledged under repurchase
agreements.
F-13
NOTE 6 - 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, 2003, 2002 and 2001:
2003 2002 2001
----------- ----------- -----------
Numerator (basic and diluted calculation):
Net income $16,314,792 $12,546,624 $ 9,038,402
Less redeemable preferred stock dividends ( 20,000)
----------- ----------- -----------
Net income available to common
stockholders 16,314,792 12,546,624 9,018,402
Denominator:
Weighted average common shares
outstanding - basic calculation 6,987,415 7,304,284 7,357,017
Dilutive effect of stock options and warrants 1,241,184 906,354 407,650
----------- ----------- -----------
Weighted average common shares
outstanding - diluted calculation 8,228,599 8,210,638 7,764,667
Earnings per share:
Basic $ 2.33 $ 1.72 $ 1.23
Diluted $ 1.98 $ 1.53 $ 1.16
Antidilutive common stock equivalents:
Options 190,000 270,000 240,000
Warrants 734,980
NOTE 7 - DEPOSITS WITH CLEARING ORGANIZATIONS:
- ---------------------------------------------
Deposits with clearing organizations at December 31, 2003 and 2002 consist of
the following:
December 31, 2003 December 31, 2002
----------------- -----------------
Cash $ 810,803 $ 407,197
U.S. Treasury obligations 8,037,926 5,911,332
----------- -----------
$ 8,848,729 $ 6,318,529
=========== ===========
Pursuant to its membership in the Government Securities Division of the Fixed
Income Clearing Corporation ("GSD-FICC"), MFI is required to maintain a clearing
deposit with GSD-FICC based upon its level of trading activity (with a minimum
deposit of $5,000,000). In addition, MFI's clearing firms require certain
minimum collateral deposits.
NOTE 8 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CUSTOMERS:
- --------------------------------------------------------------------
At December 31, 2003 and 2002, receivable from and payable to broker-dealers and
customers consists of the following:
December 31, 2003 December 31, 2002
----------------- ---------------------------
Receivable Receivable Payable
----------- ----------- -------------
Commissions receivable $21,487,492 $17,273,968 $
Receivable from clearing firms 836,614 2,249,458
Payable to clearing firm 17,337,560
----------- ----------- -------------
$22,324,106 $19,523,426 $ 17,337,560
=========== =========== =============
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. 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 at December 31, 2002 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 $483,000 and $531,000 at December 31,
2003 and 2002 respectively.
F-14
NOTE 9 - SECURITIES HELD AT CLEARING FIRMS AND TRADING CONTRACTS:
- ----------------------------------------------------------------
Securities held at clearing firms and trading contracts at December 31, 2003 and
2002 consist of the following:
December 31, 2003 December 31, 2002
------------------------- -------------------------
Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
Municipal obligations $ 6,028,680 $ $22,350,511 $
Foreign sovereign debt 551,850
Corporate bonds 6,793,364
Corporate stocks 106,594 22,428 57,500
When-issued equity trading contracts 324,653 144,153
----------- ----------- ----------- -----------
$ 6,687,124 $ 22,428 $29,526,028 $ 144,153
=========== =========== =========== ===========
Securities positions held by the Company's clearing firms may be rehypothecated
by them. At December 31, 2003, a single clearing firm, Pershing, LLC, held a
significant portion ($44.7 million) of the Company's cash equivalents.
NOTE 10 - EQUITY AFFILIATES AND MINORITY INTERESTS:
- --------------------------------------------------
Yagi Euro Nittan Corporation:
- ----------------------------
At December 31, 2000, the Company held a 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 11) which represented a significant portion of Yagi Euro's results, the
Company accounted for this investment under the equity method. 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 was
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 were 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 were
consolidated in the Company's consolidated financial statements, with Monecor's
interest presented as minority interest.
In May 2002, EBHL obtained a judgment of the London High Court of Justice
entitling 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. The
Company had 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. In February 2003, the London Court of Appeals dismissed
Monecor's appeal of the May 2002 judgment, enabling EBHL to proceed with the
acquisition of Monecor's shareholding at the discounted price. Upon completion
of the purchase in February 2003, EBFL was renamed as Euro Brokers Limited
("EBL"), and the Company recorded a one-time extraordinary gain of $2,957,547,
representing the excess of the $5,570,703 amount recorded for Monecor's interest
in EBFL over the purchase price of $2,613,156.
F-15
NOTE 11 - TOKYO-BASED VENTURE:
- -----------------------------
At December 31, 2000, the Company held a 40% interest in a Tokyo-based
derivatives brokering venture (the "Tokyo Venture") with Yagi Euro and Nittan
Capital Group Limited ("Nittan") each holding 30% interests. 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 June 30, 2001, this venture disbanded and a new, substantially similar
TK venture with Nittan as the TK operator 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, 2003, 2002 and 2001, along with the Company's share of those results, are
presented below:
2003 2002 2001
------------ ------------ ------------
Revenues $ 4,891,281 $ 10,405,376 $ 15,218,117
Expenses 7,616,662 12,473,906 16,670,071
------------ ------------ ------------
Loss ($ 2,725,381) ($ 2,068,530) ($ 1,451,954)
============ ============ ============
Company's share ($ 1,560,281) ($ 1,184,233) ($ 694,083)
============ ============ ============
NOTE 12 - FIXED ASSETS:
- ----------------------
Fixed assets at December 31, 2003 and 2002 are summarized below:
December 31, December 31,
2003 2002
------------ ------------
Furniture and telephone equipment $ 11,000,473 $ 9,458,109
Leasehold improvements 12,834,635 8,318,899
Computer and related equipment 6,380,616 7,122,245
Software 8,541,527 7,664,033
Automobiles 1,393,961 1,192,485
------------ ------------
40,151,212 33,755,771
Less - Accumulated depreciation
and amortization ( 27,140,349) ( 22,877,764)
------------ ------------
$ 13,010,863 $ 10,878,007
============ ============
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, 2003:
For the Year Ending December 31,
2004 $ 349,234
2005 469,130
-------------
Total minimum lease payments 818,364
Less - Amount representing interest ( 114,420)
-------------
Present value of total minimum lease payments $ 703,944
=============
F-16
NOTE 13 - OBLIGATIONS UNDER CAPITALIZED LEASES (Continued):
- ----------------------------------------------------------
The gross amounts of assets under capitalized leases are approximately
$1,046,000 and $1,040,000 at December 31, 2003 and 2002, 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 $375,000, $219,000 and
$80,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
NOTE 14 - BORROWING ARRANGEMENTS:
- --------------------------------
Revolving Credit Facility:
- -------------------------
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, was secured by substantially all of
EBI's assets. The borrowing availability under this facility was determined
based upon the level and condition of EBI's billed accounts receivable.
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. In November 2003, this facility was amended to
expand the permitted use of borrowings and to establish a fixed availability of
$10 million through maturity. 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. At December 31, 2003, the Company had
borrowings outstanding under this facility of $7,500,000.
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
$235,000, $213,000 and $230,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
NOTE 16 - INCOME TAXES:
- ----------------------
Income before provision for income tax, minority interest, income from equity
affiliate and extraordinary item is subject to tax under the following
jurisdictions:
For the Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ------------------ -----------------
Domestic $ 16,742,077 $ 22,801,450 $ 8,196,893
Foreign 6,540,435 2,857,723 3,690,175
----------------- ------------------ -----------------
Total $ 23,282,512 $ 25,659,173 $ 11,887,068
================= ================== =================
F-17
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,
2003 2002 2001
------------ ------------ -------------
Current
Federal $ 1,759,517 $ 7,980,966 $ 2,307,130
State and local 345,553 2,291,478 ( 3,384,531)
Foreign 3,340,276 1,880,831 1,981,160
------------ ------------ ------------
Total 5,445,346 12,153,275 903,759
------------ ------------ ------------
Deferred
Federal 2,760,376 ( 746,432) 1,602,678
State and local 1,913,063 906,825 ( 149,310)
Foreign ( 369,503) ( 182,910) ( 182,454)
------------ ------------ ------------
4,303,936 ( 22,517) 1,270,914
------------ ------------ ------------
Total $ 9,749,282 $ 12,130,758 $ 2,174,673
============ ============ ============
Deferred tax assets (liabilities) are comprised of the following:
December 31, December 31,
2003 2002
------------ ------------
Assets
Bad debt reserve $ 171,529 $ 164,510
Occupancy reserves 70,926 53,888
Depreciation and amortization 928,736 898,574
Net operating losses ("NOLs") 383,733 255,715
Foreign tax credits 103,520 96,517
Capital loss carryforwards 387,609 627,446
Other 298,851 107,918
Deferred tax asset valuation allowance ( 857,555) ( 979,678)
----------- -----------
Gross deferred tax asset, after valuation
allowance 1,487,349 1,224,890
Jurisdictional deferred taxes payable offset ( 752,941) ( 860,471)
----------- -----------
Deferred tax asset $ 734,408 $ 364,419
=========== ===========
Liabilities
Differential on assigned values and tax
basis for acquired assets ($ 205,199) ($ 331,474)
Unrealized gains ( 648,835) ( 766,390)
Differential on values of assets acquired
from insurance proceeds ( 4,668,477)
Other ( 274,188) ( 328,610)
----------- -----------
Gross deferred taxes payable ( 5,796,699) ( 1,426,474)
Jurisdictional deferred tax asset offset 752,941 860,471
----------- -----------
Deferred taxes payable ($5,043,758) ($ 566,003)
=========== ===========
The valuation allowance for deferred tax assets has been established for assets
arising from various foreign 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, $24,000 and $7,000 expire in
2005, 2007 and 2008, respectively. Foreign NOLs approximating $509,000,
$238,000, $958,000 and $853,000 expire in 2007, 2008, 2009 and 2010,
respectively.
F-18
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 pre-tax
income from continuing operations as a result of the following differences:
For the Year Ended
--------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Tax at U.S. statutory rate $ 7,916,054 $ 8,724,119 $ 4,041,603
Increase (decrease) in tax resulting from:
Higher effective rates on earnings
of foreign operations and tax
benefit of foreign losses not
recognized, net 508,896 610,115 283,351
Nondeductible meals and
entertainment 1,087,118 955,536 828,500
Nondeductible goodwill amortization/write-off 310,663
Reduction of income tax reserves ( 500,000) ( 2,359,511)
Non-taxable interest income ( 540,607) ( 336,974) ( 228,378)
Decrease to deferred tax
asset valuation allowance ( 290,210) ( 1,157,056)
State and local taxes, net 1,820,720 2,110,880 657,993
Other ( 252,689) 67,082 ( 202,492)
------------ ------------ ------------
$ 9,749,282 $ 12,130,758 $ 2,174,673
============ ============ ============
NOTE 17 - STOCKHOLDERS' EQUITY:
- -------------------------------
Dividends:
- ---------
During 2003, the Company declared and paid its first two quarterly common stock
dividends, each at the rate of $.0625 per share ($.25 per share on an annualized
basis), for aggregate payments of $877,988.
Preferred stock:
- ---------------
Pursuant to the Company's adoption of a shareholder rights plan (the "Plan") in
December 1996, the Company authorized the creation of Series A Junior
Participating Preferred Stock, par value $.001 per share ("Series A Preferred
Stock"), and reserved 300,000 shares thereof for issuance upon exercise of the
preferred stock purchase rights (each, a "Right") that, pursuant to the Plan,
were at the time dividended to holders of common stock on the basis of one
Right, expiring December 6, 2006, for each share of common stock. Each Right
will entitle the registered holder to purchase from the Company one
one-hundredth of a share of Series A Preferred Stock for $22.50, subject to
adjustment. The Rights, however, generally do not become exercisable until ten
days after a person or group acquires (or commences a tender or exchange offer
to acquire) 15% or more beneficial ownership of the common stock. Upon
occurrence of such event (subject to certain conditions and exceptions more
fully described in the Plan), and subject to the Rights no longer being
redeemable, each Right would entitle the holder thereof (other than the person
or group triggering such exercisability) to buy (with certain limited
exceptions) common stock of the Company (or, if the Company is acquired, common
shares of the surviving entity) having a market value equal to twice the
exercise price of the Right. The Rights may be redeemed by the Company,
generally at any time prior to the triggering events described above, at a price
of $.01 per Right.
On October 1, 1998 the Company issued 2,000 shares of a newly created Series B
Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") to Yagi Euro
at a purchase price of $1,000 per share ("Stated Value"), with cumulative
dividends at the annual rate of 2% of the Stated Value, payable quarterly in
arrears. In accordance with the terms of the Series B Preferred Stock, upon the
sale of the Company's investment in Yagi Euro in June 2001 (See Note 10 above),
the Company redeemed the Series B Preferred Stock from Yagi Euro at the Stated
Value, together with accrued and unpaid dividends thereon of $10,000.
F-19
NOTE 17 - STOCKHOLDERS' EQUITY (Continued):
- ------------------------------------------
Common stock and warrants:
- -------------------------
At December 31, 2000, the Company had outstanding 8,120,835 shares of common
stock and held 3,271,434 shares of common stock in treasury. 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 January 2001, the Company purchased 242,142 shares of its outstanding common
stock, at an aggregate purchase price of $293,156, representing the remaining
authorization under an 833,744 share repurchase program approved by the Board of
Directors in May 2000. The Board of Directors then approved an additional
repurchase authorization 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 approved an additional
repurchase authorization 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
Technologies, Inc.
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.
During the year ended December 31, 2003 the Company's Board of Directors
increased the July 2001 repurchase program authorization by an additional
700,000 shares, to a total authorization of 1,900,000 shares, and purchased an
additional 616,300 shares under this expanded authorization at an aggregate
purchase price of $4,736,301. The Company also issued an aggregate of 562,062
shares in 2003 pursuant to options exercised under the Company's 1996 Stock
Option Plan and the Company's 2002 Stock Option Plan (collectively, the "Option
Plans"). In connection with certain exercises, the Company received 62,199
shares into treasury as consideration for exercise prices aggregating $826,303.
As a result of the foregoing activity, at December 31, 2003 and 2002, the
Company had outstanding 7,138,723 and 7,255,160 shares of common stock,
respectively, and held 5,655,903 and 4,977,404 shares of common stock in
treasury, respectively.
At December 31, 2003, the Company had 2,390,438 shares of common stock reserved
for issuance upon exercise of options pursuant to the Option Plans and 925,000
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.
F-20
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 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 Option 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 Option Plans, all unvested options
automatically vest. Under the Option 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, 2003 December 31, 2002 December 31, 2001
------------------------- --------------------------- ---------------------------
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 1,700,000 $3.14 1,470,750 $2.29 1,755,000 $2.14
Granted 485,000 9.68 426,250 5.79 335,000 2.88
Exercised ( 562,062) 2.52 ( 127,000) 2.12 ( 220,500) 2.01
Canceled ( 75,000) 6.95 ( 70,000) 3.23 ( 398,750) 2.28
---------- ----- ----------- ----- ----------- -----
Outstanding
at end of year 1,547,938 $5.22 1,700,000 $3.14 1,470,750 $2.29
========== ===== =========== ===== =========== =====
Exercisable
at end of year 735,750 $2.74 1,030,625 $2.20 978,313 $2.12
========== ===== =========== ===== =========== =====
Weighted average
fair value of
options granted
during the year $6.26 $4.47 $2.05
===== ===== =====
At December 31, 2003 there were 794,500 options outstanding with exercise prices
ranging from $2.00 to $3.00, 318,438 options outstanding with exercise prices
ranging from $5.14 to $6.00 and 435,000 options outstanding with exercise prices
ranging from $9.35 to $10.70. The weighted-average remaining contractual life of
all options outstanding approximates 7.1 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
were issued at an exercise price of $5.875 with vesting 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 also included the granting of up to an
additional
F-21
NOTE 18 - STOCK OPTION AND WARRANT PLANS (Continued):
- ----------------------------------------------------
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. During 2003, 75,000 of the
Leveraged Finance Warrants were cancelled and the remaining 425,000 were
cancelled in January 2004.
The Company has elected to continue to follow APB 25 in accounting for the
Option Plans and the Leveraged Finance Warrants. Accordingly, the Company has
not recognized any compensation cost associated with the Option 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 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 Option
Plans and the Leveraged Finance Warrants had been recognized using the fair
value method of SFAS 123. Because stock options under the Option 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 grants in 2003, 2002 and 2001 with the following
weighted average assumptions: expected volatility of 98%, 101% and 89%,
respectively; risk free interest rate of 3.1%, 4.5% and 4.9%, respectively; and
an expected option life of five years.
For the Year Ended
----------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Net income As reported $ 16,314,792 $ 12,546,624 $ 9,038,402
Pro forma 15,358,744 11,733,262 8,385,408
Basic earnings per share As reported 2.33 1.72 1.23
Pro forma 2.20 1.61 1.14
Diluted earnings per share As reported 1.98 1.53 1.16
Pro forma 1.87 1.43 1.08
NOTE 19 - COMMITMENTS:
- ---------------------
The Company is obligated under certain non-cancelable leases for office space
and equipment and under telecommunication services contracts. Operating leases
for office space contain escalation clauses for base rent, maintenance and real
estate tax increases. In March 2003, EBI entered into various sale-leaseback
transactions for equipment aggregating $5.2 million under a master lease
agreement with GECC. Since these leases do not meet one or more of the criteria
for capital lease treatment, they are classified as operating leases and are not
recorded on the consolidated statement of financial condition.
Future minimum rental commitments for operating leases that have initial or
remaining terms in excess of one year approximate the following:
Year
----
2004 $ 12,527,124
2005 6,888,211
2006 6,351,958
2007 5,348,168
2008 5,338,266
Thereafter 41,529,279
-------------
$ 77,983,006
=============
Rental expense, net of sub-rental income, amounted to approximately $5,539,484,
$3,642,000 and $3,416,000 in 2003, 2002 and 2001, respectively.
F-22
NOTE 20 - CONTINGENCIES:
- -----------------------
Counterparty Risk and Guarantees:
- --------------------------------
The Company clears certain of its securities transactions with its institutional
counterparties 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, 2003 and 2002, the
Company has recorded no liabilities with respect to this risk. During 2003 and
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.
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, MFI 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.
On January 10, 2003, NTL emerged from bankruptcy under a plan of reorganization
providing for the issuance of one-fourth the number of shares previously
contemplated. MFI 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, either have retained the
full, unadjusted number of shares delivered to them as a result of certain
automated settlement processes or are demanding compensation for the remaining
unadjusted number of shares not delivered to them if settlement was made on an
adjusted basis.
On January 16, 2003, MFI sought and obtained from the Bankruptcy Court handling
NTL's case a temporary order that required and caused many of its 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, MFI 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 MFI, in both of these Courts. In
September 2003, the Bankruptcy Court abstained from further exercise of its
jurisdiction in the cases before it in favor of centralizing proceedings in the
New York State Supreme Court.
Included in principal transactions for the year ended December 31, 2003 is a
loss of $5.1 million recorded for the settlement of the NTL when-issued trades.
This loss includes the estimated damages payable if the above proceedings
conclude that all of MFI's NTL when-issued trades, other than permanently
adjusted settlements by mutual agreement, should have settled on an unadjusted
basis. The loss could be higher to the extent that the proceedings conclude that
MFI as a purchaser of NTL when-issued shares should have settled its
transactions on an adjusted basis, but, as seller of such shares, should have
settled its transactions on an unadjusted basis. The loss also
F-23
NOTE 20 - CONTINGENCIES (Continued):
- -----------------------------------
could be higher if such proceedings require the effect of unadjusted settlement
be achieved through the payment of damages at a level higher than MFI's recorded
estimate of damages potentially payable. On the other hand, the loss also could
be lower in the reverse of such scenarios or to the extent that MFI prevails in
the proceedings above. In addition, general, administrative and other expenses
include related legal fees incurred during the year ended December 31, 2003 of
$700,000.
In March 2004, the New York State Supreme Court entered a summary judgment
decision stating that all NTL when-issued trades among the parties before the
Court should be settled on an adjusted and uniform basis. The decision, however,
remains subject to the entry of a final order implementing its terms and
possible appeal. Accordingly, MFI does not intend to reverse any of the $5.1
million loss recorded during 2003 except to the extent MFI achieves a final
resolution, whether by mutual consent, appeal or otherwise, with any of the
counterparties with whom it traded. Since the Court's decision, one such final
resolution has already been achieved, and will result in MFI recording a
$625,000 pre-tax benefit in the first quarter of 2004.
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 $3.1 million at
December 31, 2003), plus interest estimated at approximately (pound)654,000
through December 31, 2003 (approximately $1.2 million). The Company has formally
challenged these demands as it believes the respective bonus payment methods
used did not require NIC payments under existing legislation. At December 31,
2003, the Company had reserved approximately $3.7 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.
NOTE 21 - 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, 2003, MFI had regulatory net capital of
$50.1 million, a regulatory net capital requirement of $250,000 and combined
stockholder's equity and subordinated borrowing of $55.8 million. EBL is a Type
D registered firm of the Financial Services Authority ("FSA"), required to
maintain a financial resources requirement generally equal to six weeks average
expenditures plus the amount of less liquid assets on hand. At December 31,
2003, EBL had financial resources in accordance with FSA's rules of (pound)4.5
million ($8.1 million) and a financial resources requirement of (pound)3.2
million ($5.7 million).
F-24
NOTE 22 - 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 and Japan. United States amounts
are principally derived from the Company's New York office, but include the
balances for all its U.S. based operations. United Kingdom amounts include the
consolidated balances for EBL, with net income (loss) amounts net of Monecor's
minority interest prior to the Company's purchase of the interest in February
2003 (see Note 10). Japan amounts primarily reflect the non-equity earnings
(loss) from contractual arrangement (Tokyo Venture). See Note 11 for additional
disclosure of the revenues and expenses of the Tokyo Venture. Other geographic
segments that 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
States Kingdom Japan All Other Total
--------------- --------------- ----------- --------------- ---------------
2003
- ----
Operating revenues $ 106,290,191 $ 70,358,981 $ $ 6,262,486 $ 182,911,658
Interest income 5,895,773 555,351 1,179 6,452,303
Interest expense on securities
indebtedness 4,117,319 4,117,319
Other interest expense 438,327 140,053 578,380
Depreciation and amortization 1,998,890 1,139,711 81,976 3,220,577
Provision for income taxes 6,778,509 2,728,526 242,247 9,749,282
Non-equity loss from contractual
arrangement ( 1,560,281) ( 1,560,281)
Net income (loss) 9,963,568 6,898,667 ( 1,517,882) 970,439 16,314,792
Assets 1,649,597,122 33,182,725 179,899 5,141,732 1,688,101,478
Capital expenditures 8,816,779 843,213 82,252 9,742,244
2002
- ----
Operating revenues $ 101,096,048 $ 52,717,957 $ $ 4,596,482 $ 158,410,487
Interest income 1,781,994 411,917 18 1,837 2,195,766
Interest expense on securities
indebtedness 147,865 147,865
Other interest expense 144,372 55,334 199,706
Depreciation and amortization 1,413,595 905,006 87,233 2,405,834
Provision for income taxes 10,432,832 1,549,168 148,758 12,130,758
Non-equity loss from contractual
arrangement ( 1,184,233) ( 1,184,233)
Net income (loss) 12,368,617 1,064,250 ( 1,287,064) 400,821 12,546,624
Assets 111,571,666 28,297,516 196,825 2,781,296 142,847,303
Capital expenditures 6,839,528 664,444 107,544 7,611,516
F-25
NOTE 22 - SEGMENT REPORTING (Continued):
- ---------------------------------------
United United
States Kingdom Japan All Other Total
--------------- --------------- ----------- --------------- ---------------
2001
- ----
Operating revenues $ 93,295,842 $ 50,239,021 $ $ 5,017,907 $ 148,552,770
Interest income 1,881,779 641,814 77 3,909 2,527,579
Interest expense on securities
indebtedness 444,174 444,174
Other interest expense 138,660 305,088 443,748
Depreciation and amortization 2,606,071 822,768 169,741 3,598,580
Provision (benefit) for income taxes 420,636 1,723,759 ( 51,130) 81,408 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 ( 622,924) 187,198 9,038,402
Assets 270,102,520 22,967,639 7,106,600 2,613,050 302,789,809
Capital expenditures 1,715,285 325,660 67,167 2,108,112
Included below are reconciliations of reportable segment items to the Company's
consolidated totals as reported in the consolidated financial statements.
2003 2002 2001
--------------- --------------- ---------------
Interest income:
Total for reportable segments $ 6,451,124 $ 2,193,929 $ 2,523,670
Other interest 1,179 1,837 3,909
Elimination of intersegment interest income ( 171,608) ( 48,492) ( 221,535)
--------------- --------------- ---------------
Consolidated total $ 6,280,695 $ 2,147,274 $ 2,306,044
=============== =============== ===============
Other interest expense:
Total for reportable segments $ 578,380 $ 199,706 $ 443,748
Elimination of intersegment interest expense ( 171,608) ( 48,492) ( 221,535)
--------------- --------------- ---------------
Consolidated total $ 406,772 $ 151,214 $ 222,213
=============== =============== ===============
Assets:
Total for reportable segments $ 1,682,959,746 $ 140,066,007 $ 300,176,759
Other assets 5,141,732 2,781,296 2,613,050
Elimination of intersegment receivables ( 11,878,858) ( 6,273,360) ( 10,376,533)
Elimination of investments in
other segments ( 13,095,984) ( 13,095,984) ( 13,095,984)
--------------- --------------- ---------------
Consolidated total $ 1,663,126,636 $ 123,477,959 $ 279,317,292
=============== =============== ===============
F-26
NOTE 23 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
- -------------------------------------------------------
The following table reflects the unaudited quarterly results of operations of
the Company for 2003 and 2002.
For the Three Months Ended
----------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
- ---- ------------ ----------- ------------ ------------
Net revenues $ 37,342,741 $ 52,214,646 $ 57,535,450 $ 47,656,352
Costs and expenses 38,518,831 47,670,572 49,087,144 46,115,397
(Loss) income before provision for income
taxes and minority interest and
extraordinary item ( 2,080,024) 7,725,098 14,592,569 3,044,869
(Loss) income before extraordinary item ( 1,176,090) 4,544,074 8,448,306 1,540,955
Extraordinary gain on purchase of
minority interest 2,957,547
Net income 1,781,457 4,544,074 8,448,306 1,540,955
Weighted average common shares
outstanding - basic 7,130,991 6,875,169 6,889,677 7,055,723
Weighted average common shares
outstanding - diluted 7,130,991 8,046,794 8,154,004 8,214,608
Basic (loss) earnings per share:
(Loss) income before extraordinary item ($ .16) $ .66 $ 1.23 $ .22
Extraordinary gain on purchase of
minority interest .41
Net income .25 .66 1.23 .22
Diluted (loss) earnings per share:
(Loss) income before extraordinary item ( .16) .56 1.04 .19
Extraordinary gain on purchase of
minority interest .41
Net income .25 .56 1.04 .19
2002
- ----
Net revenues $ 37,496,874 $ 38,480,395 $ 44,501,374 $ 49,924,313
Costs and expenses 36,129,675 36,370,985 41,391,173 43,964,499
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
F-27
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, 2002)
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)
4.5 Agreement on Removal of Rights Agent and Appointment of Successor
Rights Agent, dated as of September 9, 2003, by and among the
Registrant, Continental Stock Transfer & Trust Company and The
Bank of New York*
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"))
X-1
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 "2002
Proxy Statement"))
10.7+ Maxcor Financial Group Inc. Key Executive Incentive Bonus Plan
(incorporated herein by reference to Appendix B of the 2002 Proxy
Statement)
10.8+ Amended and Restated Employment Agreement, dated as of October 1,
2002, by and between the Registrant and Gilbert Scharf
(incorporated herein by reference to Exhibit 10.8 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 (the "2002 Form 10-K"))
10.9+ Amended and Restated Employment Agreement, dated as of October 1,
2002, by and between the Registrant and Keith Reihl (incorporated
herein by reference to Exhibit 10.9 of the 2002 Form 10-K)
10.10+ Amended and Restated Employment Agreement, dated as of October 1,
2002, by and between the Registrant and Roger Schwed
(incorporated herein by reference to Exhibit 10.10 of the 2002
Form 10-K)
10.11+ Employment Agreement, dated as of October 1, 2002, by and between
the Registrant and Steven Vigliotti (incorporated herein by
reference to Exhibit 10.11 of the 2002 Form 10-K)
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)
X-2
10.13+ Amendment, dated 1 October 2002, to the Clark Employment
Agreement (incorporated herein by reference to Exhibit 10.13 of
the 2002 Form 10-K)
10.14+ Change in Control Severance Agreement, dated as of October 1,
2002, by and between the Registrant and Robin Adrian Clark
(incorporated herein by reference to Exhibit 10.14 of the 2002
Form 10-K)
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)
10.17 Credit Agreement, dated March 27, 2003, between Euro Brokers Inc.
and The Bank of New York (the "Credit Agreement") (incorporated
herein by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
2003)(1)
10.18 Amendments No. 1, 2 and 3, dated June 26, 2003, September 29,
2003 and November 14, 2003, respectively, to the Credit
Agreement*
21 Subsidiaries of the Registrant*
23 Consent of PricewaterhouseCoopers LLP*
31.1 Rule 13a-14(a) Certification of Principal Executive Officer*
31.2 Rule 13a-14(a) Certification of Principal Financial Officer*
32 18 U.S.C. Section 1350 Certifications of Principal Executive and
Financial Officers*
- --------------------------
* 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 or requested pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended.
X-3