UNITED STATES
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, 2004 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 $10.72
on June 30, 2004 (the last business day of the registrant's most recently
completed second fiscal quarter), was approximately $51 million.
As of March 30, 2005, there were 6,812,232 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
Information required to be included in Part III of this Form 10-K is
incorporated by reference into Part III hereof from portions of registrant's
Proxy Statement for its 2005 Annual Meeting of Stockholders (which registrant
currently intends to file pursuant to Regulation 14A on or before May 2, 2005)
that contain such information, but solely to the extent provided therein, or
will be filed by amendment to this report by such date.
MAXCOR FINANCIAL GROUP INC.
INDEX
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Page
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PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 17
Item 3. Legal Proceedings............................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............ 18
Item 6. Selected Financial Data...................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 34
Item 8. Financial Statements and Supplementary Data.................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 36
Item 9A. Controls and Procedures...................................... 36
Item 9B. Other Information............................................ 36
PART III
Item 10. Directors and Executive Officers of the Registrant........... 36
Item 11. Executive Compensation....................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.............................. 36
Item 13. Certain Relationships and Related Transactions............... 37
Item 14. Principal Accountant Fees and Services....................... 37
PART IV
Item 15. Exhibits and Financial Statement Schedules................... 37
Signatures................................................................ 38
Consolidated Financial Statements and Notes............................... F-1
Index to Consolidated Financial Statements................................ F-2
Exhibit Index............................................................. X-1
[GRAPHIC OMITTED]
MAXCOR
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 33.
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
Recent Event
On March 4, 2005, we announced that we were holding preliminary
business combination discussions with a potential acquirer. As of March 30, 2005
(the last date before this report went to press), we had made substantial
progress towards a transaction. However, there are still issues remaining to be
resolved and, accordingly, there can be no assurance as to whether we will be
successful in reaching agreement on or completing a transaction. See "Cautionary
Statements - Risks and uncertainties associated with our current acquisition
discussions can damage our business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Subsequent Event."
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, high-yield and distressed debt,
convertible securities and equities.
We also maintain certain specialty subsidiaries. Maxcor Financial Asset
Management Inc., an investment adviser registered with the SEC, is engaged in
securities lending through its Euro Brokers Securities Lending division.
Tradesoft Technologies, Inc. ("Tradesoft"), acquired by us in August 2000,
augments our existing Maxcor and Euro Brokers software development and
technology provision capabilities.
We have approximately 500 employees worldwide and conduct our
businesses through principal offices in New York, London and Tokyo, other
offices in Stamford (CT), 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 the 50% interest that had been held
by Monecor (London) Limited ("Monecor") in those operations (see Note 10 to the
Consolidated Financial Statements). In Tokyo, we have 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% (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'
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, some of who review and pre-approve the
credit of the participating counterparties.
2
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
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.
3
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
correspondent broker relationships in Argentina, Brazil and Uruguay. The market
coverage of the teams from these locations is worldwide. Our brokerage of
emerging market debt utilizes direct communication phone lines and provides
real-time pricing through proprietary, computerized screen systems located in
clients' offices or through direct digital feeds. In most emerging markets
transactions, we act as matched riskless principal and settle trades through a
clearing firm, although we broker some transactions on a name give-up basis.
Repurchase agreements are contractual obligations entered into by two
counterparties, first to sell securities and then to repurchase those same
securities (or the reverse in the case of a buyer) at an agreed upon future date
and price. We act as an intermediary mainly for the U.S. primary government
dealer community (banks and dealers licensed to participate in auctions of U.S.
Treasury securities), as well as for a number of U.S. regional banks and
dealers, in the negotiation and execution of U.S. Treasury, federal agency and
mortgaged-backed repurchase agreements. As is the case with emerging markets, we
disseminate repurchase agreement market information via our proprietary,
computerized screens and digital data feeds. Most of the repurchase agreements
that we execute for dealers are cleared through the Government Securities
Division of the Fixed Income Clearing Corporation ("GSD-FICC") in which our
broker-dealer subsidiary, Maxcor Financial Inc., is a member, although some
transactions are brokered on a name give-up basis.
Our brokerage of U.S. Treasury and federal agency securities is also
generally conducted on a riskless principal basis and with the same client base
that participates in U.S. Treasury and federal agency repurchase agreements. The
clearance of these transactions also occurs at GSD-FICC. Dissemination of market
information to clients for these securities similarly relies on our proprietary
screen system and digital data feeds. We also use a proprietary front-end broker
interface developed by Tradesoft to monitor and manage trading activity and
market information, which has the capability of providing fully-automated client
execution capability if and when client demand for it grows.
We broker securities products to a broad institutional client base, but
mostly to banks, investment banks, broker-dealers and other financial
institutions.
4
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, high yield
and distressed debt, convertible securities and equities. Our research analysts
provide valuable trading ideas and market insights to our client base. We make
this research available by permissioning clients to access our research web
links at www.maxf.com and through other distribution methods. In addition,
through the communication and coordination among our sales and trading groups,
we allow 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 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
high-yield and distressed debt and municipal and other securities.
Institutional Securities Financing
In our Maxcor institutional securities financing business, which was
discontinued in the first quarter of 2005 after failing to gain traction in
slightly over a year of building efforts, we operated 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 enabled 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 enabled
institutions with available cash to earn interest through an investment in a
secured financing arrangement. In reverse repurchase agreements, we received
collateral in the form of securities and lent cash on which we earned interest.
The securities received as collateral were then used as collateral to secure
repurchase agreements whereby we borrowed funds from another institution and
incurred interest. Through the first quarter of 2005, a significant portion of
our interest revenues and our interest expense from securities indebtedness
resulted from this activity.
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, focusing on third-party lending. In
third-party 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
third-party lending activities are executed solely on an agency basis, so that
collateral and cash funds of clients are not received or held by us.
5
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 attempting to license 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.
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 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.
6
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.
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
Approximately 90% of our net revenues are derived 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 (until January 2005), securities positions, cash
and cash equivalents and deposits with clearing organizations, and (4) foreign
exchange gains and losses.
Interest expense on securities indebtedness, primarily on repurchase
agreements, short securities positions 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.
7
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.
Personnel
As of February 28, 2005, we and our businesses employed 406 brokerage
personnel (including trainees), plus an additional administrative staff,
including officers and senior managers, of 111 persons, for a total employee
headcount of 517. Of the brokerage personnel, 228 were located in the U.S., 132
were located in Europe, and 30 were located in Japan, with the balance
distributed among our other office locations. None of our employees are covered
by a collective bargaining agreement. We consider our relations with employees
to be good and regard compensation and employee benefits to be competitive with
those offered by other inter-dealer brokerage firms.
8
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,
2004, with respect to each of our reportable operating segments, which are based
upon the countries in which they operate.
Competition
The inter-dealer brokerage industry is highly competitive, with the
success of a company within the industry dependent on a variety of key factors.
These factors include:
o the experience and extent of client relationships 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, 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 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, in 2003 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 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.
9
The further development and successful deployment of such electronic
systems could negatively affect our business 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
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 (the "FSA").
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
10
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 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 $6.7
million requirement at December 31, 2004).
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.
The passage by Congress of the Sarbanes-Oxley Act of 2002 ("SOX") 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. Specifically, beginning with our annual
report for the year ending either December 31, 2005 or 2006, we will be required
under Section 404 of SOX and related SEC regulations to include an annual report
of management on internal controls over financial reporting and an attestation
report of our public accounting firm on management's assessment of the company's
internal controls over financial reporting. The Nasdaq Stock Market(R), in the
wake of SOX 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.
11
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.
Available Information
Our website is located at www.maxf.com. We make available free of
charge, on or through our website, our annual, quarterly and current reports,
and any amendments to those reports, as soon as reasonably practicable after
such reports are electronically filed with, or furnished to, the SEC.
Information contained on our website is not part of this report or any other
report filed with the SEC.
Our Code of Business Conduct and Ethics that applies to all officers,
directors and employees and the charters of the Audit and Nominating Committees
of our Board of Directors are also available on our website and are available in
print to any stockholder upon request by writing to Maxcor Financial Group Inc.,
One Seaport Plaza, 19th Floor, New York, New York, 10038, Attention: Investor
Relations.
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. In such an event, the
trading price of our common stock could decline and our stockholders may lose
part or all of their investment. Please also refer to "Forward-Looking
Statements" below, at page 33.
Adverse changes in economic and market conditions could negatively impact our
business.
Our brokerage businesses and, as a result, our revenues and
profitability, are directly affected by economic and market conditions out of
our control, 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, with the heightened security
and terrorism concerns that have followed in the wake of the September 11th
terrorist attacks and the war in Iraq, there is a continued level of uncertainty
in the sustained performance of the financial markets and the economy as a
whole, as well as in the New York financial community, specifically. Any
additional terrorist acts, or the prospect thereof, and governments' military
and economic responses to them, may negatively affect the financial markets, the
economy and the resulting trading volumes in the financial markets in which we
12
offer our services, which, in turn, could have an adverse effect on our
business, financial condition or results of operations.
An increase in the occurrence of "out trades" could have a material adverse
effect on our financial condition or results.
Our inter-dealer brokerage businesses primarily involve 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 between both
counterparties. Other transactions are completed with our broker-dealer
subsidiary, Maxcor Financial Inc. (MFI), acting as a "matched riskless
principal" and serving as the counterparty to both a buyer and a seller in
reciprocal, back-to-back trades. In matched riskless principal transactions, the
respective buyer and seller know only MFI as the counterparty. The transactions
are then settled through one of the clearing firms or organizations with which
MFI 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 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, it is possible that they may not be
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. 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 and
results of operations.
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
exposes MFI to various risks that individually or in combination could have a
negative impact on our 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 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.
13
If any of our clearing agents terminate our contracts with them, our business
could suffer.
Our broker-dealer subsidiary, MFI, 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. For
example, 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 contractual clearing 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 or if one of
the clearing firms or organizations declines to clear one or more categories of
security products for MFI, 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 would 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.
We have market risk exposure from trading and inventory positions held.
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 owned, held at clearing firm" 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
relating to MFI's trading in when-issued contracts for NTL, Inc. common stock.
In addition, from time to time we hold relatively small amounts of high-yield
and distressed debt and municipal and other securities in the firm's investment
account, which can create similar market risk exposures and effects.
The lack of diversification in our business could negatively affect our
financial condition or results of operations; conversely, managing our growth
and diversification 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.
We have spent considerable time, resources and efforts in attempting to
grow and diversify our business operations over the last few years, including by
building our institutional sales and trading businesses. However, these efforts
place, and are expected to continue to place, strains on our management and
other personnel and resources and require timely and continued investment in
14
facilities, personnel and financial and management systems and controls. We may
not be successful in implementing all of the processes that are necessary to
support our growth and diversification, which could result in our expenses
increasing faster than our revenues, causing our operating margins and
profitability to be adversely affected.
Additionally, maintaining our existing breadth of international
operations, and managing any desired future expansion of them, presents its own
set of challenges that we may not be able to meet. These include issues
associated with managing from a distance and across different time zones, legal
and employment law differences that can make it harder to build and retain a
work force, working with local partners and regulators, and cultural and other
differences.
Events that negatively impact our overseas business partners may negatively
affect our operations.
Some 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 Argentina and Brazil. 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.
Our regulated subsidiaries are subject to risks associated with net capital
requirements, and we may not be able to engage in operations that require
significant capital.
The SEC, NASD, GSD-FICC, FSA and various other regulatory agencies have
stringent rules and regulations that apply to us with respect to the maintenance
of specific levels of net capital. If we fail to maintain the required net
capital, we may be subject to suspension or revocation of registration by the
applicable agency, which would have a material adverse effect on our business.
If these net capital rules are changed or expanded, or if there is an unusually
large charge against net capital, operations that require the intensive use of
capital would be limited. Also, our ability to withdraw capital from our
regulated subsidiaries is subject to restrictions, which in turn could limit our
ability to pay dividends, repay any debt and redeem or purchase shares of our
common stock. A large operating loss or charge against net capital could
adversely affect our ability to expand or even maintain our present levels of
business, which could have a material adverse effect on our business. In
addition, we may become subject to net capital requirements in other foreign
jurisdictions in which we currently operate or which we may enter. We cannot
predict our future capital needs or our ability to obtain additional financing.
For a further discussion of our net capital requirements and other regulatory
issues, see the "Regulation" heading above.
Seasonal fluctuations in trading may cause our quarterly operating results to
fluctuate.
Our business generally experiences seasonal fluctuations, reflecting
reduced trading activity during summer months, particularly in August. We also
generally experience reduced activity in December due to seasonal holidays. As a
result, our quarterly operating results may not be indicative of the results we
expect for the full year. Our operating results may also fluctuate quarter to
quarter due to a variety of factors beyond our control, such as conditions in
the global financial markets, terrorism, war and other economic and political
events. Furthermore, we may experience reduced revenues in a quarter due to a
decrease in the number of business days in that quarter.
15
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, either of which could negatively impact
our business or financial results. 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 and electronic trading
platforms, 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.
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. Moreover, regardless of the outcome of these claims or
actions, we generally incur significant expense and management time dealing with
them.
Employee misconduct or errors can hurt our business.
It is not always possible to deter employee misconduct, despite the
procedures and other checks and balances we have in place, including many that
are mandated by regulators, designed to prevent and/or detect such actions.
Misconduct by employees could include, among other things, engaging in and/or
hiding unauthorized activities, committing improper or unauthorized activities
on behalf of a client, or improperly using 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.
16
Risks and uncertainties associated with our current acquisition discussions can
damage our business.
There are multiple risks and uncertainties associated with holding
publicly-disclosed acquisition discussions. A prospective change in control can
be very unsettling to our employees, and we have seen more aggressive efforts by
our competitors to recruit away our brokers in the face of the uncertainties
presented by a possible acquisition. For example, since our announcement, these
effects have contributed to the departure to a competitor of several brokers in
our Mexico City office. Further, in our London office, we are aware of several
brokers who have signed forward start agreements with one or more of our
competitors that are intended to go into effect as soon as those brokers are
legally free to change employers. Although we strive to reduce these risks and
consequences by having contracts with, and attractive compensation and working
conditions for, our employees, they cannot be entirely eliminated, and even the
departure of one or two key employees can have a material adverse effect on our
business.
Moreover, to the extent that the discussions are ultimately not
successful, the price of our shares may decline to the extent that the current
market price reflects an assumption that an acquisition transaction will be
completed. We also will remain responsible for our third-party legal, accounting
and financial advisor costs related to the discussions, which are expensed in
the periods in which they are incurred and, in the aggregate, could be material
to our results of operations for such periods.
An additional risk is the substantial time, attention and resources
required of management and other employees, which can distract from and impede
shorter-term operational focus and efficiency, as well as longer-term strategic
planning, either or both of which can have a material adverse effect on our
business and results of operations.
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 and Zurich, 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 rent 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 rent 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.
17
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, 2004.
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, 2004
----------------------------
First Quarter............................ $ 14.94 $ 11.41
Second Quarter........................... 12.15 9.76
Third Quarter............................ 11.17 8.40
Fourth Quarter........................... 10.30 8.43
Year Ended December 31, 2003
----------------------------
First Quarter............................ $ 8.09 $ 6.00
Second Quarter........................... 10.66 6.68
Third Quarter............................ 14.50 9.12
Fourth Quarter........................... 16.35 11.93
Holders:
As of March 28, 2005, there were 31 holders of record of our common
stock. The closing sale price of our common stock on March 28, 2005 was $12.50.
Dividends:
In 2004, we declared and paid four quarterly dividends and 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 2005. 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.
Securities Authorized for Issuance Under Equity Compensation Plans:
The following table sets forth certain information with respect to all
equity compensation plans and arrangements of the Company in effect as of
December 31, 2004, broken out based on whether the applicable plan was approved
by stockholders or not.
18
Number of securities
Number of securities remaining available for
to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------- ------------------- ------------------- -------------------------
Equity compensation
plans approved by
security holders 1,592,188(1) $ 5.80 707,500(2)
Equity compensation
plans not approved by
security holders -0- N/A -0-
------------ -----------
Total 1,592,188 N/A 707,500
============ ===========
(1) Comprised of 785,938 securities to be issued upon exercise of outstanding
options under the 1996 Option Plan and 806,250 securities to be issued
upon exercise of outstanding options under the 2002 Option Plan.
(2) Comprised of 42,500 securities remaining available for future issuance
under the 1996 Option Plan and 665,000 securities remaining available for
future issuance under the 2002 Option Plan.
Issuer Purchases of Equity Securities:
The following table is a summary of all purchases made by us of our common stock
during the three months ended December 31, 2004 and, as of each month end during
such three-month period, the maximum number of shares that could still be
purchased under our share repurchase program as then constituted:
Issuer Purchase of Equity Securities (1)
----------------------------------------
Total Number of Maximum
Shares Purchased Number of
as Part of Shares that May
Total Number of Average Publicly Yet be Purchased
Shares Price Paid Announced Plans Under the Plans
Purchased per Share or Programs Programs
Period --------- --------- ----------- ----------------
October 1 to October 31, 2004 -0- N/A -0- 949,612
November 1 to November 30, 2004 24,482 $ 8.87 24,482 925,130
December 1 to December 31, 2004 93,806 $ 8.91 92,900 832,230
--------- --------- -----------
Total: 118,288 $ 8.90 117,382
- -----------------------
(1) Following the full utilization of earlier share repurchase authorizations
announced on May 15, 2000 (833,744 shares) and January 26, 2001 (787,869
shares), we announced on July 26, 2001, a further authorization by our Board of
Directors of a share repurchase program for up to 709,082 shares (10% of our
then-outstanding shares). On September 18, 2001, in the immediate aftermath of
the September 11th attacks, we announced the expansion of this authorization to
bring the total repurchase authorization up to 1,200,000 shares. Our Board
subsequently authorized further expansions of the share repurchase program by an
additional 700,000 shares in April 2003 and 500,000 shares in July 2004, for a
total authorization of 2,400,000 shares. These authorizations have no expiration
date and delegate to our senior management the discretion to purchase shares,
through open market, privately negotiated and/or block transactions, at times,
amounts and prices it deems financially prudent in light of prevailing market,
business and financial conditions.
19
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.
20
Year Ended December 31,
--------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
Statement of Operations
Revenues:
Commission income $ 182,660,338 $ 176,497,549 $ 149,428,132 $ 138,003,085 $ 122,613,654
Interest income 14,852,760 6,280,695 2,147,274 2,306,044 1,823,285
Principal transactions 8,164,167 6,122,442 8,720,422 8,932,861 2,627,169
Insurance recoveries 11,106,063 11,098,135 4,498,144
Other income ( 1,547,084) ( 1,140,241) ( 843,142) 1,083,431 4,741,415
-------------- -------------- -------------- -------------- --------------
Gross revenues 204,130,181 198,866,508 170,550,821 154,823,565 131,805,523
Interest expense on securities
indebtedness 13,752,951 4,117,319 147,865 444,174 329,919
-------------- -------------- -------------- -------------- --------------
Net revenues 190,377,230 194,749,189 170,402,956 154,379,391 131,475,604
-------------- -------------- -------------- -------------- --------------
Costs and expenses:
Compensation and related costs 131,033,218 126,323,608 107,024,194 106,619,297 92,061,672
Communication costs 13,778,854 12,989,853 10,597,126 9,870,217 11,007,091
Travel and entertainment 10,824,107 9,833,755 7,406,116 6,493,462 6,620,974
Occupancy and equipment rental 10,698,360 6,623,731 4,490,356 3,967,255 5,127,875
Clearing and execution fees 3,804,372 3,865,514 3,311,759 3,511,712 3,307,802
Depreciation and amortization 3,082,439 3,220,577 2,405,834 3,598,580 4,008,937
Charity Day contributions 1,042,864 982,300 1,219,233
Other interest expense 181,221 406,772 151,214 222,213 265,038
Costs related to World Trade Center
attacks 3,204,468 1,590,060
Restructuring costs 541,961
General, administrative and other
expenses 7,500,398 7,220,567 4,933,483 6,619,527 5,161,550
-------------- -------------- -------------- -------------- --------------
181,945,833 171,466,677 144,743,783 142,492,323 128,102,900
-------------- -------------- -------------- -------------- --------------
Income before provision for income taxes,
minority interest, income from equity
affiliate and extraordinary item 8,431,397 23,282,512 25,659,173 11,887,068 3,372,704
Provision for income taxes 3,895,581 9,749,282 12,130,758 2,174,673 2,710,482
-------------- -------------- -------------- -------------- --------------
Income before minority interest, income
from equity affiliate and extraordinary
item 4,535,816 13,533,230 13,528,415 9,712,395 662,222
Minority interest ( 175,985) ( 981,791) ( 683,985) 1,203,987
Income from equity affiliate 9,992 135,890
-------------- -------------- -------------- -------------- --------------
Income before extraordinary item 4,535,816 13,357,245 12,546,624 9,038,402 2,002,099
Extraordinary item 2,957,547
-------------- -------------- -------------- -------------- --------------
Net income $ 4,535,816 $ 16,314,792 $ 12,546,624 $ 9,038,402 $ 2,002,099
============== ============== ============== ============== ==============
Year Ended December 31,
--------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------- -------------- -------------- -------------- --------------
Balance Sheet Data:
Total assets $ 281,419,078 $1,663,126,636 $ 123,477,959 $ 279,317,292 $ 70,906,347
Obligations under capitalized leases 210,636 703,944 842,399 204,252 335,635
Notes payable 447,978 1,723,169
Revolving credit facility 5,000,000 7,500,000
Total liabilities 221,272,592 1,603,082,134 70,477,645 241,021,098 37,257,798
Minority interest 5,407,228 3,979,291 3,407,628
Redeemable preferred stock 2,000,000
Stockholders' equity 60,146,486 60,044,502 47,593,086 34,316,903 28,240,921
Per Share Information
Income before extraordinary item - basic $ .64 $ 1.91 $ 1.72 $ 1.23 $ .23
Extraordinary item - basic .42
Net income - basic .64 2.33 1.72 1.23 .23
Income before extraordinary item - diluted .58 1.62 1.53 1.16 .23
Extraordinary item - diluted .36
Net income - diluted .58 1.98 1.53 1.16 .23
Book value 8.76 8.41 6.56 4.88 3.48
Weighted average common shares
outstanding - basic 7,051,720 6,987,415 7,304,284 7,357,017 8,374,166
Weighted average common shares
outstanding - diluted 7,798,663 8,228,599 8,210,638 7,764,667 8,374,166
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year Ended December 31, 2004
The year ended December 31, 2004 was an uneven one for us. After a
strong first quarter, in which we achieved year-over-year growth in commission
income and profitability, we experienced flat or declining results throughout
the remainder of 2004. The falloff reflected a combination of factors, including
weaker market activity as compared to the latter half of 2003, costs we incurred
for expansion efforts that did not result in corresponding revenue gains,
increased employment costs associated with heightened competition to hire and
retain brokers, and continued losses from the Tokyo Venture.
On a GAAP basis, our net income for the full year was $4.5 million, or
$.58 per share. We were profitable in every quarter, thereby extending our
consecutive number of such quarters to seventeen, and continued our quarterly
dividend policy of $.0625 per share (or $.25 per share annually). Nonetheless,
our bottom line results ultimately were disappointing, especially in comparison
to our record performance in 2003. A year ago our GAAP net income, aided in part
by a $6.0 million, or $.72 per share, gain recognized in connection with our
September 11th related property insurance claim settlement, was $16.3 million,
or $1.98 per share.
In our core Euro Brokers inter-dealer brokerage businesses, a 2004
highlight was our continued ability to grow our commission income revenues.
Overall, commission income increased by 3.5% to $182.7 million, from $176.5
million in 2003. In New York, our growing repurchase agreements business, as
well as our emerging market debt and cash deposits businesses, showed solid
revenue increases. Additionally, as a result of some key broker hires during
2004, we expect the positive trend in foreign currency brokerage, which began
late in 2004, to carry over into 2005. In London, we saw revenue increases in a
number of areas continuing from 2003, including our floating rate notes and
repurchase agreements businesses and in certain established interest rate
derivative businesses.
Increased costs during 2004, however, largely offset these revenue
increases. We experienced upward pressure on our employment costs for hiring and
retaining quality brokerage personnel, reflecting the increased competition from
and financial strength of larger competitors, such as ICAP plc, GFI Group and
the recently merged Tullet/Prebon operations within Collins Stewart Tullet plc,
and new players, such as the BGC Partners voice brokerage spin-off from Cantor
Fitzgerald. In addition, we made investments in certain initiatives aimed at
growing our businesses, including, among others, establishing a representative
office in China to explore brokerage opportunities in that market, and
increasing our recruiting presence in New York.
Our Maxcor Financial Inc. institutional sales and trading operations
saw reduced revenues during 2004, primarily reflecting tighter overall market
spreads in municipal and other fixed income markets and a change in focus of our
institutional corporate bond sales and trading group. Following the departure of
our leveraged finance group in January 2004, we began incurring costs to
establish a restructured institutional corporate bond sales and trading group
focusing on high grade corporate bonds and high yield/crossover corporate bonds.
This restructured operation included the use of capital to support large levels
of hedged securities positions to facilitate customer needs. However, as a
result of trading losses incurred on our bond inventory and operational losses
reflecting the lack of a focused sales effort, we discontinued this restructured
operation during the third quarter of 2004. Instead, we subsequently expanded
the focus of our institutional convertible group to also include high yield and
distressed corporate bonds. We expect that our current approach will generate
more stable results due to a higher emphasis on serving clients with research
and trading ideas, rather than the utilization of capital.
22
We continue to believe that our Maxcor Financial institutional sales
and trading businesses provide us with important diversity and contribute to a
more balanced mix of operations. For example, our institutional equities sales
and trading group established in 2002 continued to grow revenues and contribute
to profitability in 2004.
We also continued to struggle during 2004 to improve the performance of
the Tokyo Venture, where our loss rate was approximately even with 2003. We do
not expect a turnaround any time soon in 2005, as market conditions there
continue to be difficult for us and recent new broker hires have added to costs
without yet generating commensurate revenue growth. Nonetheless, we continue to
believe that Tokyo is an important strategic location for our worldwide
operations, and accordingly intend to stay the course while continuing to seek
measures to improve the operations and lessen their negative impact on our
overall results.
During 2004 we continued to make progress in resolving our outstanding
contingency involving the trading of when-issued contracts in the equity of NTL,
Inc. ("NTL") during late 2002 and early 2003. Following the favorable New York
Supreme Court decision we obtained in March 2004, we were able to reach
permanent, negotiated resolutions of our NTL when-issued trades with certain of
our counterparties who were demanding compensation for unadjusted shares that
were not delivered to them. These resolutions resulted in the dismissal of the
sole proceeding before NASD and the reversal of $3.3 million of estimated
damages payable recorded in 2003. This $3.3 million net loss reversal is
reflected on the Consolidated Statement of Operations as gains on principal
transactions. See Note 20 to the Consolidated Financial Statements for a fuller
description of the NTL matter.
Another significant item affecting our 2004 results was $3.1 million of
costs incurred to increase our reserve related to office space in London that we
have designated for sublease. In the aftermath of September 11th, we decided to
forego an extension of a tenant's sublease on this space to reallocate it for
potential use by some of our New York employees and to accommodate future
expansion of our London operations. The increase to our reserve reflects our
current intention to sublet the entire space previously occupied by the former
subtenant (15,739 square feet vs. the 10,000 square feet we were previously
reserving for and intending to sublet) and to amend our estimate of the amount
of time it will take to generate sublet income and the amount for which we
believe we will be able to sublet the space. These costs are reflected on the
Consolidated Statement of Operations in occupancy and equipment rental.
We continued our charitable efforts in 2004 by holding our third annual
Charity Day. With the full support of our customers and our employees, who waive
any entitlement to commissions from the revenues generated that day, our April
19, 2004 Charity Day raised more than $1 million. These proceeds were used as
continued support for the Euro Brokers Relief Fund, Inc., which provides
charitable aid 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., which we established in 2003 to recognize and
support organizations that benefit the various communities in which our firm and
our employees operate. Grants made by the Maxcor Foundation as a result of the
2004 Charity Day included: Marine Corps-Law Enforcement Foundation; Columbia
University Medical Center; Duke University's Fuqua/Coach K Center for Leadership
and Ethics; and the Royal Marsden Hospital in London.
The year 2004 also saw our continued execution on our common stock
repurchase program, which, in addition to 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 361,963
23
shares in 2004, at an aggregate cost of $3.7 million. These repurchases more
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
89,844 shares (see Note 17 to the Consolidated Financial Statements).
Subsequent Event
On March 4, 2005, we announced that we were holding preliminary
business combination discussions with a potential acquirer. The trend of
industry consolidation within the inter-dealer brokerage space, briefly noted
above, was a factor in our decision to participate in these discussions. As of
March 30, 2005 (the last date before this report went to press), we had made
substantial progress towards a transaction. However, there are still issues
remaining to be resolved and, accordingly, there can be no assurance as to
whether we will be successful in reaching agreement on or completing a
transaction. Although we are focused on achieving the many likely positive
results that would flow from a successful transaction, we are also aware of the
multiple risks and uncertainties associated with publicly engaging in this
process. These include, among others, the unsettling effect on our employees,
more aggressive recruiting efforts directed by our competitors at our brokers,
the diversion of management's time and attention, and the costs of legal and
other advisory fees being incurred. See "Cautionary Statements - Risks and
uncertainties associated with our current acquisition discussions can damage our
business."
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 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. The assumptions used in valuing our securities 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., excess office space,
interest and claims on securities settlement disputes and reserves for certain
income tax contingencies. The determination of the amounts of these reserves
requires significant judgment on our part. We consider many factors in
determining the amount of these reserves, such as legal precedent and case law
and historic experience. The assumptions used in determining the estimates of
reserves may be incorrect and the actual costs of resolution of these items
could be greater or less than the reserve amount.
Recently Issued Accounting Standards
In December 2003, the Financial Accounting Standards Board ("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
24
means other than voting rights and accordingly should consolidate the entity.
FIN 46(R) replaced 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) in 2004 had no impact on our Consolidated
Financial Statements.
In December 2004, the FASB issued a revision to Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Statement of Financial Accounting
Standards No. 123(R) "Shared Based Payment" ("SFAS 123(R)"). SFAS 123(R) will
require compensation costs related to share-based payment transactions to be
recognized in the financial statements over the period that an employee provides
services in exchange for the award. SFAS 123(R) replaces SFAS 123 and supersedes
APB No. 25. SFAS No. 123(R) will be effective for the Company's third quarter of
fiscal 2005. We are currently evaluating the effect of adopting SFAS 123(R).
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Commission income represents revenue generated on our brokerage
transactions conducted on an agency (including name give-up) or matched riskless
principal basis. For 2004, these revenues increased $6,162,789 to $182,660,338,
compared to $176,497,549 for 2003, reflecting increases in London and
Switzerland, partially offset by a slight decrease in New York. The increases in
London and Switzerland primarily reflected growth in the inter-dealer brokerage
and institutional businesses started in 2003 and exchange rate movements. In New
York, the decrease primarily reflected a reduction in riskless principal
transactions from our institutional corporate bond sales and trading operations
that offset increased commissions from our Euro Brokers inter-dealer brokerage
businesses.
Interest income for 2004 increased $8,572,065 to $14,852,760, compared
to $6,280,695 for 2003, primarily reflecting financing income earned on reverse
repurchase agreements in connection with our institutional securities financing
operations and coupon and financing income associated with securities positions
taken by our institutional corporate bond sales and trading operations. These
items are largely offset by interest expense incurred on related securities
indebtedness (see below). Partially offsetting the increase to interest income
during 2004 was reduced interest income on municipal securities positions as a
result of lower amounts of municipal securities held during the year. For 2005
we anticipate significantly lower amounts for interest income and interest
expense incurred on securities indebtedness as a result of the discontinuation
of our institutional securities financing operations and the restructuring of
our institutional corporate bond sales and trading operations.
Principal transactions represent the net gains or losses generated from
securities transactions involving the assumption of market risk for a period of
time. For 2004, these activities resulted in a gain of $8,164,167, compared to a
gain of $6,122,442 for 2003. This change primarily reflected the effect of a net
loss of $5.1 million recorded by MFI during 2003 on the disputed settlement of
its NTL when-issued equity trades, the reversal of $3.3 million of this loss
during 2004, and a $1.5 million gain recorded during 2004 from the resolution of
contingencies associated with the settlement of certain principal transactions
in the aftermath of the September 11th attacks. Partially offsetting these
improvements were reduced gains on municipal securities transactions and losses
incurred during 2004 by our institutional corporate bond sales and trading
operations prior to being restructured. We restructured these operations during
the third quarter of 2004, replacing its top managers and changing its focus to
rely less on the utilization of capital and more on the creation of value-added
trading ideas.
As discussed in Note 20 to the Consolidated Financial Statements, the
$5.1 million net loss recorded during 2003 on the disputed settlement of NTL
when-issued trades reflected a $5.9 million loss recorded during the first
quarter of 2003 offset in part by an $800,000 gain recorded during the second
25
quarter of 2003 on NTL shares determined to no longer constitute a hedge. The
$5.9 million loss recorded reflected the contingency that all of MFI's NTL
when-issued trades, other than permanently adjusted settlements by mutual
agreement, would be required to settle on an unadjusted basis.
In March 2004, the Court granted a summary judgment motion made by MFI
and issued a decision stating that all NTL when-issued trades among the parties
before the Court should be settled on an adjusted and uniform basis. In July
2004, based upon this decision, MFI obtained a judgment from the Court entitling
MFI to collect a total of $3.6 million (inclusive of interest) from those
counterparties that received and retained unadjusted deliveries of NTL shares
from MFI. The judgment remains subject to collection, however, as both it and
the underlying decision have been appealed by a number of MFI's counterparties.
Following the Court's favorable decision, MFI has been able to reach
permanent, negotiated resolutions of its NTL when-issued trades with certain of
its counterparties during 2004. These resolutions resulted in the dismissal of
the sole proceeding before NASD (leaving the remaining disputes centralized in
one forum - the Court) and the reversal of $3.3 million of estimated damages
payable recorded in 2003.
Because of the pending appeals and their associated uncertainties, MFI
only intends to record gains related to the $3.6 million judgment if and when
permanent resolutions, whether by negotiation, completion of the appeals process
or otherwise, are reached with counterparties.
Other items for 2004 resulted in a loss of $1,547,084, as compared to a
loss of $1,140,241 for 2003. This increased loss reflected licensing income of
$292,000 earned during 2003 on an information licensing agreement that expired
in July 2003 and foreign exchange losses in 2004 as compared to foreign exchange
gains in 2003. The losses on our 57.25% interest in the Tokyo Venture for 2004
and 2003 were comparable at $1,553,166 and $1,560,281, respectively.
For 2004, interest expense on securities indebtedness increased
$9,635,632 to $13,752,951, compared to $4,117,319 for 2003, primarily as a
result of increased interest expense incurred on repurchase agreements in
connection with our institutional securities financing operations and coupon and
financing expense associated with securities positions taken by our
institutional corporate bond sales and trading operations.
Compensation and related costs for 2004 increased $4,709,610 to
$131,033,218, compared to $126,323,608 for 2003, primarily as a result of
increases in London and Switzerland from higher revenues (resulting in higher
incentive based compensation) and the effect of translating strengthened foreign
currency amounts to U.S. dollars. Partially offsetting this increase was a
decrease in London to our reserve for the employer portion of National Insurance
contributions of $1.3 million based upon a resolution with the Inland Revenue of
a portion of this contingency.
Communication costs for 2004 increased $789,001 to $13,778,854,
compared to $12,989,853 for 2003, 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 2004 increased $990,352 to
$10,824,107, compared to $9,833,755 for 2003, reflective in part of our
increased expansion efforts in the early part of 2004.
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 2004, these costs increased
$4,074,629 to $10,698,360, compared to $6,623,731 for 2003, primarily due to
26
increased costs for office space in London effective the second quarter of 2003,
a full period of rental costs on equipment in New York that we started leasing
in late March 2003 and a $3.1 million increase to an accrual in London for
excess office space designated for sublease. The increase to our London office
space reserve reflects our current intention to sublet the entire space
previously occupied by a former subtenant (15,739 square feet vs. the 10,000
square feet we were previously reserving for and intending to sublet) and to
amend our estimate of the length of time it will take to generate sublet income
and the amount for which we believe we will be able to sublet the space.
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 2004 and 2003, these costs were comparable at
$3,804,372 and $3,865,514, respectively.
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
2004, depreciation and amortization decreased $138,138 to $3,082,439, compared
to $3,220,577 for 2003, reflecting the net effects of a reduction in London from
certain assets becoming fully depreciated and an increase due to a full year
depreciation and amortization of furniture and leasehold improvements for our
New York headquarters, which we have occupied since March 2003, and depreciation
and amortization of current year purchases in New York.
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 $1,042,864 raised on our April 19, 2004 Charity Day
were designated for The Euro Brokers Relief Fund, Inc., which provides
charitable aid 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 in turn designated four
principal recipients: Marine Corps-Law Enforcement Foundation, Inc., Columbia
University Medical Center, Duke University's Fuqua/Coach K Center for Leadership
and Ethics and The Royal Marsden Hospital in London. Our May 12, 2003 Charity
Day raised a total of $982,300 which was contributed to The Euro Brokers Relief
Fund and various charities supported by the Maxcor Foundation.
Other interest expense represents interest costs incurred on
non-securities related indebtedness, such as revolving credit facilities and
capital lease obligations. For 2004, these costs decreased $225,551 to $181,221,
compared to $406,772 for 2003, primarily due to decreased borrowings under our
revolving credit facility with The Bank of New York ("BONY") and decreased
capitalized lease obligations.
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 2004, these expenses increased
$279,831 to $7,500,398, compared to $7,220,567 for 2003, primarily as a result
of increased costs for corporate insurance, subscriptions and external
accounting and auditing fees, and the effect of an adjustment in 2003 to reduce
expenses for the recovery of consumption taxes previously paid of $160,000.
These increases were offset by a decrease of $400,000 in legal fees related to
the NTL when-issued trade disputes.
Provision for income taxes for 2004 decreased $5,853,701 to $3,895,581,
compared to $9,749,282 for 2003, primarily as a result of a decrease in pre-tax
income. The years ended December 31, 2004 and 2003 included reductions to income
27
tax reserves of $400,000 and $500,000, respectively, as a result of the
resolution of certain contingencies.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Commission income for 2003 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.
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 the institutional securities financing
operations started in 2003 and an increase in the average inventory of
securities held.
Principal transactions for 2003 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, partially offset by improved results in our
firm investment account and by an increase in gains on municipal securities.
During 2003, we recognized a net gain of $11,106,063 on the settlement
of our property insurance claim against Kemper Insurance 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).
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 the
institutional securities financing operations started in 2003. The other type of
interest expense included in this classification, interest expense incurred on
margin borrowings to finance securities positions, decreased slightly.
28
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 revenues which results in higher
commission-based payouts, and the currency effects of translating strengthened
British pound sterling amounts to U.S. dollars.
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.
Occupancy and equipment rental for 2003 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
leasing new equipment in New York.
Clearing and execution fees for 2003 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 for 2003 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.
The proceeds of $982,300 raised on our May 12, 2003 Charity Day were
designated for The Euro Brokers Relief Fund and our Maxcor Foundation. The
Maxcor Foundation 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.
Other interest expense for 2003 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 for 2003 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, increased costs for corporate
insurance coverage and increases 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 and extraordinary item, and a reduction of $500,000 to
income tax reserves as the result of the favorable resolution to certain
contingencies.
29
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.
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, customers and clearing
organizations, and securities owned, held at clearing firm.
U.S. Treasury and federal agency securities purchased under agreements
to resell (reverse repurchase agreements) and U.S. Treasury and federal agency
securities sold under agreements to repurchase (repurchase agreements) are
collateralized financings entered into for the purpose of earning 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. The fair value
of the securities purchased and sold under these agreements are monitored and
additional collateral is obtained or excess collateral is returned where
appropriate. At December 31, 2004, the Consolidated Statements of Financial
Condition include reverse repurchase agreements and repurchase agreements of
$123.6 million. These balances are substantially reduced from December 31, 2003,
reflecting the wind-down of our institutional securities financing business,
which was completed in the first quarter of 2005.
In the ordinary course of settling repurchase agreement transactions
and other securities transactions, 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, 2004, the
Consoliated Statements of Financial Condition include securities
failed-to-deliver and securities failed-to-receive of $31.4 million.
Securities held at clearing firm 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 2004, as reflected on the Consolidated
Statements of Financial Condition, we had net assets relating to securities
positions (excluding repurchase and reverse repurchase agreements) of $10.6
million, primarily reflecting securities owned of $22.2 million and margin
borrowings from a clearing broker of $11.6 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 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.
30
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 $6.7 million requirement at December 31, 2004).
Net cash used in operations for 2004 was $5.7 million. This decrease in
cash was the result of changes in various working capital items such as an
increase in net cash used for securities positions and decreases in various
payable balances. These cash decreases were offset by net income of $4.5 million
adjusted to reflect the net effect of non-cash items of $2.6 million, primarily
consisting of depreciation and amortization, unfunded losses from our Tokyo
Venture and deferred income taxes.
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 $6.5 million of non-cash items, primarily
consisting of depreciation and amortization, unfunded losses from our share of
the Tokyo Venture, deferred income taxes and the gain on the purchase of
minority interest. 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, unfunded 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 related to insurance advances and other effects of the September
11th attacks, offset in part by increased accrued compensation.
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 2004 reduced cash by $2.3 million due primarily
to cash outlays for fixed assets purchases. 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.
31
A significant portion of the cash outlays for building out our new
headquarters was 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, 2004, we had $5,000,000 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
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 General Electric Capital Corporation ("GECC").
Net cash used in financing activities for 2004 was $7.9 million,
primarily reflecting the net effects of cash used of $3.7 million to acquire
treasury stock, repayments of borrowings under the BONY facility of $2.5
million, common stock dividends paid of $1.8 million, obligations repaid under
capitalized lease obligations of $297,000 and proceeds of $320,000 received from
the exercise of options.
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 a 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.
In July 2001, our Board of Directors continued an existing 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 terrorist attacks, this authorization was expanded by 490,918
shares (to a total of 1,200,000 shares), and was further expanded in April 2003
by an additional 700,000 shares and in July 2004 by an additional 500,000
shares, for a total of 2,400,000 shares. Through December 31, 2004, we had
purchased 1,567,770 shares under this expanded repurchase 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
following table sets forth these contractual payment commitments as of December
31, 2004. Additional disclosure relating to our commitments appears in Notes 13
and 19 to the Consolidated Financial Statements.
32
Payments due by period
-------------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ----------- ----------- -----------
Operating leases $68,785,893 $ 7,079,529 $12,567,202 $11,200,812 $37,938,350
Information service contracts 7,776,531 6,152,044 1,624,487
Obligations under capitalized leases 231,578 231,578
----------- ----------- ----------- ----------- -----------
Total contractual obligations $76,794,002 $13,463,151 $14,191,689 $11,200,812 $37,938,350
=========== =========== =========== =========== ===========
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 can
be 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," "could," "will" 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:
o market and economic conditions, including the level of trading volumes
in the instruments we broker and interest rate volatilities;
o the effects of any additional terrorist acts or acts of war and
governments' military and other responses to them;
o the success of our technology development and deployment;
o the status of our relationships with employees, clients, business
partners, vendors and clearing firms;
o possible third-party litigations or regulatory actions against us or
other unanticipated contingencies;
33
o the scope of our trading gains and losses;
o the actions of our competitors;
o government regulatory changes; and
o the outcome of our current, or any future, business combination
discussions.
For a fuller description of these and additional uncertainties,
reference is made to the "Competition," "Regulation" and "Cautionary Statements"
captions of Item 1 of this report, the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" caption of Item 7 of this report
and the "Quantitative and Qualitative Disclosures about Market Risk" caption of
Item 7A of this report.
The forward-looking statements made herein are only made as of the date
of this report and we undertake no obligation to publicly update such
forward-looking statements to reflect new information or subsequent events or
circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are actively involved in the evaluation of risks associated with
certain financial instruments and will from time to time reduce other risks
inherent in our businesses through the use of financial instruments.
We reduce market risk related to positions in our 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.
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, 2004, 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, 2004 and
December 31, 2003, 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, 2004 did not materially change
from the market risk analysis at December 31, 2003. 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
34
the par amount of bonds held. Bonds not making regularly scheduled interest
payments were assigned an interest rate of 0%.
As of December 31, 2004:
- -----------------------
2005 2006 2007 2008 2009 After 2009 Total Fair Value
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Other than trading:
- ------------------
Interest rate
sensitivity:
Revolving credit
facility $ 5,000,000 $ $ $ $ $ $ 5,000,000 $ 5,000,000
(variable interest
rate)
Trading:
- -------
Interest rate
sensitivity:
Municipal securities 245,000 240,000 11,405,000 11,890,000 10,772,112
(weighted average
interest rate-6.4%)
Corporate bonds
(weighted average 4,392,000 3,000,000 1,500,000 6,035,000 14,927,000 11,096,725
average interest
rate-1.71%)
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%)
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.
35
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 that term is defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended, as of December 31, 2004. 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 within the time
periods specified in the SEC's rules and forms. 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 quarter ended December 31, 2004,
and has concluded that there was no change during this period that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
This Item 9B is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to our Proxy Statement or will be filed by amendment to this report. We
currently intend to file the Proxy Statement or such amendment with the SEC on
or prior to May 2, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the Proxy Statement or will be filed by amendment to this report. Any 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
currently intend to file the Proxy Statement or such amendment with the SEC on
or prior to May 2, 2005.
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 or will be filed by amendment to this report. We
currently intend to file the Proxy Statement or such amendment with the SEC on
or prior to May 2, 2005.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the Proxy Statement or will be filed by amendment to this report. We
currently intend to file the Proxy Statement or such amendment with the SEC on
or prior to May 2, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference
to the Proxy Statement or will be filed by amendment to this report. We
currently intend to file the Proxy Statement or such amendment with the SEC on
or prior to May 2, 2005.
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 AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
Listed on page F-2 of the Consolidated Financial Statements
included in this report.
(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements.
(b) Exhibits
Listed in the Exhibit Index appearing at page X-1 of this
report.
37
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 31, 2005
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, March 31, 2005
- ----------------------------- President and Chief
Gilbert D. Scharf Executive Officer
(Principal Executive Officer)
/s/ KEITH E. REIHL Chief Operating Officer and March 31, 2005
- ----------------------------- Director
Keith E. Reihl
/s/ STEVEN R. VIGLIOTTI Chief Financial Officer and March 31, 2005
- ----------------------------- Treasurer (Principal Financial
Steven R. Vigliotti and Accounting Officer)
/s/ LARRY S. KOPP Director March 31, 2005
- -----------------------------
Larry S. Kopp
/s/ MICHAEL J. SCHARF Director March 31, 2005
- -----------------------------
Michael J. Scharf
/s/ JAMES W. STEVENS Director March 31, 2005
- -----------------------------
James W. Stevens
/s/ FREDERICK B. WHITTEMORE Director March 31, 2005
- -----------------------------
Frederick B. Whittemore
/s/ MARC S. COOPER Director March 31, 2005
- -----------------------------
Marc S. Cooper
/s/ OSCAR M. LEWISOHN Director March 31, 2005
- -----------------------------
Oscar M. Lewisohn
38
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2004, 2003 AND 2002
--------------------------------
F-1
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 2004, 2003 AND 2002
--------------------------------
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 Registered Public Accounting Firm
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, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004, 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards 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 31, 2005
F-3
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS December 31, 2004 December 31, 2003
- ------ ----------------- -----------------
Cash and cash equivalents $ 52,075,105 $ 67,170,247
Securities purchased under agreements to resell 123,649,872 1,446,677,977
Deposits with clearing organizations 8,315,307 8,848,729
Receivable from broker-dealers, customers and clearing
organizations 24,024,898 22,324,106
Securities failed-to-deliver 31,441,349 90,669,388
Securities owned, held at clearing firm 22,229,002 6,687,124
Prepaid expenses and other assets 6,685,303 7,003,794
Deferred tax asset 826,020 734,408
Fixed assets 12,172,222 13,010,863
----------------- -----------------
Total assets $ 281,419,078 $ 1,663,126,636
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Securities sold under agreements to repurchase $ 123,608,555 $ 1,470,461,908
Payable to broker-dealer 11,578,831
Securities failed-to-receive 31,433,246 66,544,835
Securities sold, not yet purchased 36,255 22,428
Accounts payable and accrued liabilities 18,568,916 21,137,048
Accrued compensation payable 27,007,632 30,198,757
Income tax liability 178,107 1,469,456
Deferred taxes payable 3,650,414 5,043,758
Obligations under capitalized leases 210,636 703,944
Revolving credit facility 5,000,000 7,500,000
----------------- -----------------
Total liabilities 221,272,592 1,603,082,134
----------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized;
none issued at December 31, 2004 and December 31, 2003
Common stock, $.001 par value, 30,000,000 shares authorized;
12,885,376 and 12,794,626 shares issued at December 31,
2004 and December 31, 2003, respectively 12,885 12,795
Additional paid-in capital 39,279,303 38,718,445
Treasury stock at cost; 6,018,772 and 5,655,903 shares of
common stock held at December 31, 2004 and December 31,
2003, respectively ( 20,430,471) ( 16,771,571)
Retained earnings 38,953,787 36,178,583
Accumulated other comprehensive income:
Foreign currency translation adjustments 2,330,982 1,906,250
----------------- -----------------
Total stockholders' equity 60,146,486 60,044,502
----------------- -----------------
Total liabilities and stockholders' equity $ 281,419,078 $ 1,663,126,636
================= =================
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,
2004 2003 2002
------------- ------------- -------------
Revenues:
Commission income $ 182,660,338 $ 176,497,549 $ 149,428,132
Interest income 14,852,760 6,280,695 2,147,274
Principal transactions, net 8,164,167 6,122,442 8,720,422
Insurance recoveries 11,106,063 11,098,135
Other ( 1,547,084) ( 1,140,241) ( 843,142)
------------- ------------- -------------
Gross revenues 204,130,181 198,866,508 170,550,821
Interest expense on securities indebtedness 13,752,951 4,117,319 147,865
------------- ------------- -------------
Net revenues 190,377,230 194,749,189 170,402,956
------------- ------------- -------------
Costs and expenses:
Compensation and related costs 131,033,218 126,323,608 107,024,194
Communication costs 13,778,854 12,989,853 10,597,126
Travel and entertainment 10,824,107 9,833,755 7,406,116
Occupancy and equipment rental 10,698,360 6,623,731 4,490,356
Clearing and execution fees 3,804,372 3,865,514 3,311,759
Depreciation and amortization 3,082,439 3,220,577 2,405,834
Charity Day contributions 1,042,864 982,300 1,219,233
Other interest expense 181,221 406,772 151,214
Costs related to World Trade Center attacks 3,204,468
General, administrative and other expenses 7,500,398 7,220,567 4,933,483
------------- ------------- -------------
181,945,833 171,466,677 144,743,783
------------- ------------- -------------
Income before provision for income taxes, minority
interest and extraordinary item 8,431,397 23,282,512 25,659,173
Provision for income taxes 3,895,581 9,749,282 12,130,758
------------- ------------- -------------
Income before minority interest and extraordinary item 4,535,816 13,533,230 13,528,415
Minority interest in income of consolidated subsidiary ( 175,985) ( 981,791)
------------- ------------- -------------
Income before extraordinary item 4,535,816 13,357,245 12,546,624
Extraordinary gain on purchase of minority interest 2,957,547
------------- ------------- -------------
Net income $ 4,535,816 $ 16,314,792 $ 12,546,624
============= ============= =============
Basic earnings per share:
Income before extraordinary item $ .64 $ 1.91 $ 1.72
Extraordinary gain on purchase of minority interest .42
------------- ------------- -------------
Net income $ .64 $ 2.33 $ 1.72
============= ============= =============
Diluted earnings per share:
Income before extraordinary item $ .58 $ 1.62 $ 1.53
Extraordinary gain on purchase of minority interest .36
------------- ------------- -------------
Net income $ .58 $ 1.98 $ 1.53
============= ============= =============
Cash dividends per share of common stock $ .25 $ .125 $ 0
============= ============= =============
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, 2004, 2003 AND 2002
----------------------------------------------------
Accumulated
Additional Other
Comprehensive Common Paid-in Treasury Retained Comprehensive
Income Stock Capital Stock Earnings Income Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
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
(492,795 shares) 493 2,463,482 2,463,975
Exercise of stock
options, including
tax benefit of $53,749
(111,643 shares, net) 127 323,160 ( 96,525) 226,762
Acquisition of treasury
stock (375,507 shares) ( 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
(499,863 shares, net) 562 2,200,537 ( 826,303) 1,374,796
Acquisition of treasury
stock (616,300 shares) ( 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
Comprehensive income
Net income for the
year ended
December 31, 2004 $ 4,535,816 4,535,816 4,535,816
Foreign currency
translation
adjustment
(inclusive of
income tax benefit
of $193,856) 424,732 424,732 424,732
------------
Comprehensive income $ 4,960,548
============
Exercise of stock
options, including
tax benefit of
$233,131
(89,844 shares, net) 90 560,858 ( 8,063) 552,885
Acquisition of
treasury stock
(361,963 shares) ( 3,650,837) ( 3,650,837)
Common stock dividends ( 1,760,612) ( 1,760,612)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2004 $ 12,885 $ 39,279,303 ($ 20,430,471) $ 38,953,787 $ 2,330,982 $ 60,146,486
============ ============ ============ ============ ============ ============
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,
2004 2003 2002
--------------- --------------- ---------------
Cash flows from operating activities:
Net income $ 4,535,816 $ 16,314,792 $ 12,546,624
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 3,082,439 3,220,577 2,405,834
Provision for doubtful accounts 148,094 ( 63,348) ( 77,136)
Gain on purchase of minority interest ( 2,957,547)
Net loss on disposal of fixed assets 24,203
Unfunded losses of contractual arrangements 603,627 1,030,933 1,001,552
Minority interest in net earnings of consolidated
subsidiaries 175,985 981,791
Deferred income taxes ( 1,451,316) 4,303,936 ( 22,517)
Income tax benefit on stock options exercised 233,131 763,293 53,749
Change in assets and liabilities:
Decrease (increase) in securities purchased under agreements
to resell 1,323,028,105 ( 1,446,677,977)
Decrease (increase) in deposits with clearing organizations 533,422 ( 2,530,200) 17,551
Increase in receivable from broker-dealers and customers ( 1,213,395) ( 2,086,906) ( 807,736)
Decrease (increase) in securities failed-to-deliver 59,228,039 ( 90,669,388) 184,768,776
(Increase) decrease in securities owned, held at clearing firm ( 15,453,752) 22,847,012 ( 17,431,495)
Decrease (increase) in prepaid expenses and other assets 511,843 ( 2,574,640) ( 418,766)
(Decrease) increase in securities sold under agreements to
repurchase ( 1,346,853,353) 1,470,461,908
Increase (decrease) in payable to broker-dealer 11,578,831 ( 17,337,560) 10,698,736
(Decrease) increase in securities failed-to-receive ( 35,111,589) 66,544,835 ( 183,649,730)
Increase (decrease) in securities sold, not yet purchased 13,827 ( 121,725) 144,153
Decrease in accounts payable and accrued liabilities ( 3,799,931) ( 5,303,226) ( 4,413,181)
(Decrease) increase in accrued compensation payable ( 4,072,379) 1,943,438 4,631,660
(Decrease) increase in income taxes payable ( 1,270,336) 794,857 ( 511,862)
--------------- --------------- ---------------
Net cash (used in) provided by operating activities ( 5,704,674) 18,079,049 9,918,003
--------------- --------------- ---------------
Cash flows from investing activities:
Purchase of fixed assets ( 2,380,029) ( 9,742,244) ( 7,611,516)
Purchase of minority interest ( 2,613,156)
Proceeds from the sale of fixed assets 55,333
--------------- --------------- ---------------
Net cash used in investing activities ( 2,324,696) ( 12,355,400) ( 7,611,516)
--------------- --------------- ---------------
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,
2004 2003 2002
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options 319,754 611,503 173,013
Proceeds from exercise of warrants 2,463,975
Common stock dividends ( 1,760,612) ( 877,988)
(Repayments) borrowings under revolving credit
facility, net ( 2,500,000) 7,500,000
Repayment of notes payable ( 447,978)
Proceeds from asset sales under sale-leaseback
transactions 5,220,658
Repayment of obligations under capitalized
leases ( 296,910) ( 208,276) ( 137,559)
Acquisition of treasury stock ( 3,650,837) ( 4,736,301) ( 2,120,161)
------------ ------------ ------------
Net cash (used in) provided by financing
activities ( 7,888,605) 7,509,596 ( 68,710)
------------ ------------ ------------
Effect of exchange rate changes on cash 822,833 1,155,386 978,555
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents ( 15,095,142) 14,388,631 3,216,332
Cash and cash equivalents at beginning of year 67,170,247 52,781,616 49,565,284
------------ ------------ ------------
Cash and cash equivalents at end of year $ 52,075,105 $ 67,170,247 $ 52,781,616
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 13,481,393 $ 4,456,755 $ 229,750
Income taxes paid 6,162,719 5,309,227 10,639,955
Non-cash financing activities:
Capital lease obligations incurred 706,094
Capital lease obligations cancelled 203,148
Receipt of shares in treasury for exercise
price of stock options 8,063 826,303 96,525
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, 2004, 2003 AND 2002
--------------------------------
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.
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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------
Revenue recognition:
- -------------------
Commission income, principal transactions and related expenses are recorded on a
trade date basis.
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 unrealized mark-to-market gains and losses on positions
held. Revenues derived from matched riskless principal transactions are included
in commission income.
Revenue from the sale of pricing and volume data sourced from the Company's
brokerage business is included in other income and is recognized on a pro-rata
basis over the terms of the respective agreements. Any payments received in
advance are deferred and are included in accounts payable and accrued
liabilities.
Securities:
- ----------
Transactions in securities are recorded on a trade date basis.
Securities are carried at market value, generally based upon quoted dealer
prices. To the extent quoted prices are not available, securities are valued at
fair value as determined by management generally based upon quoted prices of
securities with similar characteristics.
Cash and cash equivalents:
- -------------------------
The Company considers all short-term investments with an initial maturity of
three months or less to be cash equivalents.
Allowance for doubtful accounts:
- -------------------------------
The Company maintains an allowance for doubtful accounts to reduce its billed
receivables on name give-up brokerage transactions to the amount expected to be
collected on such receivables.
F-9
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- -----------------------------------------------------
Fixed assets:
- ------------
Depreciation and amortization of furniture, equipment and software is computed
on a straight-line basis using estimated useful lives of 3 to 5 years. Leasehold
improvements are amortized over the lesser of the terms of the related leases or
the estimated useful lives of the improvements.
Foreign currencies:
- ------------------
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 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. As required by Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123,"
the Company has disclosed below its estimated pro forma net income and earnings
per share if compensation for awards issued under its option and warrant plans
had been recognized using the fair value method of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compaensation," with
such fair value estimated using the Black Scholes option pricing model. For
further information on the assumptions used and the resulting amounts, see Note
18.
F-10
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- -----------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Net income, as reported $ 4,535,816 $ 16,314,792 $ 12,546,624
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects 390,330 956,048 813,362
-------------- -------------- --------------
Pro forma net income $ 4,145,486 $ 15,358,744 $ 11,733,262
============== ============== ==============
Earnings per share:
Basic, as reported $ .64 $ 2.33 $ 1.72
Basic, pro forma $ .59 $ 2.20 $ 1.61
Diluted, as reported $ .58 $ 1.98 $ 1.53
Diluted, pro forma $ .53 $ 1.87 $ 1.43
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 December 2003, the Financial Accounting Standards Board ("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) replaced
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) in 2004 had no impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued a revision to Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Statement of Financial Accounting
Standards No. 123(R) "Shared Based Payment" ("SFAS 123(R)"). SFAS 123(R) will
require compensation costs related to share-based payment transactions to be
recognized in the financial statements over the period that an employee provides
services in exchange for the award. SFAS 123(R) replaces SFAS 123 and supersedes
APB No. 25. SFAS No. 123(R) will be effective for the Company's third quarter of
2005. Management is currently evaluating the effect of adopting SFAS 123(R).
F-11
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 consolidated statement of operations in 2002
as reductions to costs related to World Trade Center attacks. These offsets were
recorded as the extra expenses were incurred and the related recovery was
considered probable or had been recovered. The gross amount of the extra
expenses in 2002 of $7,020,331 has been reduced by an offset of $3,815,863
resulting in a net charge of $3,204,468. Included in gross costs during 2002 was
the cost of foregoing an extension of a sublease on additional space in London
that was re-allocated for potential use by New York employees. This gross cost
of $2.7 million ($2.4 million net after applying the portion of insurance
proceeds from Norwich Union allocable to this cost) was based upon the portion
of this space that management intended to sublet (10,000 square feet) and was
based upon management's estimate of the length of time it will take to generate
sublet income and the difference between the amount management believed it would
then be able to sublet the space for and the Company's cost associated with the
space. In the 2004 consolidated statements of operations, occupancy and
equipment rental include an additional $3.1 million of expenses relating to
excess office space in London to reflect management's intent to sublet the
entire space previously occupied by the former subtenant (15,739 square feet)
and to amend management's estimate of the length of time it will take to
generate sublet income and the amount management believes it will then be able
to sublet the space for. Other gross extra expenses incurred in 2002 related to
the attacks on the World Trade Center 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 2004, 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 $1,042,864 raised on the 2004 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
F-12
NOTE 4 - CHARITY DAY CONTRIBUTIONS (Continued):
- ----------------------------------------------
designated four recipients: Marine Corps-Law Enforcement Foundation, Inc.,
Columbia University Medical Center, Duke University's Fuqua/Coach K Center for
Leadership and Ethics and The Royal Mardsden Hospital in London. The 2003
Charity Day raised a total of $982,300, which was contributed to The Euro
Brokers Relief Fund, Inc. and various charities supported by the Maxcor
Foundation Inc., and the $1,219,233 raised on the 2002 Charity Day was
contributed entirely to the Euro Brokers Relief Fund, Inc.
NOTE 5 - REPURCHASE AND REVERSE REPURCHASE AGREEMENTS:
- -----------------------------------------------------
Transactions involving the purchase of U.S. Treasury and U.S. federal agency
securities under agreements to resell (reverse repurchase agreements) and the
sale of U.S. Treasury and U.S. 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, 2004, the fair value of securities pledged as collateral under reverse
repurchase agreements of $286.8 million was repledged under repurchase
agreements.
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, 2004, 2003 and 2002:
2004 2003 2002
-------------- -------------- --------------
Numerator (basic and diluted calculation):
Net income $ 4,535,816 $ 16,314,792 $ 12,546,624
Denominator:
Weighted average common shares outstanding -
basic calculation 7,051,720 6,987,415 7,304,284
Dilutive effect of stock options and warrants 746,943 1,241,184 906,354
Weighted average common shares outstanding -
diluted calculation 7,798,663 8,228,599 8,210,638
Basic earnings per share:
Income before extraordinary item $ .64 $ 1.91 $ 1.72
Extraordinary gain on purchase of minority
interest .42
-------------- -------------- --------------
Net income $ .64 $ 2.33 $ 1.72
============== ============== ==============
Diluted earnings per share:
Income before extraordinary item $ .58 $ 1.62 $ 1.53
Extraordinary gain on purchase of minority
interest .36
-------------- -------------- --------------
Net income $ .58 $ 1.98 $ 1.53
============== ============== ==============
Antidilutive common stock equivalents
Options 270,000 190,000 270,000
F-13
NOTE 7 - DEPOSITS WITH CLEARING ORGANIZATIONS:
- ---------------------------------------------
The following is a summary of deposits with clearing organizations at December
31, 2004 and 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
Cash $ 811,135 $ 810,803
U.S. Treasury obligations 7,504,172 8,037,926
----------------- -----------------
$ 8,315,307 $ 8,848,729
================= =================
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). At December 31, 2004 and 2003, MFI's clearing deposit
with GSD-FICC approximated $7,000,000 and $7,520,000, respectively. The
remaining collateral deposits reflect requirements from MFI's clearing brokers.
NOTE 8 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS, CUSTOMERS AND CLEARING
- ------------------------------------------------------------------------------
ORGANIZATIONS:
- -------------
The following is a summary of receivable from and payable to broker-dealers,
customers and clearing organizations at December 31, 2004 and 2003:
December 31, 2004 December 31, 2003
--------------------------- -----------------
Receivable Payable Receivable
------------ ------------ -----------------
Commissions receivable $ 22,640,010 $ $ 21,487,492
Receivable from clearing firms 1,334,408 836,614
Receivable from clearing organization 50,480
Payable to clearing firm 11,578,831
------------ ------------ -----------------
$ 24,024,898 $ 11,578,831 $ 22,324,106
============ ============ =================
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, 2004 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 93% 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 $613,000 and $483,000 at December 31,
2004 and 2003, respectively.
NOTE 9 - SECURITIES OWNED, HELD AT CLEARING FIRM AND SECURITIES SOLD, NOT YET
- -----------------------------------------------------------------------------
PURCHASED:
- ---------
The following is a summary of securities owned, held at clearing firm and
securities sold, not yet purchased at December 31, 2004 and 2003:
December 31, 2004 December 31, 2003
----------------------------- -----------------------------
Owned, Held at Sold, Not Yet Owned, Held at Sold, Not Yet
Clearing Firm Purchased Clearing Firm Purchased
------------- ------------- ------------- -------------
Municipal obligations $ 10,772,112 $ $ 6,028,680 $
Foreign sovereign debt 551,850
Corporate bonds 11,096,725
Corporate stocks 360,165 36,255 106,594 22,428
------------- ------------- ------------- -------------
$ 22,229,002 $ 36,255 $ 6,687,124 $ 22,428
============= ============= ============= =============
Securities positions held by the Company's clearing firms may be rehypothecated
by them.
F-14
NOTE 10 -MINORITY INTEREST:
- --------------------------
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.
NOTE 11 - TOKYO-BASED VENTURE:
- -----------------------------
Since 1994, the Company has held an interest in a Tokyo-based derivatives
brokering venture (the "Tokyo Venture") structured under Japanese law as a
Tokumei Kumiai ("TK"). A TK is a contractual arrangement in which an 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. The Company has a 57.25% interest in
the Tokyo Venture, with Nittan Capital Group Limited ("Nittan"), the TK
operator, holding a 42.75% interest. Although the operations of the Tokyo
Venture have always been run and managed by persons appointed by the Company, it
does not operate in a legal entity separately distinguishable from Nittan, which
has other substantial operations, and, accordingly, the Company accounts for its
share of the results of operations of the Tokyo Venture in other income as
non-equity income or loss from contractual arrangement.
Summarized operating results of the Tokyo Venture for the years ended December
31, 2004, 2003 and 2002, along with the Company's share of those results, are
presented below:
2004 2003 2002
------------ ------------ ------------
Revenues $ 4,399,108 $ 4,891,281 $ 10,405,376
Expenses 7,112,062 7,616,662 12,473,906
------------ ------------ ------------
Loss ($ 2,712,954) ($ 2,725,381) ($ 2,068,530)
============ ============ ============
Company's share ($ 1,553,166) ($ 1,560,281) ($ 1,184,233)
============ ============ ============
F-15
NOTE 12 - FIXED ASSETS:
- ----------------------
Fixed assets at December 31, 2004 and 2003 are summarized below:
December 31, 2004 December 31, 2003
----------------- -----------------
Furniture and telephone equipment $ 12,207,583 $ 11,000,473
Leasehold improvements 13,372,118 12,834,635
Computer and related equipment 7,438,965 6,380,616
Software 9,318,625 8,541,527
Automobiles 1,135,137 1,393,961
----------------- -----------------
43,472,428 40,151,212
Less - Accumulated depreciation
and amortization ( 31,300,206) ( 27,140,349)
----------------- -----------------
$ 12,172,222 $ 13,010,863
================= =================
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, 2004:
For the Year Ending December 31, 2005 $ 231,578
Less - Amount representing interest ( 20,942)
-----------
Present value of total minimum lease payments $ 210,636
===========
The gross amounts of assets under capitalized leases are approximately $409,000
and $1,046,000 at December 31, 2004 and 2003, 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 $20,000, $375,000 and $219,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 14 - REVOLVING CREDIT FACILITY:
- -----------------------------------
In March 2003, Euro Brokers Inc. ("EBI"), a U.S. subsidiary, 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 initially had 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. MFGI has executed an agreement to guarantee
the payment of amounts due under this facility. At December 31, 2004 and 2003,
the Company had borrowings outstanding under this facility of $5,000,000 and
$7,500,000, respectively.
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
$247,000, $235,000 and $213,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
F-16
NOTE 16 - INCOME TAXES:
- ----------------------
Income before provision for income tax, minority interest and extraordinary item
is subject to tax under the following jurisdictions:
For the Year Ended
-----------------------------------------------------------
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Domestic $ 5,549,849 $ 16,742,077 $ 22,801,450
Foreign 2,881,548 6,540,435 2,857,723
----------------- ----------------- -----------------
Total $ 8,431,397 $ 23,282,512 $ 25,659,173
================= ================= =================
The components of the provision for income taxes are as follows:
For the Year Ended
-----------------------------------------------------------
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Current
Federal $ 3,037,564 $ 1,759,517 $ 7,980,966
State and local 867,025 345,553 2,291,478
Foreign 1,403,140 3,340,276 1,880,831
----------------- ----------------- -----------------
5,307,729 5,445,346 12,153,275
----------------- ----------------- -----------------
Deferred
Federal ( 245,388) 2,760,376 ( 746,432)
State and local ( 1,072,923) 1,913,063 906,825
Foreign ( 93,837) ( 369,503) ( 182,910)
----------------- ----------------- -----------------
( 1,412,148) 4,303,936 ( 22,517)
----------------- ----------------- -----------------
Total $ 3,895,581 $ 9,749,282 $ 12,130,758
================= ================= =================
Deferred tax assets (liabilities) are comprised of the following:
December 31, 2004 December 31, 2003
----------------- -----------------
Assets
Bad debt reserve $ 180,046 $ 171,529
Occupancy reserves 88,158 70,926
Fixed assets 558,492 620,188
Net operating losses ("NOLs") 483,689 383,733
Foreign tax credits 183,529 103,520
Capital loss carryforwards 322,049 387,609
Unrealized losses 250,148
Other 347,258 298,851
Deferred tax asset valuation allowance ( 989,267) ( 857,555)
----------------- -----------------
Gross deferred tax asset, after valuation
allowance 1,424,102 1,178,801
Jurisdictional deferred taxes payable offset ( 598,082) ( 444,393)
----------------- -----------------
Deferred tax asset $ 826,020 $ 734,408
================= =================
Liabilities
Unrealized gains $ ($ 648,835)
Fixed assets ( 4,051,315) ( 4,565,128)
Other ( 197,181) ( 274,188)
----------------- -----------------
Gross deferred tax liability ( 4,248,496) ( 5,488,151)
Jurisdictional deferred tax asset offset 598,082 444,393
----------------- -----------------
Deferred tax liability ($ 3,650,414) ($ 5,043,758)
================= =================
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, $2,000 and $85,000
expire in 2005, 2007, 2008 and 2009, respectively. Foreign NOLs approximating
$710,000, $228,000, $1,505,000, $665,000 and $117,000 expire in 2007, 2008,
2009, 2010 and 2011, respectively.
F-17
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,
2004 2003 2002
------------ ------------ ------------
Tax at U.S. statutory rate $ 2,866,675 $ 7,916,054 $ 8,724,119
Increase (decrease) in tax resulting from:
Higher effective rates on earnings
of foreign operations and tax
benefit of foreign losses not
recognized, net 292,213 508,896 610,115
Nondeductible meals and
entertainment 1,276,561 1,087,118 955,536
Reduction of income tax reserves ( 391,922) ( 500,000)
Non-taxable interest income ( 102,809) ( 540,607) ( 336,974)
Decrease to deferred tax
asset valuation allowance ( 82,110) ( 290,210)
State and local taxes, net 354,940 1,820,720 2,110,880
Other ( 317,967) ( 252,689) 67,082
------------ ------------ ------------
$ 3,895,581 $ 9,749,282 $ 12,130,758
============ ============ ============
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. During 2004, the Company declared
and paid four quarterly common stock dividends, each at the rate of $.0625, for
aggregate payments of $1,760,612.
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. At December 31, 2004 and 2003, there were no shares of
preferred stock outstanding.
F-18
NOTE 17 - STOCKHOLDERS' EQUITY (Continued):
- ------------------------------------------
Common stock and warrants:
- -------------------------
At December 31, 2001, the Company had outstanding 7,026,229 shares of common
stock and held 4,586,540 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 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, 2002, the Company purchased 375,507 shares
under its repurchase program at an aggregate purchase price of $2,120,161. This
program was authorized by the Board of Directors in July 2001 for 709,082
shares, representing 10% of the then-outstanding common stock, and was expanded
by 490,918 shares, to 1,200,000 shares, by the Board of Directors in late
September 2001 (214,000 shares had been purchased under this authorization in
2001 at an aggregate purchase price of $810,725). The Company also issued
127,000 shares in 2002 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 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 an 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 and income tax
withholding payments aggregating $826,303.
During the year ended December 31, 2004, the Company's Board of Directors again
increased the July 2001 repurchase program authorization by an additional
500,000 shares to a total authorization of 2,400,000 shares, and purchased
361,963 shares under this expanded authorization at an aggregate purchase price
of $3,650,837. The Company also issued an aggregate of 90,750 shares in 2004
under the Option Plans. In connection with certain exercises, the Company
received 906 shares into treasury as consideration for exercise prices and
income tax withholding payments aggregating $8,063.
As a result of the foregoing activity, at December 31, 2004 and 2003, the
Company had outstanding 6,866,604 and 7,138,723 shares of common stock,
respectively, and held 6,018,772 and 5,655,903 shares of common stock in
treasury, respectively.
At December 31, 2004, the Company had 2,299,688 shares of common stock reserved
for issuance upon exercise of options pursuant to the Option Plans.
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,
F-19
NOTE 18 - STOCK OPTION AND WARRANT PLANS (Continued):
- ----------------------------------------------------
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, 2004 December 31, 2003 December 31, 2002
------------------------ ------------------------ ------------------------
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 1,547,938 $ 5.22 1,700,000 $ 3.14 1,470,750 $ 2.29
Granted 240,000 10.43 485,000 9.68 426,250 5.79
Exercised ( 90,750) 3.61 ( 562,062) 2.52 ( 127,000) 2.12
Canceled ( 105,000) 9.70 ( 75,000) 6.95 ( 70,000) 3.23
---------- ---------- ---------- ---------- ---------- ----------
Outstanding
at end of year 1,592,188 $ 5.80 1,547,938 $ 5.22 1,700,000 $ 3.14
========== ========== ========== ========== ========== ==========
Exercisable
at end of year 972,813 $ 4.06 735,750 $ 2.74 1,030,625 $ 2.20
========== ========== ========== ========== ========== ==========
Weighted average
fair value of
options granted
during the year $ 5.51 $ 6.26 $ 4.47
========== ========== ==========
At December 31, 2004 there were 741,250 options outstanding with exercise prices
ranging from $2.00 to $3.00, 245,938 options outstanding with exercise prices
ranging from $5.14 to $6.00 and 605,000 options outstanding with exercise prices
ranging from $8.95 to $12.67. The weighted-average remaining contractual life of
all options outstanding approximates 6.5 years.
During 2002, the Company issued 500,000 common stock purchase warrants to
employees under a newly established warrant program to provide inducements and
incentives in connection with the formation of a new leveraged finance
department (the "Leveraged Finance Warrants"). The Leveraged Finance Warrants
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 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 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
F-20
NOTE 18 - STOCK OPTION AND WARRANT PLANS (Continued):
- ----------------------------------------------------
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 2004,
2003 and 2002 with the following weighted average assumptions: expected
volatility of 73%, 98% and 101%, respectively; risk free interest rate of 3.5%,
3.1% and 4.5%, respectively; expected annual dividends of $.25, $.23 and $0; and
an expected option life of five years. The pro forma expense for stock-based
compensation during 2004 includes the impact of reversing the aggregate pro
forma expense of $444,153 previously determined for prior periods for the
425,000 Leveraged Finance Warrants cancelled in 2004.
For the Year Ended
------------------------------------------------
December 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
Net income As reported $ 4,535,816 $ 16,314,792 $ 12,546,624
Pro forma 4,145,486 15,358,744 11,733,262
Basic earnings per share As reported .64 2.33 1.72
Pro forma .59 2.20 1.61
Diluted earnings per share As reported .58 1.98 1.53
Pro forma .53 1.87 1.43
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.
Future minimum rental commitments for operating leases that have initial or
remaining terms in excess of one year approximate the following:
Year
----
2005 $ 13,231,573
2006 8,432,691
2007 5,758,998
2008 5,630,021
2009 5,570,791
Thereafter (through 2018) 37,938,350
--------------
$ 76,562,424
==============
Rental expense amounted to approximately $6,027,000, $5,539,000 and $3,642,000
in 2004, 2003 and 2002, respectively.
F-21
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 may have the right to charge the Company for losses that result
from a counterparty's failure to fulfill its contractual obligations. At
December 31, 2004 and 2003, the Company has recorded no liabilities with respect
to this risk. During 2004 and 2003, 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.
NTL When-issued Equity Trades:
- ------------------------------
On January 10, 2003, NTL Inc. ("NTL") emerged from Chapter 11 bankruptcy under
an amended plan of reorganization providing for the issuance of 50 million
shares of common stock. MFI and other participants in the when-issued trading
market for NTL shares, which began in September 2002 after confirmation of NTL's
prior plan of reorganization that contemplated the issuance of 200 million
shares, expected the settlement of their when-issued trades would be adjusted to
reflect the equivalent of 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 neither cancel nor adjust such trades, 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.
In February 2003, MFI filed a suit in the New York State Supreme Court (the
"Court"), naming all of its counterparties to its NTL when-issued trades, in
order to seek a uniform, adjusted settlement of these trades. Similar
proceedings, some seeking settlement on an adjusted basis, others on an
unadjusted basis, also were commenced by other parties to NTL when-issued trades
against their counterparties, including MFI, both in the Court and before NASD.
During 2003 MFI recorded a net loss of $5.1 million on the settlement of its NTL
when-issued trades. This loss included the estimated damages payable if the
above proceedings were to 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, and was net of a partially offsetting $800,000
principal transaction gain recorded on NTL shares subsequently determined no
longer to constitute a hedge against such an outcome.
In March 2004, the Court granted a summary judgment motion made by MFI and
issued a decision stating that all NTL when-issued trades among the parties
before the Court should be settled on an adjusted and uniform basis. In July
2004, based upon this decision, MFI obtained a judgment from the Court entitling
MFI to collect a total of $3.6 million (inclusive of interest) from those
counterparties that received and retained unadjusted deliveries of NTL shares
from MFI. The judgment remains subject to collection, however, as both it and
the underlying decision have been appealed by a number of MFI's counterparties.
Following the Court's favorable decision, MFI has been able to reach permanent,
negotiated resolutions of its NTL when-issued trades with certain of its
counterparties during 2004. These resolutions resulted in the dismissal of the
sole proceeding before NASD (leaving the remaining disputes centralized in one
forum - the Court) and the reversal of $3.3 million of estimated damages payable
recorded in 2003. This $3.3 million net loss reversal in 2004 is reflected on
the statement of operations as gains on principal transactions.
F-22
NOTE 20 - CONTINGENCIES (Continued):
- -----------------------------------
Because of the pending appeals and their associated uncertainties, MFI only
intends to record gains related to the $3.6 million judgment if and when
permanent resolutions, whether by negotiation, completion of the appeals process
or otherwise, are reached with counterparties.
General, administrative and other expenses include legal fees related to this
matter during 2004 and 2003 of $290,000 and $700,000, respectively.
U.K. National Insurance:
- -----------------------
The Company has unsettled demands from the Inland Revenue in the United Kingdom
for the employer portion of National Insurance Contributions ("NIC") related to
certain employee bonuses paid during the period from August 1995 to February
2001 in the amount of approximately (pound)1.7 million (approximately $3.2
million at December 31, 2004), plus interest estimated at approximately
(pound)642,000 through December 31, 2004 (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, 2004, the Company had reserved approximately
(pound)1.5 million (approximately $2.9 million) against these demands from the
Inland Revenue for NIC related to employee bonuses paid. Based upon this level
of reserves, management does not anticipate the ultimate outcome of this 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 Uniform Net Capital Rule (rule
15c3-1) of the Securities and Exchange Commission ("SEC"), 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 the Government Securities
Division of the Fixed Income Clearing Corporation ("GSD-FICC") requires it to
maintain minimum excess regulatory net capital of $10,000,000 and minimum net
worth of $25 million. At December 31, 2004, MFI had regulatory net capital of
$40.1 million, a regulatory net capital requirement of $250,000 and net worth of
$56.0 million. Euro Brokers Ltd. ("EBL"), a U.K. brokerage subsidiary of the
Company, 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, 2004, EBL had financial resources in accordance with FSA's
rules of (pound)4.6 million ($8.9 million) and a financial resources requirement
of (pound)3.5 million ($6.7 million).
F-23
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, Japan and Switzerland. United
States amounts are principally derived from the Company's New York office, but
include all U.S.-based operations. In the U.S. segment in 2003, net income
reflects the $11.1 million pre-tax insurance gain on property destroyed in the
September 11th attacks, and operating revenues and net income reflect the net
loss of $5.1 million pre-tax recorded on the NTL when-issued trades (see Note
20). For 2004 operating revenues and net income reflect a partial reversal of
the 2003 NTL pre-tax loss of $3.3 million. In the U.K. segment 2003 net income
reflects the $3.0 million extraordinary gain realized on the February 2003
purchase of the minority interest in EBL and includes the results for EBL, for
periods prior to the purchase, net of such minority interest (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 All
States Kingdom Japan Switzerland Other Total
--------------- -------------- ------------- -------------- -------------- ---------------
2004
- ----
Operating revenues $ 106,607,925 $ 75,638,952 $ $ 4,278,841 $ 4,298,787 $ 190,824,505
Interest income 14,564,129 697,039 2,429 360 15,263,957
Interest expense on
securities indebtedness 13,752,951 13,752,951
Other interest expense 541,459 50,959 592,418
Depreciation and amortization 2,256,217 738,921 23,568 63,733 3,082,439
Provision for income taxes 2,586,279 979,840 48,661 280,801 3,895,581
Non-equity loss from
contractual arrangement ( 1,553,166) ( 1,553,166)
Net income (loss) 2,963,571 1,299,360 ( 1,553,166) 1,416,534 409,517 4,535,816
Assets 268,711,769 31,458,442 185,013 5,697,366 2,302,533 308,355,123
Capital expenditures 1,414,049 741,398 77,888 146,694 2,380,029
2003
- ----
Operating revenues $ 106,290,191 $ 70,358,981 $ $ 2,269,812 $ 3,992,674 $ 182,911,658
Interest income 5,895,773 555,351 833 346 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 11,724 70,252 3,220,577
Provision for income taxes 6,778,509 2,728,526 17,071 225,176 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) 706,826 263,613 16,314,792
Assets 1,649,597,122 33,182,725 179,899 3,370,315 1,771,417 1,688,101,478
Capital expenditures 8,816,779 843,213 26,819 55,433 9,742,244
F-24
NOTE 22 - SEGMENT REPORTING (Continued):
- ----------------------------------------
United United All
States Kingdom Japan Switzerland Other Total
--------------- -------------- ------------- -------------- -------------- ---------------
2002
- ----
Operating revenues $ 101,096,048 $ 52,717,957 $ $ 1,076,945 $ 3,519,537 $ 158,410,487
Interest income 1,781,994 411,917 18 1,446 391 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 8,635 78,598 2,405,834
Provision for income taxes 10,432,832 1,549,168 13,553 135,205 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) 226,240 174,581 12,546,624
Assets 111,571,666 28,297,516 196,825 1,417,682 1,363,614 142,847,303
Capital expenditures 6,839,528 664,444 8,897 98,647 7,611,516
Included below are reconciliations of reportable segment items to the Company's
consolidated totals as reported in the consolidated financial statements.
2004 2003 2002
--------------- --------------- ---------------
Interest income:
Total for reportable segments $ 15,263,597 $ 6,451,124 $ 2,193,929
Other interest 360 1,179 1,837
Elimination of intersegment
interest income ( 411,197) ( 171,608) ( 48,492)
--------------- --------------- ---------------
Consolidated total $ 14,852,760 $ 6,280,695 $ 2,147,274
=============== =============== ===============
Other interest expense:
Total for reportable segments $ 592,418 $ 578,380 $ 199,706
Elimination of intersegment
interest expense ( 411,197) ( 171,608) ( 48,492)
--------------- --------------- ---------------
Consolidated total $ 181,221 $ 406,772 $ 151,214
=============== =============== ===============
Assets:
Total for reportable segments $ 306,052,590 $ 1,686,330,061 $ 141,483,689
Other assets 2,302,533 1,771,417 1,363,614
Elimination of intersegment
receivables ( 13,840,061) ( 11,878,858) ( 6,273,360)
Elimination of investments in
other segments ( 13,095,984) ( 13,095,984) ( 13,095,984)
--------------- --------------- ---------------
Consolidated total $ 281,419,078 $ 1,663,126,636 $ 123,477,959
=============== =============== ===============
F-25
NOTE 23 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
- -------------------------------------------------------
The following table reflects the unaudited quarterly results of operations of
the Company for 2004 and 2003.
For the Three Months Ended
----------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
2004
----
Net revenues $ 51,406,884 $ 48,477,378 $ 45,476,213 $ 45,016,755
Costs and expenses 46,474,882 46,668,518 44,272,623 44,529,810
Income before provision for income taxes 4,932,002 1,808,860 1,203,590 486,945
Net income 2,605,440 1,006,316 523,082 400,978
Weighted average common shares
outstanding-basic 7,153,981 7,113,784 6,993,230 6,947,668
Weighted average common shares
outstanding-diluted 8,082,514 7,876,356 7,660,510 7,586,803
Basic earnings per share $ .36 $ .14 $ .07 $ .07
Diluted earnings per share .32 .13 .07 .06
2003
----
Net revenues $ 37,342,741 $ 52,214,646 $ 57,535,450 $ 47,656,352
Costs and expenses 39,422,765 44,489,548 42,942,881 44,611,483
(Loss) income before provision for income
taxes, 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
F-26
NOTE 24 - SUBSEQUENT EVENT
- --------------------------
On March 4, 2005, the Company announced that it was holding preliminary business
combination discussions with a potential acquirer. As of March 30, 2005, the
parties had made substantial progress towards a transaction. However, there are
still issues remaining to be resolved and, accordingly, there can be no
assurance as to whether the Company will be successful in reaching agreement on
or completing a transaction.
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 (incorporated herein by
reference to Exhibit 4.5 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 (the
"2003 Form 10-K")
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)
X-1
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)
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 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2003)(1)
X-2
10.18 Amendments No. 1, 2 and 3, dated June 26, 2003, September 29,
2003 and November 14, 2003, respectively, to the Credit
Agreement (incorporate herein by reference to Exhibit 10.18 to
the 2003 Form 10-K)
10.19 Agreement for Securities Clearance Services, dated as of April
1, 2004, by and between Refco Securities, LLC and Maxcor
Financial Inc. (incorporated herein by reference to Exhibit
10.1.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2004) (1)
10.20+ Form of Section 16(a) Officer Nonqualified Stock Option
Agreement under the Registrant's 2002 Stock Option Plan
(incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2004 (the "September 2004 Form
10-Q"))
10.21+ Form of Non-Employee Director Nonqualified Stock Option
Agreement under the Registrant's 2002 Stock Option Plan
(incorporated herein by reference to Exhibit 10.2 to the
September 2004 Form 10-Q)
10.22+ Form of Section 16(a) Officer Nonqualified Stock Option
Agreement under the Registrant's 1996 Stock Option Plan
(incorporated herein by reference to Exhibit 10.3 to the
September 2004 Form 10-Q)
10.23+ Form of Non-Employee Director Nonqualified Stock Option
Agreement under the Registrant's 1996 Stock Option Plan
(incorporated herein by reference to Exhibit 10.4 to the
September 2004 Form 10-Q)
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