-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PP9arDNY+B79Qac589X4C4tvzl0me+XfWxHCTVx83TXq7Q4dn3FTLL/NrFSSSFhC 5ZcOVQw/urBwMU+lg7oTsQ== /in/edgar/work/20000814/0000889812-00-003477/0000889812-00-003477.txt : 20000921 0000889812-00-003477.hdr.sgml : 20000921 ACCESSION NUMBER: 0000889812-00-003477 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXCOR FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000931707 STANDARD INDUSTRIAL CLASSIFICATION: [6211 ] IRS NUMBER: 593262958 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25056 FILM NUMBER: 699435 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CTR STREET 2: 84TH FL CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2127487000 MAIL ADDRESS: STREET 1: TWO WORLD TRADE CENTER STREET 2: 84TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: FINANCIAL SERVICES ACQUISITION CORP /DE/ DATE OF NAME CHANGE: 19941020 10-Q 1 0001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2000 Commission File Number 0-25056 MAXCOR FINANCIAL GROUP INC. ---------------------------------------- (Exact name of registrant as specified in its charter) Delaware ------------------------ (State or other jurisdiction of incorporation or organization) 59-3262958 ---------- (I.R.S. Employer Identification Number) Two World Trade Center New York, New York 10048 ----------------------------------- (Address of principal executive office) (212) 748-7000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether 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 registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ------------ The number of shares of common stock, par value $.001 per share, of registrant outstanding as of August 11, 2000 was 8,644,435. The Exhibit Index is on Page 24 Page 1 of 49 Pages MAXCOR FINANCIAL GROUP INC. INDEX -----
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): 3 Consolidated Statements of Financial Condition 4 Consolidated Statements of Operations 6 Consolidated Statements of Changes in Stockholders' Equity 7 Consolidated Statements of Cash Flows 8 Notes to the Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 PART II. OTHER INFORMATION Item 4. Exhibits and Reports on Form 8-K 22 Signatures 23 Exhibit Index 24
Page 2 of 49 Pages PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) MAXCOR FINANCIAL GROUP INC. CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (Unaudited) Page 3 of 49 Pages MAXCOR FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 December 31, 1999 ------------- ----------------- (unaudited) ASSETS Cash and cash equivalents $ 20,170,239 $ 20,054,275 Deposits with clearing organizations 6,831,013 6,800,390 Receivable from broker-dealers and customers 17,447,589 16,027,907 Securities owned 8,362,482 9,479,694 Prepaid expenses and other assets 5,652,565 7,011,145 Deferred tax asset 3,020,642 3,752,385 Equity in affiliated companies 1,649,953 1,595,852 Furniture, equipment and leasehold improvements 6,647,327 6,959,569 Intangible assets 581,719 786,741 -------------- ------------- Total assets $ 70,363,529 $ 72,467,958 ============== =============
The accompanying notes are an integral part of these consolidated financial statements. Page 4 of 49 Pages MAXCOR FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued)
June 30, 2000 December 31, 1999 --------------- ----------------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: ------------------------------------ Liabilities: Payable to broker-dealer $ 4,394,528 $ 5,977,929 Accounts payable and accrued liabilities 12,490,770 14,924,573 Accrued compensation payable 14,940,640 13,046,001 Loan payable 674,282 Income taxes payable 755,054 723,392 Deferred taxes payable 498,319 523,052 Obligations under capitalized leases 371,449 493,367 Notes payable 1,371,102 1,799,870 -------------- -------------- 34,821,862 38,162,466 -------------- -------------- Minority interest in consolidated subsidiary 4,191,603 4,885,896 -------------- -------------- Redeemable preferred stock: Series B, 2% cumulative, stated value $1,000; 2,000 shares issued at June 30, 2000 and December 31, 1999 2,000,000 2,000,000 Stockholders' equity: Preferred stock, $.001 par value; 1,000,000 shares authorized; 2,000 shares of Series B issued at June 30, 2000 and December 31, 1999, reported above Common stock, $.001 par value; 30,000,000 shares authorized, 11,392,269 shares issued at June 30, 2000 and December 31, 1999 11,392 11,392 Additional paid-in capital 33,187,415 33,187,415 Treasury stock at cost; 3,122,834 and 3,054,832 shares of common stock held at June 30, 2000 and December 31, 1999, respectively ( 5,575,487) ( 5,454,036) Accumulated deficit ( 56,804) ( 2,608,011) Accumulated other comprehensive income: Foreign translation adjustments 1,783,548 2,282,836 ------------- --------------- Total stockholders' equity 29,350,064 27,419,596 ------------- -------------- Total liabilities and stockholders' equity $ 70,363,529 $ 72,467,958 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. Page 5 of 49 Pages MAXCOR FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the Three Months Ended For the Six Months Ended June 30, June 30, June 30, June 30, 2000 1999 2000 1999 -------------- --------------- -------------- ---------------- Revenue: Commission income $ 34,556,641 $ 39,912,054 $ 75,190,664 $ 84,324,166 Interest income 468,968 466,896 890,681 822,891 Other income 1,202,395 607,870 3,834,879 1,050,106 -------------- --------------- -------------- ---------------- 36,228,004 40,986,820 79,916,224 86,197,163 -------------- --------------- -------------- ---------------- Costs and expenses: Payroll and related costs 25,900,707 28,060,414 55,672,579 57,270,234 Communication costs 3,450,089 3,666,068 6,970,393 7,546,480 Travel and entertainment 2,039,404 2,244,391 4,146,306 4,320,794 Occupancy costs 1,277,364 1,310,920 2,455,740 2,850,834 Depreciation and amortization 947,359 1,064,224 1,903,974 2,278,891 Clearing fees 842,912 958,016 1,684,433 1,944,377 Interest expense 127,055 250,745 265,862 455,935 Restructuring costs 238,400 General, administrative and other expenses 980,682 1,355,001 2,442,245 3,184,198 -------------- --------------- -------------- ---------------- 35,565,572 38,909,779 75,779,932 79,851,743 -------------- --------------- -------------- ---------------- Subtotal 662,432 2,077,041 4,136,292 6,345,420 (Loss) income from equity affiliate ( 2,183) ( 41,696) 111,503 ( 53,839) -------------- --------------- -------------- ---------------- Income before provision for income taxes and minority interest 660,249 2,035,345 4,247,795 6,291,581 Provision for income taxes 675,196 941,822 2,177,114 2,752,060 -------------- --------------- -------------- ---------------- (Loss) income before minority interest ( 14,947) 1,093,523 2,070,681 3,539,521 Minority interest in loss (income) of consolidated subsidiaries 322,819 ( 46,520) 500,526 ( 918,718) -------------- --------------- -------------- ---------------- Net income $ 307,872 $ 1,047,003 $ 2,571,207 $ 2,620,803 ============== ============== ============== ================ Weighted average common shares outstanding - basic 8,317,488 10,897,161 8,327,463 11,109,293 Weighted average common shares outstanding - diluted 8,317,488 10,906,251 8,459,507 11,109,293 Basic earnings per share $ .04 $ .10 $ .31 $ .23 Diluted earnings per share $ .04 $ .10 $ .30 $ .23
The accompanying notes are an integral part of these consolidated financial statements. Page 6 of 49 Pages MAXCOR FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIODS ENDED DECEMBER 31, 1999 AND JUNE 30, 2000
Accumulated Additional Other Comprehensive Paid-In Treasury Accumulated Comprehensive Income Common Stock Capital Stock Deficit Income Total ------------- ------------ ------------ ----------- ------------ ------------ ----------- Balance at December 31, 1998 $ 11,392 $ 33,187,415 ($ 227,932) ($ 5,100,223) $ 1,922,862 $29,793,514 Comprehensive income Net income for the year ended December 31, 1999 $ 2,532,212 2,532,212 2,532,212 Other comprehensive income Foreign translation adjustment (inclusive of income tax benefit of $111,648) 359,974 359,974 359,974 ----------- Comprehensive income $ 2,892,186 =========== Acquisition of treasury stock (5,226,104) (5,226,104) Redeemable preferred stock dividends ( 40,000) ( 40,000) --------- ------------ ---------- ------------ ------------ ----------- Balance at December 31, 1999 11,392 33,187,415 (5,454,036) ( 2,608,011) 2,282,836 27,419,596 Comprehensive income Net income for the six months ended June 30, 2000 $ 2,571,207 2,571,207 2,571,207 Other comprehensive income Foreign translation adjustment (net of income tax benefit of $143,466) ( 499,288) ( 499,288) ( 499,288) ----------- Comprehensive income $ 2,071,919 =========== Acquisition of treasury stock ( 121,451) ( 121,451) Redeemable preferred stock dividends ( 20,000) ( 20,000) --------- ------------ ----------- ------------ ------------ ----------- Balance at June 30, 2000 $ 11,392 $ 33,187,415 ($5,575,487) ($ 56,804) $ 1,783,548 $29,350,064 ========= ============ =========== ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statement Page 7 of 49 Pages MAXCOR FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the Six Months Ended June 30, 2000 June 30, 1999 ------------- -------------- Cash flows from operating activities: Net income $ 2,571,207 $ 2,620,803 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,903,974 2,278,891 Provision for doubtful accounts ( 22,285) 24,164 Gain on partial sale of subsidiary ( 2,235,511) Minority interest in (loss) earnings of consolidated subsidiary ( 412,030) 810,084 Undistributed (earnings) losses of unconsolidated subsidiary (249,621) 214,571 Net loss (gain) on disposal of fixed assets 781 ( 2,787) Imputed interest expense 15,158 Deferred income taxes 665,141 Change in assets and liabilities: (Increase) decrease in deposits with clearing organizations ( 30,623) 327 Increase in receivable from broker-dealers and customers ( 1,889,114) ( 8,295,056) Decrease (increase) in securities owned 1,117,212 ( 549,963) Decrease in prepaid expenses and other assets 1,581,489 3,135,431 (Decrease) increase in payable to broker-dealers and customers ( 1,583,403) 943,414 Decrease in accounts payable and accrued liabilities ( 2,031,070) ( 366,173) Increase in accrued compensation payable 2,322,022 4,546,837 Increase in income taxes payable 65,338 1,891,565 -------------- -------------- Net cash provided by operating activities 1,773,507 7,267,266 -------------- -------------- Cash flows from investing activities: Purchase of fixed assets ( 1,615,123) ( 852,044) Proceeds from the sale of fixed assets 40,213 159,870 Proceeds from the partial sale of subsidiary 2,399,002 Dividends received from equity affiliates 48,856 -------------- -------------- Net cash provided by (used in) investing activities 824,092 ( 643,318) -------------- --------------
The accompanying notes are an integral part of these consolidated financial statements. Page 8 of 49 Pages MAXCOR FINANCIAL GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
For the Six Months Ended June 30, 2000 June 30, 1999 ------------- ------------- Cash flows from financing activities: Cash contribution from minority interest 3,691,972 Dividend paid to minority interest ( 620,253) Repayment of notes payable ( 731,588) ( 208,523) Repayment of obligations under capitalized leases ( 96,891) ( 191,736) Net (repayments) borrowings under revolving credit facility ( 674,282) 1,717,405 Redeemable preferred stock dividends ( 20,000) ( 20,000) Acquisition of treasury stock ( 121,451) ( 4,226,104) --------------- --------------- Net cash (used in) provided by financing activities ( 1,644,212) 142,761 --------------- --------------- Effect of exchange rate changes on cash ( 837,423) ( 586,547) --------------- -------------- Net increase in cash and cash equivalents 115,964 6,180,162 Cash and cash equivalents at beginning of period 20,054,275 15,150,296 --------------- -------------- Cash and cash equivalents at end of period $ 20,170,239 $ 21,330,458 =============== ============== Supplemental disclosures of cash flow information Interest paid $ 292,990 $ 374,423 Income taxes paid 640,121 259,578 Non-cash financing activities: Conversion of account payable to note payable 318,220 Capital lease obligations incurred 141,352 Contribution of non-cash assets from minority interest 1,962,886 Assumption of liabilities of minority interest 247,508 Issuance of notes payable to acquire treasury stock 1,000,000
The accompanying notes are an integral part of these consolidated financial statements. Page 9 of 49 Pages MAXCOR FINANCIAL GROUP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 1996, MFGI acquired Euro Brokers Investment Corporation ("EBIC"), a privately held international and domestic inter-dealer broker, in a merger transaction (the "Merger"). EBIC, incorporated in December 1986 in connection with a management buyout of predecessor operations dating to 1970, through its subsidiaries and affiliates is primarily an inter-dealer broker of money market instruments, derivative products and selected securities, with principal offices in New York, London and Tokyo, and other offices in Geneva and Mexico City, as well as correspondent relationships with other brokers throughout the world. EBIC and its subsidiaries and affiliates currently comprise substantially all of MFGI's business and assets. The consolidated financial statements include the accounts of MFGI and its majority-owned subsidiaries and other entities over which it exercises control (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated affiliates where the Company may exercise significant influence over operating and financial policies have been accounted for using the equity method. Certain reclassifications have been made to the prior period amounts to conform with the current year presentation. The accompanying unaudited consolidated condensed financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 ("1999 Form 10-K"). Page 10 of 49 Pages NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Accounting Developments: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative instruments, including certain derivatives embedded in other contracts, be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are to be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which deferred the effective date for SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). Management is currently assessing the effect, if any, SFAS 133 will have on the Company's consolidated results of operations and financial position. NOTE 3 - EARNINGS PER SHARE: The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and six month periods respectively ended June 30, 2000 and June 30, 1999:
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2000 1999 2000 1999 --------- ---------- ------------- ----------- Numerator (basic and diluted calculation): Net income $ 307,872 $1,047,003 $ 2,571,207 $ 2,620,803 Less redeemable preferred stock dividends ( 10,000) ( 10,000) ( 20,000) ( 20,000) --------- ---------- ------------- ----------- Net income available to common stockholders 297,872 1,037,003 2,551,207 2,600,803 Denominator: Weighted average common shares outstanding (basic calculation) 8,317,488 10,897,161 8,327,463 11,109,293 Dilutive effect of stock options 9,090 132,044 --------- ---------- ------------- ----------- Diluted weighted average common shares outstanding (diluted calculation) 8,317,488 10,906,251 8,459,507 11,109,293 Earnings per share: Basic $ .04 $ .10 $ .31 $ .23 Diluted $ .04 $ .10 $ .30 $ .23 Antidilutive common stock equivalents: Options 1,800,000 75,000 420,000 1,630,000 Warrants 734,980 734,980 734,980 734,980
Page 11 of 49 Pages NOTE 4 - STOCKHOLDERS EQUITY: Preferred stock: Pursuant to the Company's adoption of a shareholder rights plan (the "Plan") in December 1996, the Company authorized the creation of Series A Junior Participating Preferred Stock and reserved 300,000 shares thereof for issuance upon exercise of the rights that, pursuant to the Plan, were at the time dividended to holders of common stock. At June 30, 2000 and December 31, 1999, the Company had outstanding 2,000 shares of Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") with an aggregate stated value of $2,000,000. Common stock and warrants: At December 31, 1999, the Company had outstanding 8,337,437 shares of common stock and held 3,054,832 shares in treasury. In May 2000, the Company's Board of Directors authorized a repurchase program for up to 10% of its then-outstanding common stock, or 833,744 shares, with purchases to be made from time to time as market and business conditions warrant, in open market, negotiated or block transactions. As of June 30, 2000, the Company had repurchased 68,002 shares of its common stock under this program at an aggregate purchase price of $121,451. As a result, at June 30, 2000, the Company had outstanding 8,269,435 shares of common stock and held 3,122,834 shares in treasury. At June 30, 2000 and December 31, 1999, the Company had outstanding 685,948 redeemable common stock purchase warrants (issued in connection with the Company's initial public offering) and 49,032 Series B redeemable common stock purchase warrants (issued in connection with the Merger and economically identical in their terms to the other series of warrants). At June 30, 2000 and December 31, 1999, the Company had 734,980 shares of common stock reserved for issuance upon exercise of all warrants and an additional 1,800,000 shares reserved for issuance upon exercise of options that have been granted pursuant to the Company's 1996 Stock Option Plan. NOTE 5 - PARTIAL SALE OF SUBSIDIARY: Effective January 1, 2000, the Company's 50-50 Tokyo-based derivatives brokering venture ("Tokyo Partnership") with its 15% equity affiliate, Yagi Euro Nittan Corporation ("Yagi Euro"), formerly Yagi Euro Corporation, merged its operations with the off-balance sheet operations of Nittan Exco, Ltd. ("Nittan"). This transaction, which included a cash payment to the Company by Nittan, reduced the Company's direct interest in the expanded Tokyo Partnership to 40% and reduced Yagi Euro's interest to 30%, with Nittan acquiring the remaining 30% interest. Included in other income for the six months ended June 30, 2000 is a gain recognized by the Company on this transaction, net of related transaction costs, of approximately $2.2 million. The Company continues to consolidate the results of operations of the expanded Tokyo Partnership in its Page 12 of 49 Pages NOTE 5 - PARTIAL SALE OF SUBSIDIARY (Continued): consolidated financial statements with the combined interest of Yagi Euro and Nittan presented as minority interest. The Company's 15% equity interest in Yagi Euro has remained unchanged, except that Yagi Euro's conventional products businesses (local money markets and forward foreign exchange), which are conducted outside of the Tokyo Partnership, were combined on a 50-50 basis with the comparable business of Nittan. The Company's approximately $86,000 share of a one-time, after-tax gain realized by Yagi Euro on its restructuring activities is included in income from equity affiliate for the six months ended June 30, 2000. NOTE 6 - RESTRUCTURING COSTS: In January 2000, the Company's Toronto-based subsidiary, Euro Brokers Canada, Ltd. ("EBCL"), formalized a plan to terminate its operations later in 2000. In connection therewith a portion of the business conducted by EBCL was relocated to New York in July 2000. EBCL has reserved $238,400 for costs expected to be incurred subsequent to the ceasing of operations, which occurred on June 30, 2000. These costs consist primarily of employee severance costs, lease termination costs and the disposal of fixed assets. This reserve is expected to be fully utilized during 2000 and is representative of costs that are not associated with future revenues and are either incremental or contractual with no economic benefit. NOTE 7 - NET CAPITAL REQUIREMENTS: The Company's U.S. broker-dealer subsidiary, Maxcor Financial Inc. ("MFI"), is subject to the Securities and Exchange Commission's Uniform Net Capital Rule (rule 15c3-1), which requires the maintenance of minimum regulatory net capital. MFI has elected to use the alternative method, as permitted by the rule, which requires that MFI maintain minimum regulatory net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined; or 4% of the funds required to be segregated pursuant to the Commodity Exchange Act and regulations thereunder. MFI's membership in the Government Securities Clearing Corporation ("GSCC") requires it to maintain minimum excess regulatory net capital of $10,000,000. In addition, a number of the Company's other subsidiaries operating in various countries are subject to capital rules and regulations issued by the designated regulatory authorities to which they are subject. At June 30, 2000, MFI's regulatory net capital was approximately $13,024,000 and exceeded the minimum regulatory requirement under rule 15c3-1 of $250,000 by approximately $12,774,000. NOTE 8 - SUBSEQUENT EVENT: On August 11, 2000, the Company acquired the privately-held Tradesoft Technologies, Inc., a business-to-business e-commerce technology provider of electronic trading platforms, in exchange for cash of approximately $2.1 million and 375,000 shares of MFGI's common stock, issued from Treasury and having a then market value of approximately $500,000. Page 13 of 49 Pages NOTE 9 - SEGMENT REPORTING: In accordance with the requirements for interim period reporting under Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), the Company is reporting the operating revenues (commission income, trading gains and information sales revenue) and net income (loss) attributable to its operating segments. The Company has defined its operating segments based upon geographic location. Although all segments are primarily engaged in the inter-dealer brokerage business, they are managed separately to reflect their unique market, employment and regulatory environments. The reportable segments for the three and six month periods respectively ended June 30, 2000 and June 30, 1999 as defined by SFAS 131 consist of the United States, United Kingdom, Japan, Canada and Switzerland. United States amounts are principally derived from the Company's New York office, but include all U.S. based operations. Japan amounts include the consolidated results of operations of the Tokyo Partnership, with net income for 2000 including the one-time, after-tax gain of approximately $1.5 million on the partial sale of the Company's interest in the Tokyo Partnership ($2.2 million on a pre-tax basis, see Note 5). United Kingdom amounts include the consolidated balances of Euro Brokers Finacor Limited ("EBFL"), the Company's combined venture with Finacor S.A. ("Finacor"). Other geographic segments which did not meet the SFAS 131 materiality thresholds for the year ended December 31, 1999 and which are not expected to meet these thresholds for the year ended December 31, 2000 have been included in "All Other".
United United States Kingdom Japan Canada Switzerland All Other Total ----------- ------------ ----------- ---------- ----------- ----------- ----------- Three months ended June 30, 2000 Operating revenues $18,849,993 $ 10,611,409 $ 5,163,030 $ 142,356 $ 147,180 $ 770,994 $35,684,962 Net income (loss) 783,253 ( 328,487) 12,595 ( 78,562) ( 142,558) 61,631 307,872 Three months ended June 30, 1999 Operating revenues $19,805,861 $ 14,026,891 $ 5,006,204 $ 293,800 $ 839,792 $ 578,501 $40,551,049 Net income (loss) 559,312 124,412 243,473 ( 3,025) 82,915 39,916 1,047,003 Six months ended June 30, 2000 Operating revenues $39,158,897 $ 25,011,281 $10,395,110 $ 323,066 $ 334,081 $ 1,605,375 $76,827,810 Net income (loss) 1,757,491 ( 277,323) 1,508,261 ( 262,229) ( 302,945) 147,952 2,571,207 Six months ended June 30, 1999 Operating revenues $39,858,326 $ 31,011,868 $11,191,097 $ 538,197 $1,846,116 $ 1,103,803 $85,549,407 Net income (loss) 866,418 851,869 775,887 ( 34,001) 155,807 4,823 2,620,803
Page 14 of 49 Pages Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Commission income for the three months ended June 30, 2000 decreased $5,355,413 to $34,556,641, compared to $39,912,054 for the comparable period in 1999. The decrease resulted primarily from the combination of decreased brokerage in London and Geneva of approximately $4.1 million and decreased brokerage in New York of approximately $1.4 million. The reduction in London was broad-based and included most interest rate derivative products. The decline in Geneva was primarily the result of a reduction in brokerage staff and the transfer of some customer relationships to the London office. Brokerage in New York decreased primarily as a result of reducing or discontinuing certain marginal or loss-making brokerage desks, including parts of the energy-related derivatives group in 1999, and reduced market activity for emerging market debt securities. The decrease in New York was offset in part by an increase in brokerage of U.S. Treasury repurchase agreements as a result of the hiring of a new brokerage team during the fourth quarter of 1999. Interest income for the three months ended June 30, 2000 and June 30, 1999 was comparable at $468,968 and $466,896, respectively, reflecting the offsetting effects of an increase associated with higher average cash and cash equivalent balances and rising interest rates, and a decrease associated with a reduction in the average inventory of municipal securities held. Other income for the three months ended June 30, 2000 increased $594,525 to $1,202,395, compared to $607,870 for the three months ended June 30, 1999. This increase was primarily the result of the combined effect of an increase in trading gains on municipal securities and a full period of income derived from the Company's licensing agreement with Telerate, Inc. for a variety of pricing and other data on emerging market debt securities, which commenced in May 1999. Payroll and related costs for the three months ended June 30, 2000 decreased $2,159,707 to $25,900,707, compared to $28,060,414 for the three months ended June 30, 1999. This decrease was primarily the result of reduced employment costs in London and Geneva of approximately $2.1 million, reflective of decreased commission income. As a percentage of operating revenues, payroll and related costs increased to 72.6% for the three months ended June 30, 2000 as compared to 69.2% for the three months ended June 30, 1999, primarily reflective of fixed salary costs in certain derivatives brokerage groups in London which experienced reduced brokerage activity. Communication costs for the three months ended June 30, 2000 decreased $215,979 to $3,450,089, compared to $3,666,068 for the three months ended June 30, 1999, primarily as a result of cost reduction efforts in New York throughout 1999 and into 2000. Page 15 of 49 Pages Travel and entertainment costs for the three months ended June 30, 2000 decreased $204,987 to $2,039,404, compared to $2,244,391 for the three months ended June 30, 1999. As a percentage of operating revenues, travel and entertainment costs were comparable for the three months ended June 30, 2000 and June 30, 1999 at 5.7% and 5.5%, respectively, reflective of continued efforts to correlate these costs to revenue levels. Occupancy costs represent expenses incurred in connection with various operating leases for the Company's office premises and include base rent and related escalations, maintenance, electricity and real estate taxes. For the three months ended June 30, 2000, these costs decreased $33,556 to $1,277,364, compared to $1,310,920 for the three months ended June 30, 1999, primarily reflecting the effect of a reduction in leased space in Stamford, Connecticut as a result of the closing of certain departments within the energy-related derivatives group and the relocation of the remaining departments to the New York office. Depreciation and amortization expense consists principally of depreciation of communication and computer equipment and leased automobiles and amortization of leasehold improvements and intangible assets. For the three months ended June 30, 2000, depreciation and amortization decreased $116,865 to $947,359, compared to $1,064,224 for the three months ended June 30, 1999, primarily as a result of a reduction in depreciable fixed assets. The decrease in depreciable fixed assets reflected in part the Company's increased use of operating leases to finance the upgrading of communication and information systems during 1999 and 2000. Clearing fees are fees for transaction settlements and credit enhancements which are charged by clearing institutions where the Company acts as a riskless principal on a fully matched basis. These expenses decreased $115,104 to $842,912 for the three months ended June 30, 2000, compared to $958,016 for the three months ended June 30, 1999, due primarily to a decrease in the number of cleared transactions, primarily in emerging market debt securities. Interest expense for the three months ended June 30, 2000 decreased $123,690 to $127,055, compared to $250,745 for the comparable period in 1999, primarily as a result of the combined effect of a lesser average aggregate amount of debt (loan, notes and capitalized lease obligations payable) outstanding during the current period and a decrease in average margin borrowings to finance municipal securities positions. General, administrative and other expenses include such operating expenses as corporate insurance, office supplies and expenses, legal fees, audit and tax fees, food costs and dues to various industry associations. For the three months ended June 30, 2000, these expenses decreased $374,319 to $980,682, as compared to $1,355,001 for the three months ended June 30, 1999, primarily as a result of a reduction in consumption taxes in Europe and reductions in various other general and administrative expenses due to continued efforts to reduce these costs. For the three months ended June 30, 2000, the Company had a loss from its 15% equity interest in Yagi Euro of $2,183, as compared to a loss of $41,696 for the three months ended June 30, 1999, primarily as a result of the positive effects of Yagi Euro combining its conventional products businesses with those of Nittan, effective January 1, 2000. Page 16 of 49 Pages Provision for income taxes for the three months ended June 30, 2000 decreased $266,626 to $675,196, compared to $941,822 for the three months ended June 30, 1999, primarily due to decreased levels of pre-tax income. For the three months ended June 30, 2000, minority interest in consolidated subsidiaries resulted in a reduction of net losses from such subsidiaries of $322,819, as compared to a reduction of net income from such subsidiaries of $46,520, primarily as a result of reduced brokerage activity in EBFL, the Company's combined venture in London with Finacor. Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Commission income for the six months ended June 30, 2000 decreased $9,133,502 to $75,190,664, compared to $84,324,166 for the comparable period in 1999. The decrease resulted primarily from the combined effect of decreased brokerage in London and Geneva of approximately $7.5 million, decreased brokerage in the Tokyo Partnership of approximately $796,000 and decreased brokerage in New York of approximately $1.1 million. The reduction in London was broad-based and included most interest rate derivative products. The decline in Geneva was primarily the result of a reduction in brokerage staff and the transfer of some customer relationships to the London office. Brokerage in the Tokyo Partnership decreased in part due to a decline in the market share maintained in the early part of 1999. In New York, the decrease resulted primarily as a result of reducing or discontinuing certain marginal or loss-making brokerage desks, including parts of the energy-related derivatives operations in 1999, and reduced market activity for emerging market debt securities. The decrease in New York was offset in part by an increase in brokerage of U.S. Treasury repurchase agreements, as a result of the hiring of a new brokerage team during the fourth quarter of 1999, and an increase in brokerage in interest rate derivative products, reflecting both improved market activity and market share. Interest income for the six months ended June 30, 2000 increased $67,790 to $890,681, compared to $822,891 for the six months ended June 30, 1999, reflecting the offsetting effects of an increase associated with higher average cash and cash equivalent balances and rising interest rates, and a decrease associated with a reduction in the average inventory of municipal securities held. Other income for the six months ended June 30, 2000 increased $2,784,773 to $3,834,879, compared to $1,050,106 for the six months ended June 30, 1999, primarily due to a one-time gain on a partial sale of the Company's interest in the Tokyo Partnership, net of related transaction costs, of approximately $2.2 million (approximately $1.5 million on an after-tax basis) and a full period of income derived from the Company's licensing agreement with Telerate, Inc. for a variety of pricing and other data on emerging market bonds, which commenced in May 1999. These increases were offset in part by a decrease in trading gains on municipal securities transactions. Page 17 of 49 Pages Payroll and related costs for the six months ended June 30, 2000 decreased $1,597,655 to $55,672,579, compared to $57,270,234 for the six months ended June 30, 1999. The decrease was primarily the result of decreased employment costs in London and Geneva of approximately $2.9 million as a result of decreased commission income. This increase was partially offset by increased employment costs in New York and Mexico City of approximately $750,000 as a result of improved profitability, and increased employment costs in the Tokyo Partnership of approximately $575,000, reflecting an increase in brokerage staff in part as a result of the admission of Nittan to the Tokyo Partnership. As a percentage of operating revenues, payroll and related costs increased to 72.5% for the six months ended June 30, 2000 as compared to 66.9% for the six months ended June 30, 1999, primarily reflective of fixed salary costs in certain derivatives brokerage groups in London, which experienced reduced brokerage. Communication costs for the six months ended June 30, 2000 decreased $576,087 to $6,970,393, compared to $7,546,480 for the six months ended June 30, 1999, primarily as a result of cost reduction efforts in New York throughout 1999 and into 2000. Travel and entertainment costs for the six months ended June 30, 2000 decreased $174,488 to $4,146,306, compared to $4,320,794 for the six months ended June 30, 1999. As a percentage of operating revenues, travel and entertainment costs were comparable for the six months ended June 30, 2000 and June 30, 1999 at 5.4% and 5.1%, respectively, reflective of continued efforts to correlate these costs to revenue levels. Occupancy costs decreased $395,094 to $2,455,740, for the six months ended June 30, 2000, compared to $2,850,834 for the six months ended June 30, 1999, primarily reflecting the combined effect of a reduction in leased space in Stamford, Connecticut as a result of the closing of certain departments within the energy-related derivatives group and the relocation of the remaining departments to the New York office, and a reduction in rent tax rates in London. Depreciation and amortization expense for the six months ended June 30, 2000 decreased $374,917 to $1,903,974, compared to $2,278,891 for the six months ended June 30, 1999, primarily as a result of a reduction in depreciable fixed assets. The decrease in depreciable fixed assets reflected in part the Company's increased use of operating leases to finance the upgrading of communication and information systems during 1999 and 2000. Clearing fees for the six months ended June 30, 2000 decreased $259,944 to $1,684,433, compared to $1,944,377 for the six months ended June 30, 1999, due primarily to a decrease in the number of cleared transactions, primarily in emerging market debt securities. Interest expense for the six months ended June 30, 2000 decreased $190,073 to $265,862, compared to $455,935 for the comparable period in 1999, primarily as a result of the combined effect of a lesser average aggregate amount of debt (loan, notes and capitalized lease obligations payable) outstanding during the current period and a decrease in average margin borrowings to finance municipal securities positions. Page 18 of 49 Pages Restructuring costs of $238,400 were incurred during the six months ended June 30, 2000, relating to a reserve for costs expected to be incurred by the Company's Toronto-based subsidiary subsequent to the ceasing of its operations on June 30, 2000. This reserve was established primarily for employee severance costs, lease termination costs and the disposal of fixed assets. The Company has since relocated a portion of the business conducted in Toronto to New York. General, administrative and other expenses decreased $741,953 to $2,442,245 for the six months ended June 30, 2000, as compared to $3,184,198 for the six months ended June 30, 1999, primarily as a result of a reduction in consumption taxes in Europe and reductions in various other general and administrative expenses due to continued efforts to reduce these costs. For the six months ended June 30, 2000, the Company had income from its 15% equity interest in Yagi Euro of $111,503, as opposed to a loss of $53,839 for the comparable period in 1999, primarily as a result of the Company's approximately $86,000 share of a one-time, after tax gain realized by Yagi Euro on its restructuring activities and the positive effects of Yagi Euro combining its conventional products business with those of Nittan, effective January 1, 2000. Provision for income taxes for the six months ended June 30, 2000 decreased $574,946 to $2,177,114, compared to $2,752,060 for the six months ended June 30, 1999, primarily due to decreased levels of pre-tax income. For the six months ended June 30, 2000, minority interest in consolidated subsidiaries resulted in a reduction of net losses from such subsidiaries of $500,526, as compared to a reduction of net income from such subsidiaries of $918,718, primarily as a result of reduced brokerage activity in EBFL, the Company's combined venture in London with Finacor. Liquidity and Capital Resources A substantial portion of the Company's assets, similar to other brokerage firms, is liquid, consisting of cash, cash equivalents and assets readily convertible into cash, such as receivables from broker-dealers and customers and securities owned. Securities owned principally reflect municipal security positions taken in connection with the Company's brokerage of municipal securities business. Positions are generally held for short periods of time and for the purpose of facilitating anticipated customer needs and are generally financed by margin borrowings from a broker-dealer that clears these transactions on the Company's behalf on a fully-disclosed basis. At June 30, 2000, as reflected on the Consolidated Statements of Financial Condition, the Company had net assets relating to its municipal securities business of approximately $4.0 million, reflecting securities owned of approximately $8.4 million, financed by a payable to its clearing broker of approximately $4.4 million. MFI is a member of the GSCC for the purpose of clearing U.S. Treasury repurchase agreements. Pursuant to such membership, MFI is required to maintain excess regulatory net capital of $10,000,000, and a minimum deposit of $5,000,000. In addition, MFI's clearing arrangements Page 19 of 49 Pages require certain minimum collateral deposits with its clearing firms. The aforementioned deposits have been reflected as deposits with clearing organizations on the Consolidated Statements of Financial Condition. At June 30, 2000, the Company did not have a loan outstanding under its revolving credit facility with General Electric Capital Corporation ("GECC"). The facility provides for borrowings of up to $5 million, expires on June 17, 2004 and is secured by substantially all the assets of Euro Brokers Inc. ("EBI"), a U.S. subsidiary. The borrowing availability under the facility (which approximated $3.5 million at June 30, 2000) is determined based upon the level and condition of the billed accounts receivable of EBI. The agreement with GECC contains certain covenants, which require EBI, and the Company as a whole, to maintain certain financial ratios and conditions. Notes payable at June 30, 2000 of approximately $1.4 million reflects the remaining installments of approximately $1.1 million due on a fixed rate note payable to GECC issued in December 1999 which is secured by all owned equipment of EBI and is payable in monthly installments through December 2002, and a (pound)200,000 (approximately $303,000 at June 30, 2000) note, due March 31, 2001, issued by EBFL to Monecor (London) Limited, a subsidiary of Finacor and the minority shareholder of EBFL. The Series B Preferred Stock, with an aggregate stated value of $2,000,000, is redeemable at any time at the Company's option and is subject to mandatory redemption on October 1, 2008 or within 60 days of the disposition of the Company's investment in Yagi Euro, the current holder. All payments required under the terms of the loan, notes and Series B Preferred Stock are expected to be paid in timely fashion from the Company's resources. In May 2000, the Company's Board of Directors authorized a repurchase program for up to 10% of its then-outstanding common stock, or 833,744 shares. Purchases are to be made from time to time as market and business conditions warrant, in open market, negotiated or block transactions. Purchases have been and are anticipated to be funded using the Company's existing cash resources, including available borrowings under the revolving credit facility with GECC. As of June 30, 2000, the Company had purchased 68,002 shares of its common stock under this program at an aggregate purchase price of $121,451. The Company and its subsidiaries, in the ordinary course of their business, 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. The Company has historically met regulatory net capital and stockholders' equity requirements and believes it will be able to continue to do so in the future. Page 20 of 49 Pages Forward-Looking Statements Certain statements contained in this Item 2 and elsewhere in this report, as well as other oral and written statements made by the Company 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, the Company has identified these forward-looking statements by words such as "believes", "anticipates", "expects", "intends" and similar phrases. Such forward-looking statements, which describe the Company's current beliefs concerning future business conditions and the outlook for the Company, are subject to significant uncertainties, many of which are beyond the control of the Company. Actual results or performance could differ materially from that expected by the Company. Uncertainties include factors such as market and economic conditions, the success of technology development and deployment, the status of relationships with employees, clients and clearing firms, possible third-party litigations or other unanticipated contingencies, the actions of competitors and government regulatory changes. For a fuller description of these and additional uncertainties, reference is made to the "Competition", "Regulation", "Cautionary Statements" and "Quantitative and Qualitative Disclosures about Market Risk" sections of the Company's 1999 Form 10-K and to the Company's subsequent filings with the Securities and Exchange Commission. The forward-looking statements made herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The Company's market risk analysis did not materially change from the market risk analysis as of December 31, 1999 presented in the Company's 1999 Form 10-K. Page 21 of 49 Pages PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Information required in response to this item is incorporated herein by reference to Item 5 of the Company's Current Report on Form 8-K dated June 8, 2000. Item 5. Other Information On August 11, 2000, the Company acquired the privately-held Tradesoft Technologies, Inc., a business-to-business e-commerce technology provider of electronic trading platforms, in exchange for cash of approximately $2.1 million and 375,000 shares of MFGI's common stock. The Company's press release announcing this acquisition is attached hereto as Exhibit 99.1 and is hereby incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Description 10.1 Agreement for Securities Clearances Services, dated as of March 20, 2000, between Wexford Clearing Services Corporation and Maxcor Financial Inc.(1) 27 Financial Data Schedule (filed in electronic form only) 99.1 Press Release, dated August 14, 2000 - --------------------------- (1) Portions of this exhibit have been redacted and confidential treatment sought pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (b) Reports on Form 8-K During the three months ended June 30, 2000, the Company filed two current reports on Form 8-K, respectively dated May 17, 2000 and June 8, 2000. The May 17th Form 8-K reported on the Company's announcement of the authorization of a repurchase program for up to 10% of the Company's outstanding common stock. The June 8th Form 8-K reported on the results of the Company's annual meeting of stockholders (election of directors and ratification of appointment of independent accountants). Page 22 of 49 Pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2000 MAXCOR FINANCIAL GROUP INC. (Registrant) /s/ Gilbert D. Scharf --------------------------------------------- Gilbert D. Scharf, Chairman of the Board, President and Chief Executive Officer /s/ Keith E. Reihl --------------------------------------------- Keith E. Reihl, Chief Financial and Principal Accounting Officer and Director Page 23 of 49 Pages EXHIBIT INDEX
Exhibit Description Page - ------- ----------- ---- 10.1 Agreement for Securities Clearance Services, dated 25 as of March 20, 2000, between Wexford Clearing Services Corporation and Maxcor Financial Inc.(1) 27 Financial Data Schedule (filed in electronic form only) 47 99.1 Press Release, dated August 14, 2000 48
- ---------------------- (1) Portions of this exhibit have been redacted and confidential treatment sought pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Page 24 of 49 Pages EX-10.1 2 0002.txt AGREEMENT FOR SECURITIES CLEARANCE SERVICES Exhibit 10.1 [Wexford Clearing Services Corporation Letterhead] Agreement for Securities Clearance Services Maxcor Financial Inc. This letter sets forth our agreement (the "Agreement"), made as of March 20, 2000, concerning certain clearing services to be performed by Wexford Clearing Services Corp. ("Wexford"), a wholly owned, fully guaranteed subsidiary of Prudential Securities Inc. ("PSI"), for Maxcor Financial Inc. ("Introducing Firm") with respect to transactions of Approved Counterparties (as defined below) in the securities specified in Exhibit A hereto ("Specified Securities"). It is understood and agreed that this Agreement is contingent upon the approval of the New York Stock Exchange, Inc. ("NYSE"). 1. Certain Definitions A. "Applicable Rules" are, to the extent applicable, the Securities Act of 1933 and The Exchange Act of 1934, all rules and regulations thereunder and interpretations by the Securities and Exchange Commission ("SEC"), the rules and regulations of the National Association of Securities Dealers ("NASD") and the NYSE, all as in effect from time to time. B. An "Approved Counterparty" is a dealer trading with Introducing Firm or a customer of Introducing Firm, which Wexford as of the date of this Agreement is accepting as a counterparty for trades brokered by Introducing Firm or to which Wexford hereafter sends a letter in the form of Exhibit B and which, in either case, Wexford continues to consider acceptable; provided, however, that (i) Wexford will make no material changes to the form of Exhibit B without the prior consent of Introducing Firm and (ii) any decision by Wexford to change the status of an Approved Counterparty will be communicated either orally and followed by fax or in writing to Introducing Firm in advance of its implementation. C. A "Back-to-Back Transaction" occurs where Introducing Firm (i) has executed in a recorded conversation a sale by an Approved Counterparty to be settled by Wexford's parent, PSI, ("Side One") of Specified Securities and a buy to be settled by Wexford's parent, PSI, by another Approved Counterparty of Specified Securities ("Side Two"), (ii) has confirmed that Side One and Side Two agree on all details of the trade that must be met in order to settle (i.e. that Side One and Side Two are Validated Transactions) and (iii) has transmitted Side One and Side Two to Wexford on the same day. D. "Clearing Corporation" means CEDEL/Euroclear or any other clearing organization that settles Transactions that Wexford clears for Introducing Firm. E. A "Matching Back-to-Back Transaction" is a Back-to-Back Transaction with respect to which the counterparty to Side One and Side Two have both submitted instructions to the Clearing Corporation in the form required to settle Side One and Side Two, and a "Matching Transaction" is a Back-to-Back Transaction with respect to which only one counterparty has submitted instructions to the Clearing Corporation in the form required to settle the side to which such counterparty is a party. F. "Transactions" are any trades transmitted by Introducing Firm hereunder to Wexford for clearing and settlement. G. A "Validated Transaction" is a sale or purchase of Specified Securities with an Approved Counterparty for which the Introducing Firm has confirmed all of the trade details necessary for settlement. 2. Responsibilities of Introducing Firm A. Transmitting Transactions Introducing Firm shall execute orders for purchases and sales of Specified Securities by Approved Counterparties and transmit the Transactions to Wexford three times a day, at approximately 12:00 p.m. and 3:00 p.m., and by no later than 6:00 p.m. Eastern Standard Time (EST), (the last of which being referred to as the "Cut-Off Time"). Any Transactions that Wexford receives after the Cut-Off Time shall be subject to the additional fees set forth on Schedule A hereto. (i) Transmitting Back-to-Back Transactions Introducing Firm shall not transmit to Wexford any Transaction that, by the Cut-Off Time, is not a Back-to-Back Transaction, with the following exception. Notwithstanding anything to the contrary in the Additional Terms forming a part of Exhibit B (the "Additional Terms"), Introducing Firm may transmit only Side One or Side Two, if at the end of the trading day one of the two sides is not a Validated Transaction, subject to the aggregate amount of such one-sided Transactions not exceeding a limit established by Wexford and communicated to Introducing Firm from time to time. Introducing Firm shall exert reasonable best efforts to transmit a Validated Side One or Side two the following business day. If Introducing Firm has not done so by the end of the day after the settlement date, Wexford may, upon prior notice to Introducing Firm, on the second day after settlement date buy in or sell out the securities to settle the other side. Introducing Firm shall be liable for all loss, costs and expenses relating thereto to the extent set forth in Sections 2.D. and 5.A. The foregoing right of Introducing Firm to delay the transmission of one side is subject to (i) termination at any time that Wexford deems that it is no longer prudent to accept only one side and (ii) satisfactory amounts on deposit in the Collateral Account, in Wexford's sole discretion. In any event, such one-sided Transactions shall give rise to the additional fees established in Section 3.A. (iii) and Schedule A, regardless of when after trade date Introducing Firm transmits to Wexford the other side of the Transaction. B. Responsibility for Accounts Except as otherwise specified in this Agreement, Introducing Firm shall be solely responsible for the opening, approving and monitoring of counterparties (the "Accounts"), and ensuring that Transactions are in compliance with the Applicable Rules. Such responsibility, where applicable, includes, but is not limited to: 2 (i) Using due diligence to learn and on a continuing basis to know the essential facts of each customer, knowing all persons holding power of attorney over any Account, being familiar with each order in any Account and at all times to comply fully with Rule 405 of the NYSE and the Conduct Rules of the NASD, and any interpretations thereof, and all similar Applicable Rules; (ii) selecting, investigating, training and supervising all personnel who open, approve or authorize transaction in the Accounts; (iii) establishing written procedures for the conduct of the Accounts and ongoing review of all Transactions in Accounts, and maintaining compliance and supervisory personnel adequate to implement such procedures; (iv) determining the suitability of all Transactions; (v) ensuring that there is a reasonable basis for all recommendations made; (vi) determining the appropriateness of the frequency of trading in Accounts; (vii) determining the authorization and legality of each transaction in the Account; (viii) determining the amount of any difference between the prices paid or received by an Account for a Specified Security and the prices paid or received by Wexford for said Specified Security; (ix) obtaining and maintaining all documents necessary for the performance of Introducing Firm's responsibilities under this Agreement and retaining such documents in accordance with all the Applicable Rules; (x) responding to all its customer inquiries and complaints, and promptly notifying Wexford in writing of complaints concerning Wexford; (xi) arranging for completion of all Wexford forms and providing any supporting documents required for the opening and maintenance of the Account and (xii) promptly furnishing Wexford with all information concerning its customer and Introducing Firm's relationship with its customer and any related documents that Wexford may reasonably require. Nothing herein shall restrict Wexford from making any further inquiry or investigation, as Wexford deems necessary. Introducing Firm authorizes and directs Wexford to (i) furnish promptly any written customer complaint received by Wexford, regarding Introducing Firm or its associated persons and relating to functions and responsibilities allocated to Introducing Firm, directly to Introducing Firm and to Introducing Firm's designated examining authority, and (ii) notify the customer, in writing, that Wexford has received the complaint and that the complaint has been furnished to Introducing Firm and Introducing Firm's designated examining authority. All other correspondence in the nature of customer inquiries or customer complaints relating to functions and responsibilities allocated to Wexford is to be directed to and responded to by Wexford. All such correspondence (including customer inquiries and complaints) is to be reviewed and replied to by Wexford or Introducing Firm depending on who is responsible for the function which is the subject matter of the correspondence. If such correspondence is not directed to the appropriate party initially, Wexford or Introducing Firm shall promptly forward such correspondence to the appropriate party. C. Volume Limitations Introducing Firm shall not transmit to Wexford more than the number of Transactions per day that Wexford informs Introducing Firm from time to time constitute the Introducing Firm's volume limit, as set by Wexford in its reasonable discretion, acting in good faith. Any Transactions in excess of the volume limitation, as in effect from time to time, may be rejected by Wexford unless Wexford has earlier indicated orally or in writing in the course of the applicable day that it will accept such Transactions. 3 D. Indemnification Introducing Firm agrees to indemnify and hold harmless Wexford, its officers, directors, employees and affiliates, against any and all losses, costs, claims and expenses (including reasonable attorneys' fees), as incurred, (a) arising out of (i) Wexford acting as clearing broker for Introducing Firm pursuant to this Agreement, (ii) Introducing Firm's failure to perform its obligations under this Agreement or the willful misconduct of Introducing Firm, and (b) constituting Introducing Firm Failure Costs or Counterparty Failure Costs (all referred to as "Indemnified Losses"), but excluding Credit Failure Costs, as defined in Section 5.B., any indirect or consequential losses, lost opportunity costs, or any Indemnified Loss caused by Wexford's or PSI's negligence, Wexford's or PSI's failure to perform their respective obligations under this Agreement, or Wexford's or PSI's willful misconduct. Wexford shall give Introducing Firm prompt written notice of any matter that may constitute an Indemnified Loss hereunder, and, if the Indemnified Loss involves a third-party claim, the Introducing Firm may, but shall not be obligated to, assume the defense thereof with counsel of its own choosing and at its own expense. E. Recording, Retaining Tapes Introducing Firm shall record every trading conversation with counterparties to Transactions and shall retain tapes of all such conversations for at least thirty business days, and longer with respect to specified days, Approved Counterparties or Transactions if Wexford so requests, either orally and confirmed by fax or in writing. 3. Responsibilities of Wexford A. Clearing Subject to the exception described in Section 2. A. (i), Wexford's parent, PSI, is obligated to clear only Matching Back-to-Back Transactions and Matching Transactions with Approved Counterparties in Specified Securities, which entails Wexford's parent, PSI, taking a position as a fully disclosed principal on Side One and on Side Two of Matching Back-to-Back Transactions (or, in the case of Matching Transactions on the side that is matched) pursuant to the following procedure. (i) Upon receipt of a transmission of Back-to-Back Transactions from Introducing Firm, Wexford may, but is not obligated to, check whether all or any number of such Transactions fail to meet the definition of a Back-to-Back Transaction. Subject to the exception established in Section 2.A. (i), any Transaction that does not meet the definition of a Back-to-Back Transaction may be rejected by Wexford, and Wexford's parent, PSI, shall not, unless the Transaction is subsequently accepted by Wexford, be principal to the counterparty nor carry the position on its books. (ii) Wexford shall download to the Clearing Corporation by either the end of the day of trade date or, with respect to Transactions transmitted after the Cut-Off Time, on T +1, the trade details received from Introducing 4 Broker for each Transaction that Wexford has not rejected pursuant to subsection (i) above. (iii) On the business day following the download of information regarding any Transaction to the Clearing Corporation, Wexford shall review a report from the Clearing Corporation indicating whether any Transactions were not Back-to-Back Transactions or were not Matching Back-to-Back Transactions. In either case, if Introducing Firm has transmitted any Transaction to Wexford other than a Back-to-Back Transaction, Introducing Firm shall pay to Wexford the applicable fees set forth in Schedule A, and, as set forth in Section 5.A., Introducing Firm shall reimburse Wexford for all Introducing Firm Failure Costs. Wexford's parent, PSI, shall settle as fully disclosed principal any Transactions for which Wexford has sent a confirmation, pursuant to Section 3.B. The sending of a confirmation shall mean that Wexford's parent, PSI, has taken a position as principal and is therefore carrying such Transactions on its books, notwithstanding that Introducing Firm remains financially responsible to Wexford hereunder for any Introducing Firm Failure Costs and Counterparty Failure Costs. Upon prior notice to Introducing Firm, Wexford may take commercially reasonable action to settle or liquidate any unmatched Back-to-Back Transactions for which it has sent a confirmation to the counterparty and has submitted settlement instructions to the Clearing Corporation. B. Confirmations No later than T+1 or one day after Wexford has received a Transaction, whichever is later, Wexford shall deliver confirmations to all counterparties on Transactions that Wexford has not rejected pursuant to Section 3.A. (i) hereof and that Wexford is obligated to transmit to the Clearing Corporation, pursuant to Section 3.A. (ii). From the time that Wexford transmits a confirmation with respect to a Transaction pursuant to this Section 3.B, its parent, PSI, shall be acting as principal for and carrying such Transaction on its books for regulatory capital purposes. For the avoidance of doubt with respect to any Transaction transmitted to Wexford pursuant to the exception described in Section 2.A (i), Wexford's parent, PSI, shall act as principal for and carry such Transaction on its books for regulatory capital purposes, provided that it is a Validated Transaction, notwithstanding anything to the contrary in the Additional Terms. C. Revenue; Fees Wexford shall receive on settled Matching Back-to-Back Transactions and Matching Transactions revenue in the form of commissions of Introducing Firm or the spread between Side One and Side Two. Wexford shall remit to Introducing Firm within five business days of the end of each calendar month such amounts remaining after Wexford deducts (i) its fee, as established in Schedule A, including any additional fees set forth therein for transmissions after the Cut-Off Time pursuant to Section 2.A. and for transmissions of non Back-to-Back Transactions pursuant to Section 3.A (iii) ("Fees"), (ii) Introducing Firm Failure Costs, (iii) Counterparty Failure Costs and (iv) amounts for any Indemnified Losses. Wexford shall furnish Introducing Firm with a detailed supporting schedule with each revenue payment. Wexford's determination of the amount payable to Introducing Firm 5 with respect to any calendar month shall be conclusive and binding on the parties hereto if Introducing Firm does not object thereto in writing, with details of its objections, within thirty (30) days after its receipt of such supporting schedule and any reasonably requested additional information with respect thereto, provided such request is made no later than 15 days after initial receipt of the supporting schedule. D. Safekeeping/Credit Wexford shall be responsible for (i) the delivery and receipt of funds and/or Specified Securities to and from Accounts, as applicable, and for the transfer of Specified Securities to and from Accounts and (ii) the receipt, timely delivery and safeguarding of funds and securities and maintenance of books and records (including preparation and timely transmittal of the trade confirmations and statements) relating to all Transactions settled by Wexford or PSI pursuant to Section 3.A. Although Wexford in no way undertakes to extend credit to any Approved Counterparty, if it were to do so, any credit shall be extended in compliance with Regulation T, Rule 431 of the NYSE Rules and any other applicable margin regulations. E. Indemnification Wexford agrees to indemnify and hold harmless Introducing Firm, its officers, directors, employees and affiliates, against any and all losses, costs, claims and expenses, reasonable legal fees (including reasonable legal fees incurred in the enforcement of this provision), as incurred, (a) caused by (i) Wexford's or PSI's failure to perform their respective obligations under this Agreement or (ii) Wexford's or PSI's negligence or willful misconduct or (b) constituting Credit Failure Costs, as defined in Section 5.B. (all referred to as "IF Indemnified Losses"), but excluding any indirect or consequential losses, or lost opportunity costs. The Introducing Firm shall give Wexford prompt written notice of any matter that may constitute an IF Indemnified Loss hereunder, and, if the IF Indemnified Loss involves a third party claim, Wexford may, but shall not be obligated to, assume the defense thereof with counsel of its own choosing and at its own expense. F. Reports Wexford will provide Introducing Firm with same-day reports of Transactions that do not constitute Back-to-Back Transactions and with daily morning reports, starting with T+1, of Transactions that are not Matching Transactions. Simultaneously with the execution of this Agreement, and annually thereafter, Wexford shall furnish to Introducing Firm a list of all reports (i.e., exception and other types of reports) which it offers to Introducing Firm to assist Introducing Firm to supervise and monitor its introduced accounts in order for Introducing Firm to carry out its functions and responsibilities pursuant to this Agreement. These reports are in addition to the data, information or reports provided to Introducing Firm in the ordinary course of providing clearing Services to Introducing Firm. Introducing Firm shall notify Wexford promptly, in writing, of those specific reports offered by Wexford that Introducing Firm requires to supervise and monitor its introduced accounts. Annually, within 30 days of July 1 of each year, Wexford shall give written notice to Introducing Firm's chief executive and compliance officers, indicating, as of the date of such notice, the list of reports offered to 6 Introducing Firm pursuant to this paragraph and specifying those reports that were actually requested by and/or supplied to Introducing Firm as of such date. At the same time, Wexford shall provide a copy of this written notice to Introducing Firm's designated examining authority. Simultaneously with the execution of this Agreement, Introducing Firm shall furnish Wexford with a list of its chief executive and compliance officers and the name of its designated examining authority. 4. Separate Responsibilities Pursuant to NYSE Rule 382, the parties have allocated between themselves in this Agreement responsibility for compliance with all applicable laws, rules and regulations of the SEC, NYSE and NASD. In addition, for purposes of the Securities and Exchange Commission's financial responsibility rules and SIPC, the Introducing Firm's customers will be considered customers of Wexford and not customers of the Introducing Firm; provided, however, that nothing in this Section shall cause the Introducing Firm's customers to be construed or interpreted as customers of Wexford for any other purpose or to negate the intent of any other Section of this Agreement, including, but not limited to, the delineation of responsibilities as set forth elsewhere in this Agreement. Each party shall be solely responsible for (i) adherence to Applicable Rules and for the supervision of its own operations area and personnel; (ii) compliance with all restricted/control stock requirements, as applicable to it; (iii) compiling and filing its respective regulatory reports, as applicable; and (iv) supplying the other with reasonable access to its relevant records and supplying any information in its possession reasonably requested by such party in order for both parties to properly perform their respective functions under the Agreement. Each party shall be responsible for its own errors with respect to this Section 4. 5. Failure to Match; Failure to Settle; Responsibilities of the Parties A. Not Back-to-Back Transactions/Introducing Firm Failure In the event Wexford receives a Transaction that does not meet the definition of a Back-to-Back Transaction for any reason, including without limitation, (i) the failure of Introducing Firm to transmit to Wexford Validated Transactions or (ii) the failure of Introducing Firm to transmit to Wexford Side One and Side Two on the same day, Introducing Firm shall have full responsibility for, and shall pay to Wexford upon demand, all amounts constituting Wexford's reasonable out-of-pocket costs (whether or not already paid), losses and expenses (including reasonable attorneys' fees) arising therefrom including, without limitation, costs to buy-in, borrow or sell-out the securities, to compel performance by the counterparty, or to pay additional personnel or overtime, but only if such additional personnel or overtime costs are beyond the ordinary course of business. All of the foregoing is referred to as "Introducing Firm Failure Costs". B. Settlement Failure/Counterparty Failure In the event Wexford has transmitted a Back-to-Back Transaction to the Clearing Corporation that becomes a Matching Back-to-Back Transaction but that (i) fails on settlement date due to failure of the counterparty to deliver securities or cash or (ii) fails 7 to become a Matching Back-to-Back Transaction because of the failure of the counterparty to either Side One or Side Two to send to the Clearing Corporation adequate instructions required for settlement, but excluding in either case counterparty failure due to actual or impending bankruptcy or similar insolvency proceedings or credit issues ("Credit Failure Costs"), Introducing Firm shall be responsible for, and shall pay to Wexford upon demand, all amounts constituting Wexford's reasonable out-of-pocket costs (whether or not already paid), losses and expenses (including reasonable attorneys' fees) arising from such fail, including, without limitation, costs to buy-in, borrow or sell-out securities, to compel performance by the counterparty, to pay additional personnel or to pay overtime, but only if such personnel or overtime costs are beyond the ordinary course of business. All of the foregoing costs, losses, and expenses are referred to herein as the "Counterparty Failure Costs". C. Suspension of Certain Trading If at any time the number of Transactions (either Side One or Side Two), with respect to which the counterparty has not provided Clearing Corporation with matching instructions, reaches an amount that Wexford finds unacceptable Wexford may, acting in good faith, suspend accepting Transactions from Introducing Firm, with respect to that counterparty, immediately upon written or oral notice, until such time that Wexford decides that it is prudent to resume accepting such Transactions hereunder. If at any time the number of Transactions that are not Back-to-Back Transactions reaches an amount that Wexford finds unacceptable (subject to Section 2.A. (i)), Wexford may, acting in good faith, suspend accepting Transactions from Introducing Firm immediately upon written or oral notice, until such time that Wexford decides that it is prudent to resume accepting Transactions hereunder. D. Regulatory Capital It is understood that in no event shall Introducing Firm Failure Costs, Counterparty Failure Costs or Indemnified Losses include any costs or expenses of Wexford or PSI incurred in connection with capital charges for Transactions. In conformity with the SEC No-Action Letter dated November 3, 1998 and publicly available November 10, 1998 ("No-Action Letter") relating to the capital treatment of assets in the proprietary account of an introducing broker ("PAIB") and to permit Introducing Firm to use PAIB assets in its net capital computations, Wexford and Introducing Firm agree as follows: 1) Introducing Firm shall identify to Wexford in writing all accounts that are, or from time to time may be, proprietary accounts of Introducing Firm. Wexford shall perform a computation for PAIB assets of Introducing Firm ("PAIB Reserve Computation") in accordance with the customer reserve computation set forth in Rule 15c3-3 under the Securities Exchange Act of 1934 ("Customer Reserve Formula") with the following modifications: A) Any credit (including a credit applied to reduce a debit) that is included in the customer reserve formula may not be included as a credit in the PAIB Reserve Computation; 8 B) Note E (3) to Rule 15c3-3a which reduces debit balances by 1% under the basic method and subparagraph (a)(1)(ii)(A) of Rule 15c3-1 which reduces debit balances by 3% under the alternative method shall not apply; and C) Neither Note E (1) to Rule 15c3-3a nor Exchange Interpretation /04 to Item 10 of Rule 15c3-3a regarding securities concentration charges shall be applied to the PAIB Reserve Computation. 2) The PAIB Reserve Computation shall include all proprietary accounts of introducing Firm. All PAIB assets shall be kept separate and distinct from customer assets under the Customer Reserve Formula in Rule 15c3-3. 3) The PAIB Reserve Computation shall be prepared within the same time frames as those prescribed by Rule 15c3-3 for the Customer Reserve Formula. 4) Wexford shall establish and maintain a separate "Special Reserve Account for the Exclusive Benefit of Customers" with a bank in conformity with the standards of paragraph (f) of Rule 15c3-3 ("PAIB Reserve Account"). Cash and/or qualified securities as defined in the Customer Reserve Formula shall be maintained in the PAIB Reserve Account in an amount equal to the PAIB reserve requirement. 5) If the PAIB Reserve Computation results in a deposit requirement, the requirement may be satisfied to the extent of any excess debit in the Customer Reserve Formula of the same date. However, a deposit requirement resulting from the Customer Reserve Formula shall not be satisfied with excess debits from the PAIB Reserve Computation. 6) Within two business days of entering into this Agreement, Introducing Firm shall notify its designated examining authority in writing (with a copy to Wexford) that it has entered into this Agreement regarding the capital treatment of Introducing Firm's PAIB assets. 7) Commissions receivable and other receivables of Introducing Firm from Wexford (excluding clearing deposits) that are otherwise allowable assets under Rule 15c3-1 may not be included in the PAIB Reserve Computation, provided the amounts have been clearly identified as receivables on the books and records of Introducing Firm and as payables on the books of Wexford. 8) If Introducing Firm is a guaranteed subsidiary of Wexford or if Introducing Firm guarantees Wexford (i.e., guarantees all liabilities and obligations) then the proprietary accounts of Introducing Firm shall be excluded from the PAIB Reserve Computation. 9) Upon discovery that any deposit made to the PAIB Reserve Account did not satisfy its deposit requirement, Wexford shall by facsimile or telegram immediately notify its designated examining authority and the SEC. Unless a corrective plan is found acceptable by the SEC and the designated examining authority, Wexford shall provide written notification within 5 business days of the date of discovery to Introducing Firm that PAIB assets held by Wexford shall not be deemed allowable assets for net capital purposes. The notification shall also state that if Introducing Firm wishes to continue to count its PAIB assets as allowable, it has until the last business day of the month following the month in which the notification was made to transfer all PAIB assets to another clearing broker. However, if the deposit deficiency is remedied before the time at which Introducing Firm must transfer its PAIB assets to another clearing broker, Introducing Firm may choose to keep its assets at Wexford. 10) Wexford and Introducing Firm shall adhere to the terms of the No Action Letter, including the Interpretations as set forth therein, in all respects. 9 6. Fees and Charges Introducing Firm agrees to pay Wexford the fees and charges set forth in Schedule A hereto. 7. Introducing Firm Representations and Covenants Introducing Firm represents, warrants and covenants to Wexford as follows: (i) It is a member in good standing of the NASD. (ii) It is and during the term of this Agreement will remain duly registered or licensed and in good standing as a broker/dealer under the Applicable Rules. (iii) It has all the requisite authority in conformity with all Applicable Rules to enter into this Agreement and to retain the services of Wexford in accordance with the terms hereof and has taken all necessary action to authorize the execution of this Agreement and the performance of the obligations hereunder. (iv) It is in compliance, and during the term of this Agreement will remain in compliance with (a) the capital and financial reporting requirements of any and all national securities exchange or other securities exchange and/or securities association of which it is a member, (b) the capital requirements of the Securities and Exchange Commission and (c) the NASD Conduct Rules. (v) It shall provide representatives of any governmental body having jurisdiction over the respective businesses of the parties with reasonable access to the records relating to Accounts and their owners. (vi) It shall keep confidential any information it may acquire as a result of this Agreement regarding the business and affairs of Wexford, which requirements shall survive the termination of this Agreement. 8. Wexford and PSI Representations and Covenants Each of PSI and Wexford represents, warrants and covenants to Introducing Firm as follows: (i) Each of PSI and Wexford is a member in good standing of the NASD and of the NYSE. (ii) Each of PSI and Wexford is and during the term of this Agreement will remain duly licensed and in good standing as a broker/dealer under the Applicable Rules. (iii) Each of PSI and Wexford has all the requisite authority, in conformity with all Applicable Rules to enter into and perform this Agreement and has taken all necessary action to authorize the execution of this Agreement and the performance of the obligations hereunder. (iv) Each of PSI and Wexford is in compliance, and during the term of this Agreement will remain in compliance with (a) the capital and financial reporting requirements of every national securities exchange and/or other securities exchange or association of which it is a member, (b) the capital requirements of the Securities and Exchange Commission and (c) the NASD Conduct Rules. 10 (v) The names and addresses of Introducing Firm's customers which have or which may come to Wexford's or PSI's attention in connection with the clearing and related functions it has assumed under this Agreement are confidential and shall not be utilized by Wexford or PSI except in connection with the functions performed by Wexford and PSI pursuant to this Agreement. Notwithstanding the foregoing, should any customer of Introducing Firm request, on an unsolicited basis that Wexford become its broker, acceptance of such Account by Wexford and PSI shall in no way violate this representation and warranty, nor result in a breach of this Agreement. (vi) Each of PSI and Wexford shall keep confidential any information it may acquire as a result of this Agreement regarding Introducing Firm's business and affairs, which requirement shall survive the termination of this Agreement. 9. Nature of Relationship A. Wexford shall limit its services pursuant to the terms of this Agreement to that of the clearing and the specified related functions described herein, and Introducing Firm shall not hold itself out as an agent of Wexford or of any subsidiary or company controlled directly or indirectly by or affiliated with Wexford. Neither this Agreement nor any operation hereunder shall create a general or limited partnership, association or joint venture or agency relationship between the parties. B. Introducing Firm shall not, without the prior written approval of Wexford, place any advertisement in any newspaper, publication, periodical or any other media if such advertisement in any manner makes reference to Wexford or to the clearing arrangements set forth in this Agreement; provided, however, that the public parent company of Introducing Firm may name Wexford and accurately describe this Agreement in any filing such company makes with the Securities and Exchange Commission pursuant to either the Securities Act of 1933 or the Securities Exchange Act of 1934. C. Should Introducing Firm in any way hold itself out as, advertise or represent that it is the agent of Wexford, Wexford may, at its option, terminate this Agreement and Introducing Firm shall be liable for any loss, liability, damage, claim, cost or expense (including but not limited to reasonable fees and expenses of legal counsel) sustained or incurred by Wexford as a result of such a representation of agency or apparent authority to act as an agent of Wexford or agency by estoppel. 10. Deposit of Collateral A. To ensure Introducing Firm's performance of its obligations under this Agreement (including, without limitation, the payment of Fees, Introducing Firm Failure Costs, Counterparty Failure Costs and Indemnified Losses), there shall be established a securities holding account with Wexford to be opened in the name of Introducing Firm and designated as the Introducing Firm Collateral Account (the "Collateral Account"). The Collateral Account shall at all times contain cash, securities, or a combination of both, having a market value of not less than the sum required by Wexford as of the date of this Agreement; provided that Wexford shall have the right, in its reasonable discretion, to increase upon not less than three business days 11 notice to Introducing Firm, the Collateral Amount to reflect materially changed conditions relating to the Introducing Firm or its business or an unusually high number or value of unresolved errors or fails with respect to Transactions (the "Collateral Amount"). Said securities shall consist only of direct obligations issued by or guaranteed as to principal and interest by the United States and such other securities as Wexford may in writing consent to, in its sole discretion, from time to time. As collateral security for all of its obligations to Wexford under and with respect to this Agreement, Introducing Firm hereby pledges, assigns and grants a first priority security interest and lien to Wexford in and upon all property from time to time now or hereafter in the Collateral Account, and Wexford shall have all rights and remedies with respect thereto of a secured party under the New York Uniform Commercial Code or other applicable law, as well as its other rights hereunder. Introducing Firm represents and warrants that any Collateral shall be free of any lien, pledge or interest other than that of Wexford. Introducing Firm shall be entitled to receive all cash distributions made on or in respect of the securities unless the market value of the cash and/or securities in the Collateral Account is less than the Collateral Amount. If the Collateral Account consists of cash, Wexford shall pay interest to the Introducing Firm on this cash held from time to time at an agreed upon rate. If at any time the market value of the cash and/or securities in the Collateral Account fall below 90% of the Collateral Amount, as determined by Wexford, Wexford may, by notice to Introducing Firm, demand that Introducing Firm deliver additional collateral to the Collateral Account no later than the third following business day to increase the market value to the full Collateral Amount. B. Except as provided herein, Introducing Firm shall not have access to, nor have any right to transfer or withdraw any cash or securities from, the Collateral Account without the prior written consent of Wexford. The Collateral Account shall not be deemed to be margin for any Approved Counterparty accounts. C. Wexford shall have the right to deduct the amount of any and all amounts owed to Wexford hereunder, including without limitation, Fees, Introducing Firm Failure Costs and Counterparty Failure Costs and Indemnified Losses, from the securities collateral, and, in such event, Wexford shall have the right to liquidate the securities in a commercially reasonable manner; provided, however, Wexford agrees to deduct the foregoing amounts first from revenue, pursuant to Section 3.C. and then, to the extent revenue is insufficient, from the Collateral Account. Any amounts deducted from revenue or the Collateral Account, which are subsequently determined (by Wexford, mutual agreement, arbitration or otherwise) to be incorrect, excessive or otherwise not the responsibility of Introducing Firm, shall be promptly reimbursed by Wexford to Introducing Firm together with interest thereon (from the date of deduction to the date of reimbursement) calculated at a comparable Treasury rate. D. Within thirty (30) days of the termination of this Agreement, Wexford will (a) effect the payment and delivery to Introducing Firm of the funds and/or securities in the Collateral Account, less any amounts Wexford is entitled to withdraw under the preceding paragraph; provided, however, that Wexford may retain in the Collateral Account such amount as it reasonably deems appropriate for its protection from any claim or proceeding of any type then threatened or pending, until the final determination thereof is made, and (b) deliver or cause to be delivered to Introducing Firm (without the reproduction or other copying thereof) all documents and other materials, including customer lists, prepared in connection with this Agreement or 12 the business of Introducing Firm, except for such documents and other materials as Wexford may have destroyed in the normal course of its business or may be required to keep for regulatory purposes or otherwise as may be required by law. In any event, Wexford agrees that no such documents or other materials will be distributed by it to any person or group in or outside Wexford that does not have responsibility for the administration, legal or audit review of this Agreement or transactions thereunder. 11. Assignment This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. Introducing Firm may not assign its rights and/or obligations hereunder without the prior written consent of Wexford, which consent shall not be unreasonably withheld. 12. Amendments; Waiver; Integration Any amendment or supplement to this Agreement and any waiver of any rights hereunder must be in writing signed by the Parties. Further, without limiting the foregoing, no failure to enforce a right, no act or pattern of conduct shall constitute an amendment, supplement or waiver. This Agreement supersedes all other agreements between the parties with respect to the subject matter hereof. 13. Governing Law This agreement shall be construed and interpreted in accordance with the internal laws of the state of New York without reference to choice of law principles. 14. Arbitration Each party agrees that any claim, dispute, grievance or controversy arising under this Agreement or any Transactions executed or arising therefrom or thereunder shall be settled by arbitration pursuant to and in accordance with Article XI of the NYSE Constitution and the NYSE Arbitration Rules. Each party further agrees to service of process in any arbitration proceeding by mailing of copies thereof (by registered or certified mail, if practicable) postage prepaid, or by telex, to it at an address for notices under this Agreement; and agrees that nothing herein shall affect the other party's right to effect service of process in any other manner permitted by NYSE Arbitration Rules, and that each party shall have the right to bring a proceeding for enforcement of a judgment entered by any arbitration panel against the other party in any court or jurisdiction in accordance with applicable law. 15. Termination This Agreement may be terminated by either party upon ninety days' written notice given to the other party at any time, or immediately upon written notice following an 13 Event of Default which event shall occur if (i) either party shall fail to perform or observe any term, covenant or condition to be performed or observed by it hereunder and such failure shall continue to be un-remedied for a period of five business days after written notice from the non-defaulting party to the defaulting party specifying the failure and demanding that the same be remedied; (ii) any representation or warranty made by either party shall prove to be incorrect at any time in any material respect; (iii) a receiver, liquidator or trustee of either party, or of any material property held by either party, is appointed by court order; or either party is adjudicated bankrupt or insolvent; or any of its material property is sequestered by court order and such order is not appealed and stayed within fifteen days of its entrance; or a petition is filed against either party under the bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect and is not dismissed within fifteen days of such filing, or (iv) either party makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of either party, or of any property held by either party. 16. Notices Written notices shall be properly made if hand delivered, mailed (registered mail) or telecopied ("faxed") to the party entitled to receive such notices at the following address or telephone number: To Introducing Firm: Maxcor Financial Inc 2 World Trade Center, 84th Floor New York, N.Y. 10048-0697 Tel. No: (212) 748-7040 Fax No.: (212) 748-7049 Attn.: Steven Vigliotti, Chief Financial Officer To Wexford: Wexford Clearing Services Corp. One New York Plaza, 34th Floor New York, New York 10292-2034 Tel. No.: 212-778-7772 Fax No.: 212-778-7622 Attn. Thomas S. Dillon, Executive Vice President 17. Miscellaneous There will be no Account opened on behalf of any employee or officer of any New York Stock Exchange member organization, self-regulatory organization or other financial institution without the prior written consent of Wexford. 14 This Agreement and all transactions in the Accounts, will be subject to the applicable constitution, rules, by-laws, regulations and customs of any securities market, association, exchange or clearing house where such transactions are effected, and also to all applicable NYSE and NASD Rules and to all U.S. federal and state laws and regulations. All telephone conversations in connection with Transactions under the Agreement may be electronically recorded and may be used to resolve any uncertainty or any dispute arising in connection with this Agreement or any transaction hereunder. 15 Please indicate your agreement with the foregoing by signing and returning the enclosed copy of this letter. Very truly yours, Wexford Clearing Services Corporation By: /s/ Thomas S. Dillon ----------------------------------- Name: Thomas S. Dillon ----------------------------------- Title: Executive Vice President ----------------------------------- Prudential Securities Incorporated By: /s/ Daniel Cavanaugh ----------------------------------- Name: Daniel Cavanaugh ----------------------------------- Title: Senior Vice President ----------------------------------- ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE: Maxcor Financial Inc By: /s/ Keith E. Reihl ----------------------------------- Name: Keith E. Reihl ----------------------------------- Title: Chief Operating Officer ----------------------------------- 16 Exhibit A --------- Schedule of Specified Securities -------------------------------- 1. Securitized Adjustable Rate Mortgages 2. Asset-backed Securities bearing a credit rating of AA or better 3. Collateralized Mortgage Obligations bearing a credit rating Have AA or better 4. GNMA, FNMA and Freddie Mac Securities 5. Brady Bonds 6. U.S. Government and Agency Securities 7. Sovereign Debt - EuroClear/CEDEL/DTC Eligible 8. Euro Bonds 9. Corporate Securities 10. Convertible Bonds 11. Municipal Securities 12. High Yield Corporate Bonds 17 Exhibit B --------- RE: Maxcor Financial Inc. Allocation of Brokerage Account Responsibilities ------------------------------------------------ Ladies and Gentlemen: As you know, your account has been introduced to Wexford Clearing Services Corporation ("Wexford"), a wholly owned, fully guaranteed subsidiary of Prudential Securities Incorporated ("PSI"), by your brokerage firm, Maxcor Financial Inc. ("Maxcor"), for the purpose of Wexford's parent, PSI, clearing trades, as fully disclosed principal, in certain specified securities pursuant to the clearing services agreement between Maxcor and Wexford. Once Wexford enters a trade on its books, you will be considered a customer of Wexford for purposes of the Securities and Exchange Commission's financial responsibility rules and the Securities Investor Protection Act. Nothing herein shall cause customers of Maxcor to be construed as customers of Wexford for any other purpose.. In establishing this relationship, Maxcor is acting solely on your behalf and not on behalf of, or as agent of, Wexford. Maxcor shall remain responsible for the ongoing relationship that it has with you, and for the following: o Learning your investment objectives and opening, approving and monitoring your account and in all respects complying with Rule 405 of the New York Stock Exchange. o Reviewing your account and all orders in it and supervising all investment advice. o Accepting or rejecting your orders and correcting errors in trade details in order to transmit only matching transactions to Wexford. o Ensuring that all the transactions conducted in your account are in compliance with all applicable law and rules. o Responding to any inquiries or complaints you may make concerning your account. o Supervising all functions performed by Maxcor's employees, including investment advisory, sales, trading and account opening and approving activities. Additionally, Maxcor is responsible to Wexford for supplying all documentation required by Wexford, notwithstanding the fact that Wexford has at all times the right to contact you directly regarding its information requirements. Wexford has at all times the right, exercisable in its sole discretion, to refuse to accept orders for your account. Wexford will be responsible for the following areas: 18 o Clearing as a principal, transactions in your account pursuant to Maxcor's instruction. o Maintaining books and records and filing regulatory reports. o Delivering and receiving funds and securities to or from your account, transfers of securities, payment of dividends or interest and the handling of exchange or tender offers, rights, warrants and redemptions in accordance with the last instructions received either from you or Maxcor. o Safeguarding funds and securities. o Preparing and transmitting confirmations and statements. Any questions you may have concerning the conduct of your account should be addressed directly to Maxcor. You agree that any and all telephone conversations between us with respect to the contemplated transactions may be tape recorded and we each authorize the other to do so and we each hereby waive further notice of tape recording. In the event of any dispute, tapes can be used in any forum in which a dispute is sought to be resolved. THE ATTACHED ADDITIONAL TERMS SET FORTH ADDITIONAL INFORMATION, PROCEDURES AND LIMITATIONS APPLICABLE TO TRANSACTIONS IN YOUR ACCOUNT. PLEASE READ IT CAREFULLY. UNLESS AND UNTIL OTHERWISE AGREED AMONG YOU, WEXFORD AND MAXCOR, THE TERMS OF THIS LETTER, INCLUDING THE ATTACHED ADDITIONAL TERMS, WILL GOVERN ANY TRADES THAT MAXCOR INTRODUCES TO WEXFORD ON YOUR BEHALF. Very truly yours, WEXFORD CLEARING SERVICES CORPORATION By: ---------------------------------- Thomas S. Dillon Executive Vice President 19 ADDITIONAL TERMS ---------------- The following are procedures for trades in the specified securities below which will be initiated by Maxcor Financial Inc. ("Maxcor"), and in which you and Wexford Clearing Services Corporation's ("Wexford") parent, Prudential Securities Incorporated ("PSI"), will act as principals. In general, Wexford will be responsible for the booking of trades initiated by Maxcor and approved by Wexford and for maintaining appropriate records of all such transactions and sending you confirmation. Maxcor. is responsible for adherence to those securities laws, regulations and rules, that apply to it regarding its own operations and for supervision of its own personnel. Authorized employees of Maxcor may, by telephone, directly contact your trading desk to initiate transactions between you and Wexford. However, such employees of Maxcor will not be acting as agent for Wexford and no proposed transaction will be deemed approved or confirmed by Wexford and no such transaction will be consummated by Wexford until your trading desk compares the transaction by telephone with Wexford's authorized personnel and Wexford directly confirms by telephone the transaction. Wexford's parent, PSI, will act as a principal in each of these back-to-back transactions only after each side, i.e., the purchase side and the sell side is independently and severally confirmed by Wexford's authorized personnel. Exceptions to telephonic confirmation will be if trades are confirmed via GSCC for Government Securities; MBSCC for Mortgage-backed Securities; MATCH-EM System operated by Emerging Markets Clearing Corporation, or EuroClear, or CEDEL for Euro Bonds and Emerging Debt Securities (LDC's); and GEMS MATCH-EM System or EuroClear or CEDEL for Brady Bonds. Wexford agrees that once a transaction has been so confirmed, Wexford's parent, PSI, is thereafter acting as principal in the trade, and you agree that you will always act as principal on the other side of the trade. All your customary documentation for trades in which you act as principal, regardless of how initiated, should be sent directly to Wexford and Wexford will send you its usual documentation. The specified securities are: Securitized Adjustable Rate Mortgages; Asset-backed Securities bearing a credit rating of AA or better; CMO's bearing a credit rating of AA or better; GNMA, FNMA and Freddie Mac Securities; Brady Bonds; U.S. Government and Agency Securities; Sovereign Debt/ EuroClear/CEDEL eligible; Euro Bonds; Corporate Bonds; Convertible Bonds; Municipal Securities; High Yield Corporate Bonds. Euro and Brady Bond transactions should be submitted to Ken Shore for comparison. Our number is (212) 778-2872; FAX (212) 778-8115/7244/7962. Confirmations should be sent to Wexford Clearing Services Corporation, Attn: Ken Shore, One New York Plaza, and 34th floor, New York, N.Y. 10292. Mortgage trades should be submitted to Len Bialous for comparison. Our number is 212-778-7719; FAX (212) 778-8184. Confirmations of such trades should be sent to Wexford Clearing Services Corporation, Attn: Len Bialous, One New York Plaza, 34th floor, New York, N.Y. 10292. Government trades should be submitted to Bruce Wallace for comparison. Our number is (212) 778-3376. Confirmations of such trades should be sent to: Wexford Clearing Services Corporation, Attn: Bruce Wallace, One New York Plaza, 12th Floor, New York, NY 10292. Corporate and Equity transactions should be submitted to Hilda Mele for comparison. Our number is (212) 778-7746; FAX (212) 778-8184. Confirmations should be sent to Wexford 20 Clearing Services Corporation, Attn: Hilda Mele, One New York Plaza, and 34th floor, New York, N.Y. 10292. Attached please find a complete list of all delivery instructions. 21 Schedule A ---------- Schedule A has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 22 EX-99.1 3 0003.txt MAXCOR FINANCIAL PRESS RELEASE FOR IMMEDIATE RELEASE ---------------------- Maxcor Financial ---------------------- MAXCOR AND EURO BROKERS ANNOUNCE ACQUISITION OF TRADESOFT TECHNOLOGIES TO EXPAND ELECTRONIC TRADING OFFERINGS (New York, New York - August 14, 2000) - Maxcor Financial Group Inc. (Nasdaq: MAXF) today announced that it has acquired the privately-held Tradesoft Technologies, Inc. for a combination of cash and common stock of Maxcor valued at approximately $2.6 million. Tradesoft is a B2B e-commerce technology provider of electronic trading platforms to interdealer brokers and large financial institutions. In conjunction with Maxcor's various Euro Brokers interdealer brokerage operations, Tradesoft has developed what is believed to be the leading electronic alternative trading system (ATS) for trading emerging market debt, with users comprised of some of the largest financial institutions in the world. "We are delighted with the technology and expertise Tradesoft has demonstrated in launching our emerging markets electronic trading system," said Gilbert Scharf, Maxcor's President and Chief Executive Officer. "By integrating their technology seamlessly into our existing back office and screen systems, Tradesoft is revolutionizing the way we deliver brokerage services and helping us fulfill our strategy of also becoming a financial services information and technology provider. We believe this transformation can be extended to our other brokerage operations, as well as new products, to grow our electronic trading presence rapidly on a worldwide basis." The acquisition will accelerate Maxcor's ability to offer its global customer base the benefits of a fully electronic trading alternative across a wider range of products, with automation of order entry, price distribution, continuous order matching and straight through processing. The emerging market debt trading system represents the first of a number of markets, including additional Euro Brokers businesses, that Maxcor intends to automate. Maxcor also expects the technology improvements associated with its new electronic trading systems to provide significant opportunities for improving and strengthening its core voice brokerage operations. "Technology will be the linchpin of our business going forward, and this combination unites the leadership position of Euro Brokers with the best technology available in this market," said Michael Pins, President of Maxcor's broker-dealer subsidiary. "Our largest customers have already embraced Tradesoft's trading system for its superior functionality and ease-of-use, as well as for its anonymity, stability and robust performance." Dan White, Tradesoft's Chief Technology Officer, stated that "the skills and businesses of Tradesoft and Maxcor are a perfect match. Maxcor brings to the table existing order flow, extensive customer relationships and a proven name in its Euro Brokers business units. Euro Brokers' expertise and presence in so many markets, in association with Tradesoft's experience with electronic brokerage systems, will leverage Tradesoft's ability to forge alliances with other intermediaries, trading companies and financial institutions and extend our e-commerce initiatives to new markets and new customers." Maxcor Financial Group Inc. (www.maxf.com), through its various Euro Brokers entities, is a leading domestic and international inter-dealer brokerage firm specializing in interest rate and currency derivatives, emerging market products, cash deposits and other money market instruments, repurchase agreements, corporate bonds and other fixed income securities and certain energy products (including electricity, physical emissions, bandwidth and coal). Maxcor Financial Inc. is the Company's U.S. registered broker-dealer subsidiary and Maxcor Financial Asset Management Inc. is the Company's SEC registered investment adviser subsidiary. The Company employs approximately 570 persons and maintains principal offices in New York, London, and Tokyo, with other offices in Stamford (CT), York (PA), Vancouver (WA), Geneva and Mexico City. Tradesoft Technologies, Inc. (www.tradesoft.com) is a leading B2B e-commerce technology provider to financial intermediaries and large financial institutions. Tradesoft specializes in the design and development of electronic brokerage systems, straight through processing facilities and continuous order matching engine technology. Tradesoft was founded in 1997 and has offices in New York and Parsippany (NJ). Contacts: Maxcor Financial Group Inc., New York Keith Reihl, (212) 748-7000 Tradesoft Technologies, Inc., New York Ian Doull, (212) 748-2615 - -------------------------------------------------------------------------------- This release contains certain "forward-looking" statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Wherever possible, the Company has identified these forward-looking statements by words such as "believes," "anticipates," "intends," "expects" and similar phrases. Such forward-looking statements, which describe the Company's current beliefs concerning future business conditions and the outlook for the Company, are subject to significant uncertainties, many of which are beyond the control of the Company. Actual results or performance could differ materially from that expected by the Company. Uncertainties include factors such as market and economic conditions, the success of technology development and deployment, the status of relationships with employees, customers and clearing firms, possible third-party litigations or other unanticipated contingencies, the actions of competitors, and government regulatory changes. Reference is made to the "Cautionary Statements" section of the Company's 1999 Annual Report on Form 10-K and to the Company's subsequent filings with the Securities and Exchange Commission for a fuller description of these and additional uncertainties. The forward-looking statements made herein are only made as of the date of this press release, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. - -------------------------------------------------------------------------------- 2 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
BD This schedule contains financial information extracted from the Consolidated Financial Statements of Maxcor Financial Group Inc. at and as of June 30, 2000 and is qualified in its entirety by reference to such Consolidated Financial Statements 3-MOS 6-MOS DEC-31-2000 DEC-31-2000 APR-01-2000 JAN-01-2000 JUN-30-2000 JUN-30-2000 20,170,239 20,170,239 17,447,589 17,447,589 0 0 0 0 8,362,482 8,362,482 6,647,327 6,647,327 70,363,529 70,363,529 0 0 4,394,528 4,394,528 0 0 0 0 0 0 1,371,102 1,371,102 2,000,000 2,000,000 0 0 11,392 11,392 29,338,672 29,338,672 70,363,529 70,363,529 628,320 635,646 468,968 890,681 34,556,641 75,190,664 0 0 0 0 127,055 265,862 25,900,707 55,672,579 660,249 4,247,795 660,249 4,247,795 0 0 0 0 307,872 2,571,207 0.04 0.31 0.04 0.30
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