-----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, Q0xcr2RjQel3JUYInW3fVG1ukQWMcQC6M+rJQKn8qm9CkD9j4E8lhsLBq1iBWzmL i+wrOX8en/KcRS2eYVCIVQ== 0001019056-03-000285.txt : 20030331 0001019056-03-000285.hdr.sgml : 20030331 20030331142916 ACCESSION NUMBER: 0001019056-03-000285 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXCOR FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000931707 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 593262958 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25056 FILM NUMBER: 03629226 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-K 1 maxcor_10k02.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to____________ Commission File Number 0-25056 ------- MAXCOR FINANCIAL GROUP INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 59-3262958 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Seaport Plaza, 19th Floor, New York, NY 10038 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (646) 346-7000 -------------- Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share --------------------------------------- (Title of class) Preferred Stock Purchase Rights ------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant (assuming directors, executive officers and 10% stockholders are affiliates), based on the Nasdaq Stock Market(R) last sales price of $5.86 on June 28, 2002 (the last business day of the registrant's most recently completed second fiscal quarter), was approximately $30,000,000. As of March 27, 2003, there were 7,120,060 shares of Common Stock outstanding. Documents Incorporated by Reference: Those portions of registrant's Proxy Statement for its 2003 Annual Meeting of Stockholders (which registrant intends to file pursuant to Regulation 14A on or before April 30, 2003) that contain information required to be included in Part III of this Form 10-K are incorporated by reference into Part III hereof solely to the extent provided therein. MAXCOR FINANCIAL GROUP INC. INDEX ----- Page ---- PART I Item 1. Business.......................................................... 1 Item 2. Properties........................................................ 20 Item 3. Legal Proceedings................................................. 20 Item 4. Submission of Matters to a Vote of Security-Holders............... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................... 21 Item 6. Selected Financial Data........................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 40 Item 8. Financial Statements and Supplementary Data....................... 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 42 PART III Item 10. Directors and Executive Officers of the Registrant................ 42 Item 11. Executive Compensation............................................ 43 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters....................................... 43 Item 13. Certain Relationships and Related Transactions.................... 43 Item 14. Controls and Procedures........................................... 43 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................................... 44 Signatures................................................................. 45 Certifications............................................................. 46 Consolidated Financial Statements and Notes................................ F-1 Index to Consolidated Financial Statements................................. F-2 Exhibit Index.............................................................. X-1 [GRAPHIC OMITTED] This report includes certain statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statement in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Because these forward-looking statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report in the section entitled "Cautionary Statements." For additional information about forward-looking statements, see page 40. References in this report to "we," "us," and "our" mean Maxcor Financial Group Inc. and its subsidiaries and other businesses, unless the context requires otherwise. PART I ITEM 1. BUSINESS Overview Maxcor Financial Group Inc. is a publicly-held financial services holding company, incorporated in Delaware in August 1994. We maintain a web page at WWW.MAXF.COM and our common stock is traded on The Nasdaq Stock Market(R) under the symbol "MAXF." At our web page you can access free-of-charge our current and historical filings with the Securities and Exchange Commission (the "SEC"). In August 1996, we acquired Euro Brokers Investment Corporation, a privately held domestic and international inter-dealer broker for a broad range of financial instruments, having operational roots dating back to 1970. Through our various Euro Brokers businesses, we conduct our core business as a domestic and international inter-dealer brokerage firm, specializing in (i) cash deposits and other money market instruments, (ii) interest rate and credit derivatives, (iii) emerging market debt and related products, (iv) various fixed income securities, including, convertible bonds, U.S. Treasury securities and federal agency bonds, and (v) U.S. Treasury, federal agency and mortgage-backed repurchase agreements. Maxcor Financial Inc., our U.S. registered broker-dealer subsidiary, also conducts institutional sales and trading operations in municipal bonds, high-yield and distressed debt, convertible securities and equities. We also maintain certain specialty subsidiaries. Tradesoft Technologies, Inc. ("Tradesoft"), acquired by us in August 2000, is a software developer and technology provider that specializes in designing trading systems and broker platforms for automating or enhancing order entry and tracking, price and information distribution, order matching and straight through processing. Maxcor Financial Asset Management Inc., an investment adviser registered with the SEC, is engaged in securities lending through its Euro Brokers Securities Lending division. Maxcor Information Inc. is charged with packaging and exploiting the data and other information generated by our inter-dealer brokerage businesses. We have approximately 500 employees worldwide and conduct our businesses through principal offices in New York, London and Tokyo, other offices in Stamford (CT), Nyon (Switzerland) and Mexico City, and correspondent relationships with other brokers throughout the world. Except as described below, we operate in each financial center through wholly-owned subsidiaries. In London, as of January 1, 1999, we formed Euro Brokers Finacor Ltd. ("EBFL"), a 50/50 equity venture with the European broker, Finacor, that combined our respective London-based capital market operations, as well as Finacor's Paris-based capital markets operations. In February 2003 we purchased Finacor's 50% interest in EBFL (held by Finacor's subsidiary, Monecor (London) Limited) at a 30% discount to the book value attributable to this interest, measured as of December 2000, and renamed EBFL as Euro Brokers Limited ("EBL"). The purchase was triggered under the provisions of a shareholders' agreement by the failure of Monecor to provide certain requested funding to EBFL in late 2000. Our other London-based operations, primarily comprised of securities businesses, have been and remain wholly owned. In Tokyo, since 1994, we have had a controlling financial interest in a brokerage venture conducting yen and dollar denominated derivative businesses (the "Tokyo Venture"). Since July 1, 2001, we have had a 57.25% interest in the Tokyo Venture, with Nittan Capital Group ("Nittan") holding the other 42.75%. Previously, from January 1, 2000, we and Nittan respectively held 40% and 30% interests in the Tokyo Venture, with Yagi Euro Nittan ("Yagi Euro"), in which we also held a 15% minority interest, holding the other 30% interest. Prior to 2000, we and Yagi Euro were the sole partners in the Tokyo Venture, each holding a 50% interest. Inter-Dealer Brokerage Businesses In our inter-dealer brokerage businesses, we function primarily as an intermediary, matching up the trading needs of our institutional client base, which is primarily comprised of well-capitalized banks, investment banks, broker-dealers and other financial institutions. We assist our clients in executing trades by identifying counterparties with reciprocal interests. We provide our services through an international network of brokers who service direct phone lines to most of our clients and through proprietary screen systems and other delivery systems that provide clients with real-time bids, offers and pricing information in our various products. Clients use our services for several reasons. First, a client can benefit from the broader access and liquidity provided by our worldwide broker and telecommunications network, which communicates with and services most of the largest banks and securities firms. The result is typically better pricing and faster execution than the client could achieve acting unilaterally. Second, we provide clients with anonymity, both as to their identity and, depending on the product, the size of their proposed trade, thereby enhancing their flexibility and ability to act without signaling their intentions to the marketplace. Third, 2 because of our network, we can provide high-quality pricing and market information, as well as sophisticated analytics and trading and arbitrage opportunities. Our inter-dealer brokerage transactions are principally of two types: (i) "name give-up" transactions, in which we act only as an introducing broker, and (ii) transactions in which we act as a "matched riskless principal." In the first type of transaction, primarily involving money market instruments and derivative products, the trades are arranged while preserving the clients' anonymity, but executed at the last instant on a name give-up basis and settled directly between the counterparties. In these transactions we act solely as an introducing broker who brings the two counterparties together, and not as a counterparty ourselves. Consummation of the transaction may then remain subject to the actual counterparties who have been matched by us accepting the credit of each other. In the second type of transaction, primarily securities transactions, we act as a matched riskless principal, connecting the buyer and seller for the transaction on a fully anonymous basis by acting as the counterparty for each in matching, reciprocal back-to-back trades. This type of transaction is then settled through one of various clearing institutions with which we have contractual arrangements, and who will have previously reviewed and approved the credit of the participating counterparties. Products Our inter-dealer brokerage businesses generally fall into the brokerage of three broad groups of products: (i) money market products, (ii) derivative products and (iii) securities products. Money Market Products In general, money market products take the form of cash deposits or other negotiable instruments placed by one financial institution with another, at an agreed-upon rate of interest, for a fixed period of time. Money market products primarily include offshore deposits (i.e., deposits placed outside the country of denomination), onshore deposits (i.e., deposits placed within the country of denomination), certificates of deposit and short-term commercial paper. U.S. dollars continue to be the most actively traded offshore currency deposit. Other offshore currency deposits may be denominated in Japanese yen, British pounds sterling, Swiss francs, Canadian dollars or the euro. Examples of onshore deposits include term and overnight U.S. federal funds. We broker money market products predominantly to multinational banks. Derivative Products A derivative products transaction generally is an agreement entered into by two parties, in which each commits to a series of payments based upon the price performance of an underlying financial instrument or commodity for a specified period of time. This category includes a broad range of sophisticated financial instruments employed by multinational banks, financial institutions, securities dealers and corporations. Some of the types of derivatives we most frequently broker are interest rate swaps, interest rate options and forward 3 rate agreements, in each case conducted in a multitude of different currencies and localized primarily by office. We also broker credit derivatives in the form of default swaps. In an interest rate swap transaction, two parties agree to exchange interest rate payment obligations on a notional principal amount over the term of the swap. No principal is exchanged, and market risk for the parties is limited to differences in the interest payments. The usual format for swaps involves the exchange of fixed rate payments based on the term of the swap for a series of floating rate payments based on a shorter-term rate. Interest rate options, which include "cap," "floor" and "swaption" transactions, are transactions in which one party grants the other the right (but not the obligation) to receive a payment equal to the amount by which an interest rate either exceeds (for call options) or is less than (for put options) a specified strike rate. Forward rate agreements ("FRAs") are over-the-counter, off-balance sheet instruments designed to give the counterparties protection against a future shift in interest rates for time deposits. The buyer, or borrower, of a FRA agrees to pay the seller, or lender, at some specified future settlement date, an amount of interest based on a notional principal at a fixed rate for a specified period of time. The seller agrees to pay the buyer, on the same future settlement date, an amount of interest based on the same amount of notional principal and the same period of time, but based on the then-prevailing market rate for the time period. No actual principal is exchanged. On the settlement date, the buyer and the seller calculate the present value of the net interest owed, and one party pays the other accordingly. In a default swap transaction, a counterparty who is seeking to buy credit protection pays a periodic fee or premium to the other counterparty (or seller of protection) in order to transfer or hedge credit risk with respect to a particular issuer or security. If the reference issuer suffers a specified credit event within the term of the swap, such as an event of default under its loan agreements or indentures, then the seller of protection pays the loss on the reference security to the buyer, generally either by buying bonds or loans of the issuer from the buyer at par or making a cash payment to the buyer based on the difference between such par amount and the market value of the reference security at the time of default. We broker most of our derivative products predominantly to multinational banks and investment banks. Securities Products Products that we broker in this category consist primarily of a variety of debt obligations issued by governments, government agencies, banks and corporations. We broker transactions in emerging market debt, U.S. Treasury and federal agency securities and repurchase agreements, U.S. domestic convertible bonds, floating rate notes and other corporate securities. 4 Emerging market debt, including Brady bonds, global bonds, Eurobonds, local issues and loans, as well as options on the foregoing, is brokered by specialized teams located in New York, London and Mexico City and through a correspondent broker relationship in Buenos Aires. The market coverage of the teams from these locations is worldwide. Our brokerage of emerging market debt utilizes direct communication phone lines and provides real-time pricing through proprietary, computerized screen systems located in clients' offices or through direct digital feeds. In most emerging markets transactions, we act as matched riskless principal and settle trades through a clearing firm, although we broker some transactions on a name give-up basis. Repurchase agreements are contractual obligations entered into by two counterparties, first to sell securities and then to repurchase those same securities (or the reverse in the case of a buyer) at an agreed upon future date and price. We act as an intermediary mainly for the U.S. primary government dealer community (banks and dealers licensed to participate in auctions of U.S. Treasury securities), as well as for a number of U.S. regional banks and dealers, in the negotiation and execution of U.S. Treasury, federal agency and mortgaged-backed repurchase agreements. As is the case with emerging markets, we disseminate repurchase agreement market information via our proprietary, computerized screens and digital data feeds. Most of the repurchase agreements that we execute for dealers are cleared through the Government Securities Division of the Fixed Income Clearing Corporation ("GSD-FICC") in which our broker-dealer subsidiary, Maxcor Financial Inc., is a member, although some transactions are brokered on a name give-up basis. Our brokerage of U.S. Treasury and federal agency securities is also generally conducted on a riskless principal basis and with the same client base that participates in U.S. Treasury and federal agency repurchase agreements. The clearance of these transactions also occurs at GSD-FICC. Dissemination of market information to clients for these securities similarly relies on our proprietary screen system and digital data feeds. We also use a proprietary front-end broker interface developed by Tradesoft to monitor and manage trading activity and market information, which has the capability of providing fully-automated client execution capability if and when client demand for it grows. We broker securities products to a broad institutional client base, but mostly to banks, investment banks, broker-dealers and other financial institutions. Sales and Trading Businesses In our sales and trading businesses, we provide research and execution to the institutional money management community, as well as to corporations with publicly-traded securities and other institutional clients. In these businesses, we specialize in municipal securities, high yield and distressed debt, convertible securities and equities. Our research analysts provide valuable trading ideas and market insights to our client base. We make this research available by permissioning clients to access our research web links at WWW.MAXF.COM and through other distribution methods. In addition, through the communication and coordination among our sales and trading groups, we allow 5 clients to take advantage of trading strategies across multiple asset classes. Our execution services are designed to provide our clients with discreet placement of client orders with minimal market impact. We allocate a portion of our capital to support limited trading and inventory positions in these businesses, most often for the purpose of facilitating anticipated client needs. We manage the risks associated with these positions by limiting their size and the number of days they are held. They are marked-to-market and monitored on a daily basis. We also utilize a portion of our capital for investment positions in municipal and other securities. Communications Network and Information and Related Systems We conduct our inter-dealer brokerage businesses through a global communications network and sophisticated computerized information systems over which we receive and transmit current market information. Our proprietary screen system and digital data feeds display to all screen-based clients real-time bid, offer and transaction information for various products offered on the system. To ensure rapid and timely access to the most current market bids and offers, the majority of our clients are connected to our brokers and information feeds via dedicated, "always on," point to point telephone and data lines around the world. For products that are screen-brokered, such as emerging market debt and related options, U.S. Treasury and federal agency securities, repurchase agreements, banker's acceptances and commercial paper, we maintain an extensive private network to connect our offices and the specific clients who trade in these products. In this way, all such clients have the simultaneous ability to view and act upon market bids and offers. We also have developed and deployed an Internet real-time distribution capability for both our emerging markets and repurchase agreement screen information, which has allowed access to clients in more remote or unproven brokerage locations without incurring the infrastructure costs associated with expanding our private network. On many of our brokerage desks, the Tradesoft(R) system is used to provide a sophisticated and automated broker station, enhancing brokers' ability to monitor trading activity and relevant market information efficiently and communicate analysis and transaction details to their clients. The system now also incorporates a paperless ticket and confirmation process, which captures relevant trade details and then generates automatic e-mail or fax confirmations to clients. If and when client demand for it in our products grows, the Tradesoft(R) system also retains the ability to be deployed to display real-time bid, offer and transaction information to clients so that they can initiate bids, offers and trades directly through a dedicated keypad at their workstations, with or without contacting one of our voice brokers, using the system's proprietary matching engine. Our proprietary middle-office trade processing system (the "MEB System"), which incorporates an electronic touchpad blotter system for post-trade data input, is integrated with and captures transactions effected through either our proprietary screen system or the Tradesoft(R) system, and 6 thereafter transmits those transactions for back office processing. The MEB System has effectively replaced paper blotters on most securities desks and, by automating a number of manually-intensive processes, has introduced numerous efficiencies to our trade processing and handling, including the ability to handle significantly increased trading volumes, identify unbalanced trade conditions as they occur, impose tighter security and provide clients with more certain and rapid check-outs of their transactions. We maintain teams of computer and communications specialists to provide technological support to the network. We are continually upgrading our technological facilities in order to access and collate market information and redistribute it virtually instantaneously throughout the network. Through the continued development and use of proprietary software, computerized screen displays, digital networks and interactive capabilities, we strive to keep our communication, technology and information systems as current as possible. Although we continue to explore whether more of our inter-dealer brokerage businesses should become screen-based or incorporate a higher degree of automation, we believe that our clients' diverse needs in each of our products require us to remain flexible in our approaches. Currently, we believe that a hybrid approach to servicing our clients, by providing both quality voice brokering and advanced screen system and other technology, including the front end Tradesoft(R) broker station, paperless confirmations and straight through processing, will best enable us to build liquidity, maintain a satisfied employee base and retain client loyalty. Revenues and Expenses Our revenues currently are derived primarily from commissions related to our inter-dealer brokerage businesses. Generally, we receive a commission from both counterparties in a trade, although in trades of certain products only one party pays a commission. The dollar amount of the average transaction generating a commission varies significantly by the type of product and the duration of the transaction. Similarly, the applicable commission will vary according to product and services required and may also reflect discounts for high transaction volumes or other client rebates. Other sources of revenues include (1) the net gains or losses from sales and trading transactions and investment positions involving the assumption of market risk for a period of time, (2) profits or losses from the Tokyo Venture, (3) interest income, derived primarily from cash and cash equivalents, deposits with clearing organizations and interest associated with securities positions, (4) income from the sale of data and financial information generated from our brokerage businesses, and (5) foreign exchange gains and losses. The largest single component of our expenses is compensation paid to our brokers. Attracting and retaining qualified brokerage personnel with strong client relationships is a prerequisite in our business and in the brokerage business in general. Brokers are generally compensated by a combination of fixed salary and incentive payments based on commissions generated by them or on the 7 net profitability of their respective departments. For this reason, compensation expense frequently will increase or decrease in rough proportion to revenues, although the fixed salary component can skew the correlation in businesses with declining revenues by causing decreases in compensation to lag behind decreases in revenues, and starting salaries for new hires in businesses for which revenue growth is sought can increase compensation expenses in advance of realizing the anticipated revenue growth. To manage this area, we include performance-based salary adjustment provisions in substantially all of our broker contracts and closely track revenues and compensation expenses (as well as other direct costs) by department (which may involve one or more products) and by broker, at each location. Most of the markets in which we operate are highly efficient, offering participants immediate access and enormous liquidity. Some markets are subject to a high degree of volatility. Even the slightest variation in price can make the difference between missing or executing a transaction. Consequently, many of our businesses depend heavily on the use of direct line voice communications, advanced telephone equipment, real-time computerized screen systems and digital feeds and proprietary pricing software in order to ensure rapid trade executions and timely analyses for our clients. For this reason, we continually need to expend significant resources on the maintenance, expansion and enhancement of our communication and information system networks. After payroll, such costs have historically represented our second largest item of expenditure. The costs of maintaining sophisticated trading room environments and a worldwide data and communications network comprise another significant portion of the Company's expenses, and, with the usage of electronic execution and matching systems, the need to invest in new technology and Internet deployment strategies has also increased. Our ability to compete effectively is significantly dependent on our ability to maintain a high level of client service, through our proprietary software, computerized screen displays and digital networks, the Tradesoft(R) systems, the MEB System and our provision of whatever additional systems are demanded by clients at any given time. It is this infrastructure and technological commitment that enables us to support our existing client base and product lines, as well as provide a platform for offering brokerage or other services in additional or newly developing financial instruments. Although we maintain sizeable management information services and communications departments, we will also license technology or outsource infrastructure or technology projects, where practical and consistent with our business goals, in order to manage our fixed costs in these areas. Direct client contact, including entertainment, is also an integral part of our marketing program and represents another significant component of our expenses. We have made it a priority to manage these expenditures in a more focused and coordinated fashion, and have had reasonable success in controlling their levels from year-to-year. To grow revenues and stay competitive, we constantly need to analyze and pursue growth opportunities in both new and existing product lines. Product expansion, when undertaken, however, generally leads to an increase in the number of brokerage personnel, and therefore in compensation expense, since the 8 markets usually require brokers to specialize in a single product or group of related products, rather than function as market generalists. Product expansion, and the effort to grow market share, also typically results in increased entertainment expenses and the increased infrastructure and communication costs associated with configuring a new desk and delivering its product to the necessary client base. Other Businesses Through the Euro Brokers Securities Lending division of our SEC-registered investment adviser, Maxcor Financial Asset Management Inc., we conduct a securities lending business. In securities lending, we arrange for the lending of securities held in our clients' portfolios to securities dealers and other market participants who need them to manage their own positions. In exchange for such loaned securities, which include U.S. Treasury and federal agency securities, U.S. corporate bonds (but also non-dollar government securities and corporate bonds) and equities, we arrange for our clients or their custodians to receive either (i) cash collateral, for which we then direct the reinvestment to earn a spread over the rebate rate the client is required to pay in connection with the underlying loan, or (ii) non-cash collateral plus fee income from the borrower. Our securities lending activities are executed solely on an agency basis, so that collateral and cash funds of clients are never received or held by us. Maxcor Financial Services Inc. is a non-regulated subsidiary through which we from time to time develop and initially conduct various new business efforts unrelated to inter-dealer brokerage. It is also charged with managing our firm's investment account. Our information and data subsidiary, Maxcor Information Inc., is charged with exploiting the data generated by our inter-dealer brokerage businesses, including licensing such data to third party vendors. Capital Structure History Our initial public offering occurred in December 1994, and we issued a total of 3,583,333 units, each comprised of one share of common stock, $.001 par value, and two redeemable common stock purchase warrants. The offering raised net proceeds of approximately $20 million. In our August 1996 acquisition of Euro Brokers Investment Corporation, we issued aggregate consideration consisting of approximately $22 million in cash, 4,505,666 shares of common stock and 7,566,625 Series B redeemable common stock purchase warrants, economically identical in their terms to the initial public offering warrants. In November 1997, we consummated an exchange offer, on the basis of 0.1667 of a share of common stock for each warrant of either series (the "Exchange Offer"), pursuant to which we issued an aggregate of 2,380,975 shares of common stock in exchange for 14,283,296 (or approximately 95.1%) of the then-outstanding warrants. As a result of the Exchange Offer, the warrants (and 9 any remaining, related units) were delisted from trading on The Nasdaq Stock Market(R) and deregistered under the Securities Exchange Act of 1934, as amended. Although delisted and deregistered, each warrant entitled the holder thereof to purchase from us one share of Common Stock at an exercise price of $5.00 per share. Each warrant was also redeemable by us at a price of $.01 if the last sales price of the common stock has been at least $8.50 per share for 20 consecutive trading days. During April 2002, 492,795 shares of common stock were issued upon the exercise of a like number of warrants, for total proceeds of $2,463,975. The remaining warrants expired on April 12, 2002. In October 1998, we issued 2,000 shares of a newly created Series B cumulative redeemable preferred stock to our 15% equity affiliate, Yagi Euro, for an aggregate purchase price of $2 million. The preferred stock paid a quarterly cumulative dividend, in arrears, at an annual rate of 2%, and was subject to optional redemption by us at any time, and to mandatory redemption on the tenth anniversary of its issue. The preferred stock did not have conversion rights or, unless there was a payment default, voting rights. In June 2001, upon the sale of our investment in Yagi Euro, we redeemed the preferred stock at its stated value, together with accrued and unpaid dividends thereon. In June 1999, we repurchased 2,986,345 shares of common stock from various partnerships of the venture capital firm, Welsh, Carson, Anderson & Stowe. The aggregate purchase price was approximately $5.23 million, or $1.75 per share. The shares repurchased represented approximately 26.4% of the shares of common stock then outstanding. In May 2000, our Board of Directors authorized a repurchase program for up to 10% of our then outstanding common stock, or 833,744 shares, with purchases to be made from time to time as market and business conditions warranted, in open market, negotiated or block transactions. In January 2001, we completed this repurchase program for an aggregate purchase price of $1,187,650, or $1.42 per share, and our Board authorized an additional repurchase of up to 787,869 shares, or 10% of the then outstanding common stock. In July 2001, this repurchase program was completed for an aggregate purchase price of $1,907,660, or $2.42 per share, and our Board authorized an additional repurchase of up to 709,082 shares, or 10% of the then outstanding common stock. In the week after the September 11th terrorist attacks, this authorization was further expanded by 490,918 shares, to 1,200,000 shares. Through December 31, 2002, we had purchased 589,507 shares under this expanded authorization at an aggregate purchase price of $2,930,886, or $4.97 per share. In August 2000, we issued from treasury 375,000 shares of common stock as part of the consideration for our acquisition of Tradesoft. In August 2001, we received 22,528 of these shares back into treasury as part of a post-closing adjustment valued at approximately $82,000. Through December 31, 2002, 347,500 shares of common stock were issued pursuant to options exercised under our 1996 Stock Option Plan. The 1996 Stock Option Plan provides for options to purchase a maximum of 1,800,000 shares. In 10 connection with certain of these exercises, we received 63,924 shares into treasury as consideration for exercise prices aggregating $316,525. At the Company's annual meeting in June 2002, the Company's stockholders approved the Company's 2002 Stock Option Plan. The 2002 Stock Option Plan provides for incentive awards in the form of stock options, stock appreciation rights, restricted stock and bonus awards. A total of 1,500,000 shares were authorized for awards under the 2002 Stock Option Plan. In April 2002, the Company issued 500,000 common stock purchase warrants to employees under a newly established warrant program to provide inducements and incentives in connection with the formation of a new leveraged finance department (the "Leveraged Finance Warrants"). The Leveraged Finance Warrants issued have an exercise price of $5.875 and vest at the rate of 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries. This warrant program provides for the granting of up to an additional 500,000 common stock purchase warrants, with the same four-year vesting schedule, upon the achievement of specific performance goals. Exercise prices of any such additional warrants (which will not be granted prior to January 1, 2004), will be equal to the higher of the book value per share and the fair market value per share of our common stock at the time of grant. At December 31, 2002, we had outstanding 7,255,160 shares of common stock, 1,700,000 employee stock options and 500,000 Leveraged Finance Warrants. Personnel As of February 28, 2003, we and our businesses employed 389 brokers (including trainees), plus an additional administrative staff, including officers and senior managers, of 125 persons, for a total employee headcount of 514. Of the brokers, 218 were located in the U.S., 126 were located in Europe, and 30 were located in Japan, with the balance distributed among our other office locations. None of our employees are covered by a collective bargaining agreement. We consider our relations with employees to be good and regard compensation and employee benefits to be competitive with those offered by other inter-dealer brokerage firms. Segment and Geographic Data Note 23 to the Consolidated Financial Statements contains summary financial information, for each year of the three-year period ended December 31, 2002, with respect to each of our reportable operating segments, which are based upon the countries in which they operate. 11 Competition The inter-dealer brokerage industry is highly competitive, with the success of a company within the industry dependent on a variety of key factors. These factors include: o the experience of and extent of client networks developed by the firm and its personnel; o the range of products and value-added services offered; o commission rates; o the quality, speed and reliability of service; o proficiency in and ability to implement current technology, including electronic execution and straight through processing; o salaries and other cost structures; and o capital resources and perceived creditworthiness. While there are not many large international inter-dealer brokers and entry into the industry is costly, we encounter intense competition in all aspects of our businesses from a number of companies that have significantly greater resources than us. Recent consolidations in the industry have narrowed the field of competition somewhat, but have also produced combined entities with even greater resources. Moreover, with the recent advent of electronic brokerage in non-equity markets, new potential competitors have emerged that do not have traditional inter-dealer brokerage roots, such as the BrokerTec Global consortium formed by a number of the leading investment banks. In addition, dealer firms within a consortium could elect to conduct a disproportionate or increased share of their business between other member firms, or even to deal directly with each other, thus reducing liquidity in the traditional inter-dealer markets and potentially eroding our market shares. The recent pace of consolidation in the banking and financial services community continues to reduce the number of clients in the marketplace and, accordingly, has further increased the competition among inter-dealer brokers and potentially the downward pressure on already low commission rates. As a result, increases in market volumes do not necessarily result in proportionate increases in brokerage commissions and revenues. During the last several years, the industry has seen an acceleration of the development of electronic execution systems that claim to provide fully automated trade matching. The electronic system first deployed by eSpeed, Inc. in late 1999 successfully garnered liquidity in the U.S. Treasury markets, and continues to do so even after the horrendous losses that firm suffered as a result of the September 11th attacks. Another well-financed competitor, ICAP plc, has announced its plan to acquire BrokerTec. In practice, these systems so far have proved most viable in markets involving very standardized products, such as U.S. Treasuries, spot foreign exchange, commodities and U.S. equities. We believe that more complex financial vehicles, in particular derivatives, are less amenable to fully electronic matching, and that clients in these markets are not inclined to forego talking to voice brokers for information and execution. However, it can be expected that significant efforts and resources 12 will continue to be devoted by our competitors and others to trying to increase the number and penetration of such automated trading platforms across all profitable brokerage markets. The further development and successful deployment of such electronic systems could negatively affect our market shares and ultimately have material adverse effects on our businesses. Although we are devoting substantial financial and other resources to ensure the success of our electronic brokerage and technology initiatives (described above under "Communications Network and Information and Related Systems"), our ability to execute successfully thereon is subject to a number of uncertainties, not all of which are within our control. These include, but are not necessarily limited to, the speed, capacity and interfaces of systems performing acceptably under both normal and stress conditions, the availability of sufficient funds to develop, refine and promote further the systems, the retention of sufficient training and maintenance resources, the desire for and acceptance of the systems by clients, both at the trader and the information technology department levels, the internal broker support for the systems, the timing and success of deployment of competitive systems, and market conditions at the time of deployment. We are inherently reliant on relationships with clients that develop over time, and certain of our brokers have established long-term associations with clients. Our success depends to a significant extent on these relationships and the service we provide our clients. The loss of one or more of our key employees, who are often the target of aggressive recruitment efforts by competitors within the industry, could have a material adverse effect on us. Moreover, the highly competitive hiring environment by itself creates upward pressures on broker compensation that can reduce profit margins. While we have entered into employment agreements with, and granted stock options to, many of our key employees, there can be no assurance that such employment agreements or stock-based compensation will be effective in retaining such persons' services or that other key personnel will remain with us indefinitely. Nor can there be any guarantee that we will be able to attract and retain qualified, experienced individuals, whether to replace current personnel or as a result of expansion, because competition in the brokerage industry for such individuals is intense. Regulation Our businesses are subject to extensive regulation at international, federal and state levels by various regulatory bodies which are charged with safeguarding the integrity of the securities and other financial markets and protecting the interests of clients participating in those markets. Our broker-dealer subsidiary, Maxcor Financial Inc. ("MFI"), is registered with the SEC, all applicable states, and is a member of NASD. Broker-dealers are subject to regulations that cover all aspects of the securities business, including initial licensing requirements, sales and trading practices, safekeeping of clients' funds and securities, capital structure, record-keeping and the conduct of directors, officers and employees. The SEC, other governmental regulatory authorities, including state securities commissions and self-regulatory organizations, such as NASD in the case of MFI, have broad oversight powers, including the ability to institute administrative 13 proceedings that can result in censure, fine, the issuance of cease-and-desist orders, the suspension or expulsion of a broker-dealer, its officers or employees or other similar consequences. At the end of 2001, MFI established a new London branch office in order to conduct certain securities businesses that were previously being conducted in a separate, London-based subsidiary. As a result, these operations of MFI, although primarily overseen by NASD, are also subject to oversight by the London-based regulatory body, the Financial Services Authority. MFI is also a member of the GSD-FICC for the purpose of clearing transactions in U.S. Treasury and federal agency securities and repurchase agreements collateralized by such instruments. Such membership requires MFI to maintain minimum net capital of $10,000,000, including a minimum deposit with GSD-FICC of $5,000,000. In addition, as a result of the recent upgrading of MFI's GSD-FICC membership to dealer status, MFI is required to maintain a minimum net worth of $25 million. MFI is also registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member of the National Futures Association. As such, any business activities by MFI in the futures and options-on-futures markets would be subject to regulation by these bodies. Our subsidiary, Maxcor Financial Asset Management Inc. ("MFAM"), is a SEC-registered investment adviser, pursuant to its securities lending activities. As a result, MFAM's investment advisory business is subject to various federal and state laws and regulations that generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict MFAM from carrying on its investment advisory business in the event that it fails to comply with such laws and regulations and/or to impose other censures and fines. EBL is a Type D registered firm with the Financial Services Authority in the U.K., required to maintain a financial resources requirement generally equal to six weeks average expenditures ($3.9 million at December 31, 2002). Our other foreign businesses are also subject to regulation by the governments and regulatory bodies in their countries, including: (i) the Bank of Japan and the Japanese Ministry of Finance in Japan and (ii) the Banking and Securities National Commission in Mexico. The compliance requirements of these different overseer bodies may include, but are not limited to, net capital or stockholders' equity requirements. We are also subject to SEC rules regarding the regulation of alternative trading systems ("Regulation ATS"). Regulation ATS imposes significant reporting and recordkeeping requirements on so-called "alternative trading systems" and imposes certain substantive requirements, primarily depending upon the scope of coverage and market share of the alternative trading system. Such requirements may include maintaining transparency of certain 14 pricing information, providing fair and equal access to the system, and taking necessary steps to ensure the capacity, integrity and security of the system. A number of our brokerage businesses are subject to Regulation ATS and its requirements. The passage by Congress of the Sarbanes-Oxley Act of 2002 has imposed, and required the promulgation by the SEC of, numerous rules and regulations directly impacting the operation of public companies such as ourselves. These include mandates for: the composition and member qualification of boards of directors and audit committees, the enhanced independence of accounting firms and the manner and content of their communications with audit committees, rigorous certification procedures for financial statements and SEC filings, the establishment and review of and the making of disclosures with respect to internal controls and procedures, the use and reconciliation to generally accepted accounting principles in the United States ("GAAP") of non-GAAP financial information, internal and outside counsel reporting requirements relating to evidence of material violations, disclosures with respect to the adoption of or waivers under codes of ethics, and, generally, significantly expanded, accelerated and more frequent public reporting and disclosure requirements in SEC filings. The foregoing requirements, and additional legislation and regulations, changes in rules promulgated by the SEC or other U.S. federal and state governmental regulatory authorities, self-regulatory organizations or clearing organizations, as well as non-U.S. governments or governmental regulatory agencies, or changes in the interpretation or enforcement of laws and rules, may directly affect our manner of operation and profitability, including as a result of the costs and management time required for compliance. In addition, any expansion of our activities into new areas may subject us to additional regulatory requirements that could similarly affect our manner of operation and profitability. Cautionary Statements As provided under the Private Securities Litigation Reform Act of 1995, we wish to caution investors that the following factors, among others (including the factors discussed above under the "Revenues and Expenses," "Competition" and "Regulation" headings, and the factors discussed below under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk"), could affect our results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this report and elsewhere by us or on our behalf to the public. Please also refer to "Forward-Looking Statements" below, at page 40. We continue to face uncertainties from the September 11th terrorist attacks on the World Trade Center, which destroyed our corporate headquarters and killed 61 of our employees. On September 11, 2001, our New York headquarters on the 84th floor of Two World Trade Center were destroyed when two commercial jet planes hijacked by terrorists crashed into the World Trade Center towers. As a result of the attacks, 61 of our employees and staff members were killed, out of a New York 15 work force of approximately 300. We also lost all of our property and technological infrastructure maintained on site. We have since then accomplished a remarkable recovery - both in human and financial terms - that is a testament to the spirit and hard work of our employees and others, and have recently moved into new, state-of-the-art, permanent headquarters at One Seaport Plaza in lower Manhattan (see "Year Ended December 31, 2002" below under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"). However, the longer-term effects on our business and employees of the dislocation and rebuilding efforts and the coping with the trauma of the attacks and the death of so many of our colleagues are simply unknown. Moreover, the ongoing tension of current world events and the potential for additional terrorist attacks adds another layer to these uncertainties. Adverse changes in economic and market conditions in the current geopolitical environment could negatively impact our business. Our brokerage businesses and profitability are directly affected by economic and market conditions, including the volatility of the securities markets, the volume, size and timing of securities transactions, the level and volatility of interest rates, and the economy in general. Our businesses generally benefit if these factors cause trading volumes in the instruments we broker to increase and, conversely, can suffer if they cause such trading levels to decrease. In the current geopolitical environment there is an increased uncertainty in the performance of the financial markets and the economy as a whole, as well as specifically in the New York financial community. Moreover, in the aftermath of September 11th, any additional terrorist acts, and governments' military and economic responses to them, could further affect the financial markets and the economy, and exacerbate anxieties. To the extent we experience lower trading volumes in the instruments we broker as a result, we are likely to have reduced revenues, which would generally negatively impact our profitability because a portion of our costs is fixed. Unanticipated system or technology failures internally or externally could negatively impact our business or financial results. To remain competitive in our industry, we continuously need to expend significant resources on the maintenance, expansion and enhancement of our communication networks, information systems and other technology, and our business is highly reliant on these systems. Many of these systems are internal, but others are provided by third-party suppliers over whom we have no control, such as telephone companies, online data providers and software and hardware vendors. It is an ongoing risk that the systems we currently have or in the future implement, or the software underlying these systems, will fail in some fashion or be inadequate to the task. During the Asian and Latin American debt crisis that occurred in late October 1997, our then-existing trade processing system for emerging market debt was unable to handle smoothly the extraordinary spike in trading volume that occurred for a sustained five-day trading period. As a result, we experienced significant delays and backlogs in the processing and settlement of such trades and a higher than usual incidence of disputed trades, all of which negatively impacted 1997 fourth quarter earnings. Although we believe that a subsequent significant upgrade to our trade processing systems, together with periodic stress-testing and monitoring, has reduced the likelihood of a similar recurrence for our internal systems, there can be no assurance that there will not be other, unanticipated system or technology failures, internally or externally, that could negatively impact our business or financial results. 16 An increase in the occurrence of "out trades" could have a material adverse effect on our financial condition or results. Our core inter-dealer brokerage business primarily involves one or more of our subsidiaries acting as an intermediary, matching the trading needs of our predominantly institutional client base by providing specialized services. Some of these transactions are executed on a name give-up basis, that is, once the specific economic terms of a proposed transaction are agreed, the names of the individual counterparties are disclosed and, subject to acceptance of the credit, the transaction is confirmed to and completed directly by both counterparties. Other transactions are completed with our broker-dealer subsidiary acting as a matched riskless principal, with the respective parties to the transaction knowing the subsidiary as the counterparty. The transactions are then settled through one of the clearing firms or organizations with which the subsidiary has a contractual relationship. In the process of executing brokerage transactions, from time to time in the fast moving markets in which our subsidiaries and brokers operate, miscommunications or other errors can arise, such as parties knowing different trade details or transactions being completed with only one counterparty ("out trades"), thereby creating a potential liability for us. If the out trade is promptly discovered, thereby allowing prompt correction or disposition of the unmatched position at or around the same price, the risk to us is usually limited. If discovery is delayed, the risk is heightened by the increased possibility of intervening market price movements prior to such correction or disposition. Although out trades usually become known at the time of or later on the day of the trade, on occasion they are not discovered until later in the settlement process. When out trades occur and are discovered, our policy is to have the resultant position corrected or disposed of promptly. Accordingly, the cost of individual out trades can vary widely, although on an aggregate basis in each of our last three fiscal years they have approximated only 1% of total commission income. The occurrence of out trades generally rises with increases in the volatility of the market and, depending on their number and amount, have the potential to have a material adverse effect on our financial condition or results of operations. If any of our clearing agents terminate our contracts with them, our business could suffer. Our broker-dealer subsidiary, Maxcor Financial Inc., has contractual arrangements with a variety of clearing firms and organizations for purposes of clearing and settling the various securities transactions it brokers. Each clearing firm or organization typically handles only certain types of securities for MFI. Thus, one firm clears its emerging market debt transactions, another clears its municipal securities, corporate bond and equity transactions and another two collectively clear different aspects of its transactions in U.S. Treasury and federal agency securities and repurchase agreements collateralized by such instruments. Without the capital resources and services of these firms and organizations which generally step in and act as principal in substitution for MFI, MFI's business, and our financial results, could be materially adversely impacted. Although most of the clearing contractual arrangements have 17 existed for some time, they are generally terminable by the clearing firm upon reasonably short notice. We believe that in each category of securities there are alternative clearing firms or arrangements that could be put into place, but not necessarily with immediate effect or upon as favorable terms. Accordingly, if any of our existing clearing agreements were to be terminated, and we were unable to establish in timely fashion a new clearing arrangement with another clearing firm or organization on financial and other terms acceptable to MFI, we might suffer an interruption in or not be able to continue brokering the particular product that was the subject of the terminated clearing arrangement, and we could suffer a material adverse effect on our results of operations and financial condition. The securities settlement process exposes MFI to credit and other risks that can negatively impact our business and profitability. The securities settlement process for matched riskless principal trades brokered by MFI exposes MFI to various risks that individually or in combination could have a negative impact on its business, profitability and results of operations. Credit risk exists because there is always the possibility that a counterparty that was solvent or believed to be solvent on trade date has become insolvent and incapable of performing by the time of settlement. This risk is mitigated in part, but not fully, by short settlement cycles, the predominantly institutional nature of MFI's client base, and the fact that some (but not all) of MFI's clearing agreements provide for the relevant clearing firm or organization to assume all counterparty risk, including credit risk, once the parties to and the terms of the trade have been confirmed on trade date by the clearing firm or matched through its related settlement facilities. Financing risk exists because if the trade does not settle timely, either because it is not matched immediately or, even if matched, one party fails to deliver the cash or securities it is obligated to, the resulting unbalanced position may need to be financed, either directly by MFI or through one of its clearing firms at MFI's expense. These charges may be recoverable by claiming interest from the failing counterparty, but sometimes are not. Finally, in instances where the unmatched position or failure to deliver is prolonged, there may also be regulatory capital charges required to be taken by MFI, which depending on their size and duration, can limit MFI's business flexibility or even force the curtailment of those portions of MFI's business requiring higher levels of capital. Events that negatively impact our overseas business partners may negatively affect our operations. Many of our overseas brokerage operations are conducted in conjunction with independent business partners, such as Nittan Capital Group in Tokyo and a correspondent broker, Delsur, in Buenos Aires. Some of our partners compete with us in other products, and their business interests may not always coincide with ours. Although such brokerage operations are generally subject to detailed governing documents, any event which negatively affects the financial condition or management of any of our partners, or their willingness otherwise to conduct such brokerage operations in conjunction with us (or vice versa), may have a negative impact on our operations. 18 We may be subject to litigation and arbitration, which could limit our profitability. Many aspects of our businesses involve varying risks of liability. Over the years, participants in the inter-dealer brokerage industry have been parties to or otherwise involved in numerous litigations, arbitrations, claims and investigations, including employee claims alleging discrimination or defamation in connection with terminations, client claims alleging the occurrence of out trades or other errors in the handling of trade orders, clearing firm claims for financing charges or other liabilities associated with out trades or settlement problems, and competitor claims alleging theft of trade secrets, unfair competition or tortious interference in connection with new employee or desk hires or intellectual property infringement in connection with new product launches. To the extent we become subject to any such claims or actions that are significant, a settlement or judgment related thereto could have a material adverse effect on our financial condition or results of operations. Employee misconduct or errors can hurt our business Although we have significant procedures and other checks and balances in place designed to prevent and/or detect employee misconduct, including many that are mandated by regulators, it is not always possible to deter employee misconduct and our precautions may not always be effective. Misconduct by employees could include hiding unauthorized activities, improper or unauthorized activities on behalf of a client, or improper use of proprietary or confidential information. Any of the foregoing types of misconduct could subject us to financial losses, regulatory sanctions and/or harm our reputation, and thereby hurt our results of operations and business. Similarly, employee errors, including mistakes recording or executing transactions for clients, may cause us to record transactions that clients later disavow and refuse to settle, exposing us to risk of material loss until the errors in question are detected and resolved. As with out trades, adverse movements in the prices of the instrument involved in an error transaction before it is detected and unwound, reversed or otherwise corrected can increase this risk. We have market risk exposure from trading and inventory positions held in our sales and trading businesses and in our firm investment account. We allocate a small portion of our available capital to MFI's sales and trading brokerage operations to support limited trading and inventory positions. The positions are generally intended to be held short term, often for the purpose of facilitating anticipated client needs. Where available, they are financed by margin loans provided by MFI's clearing firms. As a result, we have market risk exposure on these securities, varying based on the size of the overall positions, the terms of the securities themselves, and the number of days the positions are held. The aggregate market value of such positions is included in "securities held at clearing firm and trading contracts" line of our Consolidated Statements of Financial Condition. Although such positions are marked to market and carefully monitored on a daily basis, resulting principal gains and losses from such positions can on occasion have a disproportionate effect, positive or negative, on our results of operations for any particular reporting period. For example, see Note 20 to the Consolidated Financial Statements, describing an anticipated 2003 loss associated with MFI's trading in when-issued contracts for NTL, Inc. common stock. In addition, from time to time we hold small amounts of municipal and other securities in the firm's investment account, which can create similar risk exposures and effects. The lack of diversification in our business could negatively affect our financial condition or results of operations; conversely, managing our growth effectively can be difficult. From a revenue perspective, our inter-dealer brokerage businesses account for substantially all of our revenues denoted as "commission income" in our Consolidated Statements of Operations. Accordingly, the prospects for our performance and the market prices for our common stock are highly dependent upon the performance of the inter-dealer brokerage businesses. This lack of diversification could negatively affect our financial condition or results of operations. As a result, we have spent considerable time, resources and efforts in attempting to grow and diversify our business operations over the last few years, including by building our sales and trading businesses. However, these efforts place, and are expected to continue to place, strains on our management and other personnel and resources and require timely and continued investment in facilities, personnel and financial and management systems and controls. Accordingly, there can be no assurances that our growth and diversification efforts will be successful or, if achieved, whether they will positively or negatively affect our financial condition or results of operations. 19 ITEM 2. PROPERTIES We have offices in each of the following locations: New York, New York; London, England; Tokyo, Japan; Stamford, Connecticut; Nyon, Switzerland (with a registered office in Geneva); and Mexico City, Mexico. We lease all of our office space and have material lease obligations with respect to our New York and London premises. In New York, we occupy an aggregate of approximately 62,000 square feet on the 18th and 19th floors at One Seaport Plaza in lower Manhattan under a lease expiring in 2014. In London, we occupy approximately 36,000 square feet of space in London's financial center, The City, under a lease expiring in 2018. We believe that all of our other facilities are suitable and adequate for their present and anticipated purposes. See Note 19 to the Consolidated Financial Statements for further information regarding future minimum rental commitments under our existing leases. ITEM 3. LEGAL PROCEEDINGS Our businesses are subject to various legal proceedings, arbitrations and claims that generally arise in the ordinary course. Although the results of such matters cannot be predicted with certainty, based on available information and advice of counsel, management believes that resolving any currently known matters, after taking into account reserves already established, will not have a material adverse impact on our consolidated financial condition (although they may be material to our results of operations for any particular period). For additional discussion of certain pending matters and reserve levels, see Note 20 to the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2002. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock currently trades on The Nasdaq Stock Market(R) under the symbol "MAXF." The following table sets forth the range of high and low sales prices for our common stock, as reported by The Nasdaq Stock Market(R), for our last two fiscal years. Common Stock: High Low -------- -------- Year Ended December 31, 2002 ---------------------------- First Quarter ........................ $ 6.510 $ 5.000 Second Quarter ....................... 7.920 5.250 Third Quarter ........................ 6.300 3.850 Fourth Quarter ....................... 6.700 5.050 Year Ended December 31, 2001 ---------------------------- First Quarter ........................ $ 2.063 $ 0.906 Second Quarter ....................... 3.030 1.750 Third Quarter ........................ 4.740 2.380 Fourth Quarter ....................... 5.880 2.650 As of March 27, 2003 there were 42 holders of record of our common stock. We are aware that certain holders of record hold a substantial number of shares of common stock as nominees for a significant number of beneficial owners. Based on a preliminary broker-dealer inquiry made by our transfer agent in March 2003, we believe there are approximately 1,000 beneficial owners of our common stock. We have never declared any cash dividends on our common stock, nor do we currently anticipate declaring any cash dividends in the foreseeable future. However, as described above in Item 1 of this report, under the caption "Capital Structure History," we have over the past several years repurchased significant amounts of our common stock, both in privately-negotiated transactions and through an open market repurchase program. ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each included elsewhere in this report. Statement of operations data presented below includes reclassifications of certain revenue and expense items which are not directly associated with operations. Such reclassifications include interest income, interest expenses, amortization of intangible assets (including goodwill), foreign exchange effects and other non-operating items. 21
Year Ended December 31, ----------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------- ------------- ------------- ------------- Statement of Operations Commission income $ 149,428,132 $ 138,003,085 $ 122,613,654 $ 132,892,282 $ 126,120,712 Insurance recoveries 11,098,135 4,498,144 Principal transactions 8,720,422 8,932,861 2,627,169 1,215,233 954,249 Other income (1) (922,300) 922,741 2,527,483 1,600,990 3,283,403 ------------- ------------- ------------- ------------- ------------- 168,324,389 152,356,831 127,768,306 135,708,505 130,358,364 ------------- ------------- ------------- ------------- ------------- Operating costs: Compensation and related costs 107,024,194 106,619,297 92,061,672 93,392,948 87,511,455 Communication costs 11,033,342 10,465,852 11,643,857 13,613,656 13,258,756 Travel and entertainment 7,406,116 6,493,462 6,620,974 6,797,740 7,763,109 Occupancy costs 4,054,140 4,404,994 4,406,215 5,061,370 5,776,416 Clearing and execution fees 3,311,759 3,511,712 3,307,802 3,005,785 4,588,170 Depreciation and amortization 2,405,834 2,962,582 3,501,373 3,955,500 4,594,622 Contributions to The Euro Brokers Relief Fund, Inc. 1,219,233 General and administrative 4,933,483 5,784,107 4,769,444 5,516,349 5,140,885 ------------- ------------- ------------- ------------- ------------- 141,388,101 140,242,006 126,311,337 131,343,348 128,633,413 ------------- ------------- ------------- ------------- ------------- Operating profit 26,936,288 12,114,825 1,456,969 4,365,157 1,724,951 ------------- ------------- ------------- ------------- ------------- Other (expenses) income: Interest expense (299,079) (666,387) (594,957) (833,935) (1,079,147) Amortization of intangible assets (635,998) (507,564) (410,004) (410,004) Non-operating expenses (1,050,472) (477,000) (1,141,356) Non-operating income 43,767 1,638,506 2,235,511 527,018 Restructuring costs (541,961) (321,000) Costs related to World Trade Center attacks (3,204,468) (1,590,060) Income (loss) from equity affiliate 9,992 135,890 (1,576,644) (19,925) Interest income 2,147,274 2,306,044 1,823,285 1,879,500 1,737,403 Foreign exchange gain (loss) 35,391 (229,390) (21,579) (282,536) (164,860) ------------- ------------- ------------- ------------- ------------- (1,277,115) (217,765) 2,051,625 (1,017,601) (1,077,889) ------------- ------------- ------------- ------------- ------------- Income before provision for income taxes and minority interest 25,659,173 11,897,060 3,508,594 3,347,556 647,062 Provision for income taxes 12,130,758 2,174,673 2,710,482 545,216 1,922,212 ------------- ------------- ------------- ------------- ------------- Income (loss) before minority interest 13,528,415 9,722,387 798,112 2,802,340 (1,275,150) Minority interest (981,791) (683,985) 1,203,987 (270,128) ------------- ------------- ------------- ------------- ------------- Net income (loss) $ 12,546,624 $ 9,038,402 $ 2,002,099 $ 2,532,212 ($ 1,275,150) ============= ============= ============= ============= =============
Year Ended December 31, ------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Balance Sheet Data: Total assets $123,477,959 $279,317,292 $ 70,906,347 $ 72,467,958 $ 75,269,665 Obligations under capitalized leases 842,399 204,252 335,635 493,367 751,747 Notes payable 447,978 1,723,169 1,799,870 3,824,842 Loan payable 674,282 Total liabilities 70,477,645 241,021,098 37,257,798 38,162,466 43,476,151 Minority interest 5,407,228 3,979,291 3,407,628 4,885,896 Redeemable preferred stock 2,000,000 2,000,000 2,000,000 Stockholders' equity 47,593,086 34,316,903 28,240,921 27,419,596 29,793,514 Per Share Information Net income (loss) - basic $ 1.72 $ 1.23 $ .23 $ .26 $ (.11) Net income (loss) - diluted 1.53 1.16 .23 .25 (.11) Book value 6.56 4.88 3.48 3.29 2.63 Weighted average common shares outstanding - basic 7,304,284 7,357,017 8,374,166 9,711,974 11,327,741 Weighted average common shares outstanding - diluted 8,210,638 7,764,667 8,374,166 9,846,257 11,327,741
(1) Includes non-equity earnings (loss) from contractual arrangement (Tokyo Venture) and information sales revenue (since 1999). 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended December 31, 2002 We are very proud of our performance during the year ended December 31, 2002. It was a year in which we continued a remarkable recovery from the devastating effects of the September 11th terrorist attacks, while also achieving solid financial results. Our recovery took many forms. We hired new brokers. We improved the performance of many of our established businesses and expanded into new business lines. We selected new permanent headquarters in lower Manhattan, at One Seaport Plaza, and signed a 12-year lease. We held a Charity Day on March 11, 2002 that raised $1.2 million for The Euro Brokers Relief Fund, Inc. We obtained timely cash advances from our insurance carrier throughout the year that provided needed liquidity and then negotiated a final settlement of our September 11th business interruption insurance claim that ensured the maintenance of our strong financial base. We improved and expanded the application of our leading technology solutions to our existing and new businesses. We won a significant litigation in the United Kingdom that permitted us to acquire 100% ownership of our London operations at a very favorable purchase price. We actively managed our capital structure through the elimination of two series of outstanding warrants, which upon exercise raised proceeds of $2.5 million, and the continuation of our common stock repurchase program. Through it all, the perseverance and hard work of our employees and staff, the strength of the families of our lost employees, and the loyalty and support of our clients lifted and energized us. Working out of sub-optimal, temporary headquarters for the entire year, we experienced a remarkable bonding and coming together of the Maxcor and Euro Brokers teams. Their performance during 2002 is a testament to their spirit, energy and work ethic, as well as their loyalty to our company and their desire to honor their 61 lost colleagues. The result is what we ultimately believe to be a stronger company, both financially and emotionally. Our basic financial measures of performance, on a GAAP basis, were up across the board in 2002 over 2001. Net income increased by more than 30%, to $12.5 million, or $1.53 per share, from $9.0 million, or $1.16 per share. Revenues increased 10%, to $170.6 million from $154.8 million. Overall stockholders' equity jumped almost 40%, to $47.6 million (a per share book value of $6.56) from $34.3 million (a per share book value of $4.88). Continuing the pattern of 2001, much of 2002 saw strong levels of trading activity in the fixed income and derivatives markets in which we are active. We took advantage of these active markets by making judicious new hires and focusing on client service to help us to maintain or increase our market share in key products. As a result, our Euro Brokers operations generated improved revenues and performance across many of our brokerage desks in New York. In particular, we garnered improved revenues from each of our interest rate swaps, interest rate options, U.S. Treasury, federal agency and mortgage-backed repurchase agreements and federal agency bond desks. Revenues 23 from our cash deposits and money market desks, however, were down from 2001 levels, and our emerging market debt businesses continued to have to cope with depressed trading volumes in that sector. In New York, we launched a new U.S. Treasury brokerage desk in August 2002, believing that there was a market opportunity in this area for well-focused voice broker services. We also viewed the desk as nicely complementing a number of our existing businesses. We believe that the U.S. Treasury's financing requirements will continue to increase and we are optimistic that this new business will become successful with improved results in 2003. In London, we launched a new credit derivatives desk in 2002 on the heels of our late 2001 launch of such a desk in New York. Both desks, but London in particular, contributed positively to results in 2002. The New York desk suffered near the end of the year as the result of the loss of several key employees, but we have since made replacement hires. We believe credit derivatives will continue to be a growth area. Our London operations as a whole had a solid and profitable 2002, on a level about equal with that of 2001, while also building what we believe will be a stronger foundation for improved future results. In addition to the positive results of the credit derivatives desk, we garnered continued strong performance from our interest rate options, U.S. dollar swaps and euro currency swaps desks. Emerging market debt products brokered out of London saw reduced revenues, but still made an overall positive contribution to results. Our Tokyo operations continued to struggle during 2002 in the midst of an extended downturn in overall derivatives market activity there as a result of extraordinarily low interest rates and very low volatilities. At the end of 2002, we began implementing an internal restructuring to attack our cost structure. Brokers were migrated from high, guaranteed base salaries to lower base salaries and higher performance-based payouts. We think this revised incentive-based structure, which, as of the end of the first quarter in 2003, has been substantially implemented, will protect our downside cost exposure while allowing us to attract new hires and compete favorably in the marketplace until overall economic and trading conditions in Tokyo improve. Throughout 2002, in addition to focusing on our core inter-dealer brokerage operations, we continued our diversification efforts by expanding our sales and trading operations within our Maxcor Financial Inc. broker-dealer. In April 2002, we hired a leveraged finance group to specialize in institutional sales and trading operations in high-yield and distressed debt, supplemented by quality research efforts. We followed this expansion with the launch mid-year of an institutional equities sales and trading operation focused on providing top quality service, research and order execution to the money management community. The equity group's emphasis is on the less actively traded stocks, including small cap stocks, value stocks and real estate investment trusts. In the fourth quarter, we also started an institutional convertible securities operation, aimed at providing clients with quality execution and arbitrage trading ideas. 24 The goal in these various new Maxcor initiatives, in addition to growth and diversification, has been to establish businesses with institutional clients in which we can offer research, trading strategies and execution services over broad, but underserved, asset classes in a coordinated approach. All three new groups - leveraged finance, equities and convertibles - contributed positively to results in 2002. We intend to continue to expand our sales and trading operations in 2003, with opportunistic additions when and where we believe we can hire the right people and establish a meaningful presence. To this end, in late March 2003, we have contributed an additional $20 million in capital to our broker-dealer - thereby raising its total capital to in excess of $50 million - in order to be able to upgrade to dealer membership status with the Government Securities Division of the Fixed Income Clearing Corporation. The new capital is intended primarily to facilitate riskless principal transactions within our sales and trading operations by enhancing our broker-dealer's credit status with GSD-FICC. The additional capital is primarily being financed by a new $15 million, secured reducing credit facility (see Note 14 to the Consolidated Financial Statements). We continued in 2002 to allocate a small portion of our existing capital to support principal transactions in which we assume market risk for a period of time. This trading occurs primarily in our municipal securities and leveraged finance businesses, where we will often hold inventory in anticipation of client needs, but also in our firm investment account. For 2002, all three of these areas contributed positively to results, with aggregate revenue from trading gains approximately equal to 2001 levels, at $8.7 million. We expect, however, to incur a significant loss in 2003 on our trading contracts in when-issued shares of NTL, Inc. (see Note 20 to the Consolidated Financial Statements). Looking forward, we will continue to use some of our existing capital to support various trading and inventory positions, but do not currently envision any significant expansion of that commitment. On March 11, 2002, the six-month anniversary of the terrorist attacks, we held our first annual charity day. With the full support of our clients and our employees, who waived any entitlement to commissions from the revenues generated that day, we were able to raise slightly over $1.2 million for our Euro Brokers Relief Fund. We were very proud of these results and will be holding another charity day, to benefit both the Fund and our newly-established Maxcor Foundation, in May 2003. In May 2002, we won an important lawsuit in London that entitled us to obtain 100% ownership of our non-securities brokerage operations in London (Euro Brokers Finacor Limited) by purchasing the 50% shareholdings therein of our partner, Monecor (London) Limited, at a 30% discount to the net book value of those holdings, measured as of late December 2000. The judgment enforced specific contractual buy-out provisions in a shareholders' agreement between us and Monecor (a subsidiary of Finacor, which was acquired by Viel & Cie in 2000) that were triggered by the failure of Monecor, in late 2000, to provide certain 25 requested funding for the London operations. Monecor's appeal of the judgment was dismissed unanimously by a three-member panel of the London Court of Appeals in February 2003. The panel also refused Monecor's request to appeal further to the House of Lords. As a result, Monecor was obligated to transfer its shareholdings to us later that same month, and Euro Brokers Finacor Limited then changed its name to Euro Brokers Limited (although Monecor has subsequently petitioned the House of Lords directly for leave to appeal, it is not expected that such leave will be granted or, if granted, that the appeal itself will be successful). Because of the discounted purchase price paid by us for Monecor's shareholdings, we will recognize a one-time extraordinary gain of approximately $3.0 million in the first quarter of 2003, which will have the effect of increasing that period's after-tax net income by the same amount. The 100% ownership also means that our future results of operations will no longer exclude the income (or loss) allocable to Monecor's 50% interest. In 2002, for example, approximately $1.0 million of income was allocated to this interest. In August 2002, we signed a lease for new permanent headquarters in New York at One Seaport Plaza, also known as 199 Water Street. The lease, which has an initial duration of slightly over 12 years (until December 31, 2014), signifies our long-term commitment both to our business and to lower Manhattan. The leased premises are for the entire 18th and 19th floors and cover over 60,000 rentable square feet, providing us with room to grow over the lease's term. In connection with signing the lease, we accepted an incentive package offer from New York State and New York City that provides us a with an initial cash grant of $1.75 million for job retention and up to an additional $800,000 in grants for job growth. Payment of the initial grant is expected to be made in April 2003. Because of contingent recapture provisions associated with the grant in the event of future job losses or relocations, this amount (and any additional grants for future growth) will only be recognized in earnings over the term of the new lease. Our 2002 cash flows were significantly helped by periodic advances we obtained from Kemper Insurance Companies on our business insurance claims relating to the September 11th terrorist attacks. In December 2002, we negotiated a final settlement with Kemper of our claim under the coverage portion of our policy providing for the recovery of lost revenues (net of saved expenses) and additional expenditures incurred to restore operations or minimize the period and total cost of disruption to operations. The settlement of $18.85 million generated a one-time 2002 fourth quarter after-tax net benefit of $3.9 million (or $.48 per share), reflecting additional lost income in excess of amounts previously recognized, after application of the proceeds to cover both new and previously-charged September 11th-related expenses. The settlement did not resolve our property insurance claim under a separate policy coverage with Kemper providing for, among other things, the full replacement cost of assets destroyed in the attacks. As of year-end 2002, Kemper had advanced us $8 million pursuant to this coverage, which has an aggregate limit of approximately $14 million, pending completion and documentation of our total expenditures in connection with our planned move to and build out at One Seaport Plaza. 26 When our property claim is fully and finally settled or otherwise resolved, we will record a significant one-time gain that, on a pre-tax basis, will be equal to the amount by which the total proceeds under the coverage exceed the net, depreciated book value of property destroyed in the attacks (which was approximately $2.5 million). However, under GAAP, such gain will be offset in earnings over time by the required expensing, over their respective useful lives, of the replacement assets purchased with the property insurance proceeds. In February 2003, we completed our move to One Seaport Plaza, staggered over the course of three weekends to maintain business continuity. After more than 16 months in our temporary headquarters, our brokers and other employees were delighted to have a permanent home again, complete with state-of-the-art infrastructure and equipment and optimized desk configurations. Our new premises now house all of our approximately 300 New York-based employees and staff. We used the opportunity of a new build out at One Seaport Plaza to re-think technology applications across all of our desks. Our goals have always been to use technology to provide our brokers with the best tools, manage execution and settlement risks and provide our clients with the highest possible level of service. As a result, we used our Tradesoft(R) technology to automate further the broker interfaces on many of our desks. We also expanded the deployment of Tradesoft's paperless ticket system, which generates automatic e-mail and fax trade confirmations to our clients and provides direct electronic transmission of the trade data to our back office, to more of our businesses. This deployment has most recently also encompassed our Tokyo office as well. The year 2002 also saw the continuation of our common stock repurchase program, as part of our overall effort to manage our capital structure and increase value to stockholders. In total, we repurchased 375,507 shares in 2002, at an aggregate cost of $2.1 million. These repurchases helped to offset dilution from warrant and stock option exercises during 2002. On April 12, 2002, we permitted the expiration of our two series of outstanding warrants issued in connection with our 1994 initial public offering and our 1996 acquisition of the Euro Brokers businesses. In the period just prior to that expiration, 492,795 of these warrants were exercised at a price of $5.00 per share, resulting in the issuance of a like number of shares and raising proceeds for us of approximately $2.5 million. Option exercises during 2002 increased our shares outstanding by a net total of 111,643 shares. Repurchases to date in 2003 (through March 27, 2003) have totaled 160,100 shares, leaving us with remaining authorization under our repurchase program for 450,393 shares. As has always been the case, all purchases of shares are subject to the availability of shares at prices which are acceptable to us, as well as to our assessment of prevailing market and business conditions, and, accordingly, there is no guarantee as to the timing or number of shares to be repurchased. 27 Critical Accounting Policies Note 2 to the Consolidated Financial Statements details the significant accounting policies used in the preparation of those statements. There are certain of these policies that are considered to be of particular importance because they require difficult, complex or subjective judgments on matters that are often inherently uncertain. The following is a discussion of these policies. Securities and trading contracts are carried at fair values generally based on quoted market prices. From time to time quoted market prices are not available for certain municipal or other securities positions. For such securities, we, with the assistance of independent pricing services, determine fair values by analyzing securities with similar characteristics that have quoted market prices. Consideration is given to the size of our individual positions relative to the overall market activity in such positions when determining the impact our sale would have on fair values. Since uncertainties may exist as to the settlement of when-issued equity trading contracts, we defer any gains resulting from adjusting the costs of these contracts to fair values until uncertainties relating to settlement are resolved. The assumptions used in valuing our securities and trading contracts may be incorrect and the actual value realized upon disposition could be different from the current carrying value. Included in accounts payable and accrued liabilities are reserves for certain contingencies to which we may have exposure, such as the employer portion of National Insurance Contributions in the U.K., interest and claims on securities settlement disputes and reserves for certain income tax contingencies. The determination of the amounts of these reserves requires significant judgment on our part. We consider many factors in determining the amount of these reserves, such as legal precedent and case law and historic experience. The assumptions used in determining the estimates of reserves may be incorrect and the actual costs of resolution of these items could be greater or less than the reserve amount. Recently Issued Accounting Standards In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a roll-forward of the entity's product warranty liabilities. We adopted the disclosure provisions of FIN 45 effective December 31, 2002 and are presently evaluating the recognition and measurement provisions of FIN 45 that are required to be adopted in 2003. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting Standards No. 123, "Accounting for 28 Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the disclosure provisions of SFAS No. 148 effective December 31, 2002, and continue to follow the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for the purpose of recognizing compensation cost. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires consolidation of a variable interest entity ("VIE") if we have variable interests that give us a majority of the expected losses or a majority of the expected residual returns of the entity. Prior to FIN 46, VIEs were commonly referred to as special purpose entities. As we do not have any VIEs, the adoption of this statement will not have an effect on our Consolidated Financial Statements. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Commission income represents revenues generated on our brokerage transactions conducted on an agency (including name give-up) or matched riskless principal basis. For 2002, these revenues increased $11,425,047 to $149,428,132, compared to $138,003,085 for 2001, due to increased brokerage in New York and London. In New York, the increase principally reflected increased revenues from repurchase agreements, federal agency bonds, credit derivatives and interest rate derivatives, commissions derived from newly-started U.S. Treasury, leveraged finance and institutional equity departments and reduced amounts in 2001 from the disruption to operations following the September 11th terrorist attacks. Partially offsetting these increases were reduced revenues in emerging market debt and money market instruments and the suspension or discontinuation of certain operations after the September 11th attacks. The increase in London reflected the net effects of revenues derived from our newly-started credit derivatives department, the currency effect of translating strengthened British pound sterling amounts to U.S. dollars and reduced revenues from emerging market debt. Insurance recoveries for 2002 represent the portions of the settlements of claims under U.S. and U.K. business interruption insurance policies for losses incurred in New York and London following the September 11th attacks attributable to lost revenues (net of saved expenses). The balance of these settlements is recorded as offsets to costs related to World Trade Center attacks (see below). During 2002 we recorded $10.3 million in insurance recoveries relating to the settlement of our U.S. claim against Kemper, representing the $14.8 million portion of the $18.9 million total settlement allocated to lost revenues (net of saved expenses), less the $4,498,144 amount recorded in 2001. Also during 2002 we recorded an insurance recovery of $831,000 pursuant to the U.K. settlement of $1.2 million with Norwich Union, representing the portion of that settlement allocated to lost revenues (net of saved expenses). The $4,498,144 amount recorded in 2001 reflected the portion of lost revenues (net of saved expenses) through September 30, 2001 under our U.S. 29 policy with Kemper for which we believed there were no contingencies that would have a material impact. We anticipate a significant one-time gain in 2003 for insurance recoveries upon the settlement of our property casualty insurance policy with Kemper for the excess of replacement costs over the book values and lease termination costs of assets destroyed in the September 11th attacks. Such gain will be offset over time in future periods by increases to depreciation and amortization expense of assets held and rental expense for assets leased pursuant to sale-leaseback arrangements. Principal transactions represent the net gains generated from our securities transactions that involve the assumption of market risk for a period of time, as well as the results of activities in our firm investment account. For 2002, these revenues decreased $212,439 to $8,720,422, compared to $8,932,861 for 2001, primarily due to reduced gains on municipal securities and in our investment account, offset in part by gains from our newly-started leveraged finance department, which conducts sales and trading of high yield and distressed debt. Interest income for 2002 decreased $158,770 to $2,147,274, compared to $2,306,044 in 2001, reflecting the net effects of a lower interest rate environment for our deposits and cash equivalents and an increase in the average inventory of municipal securities held. Other income items for 2002 resulted in a loss of $843,142, as compared to income of $1,083,431 for 2001. This change resulted primarily from a loss of $1,184,233 on our interest in the Tokyo Venture in 2002 as compared to a loss of $694,083 during 2001, income of $262,000 during 2002 on the sale of financial information derived from our brokerage business as compared to income of $1.6 million during 2001, a gain in 2001 of approximately $390,000 on the sale of our 15% interest in Yagi Euro and foreign exchange gains during 2002 as compared to foreign exchange losses during 2001. Compensation and related costs for 2002 increased $404,897 to $107,024,194, as compared to $106,619,297 for 2001. This increase was primarily the result of the increase for 2002 in operating revenues (commission income, principal transactions and information sales revenue) and the impact of translating strengthened British pound sterling amounts to U.S. dollars. Limiting this increase were continued cost reduction efforts in New York and London and compensation waived by employees on our 2002 charity day (see further discussion on charity day below). As a percentage of operating revenues, compensation and related costs decreased to 68% for 2002 as compared to 72% for 2001. Communication costs for 2002 increased $567,490 to $11,033,342, compared to $10,465,852 for 2001, primarily due to the suspension of certain services in New York in the prior year following the September 11th attacks and the impact of translating strengthened British pound sterling amounts to U.S. dollars, offset in part by a $350,000 reduction to accruals in London during 2002 based upon settling claims with a vendor. 30 Travel and entertainment costs for 2002 increased $912,654 to $7,406,116, compared to $6,493,462 for 2001. As a percentage of operating revenues, travel and entertainment costs increased to 4.7% for 2002, compared to 4.4% for 2001. Occupancy costs represent expenses incurred in connection with our office premises and include base rent and related escalations, maintenance, electricity and real estate taxes. For 2002 these costs increased $897,572 to $4,054,140, compared to $3,156,568 for 2001, reflecting the net effects of eliminating certain occupancy accruals associated with the World Trade Center lease in the prior period and reduced costs in the current period for office space in New York resulting from the use of temporary facilities following the September 11th attacks. The prior period accruals consisted of a $411,000 accrual for the payment of a fee to exercise an early lease termination option, which was eliminated due to our decision, prior to September 11th, to allow the option to expire, and an $837,000 accrual established in order to straight-line the average rent costs over the lease, which was eliminated due to the destruction of the premises on September 11th. Clearing and execution fees are fees paid to clearing firms for transactions settlements and credit enhancements and to other broker-dealers (including ECNs) for providing access to various markets and exchanges for executing transactions. For 2002 these costs decreased $199,953 to $3,311,759, compared to $3,511,712 for 2001, primarily as a result of a reduction in the number of emerging market debt transactions, offset in part by clearing and execution fees incurred by the newly started institutional equities desk. During 2002 we recorded net costs of $3,204,468 as a result of the September 11th attacks on the World Trade Center, reflecting gross costs incurred of $7,020,331 reduced by the aggregate amount of the insurance settlements with Kemper and Norwich Union allocated to extra expenses during 2002 of $3,815,863. During 2001 we recorded net costs related to the World Trade Center attacks of $1,590,060, reflecting gross costs incurred of $2,187,281 reduced by the portion of those expenses considered probable of recovery during 2001 of $597,221. Included in gross costs during 2002 was the cost of foregoing an extension of a sublease on additional space in our London premises that was re-allocated for potential use by New York employees. This gross cost of $2.7 million ($2.4 million net after applying the portion of insurance proceeds from Norwich Union allocable to this cost) was based upon our estimate of the length of time it will take to generate replacement sublet income on this space and the difference between the amount we believe we will then be able to achieve and our cost associated with the space. Other gross extra expenses incurred during 2002 and 2001 include additional occupancy costs in New York, the purchase of equipment solely compatible with our temporary facilities in New York, the use of outside professionals, interest on failed securities settlements, recruitment fees and benefits for the families of deceased employees. Depreciation and amortization expense consists principally of depreciation of communication and computer equipment and leased automobiles and amortization of leasehold improvements, goodwill and other intangible assets. These costs decreased $1,192,746 to $2,405,834 during 2002, compared to $3,598,580 during 2001, primarily as a result of the discontinuance of depreciation in New York on assets destroyed in the September 11th attacks and 31 the discontinuance of amortization of intangible assets that were either fully amortized or written-off in late 2001. We anticipate increases to these costs in 2003 and forward as a result of having to depreciate and amortize replacement costs of assets purchased from insurance proceeds and not leased pursuant to sale-leaseback arrangements. During 2002 we made a charitable contribution to The Euro Brokers Relief Fund, Inc. of $1,219,233, an amount equal to all the revenue generated by the New York, Stamford, Mexico, London and Switzerland offices on our 2002 charity day. All participating employees waived any entitlement to compensation from such revenues. The Euro Brokers Relief Fund, Inc. is a 501(c)(3) tax-exempt corporation (HTTP://RELIEF.EBI.COM), established to provide charitable aid to the families and other financial dependents of the Company's 61 employees and staff members killed as a result of the September 11th attacks. Interest expense for 2002 decreased $367,308 to $299,079, compared to $666,387 for 2001, primarily as result of using more of our cash and cash equivalents to finance securities positions, thereby reducing the level of margin borrowings, and a lower interest rate environment for such borrowings. General, administrative and other expenses include such expenses as corporate insurance, office supplies and expenses, professional fees, food costs and dues to various industry associations. In 2002, these costs decreased $1,901,096 to $4,933,483, compared to $6,834,579 in 2001, primarily as a result of decreases during 2002 in professional fees and rental expense for leased equipment and the write-off in 2001 of goodwill, identifiable intangibles and certain other assets obtained in the August 2000 Tradesoft acquisition approximating $1.1 million. These decreases were partially offset by an increase during 2002 in insurance costs. We anticipate an increase in general, administrative and other expenses during 2003 and forward associated with rental expense for furniture and equipment acquired with insurance proceeds that we will be leasing pursuant to sale-leaseback arrangements. Provision for income taxes for 2002 increased $9,956,085 to $12,130,758, compared to $2,174,673 for 2001, primarily due to the increase in pre-tax income during 2002, the $3 million reduction to income tax reserves during 2001 resulting from the favorable resolution to certain contingencies, and tax planning strategies applied during 2001 to gains on the sale of Yagi Euro and other investments. For 2002, minority interest in consolidated subsidiaries resulted in a reduction of net income from such subsidiaries of $981,791, as compared to a reduction of net income from such subsidiaries of $683,985 during 2001. This change was primarily the result of increased profitability of EBFL. We will no longer record minority interest in the earnings (losses) of this subsidiary after February 2003 as a result of the favorable ruling from the London Court of Appeals enabling us to purchase the minority share of EBFL at a 30% discount to the December 2000 book value of this interest. 32 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Commission income for 2001 increased $15,389,431 to $138,003,085, compared to $122,613,654 for 2000, due to increased brokerage in New York and London. In New York, the increase principally reflected brokerage from our newly hired federal agency bond brokerage team and increased brokerage of interest rate derivatives, offset in part by a significant reduction in brokerage from the disruption to operations caused by the September 11th attacks. In London, the increase resulted primarily from improved brokerage on interest rate derivatives and emerging market debt securities, offset in part by the currency effects of translating weakened British pound sterling amounts to U.S dollars. Insurance recoveries of $4,498,144 for 2001 represents the portion of lost revenues (net of saved expenses) through September 30, 2001 recoverable under the business interruption and extra expense policy for which we believed no contingencies existed having a material impact. Additional amounts for lost revenues (net of saved expenses) through December 31, 2001 were recorded in 2002 upon settlement of the claim. Principal transactions increased $6,305,692 to $8,932,861 for 2001, compared to $2,627,169 for 2000, due to increased gains on municipal securities transactions and in our firm investment account. Interest income for 2001 increased $482,759 to $2,306,044, compared to $1,823,285 for 2000, primarily reflecting an increase in the average inventory of municipal securities held. Other income for 2001 decreased $3,657,984 to $1,083,431, compared to $4,741,415 for 2000, primarily due to a gain of approximately $2.2 million recognized in 2000 related to the partial sale of our interest in the Tokyo Venture, a loss of $694,083 on our interest in the Tokyo Venture in 2001 compared to earnings of $523,704 in 2000, revenue of approximately $1.6 million in 2001 compared to approximately $2.0 million in 2000 from the sale of financial information derived from our brokerage business and an increase in foreign exchange losses. These decreases were offset in part by an approximate $390,000 gain recognized during 2001 on the sale of our 15% equity interest in Yagi Euro. Compensation and related costs increased $14,557,625 to $106,619,297 for 2001, compared to $92,061,672 for 2000. This increase was primarily the result of increased employment costs in New York, primarily reflective of increased revenue levels. Partially offsetting this increase was decreased employment costs in London reflecting the net effect of cost reduction efforts, the currency effects of translating weakened British pound sterling amounts to U.S. dollars and improved brokerage. As a percentage of operating revenues (commission income, principal transactions and information sales revenue), compensation and related costs were 72% for both 2001 and 2000. Communication costs for 2001 decreased $1,178,005 to $10,465,852, compared to $11,643,857 for 2000, primarily reflective of cost reduction efforts 33 in London, the currency effects of translating weakened British pound sterling amounts to U.S. dollars and decreased costs in New York resulting from the destruction of our New York headquarters on September 11th. Travel and entertainment costs for 2001 decreased $127,512 to $6,493,462, compared to $6,620,974 for 2000. As a percentage of operating revenues, travel and entertainment costs decreased to 4.4% for 2001, compared to 5.2% for 2000. Occupancy costs decreased $1,249,647 to $3,156,568 in 2001, compared to $4,406,215 for 2000, primarily as a result of the decrease in occupancy accruals associated with the World Trade Center lease during 2001 described above. Clearing and execution fees increased $203,910 to $3,511,712 for 2001, compared to $3,307,802 for 2000, primarily as a result of an increase in cleared emerging market debt transactions. In 2001, we recorded $1,590,060 of costs as a direct result of the September 11th attacks on the World Trade Center, reflecting gross expenses incurred of $2,187,281 reduced by the portion of these expenses, $597,221, we believed probable of recovery and which were reasonably estimable. These costs include the use of outside professionals, recruitment fees, interest on failed securities settlements, meals and lodging for employees during the rebuilding process, and benefits for the families of deceased employees. Depreciation and amortization expense decreased $410,357 to $3,598,580 for 2001, compared to $4,008,937 for 2000, primarily as a result of a reduction in depreciable fixed assets in London and the discontinuance of depreciation in New York on assets destroyed in the September 11th attacks. These decreases were offset in part by an increase in the amortization of software, goodwill and other intangible assets obtained in the August 2000 acquisition of Tradesoft. Interest expense for 2001 increased $71,430 to $666,387, compared to $594,957 for 2000, primarily due to an increase in average margin borrowings to finance municipal securities positions, offset in part by a decrease associated with a lesser amount of debt (loan, notes and capitalized lease obligations payable) outstanding. During 2000 we incurred restructuring costs of $541,961 relating to the costs of ceasing the operations of our Toronto-based subsidiary in June 2000 and the notice given in December 2000 to close EBFL's branch operations in Paris effective January 5, 2001. A portion of the business previously conducted in Toronto was relocated to New York. General, administrative and other expenses increased $1,588,135 to $6,834,579 for 2001, compared to $5,246,444 for 2000, primarily as a result of the write-off of goodwill, identifiable intangibles and certain other assets obtained in the Tradesoft acquisition approximating $1.1 million, and increases in consumption taxes in Europe, rental expense for leased equipment and other general, administrative and other expenses. These increases were offset by a one-time charge of $477,000 in 2000 attributable to Tradesoft's in-process research and development initiatives ongoing at the date of acquisition. 34 Provision for income taxes for 2001 decreased $535,809 to $2,174,673, compared to $2,710,482 for 2000. This decrease occurred, despite a significant increase in income before provision for taxes and minority interest, primarily because of an approximately $3 million adjustment during 2001 to reduce income tax reserves as a result of obtaining a favorable resolution to certain contingencies, but also because of tax planning strategies applied to gains we earned on the sale of Yagi Euro and other investments. For 2001, minority interest in consolidated subsidiaries resulted in a reduction of net income from such subsidiaries of $683,985, as compared to a reduction of net losses from such subsidiaries of $1,203,987 for 2000, primarily reflecting the improved profitability of EBFL. Income (loss) from equity affiliate represents our 15% share of the profits and losses of Yagi Euro. For 2001, we recognized income from this investment of $9,992 as compared to income of $135,890 in 2000. The decrease in this amount primarily represents our approximate $86,000 share of a one-time gain realized by Yagi Euro in 2000 relating to its restructuring activities and the fact that this investment was sold on June 30, 2001. Liquidity and Capital Resources Operating Activities A substantial portion of our assets, similar to other brokerage firms, is liquid, consisting of cash, cash equivalents and assets readily convertible into cash, such as receivables from broker-dealers and customers, and securities held at clearing firm and trading contracts. Securities held at clearing firm and trading contracts reflect securities positions taken in connection with our sales and trading brokerage operations and in our investment account. Positions are financed either from our cash resources or by margin borrowings (if available) from broker-dealers that clear these transactions on our behalf on a fully-disclosed basis. At year-end 2002, as reflected on the Consolidated Statements of Financial Condition, we had net assets relating to securities and trading contracts of approximately $12.0 million, reflecting a net position in securities and trading contracts of $29.4 million, financed by a payable to a clearing broker of approximately $17.3 million. MFI is a member of the GSD-FICC for the purpose of clearing transactions in U.S. Treasury and federal agency securities and repurchase agreements collateralized by such instruments. Pursuant to such membership, MFI is required to maintain excess regulatory net capital of $10,000,000, and a pledge of $5,000,000 in U.S. Treasury securities, which has been reflected as deposits with clearing organizations on the Consolidated Statements of Financial Condition. In addition, as a result of the recent upgrading of MFI's GSD-FICC 35 membership to dealer status, MFI is required to maintain a minimum net worth (including subordinated borrowings) of $25 million. To the extent MFI conducts transactions with non-netting members of GSD-FICC, MFI also will have to post additional clearing deposits (which it would expect to satisfy in part through the collection of margin deposits from such non-netting members). EBL is a Type D registered firm of the Financial Services Authority in the U.K., required to maintain a financial resources requirement generally equal to six weeks average expenditures ($3.9 million at December 31, 2002). Net cash provided by operations for 2002 was approximately $9.9 million. This increase in cash was the result of net income of approximately $12.5 million adjusted to reflect the net effect of approximately $4.3 million of non-cash items, primarily consisting of depreciation and amortization, unreimbursed losses from our share of the Tokyo Venture and minority interest in the net earnings of consolidated subsidiaries. These cash increases were reduced by the effect of other working capital items, including increased net assets relating to securities and trading contracts and decreased liabilities related to insurance advances and other effects of the September 11th attacks, offset in part by increased accrued compensation. Net cash provided by operations for 2001 was approximately $32.5 million. This increase in cash was the result of net income of approximately $9.0 million adjusted to reflect the net effect of approximately $6.3 million of non-cash items, primarily consisting of depreciation and amortization, the write-off of intangible assets, minority interest in the net earnings of consolidated subsidiaries and the change in deferred tax items, and the net positive effects of other working capital items, principally increased accounts payable and accrued liabilities exceeding $15 million. The increase in accounts payable and accrued liabilities is primarily due to the portion of advances received under our insurance policies that is currently unrecognized and other effects of the September 11th attacks. Net cash provided by operations for 2000 was approximately $6.8 million. This increase in cash was the result of net income of approximately $2.0 million adjusted to reflect the net effect of approximately $2.4 million of non-cash items, primarily consisting of depreciation and amortization, the gain on the partial sale of our interest in the Tokyo Venture, minority interest in the loss of consolidated subsidiaries and the change in deferred tax items, and the net positive effects of other working capital items, principally increased accrued compensation and decreased prepaid expenses and other assets. In the ordinary course of our businesses, we are subject to extensive regulation at international, federal and state levels by various regulatory bodies which are charged with safeguarding the integrity of the securities and other financial markets and protecting the interest of customers. The compliance requirements of these different regulatory bodies may include, but are not limited to, net capital or stockholders' equity requirements. We believe that all of our ongoing liquidity needs will be met in timely fashion from our cash and cash equivalents or other of our resources. Moreover, we have historically met regulatory net capital and stockholders' equity requirements and believe we will continue to do so in the future. 36 Investing Activities Investing activities in 2002 reduced cash by approximately $7.6 million, primarily due to cash outlays associated with the build-out of our new permanent headquarters at One Seaport Plaza in lower Manhattan. In 2001, investing activities resulted in an increase to cash of approximately $1.6 million, reflecting the net effects of insurance proceeds recognized for destroyed fixed assets approximating $1.5 million, proceeds from the sale of our 15% interest in Yagi Euro approximating $1.9 million and net cash used for fixed asset purchases/sales approximating $1.9 million. Investing activities for 2000 reflects net cash used of approximately $2.0 million, primarily resulting from the net effect of fixed asset purchases/sales approximating $2.2 million, the cash portion of the Tradesoft acquisition approximating $2.1 million and the proceeds received on the partial sale of our interest in the Tokyo Venture approximating $2.4 million. In addition to purchasing fixed assets, we from time-to-time use operating leases to finance the upgrading of communications and information systems necessary to sustain our commitment to maintaining current technology. In March 2003, we entered into various sale-leaseback transactions for equipment and furniture approximating $5 million, resulting in operating leases under a master lease agreement with General Electric Capital Corporation ("GECC") with durations ranging from three to five years. We expect additional cash outlays approximating $8.4 million in 2003 associated with the completion of the build-out of our new permanent headquarters in New York. Such outlays would bring our total build-out costs (inclusive of replaced furniture and equipment) to approximately $15.7 million. We believe the final settlement of our property casualty insurance claim, which we expect during the first half of 2003, will fund or reimburse a significant portion of these costs. Our policy with Kemper provides a limit of approximately $14 million in replacement costs. To date, Kemper has provided us with cash advances relating to this claim of $8 million. Financing Activities At December 31, 2002 and 2001, we did not have a loan outstanding under our revolving credit facility with GECC. The facility provides for borrowings of up to $5 million, expires on June 17, 2004 and is secured by substantially all the assets of our Euro Brokers Inc. ("EBI") subsidiary. The borrowing availability under the facility (which approximated $3.7 million and $3.5 million at December 31, 2002 and 2001, respectively) is determined based upon the level and condition of the billed accounts receivable of EBI. The agreement with GECC contains certain covenants, which require EBI separately, and our entire company as a whole, to maintain certain financial ratios and conditions. 37 In March 2003 we terminated the facility with GECC and entered into a new facility with The Bank of New York ("BONY") for a three-year revolving credit facility of up to $15 million. This facility is secured by EBI's billed accounts receivables and the stock issued by EBI to its direct parent and has mandatory reductions to availability of $5 million on each of the eighteenth and thirtieth months following the closing date. As with the GECC facility, the agreement with BONY contains certain covenants, which require EBI separately, and our entire company as a whole, to maintain certain financial ratios and conditions. Notes payable at December 31, 2001 represented the remaining approximately $448,000 due on a fixed rate note issued to GECC in December 1997. This note was secured by all owned equipment of EBI and was payable in monthly installments through December 2002. As a result of the September 11th attacks on the World Trade Center, the equipment securing this note was destroyed. Pursuant to the terms of the note, we retired the note early in 2002 without penalty. Net cash used in financing activities for 2002 was approximately $15,000, primarily reflective of the net effect of cash of approximately $2.1 million used to acquire treasury stock, the repayment of the note payable to GECC and obligations under capital leases aggregating approximately $586,000 and proceeds received from the exercise of stock options and warrants of approximately $2.7 million. Net cash used in financing activities for 2001 was approximately $6.3 million, primarily reflective of the net effect of cash of approximately $3.0 million used to acquire treasury stock, cash used of $2.0 million for the redemption of preferred stock, the repayment of notes payable and obligations under capitalized leases aggregating approximately $1.5 million and proceeds received from the exercise of stock options of approximately $222,000. Net cash used in financing activities for 2000 was approximately $2.6 million, primarily reflective of cash of approximately $894,000 used to acquire treasury stock, the repayment of notes payable and obligations under capitalized leases aggregating approximately $1.2 million and the net repayment of borrowings under the GECC revolving credit facility of approximately $674,000. In July 2001, our Board of Directors continued our common stock repurchase program by authorizing the purchase of up to an additional 709,082 shares, or 10% of the then outstanding shares. In the immediate aftermath of the September 11th attack, the Board further expanded this authorization by an additional 490,918 shares in order to bring the total authorization up to 1,200,000 shares. As of December 31, 2002, we had purchased 589,507 shares under this expanded program. As has been the case with each of our repurchase program authorizations, all purchases of shares are subject to the availability of shares at prices which are acceptable to us, as well as to our assessment of prevailing market and business conditions, and, accordingly, there is no guarantee as to the timing or number of shares to be repurchased. All purchases are anticipated to be funded using our existing resources. 38 Contractual Obligations We have contractual obligations to make future payments in connection with operating and capital leases and information service contracts. The following table sets forth these contractual payment commitments as of December 31, 2002. Additional disclosure relating to our commitments appears in Notes 13 and 19 to the Consolidated Financial Statements.
Payments due by period Less than 1 3-5 More than Total year 1-3 years years 5 years ----------- ----------- ----------- ----------- ----------- Operating leases $72,427,980 $ 7,394,164 $11,109,501 $10,193,318 $43,730,997 Information service contracts 3,517,485 2,800,568 716,917 Obligations under capitalized leases 842,399 212,443 629,956 ----------- ----------- ----------- ----------- ----------- Total contractual obligations $76,787,864 $10,407,175 $12,456,374 $10,193,318 $43,730,997 =========== =========== =========== =========== ===========
In March 2003, we entered into various sale-leaseback transactions for equipment and furniture resulting in leases under a master lease agreement with GECC. These leases contain options at the end of the terms to purchase the assets at a percentage of their original cost or to return the assets and either (1) pay GECC the amount by which our termination obligation exceeds the proceeds on GECC's disposition of the assets or (2) receive the amount by which the proceeds on GECC's disposition exceeds the cost of our purchase option. These leases do not meet one or more of the criteria for capital lease treatment and, accordingly, they are classified as operating leases. The following table sets forth our contractual payment commitments pursuant to these leases.
Payments due by period Less than 1 3-5 More than Total year 1-3 years years 5 years ----------- ----------- ----------- ----------- ----------- March 2003 GECC leases $ 5,012,037 $ 1,476,807 $ 2,526,045 $ 1,009,185 $
Effects of Inflation Because our assets are to a large extent liquid in nature, they are not significantly affected by inflation, although the value of any longer-term fixed-income securities held in inventory may decrease. However, to the extent inflation increases certain of our operating expenses, such as employee compensation, travel and entertainment, occupancy and communication costs, such increases may not be readily recoverable in the price of our services, particularly for operations domiciled outside the United States, where there are increased inflationary pressures. In addition, to the extent inflation increases 39 or decreases volatility in the securities markets, our brokerage business is likely to be affected by corresponding increases or decreases in brokerage transaction volumes. Forward-Looking Statements Certain statements contained in this Item 7 and elsewhere in this report, as well as other oral and written statements made by us to the public, contain and incorporate by reference forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Wherever possible, we have identified these forward-looking statements by words such as "believes," "anticipates," "expects," "may," "intends" and similar phrases. Such forward-looking statements, which describe our current beliefs concerning future business conditions and the outlook for our company and business, are subject to significant uncertainties, many of which are beyond our control. Actual results or performance could differ materially from that which we expect. Uncertainties include factors such as: market and economic conditions, including the level of trading volumes in the instruments we broker and interest rate volatilities; the effects of any additional terrorist acts or acts of war and governments' military and other responses to them; the scope of our recoveries from insurers; the success of our technology development and deployment; the status of our relationships with employees, clients, business partners, vendors and clearing firms; possible third-party litigations or regulatory actions against us or other unanticipated contingencies; the scope of our trading gains and losses; the actions of our competitors; and government regulatory changes. For a fuller description of these and additional uncertainties, reference is made to the "Competition," "Regulation" and "Cautionary Statements" captions of Item 1 of this report, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" caption of Item 7 of this report and the "Quantitative and Qualitative Disclosures about Market Risk" caption of Item 7A of this report. The forward-looking statements made herein are only made as of the date of this report and we undertake no obligation to publicly update such forward-looking statements to reflect new information or subsequent events or circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are actively involved in the evaluation of risks associated with certain financial instruments and will from time to time reduce other risks inherent in our businesses through the use of financial instruments. We reduce market risk related to positions in our sales and trading operations by limiting both the size of our overall positions and the number of days positions are held. We closely monitor our securities positions on a daily basis through a review by management of daily activity and position reports prepared by operations staff. These reports detail all executed transactions, the resulting commissions and principal gains and losses and the closing positions. The detail of closing positions includes their cost basis and independently verified market prices. 40 In the process of executing brokerage transactions, we sometimes experience "out trades" or other errors in which we may have liability for the resulting unmatched position. Out trades generally increase with increases in the volatility of the market. If an out trade is promptly discovered, thereby allowing prompt correction or disposition of the unmatched position, our risk is usually limited. If discovery (or correction or disposition) is delayed, the risk is heightened by the increased possibility of intervening market movements prior to such correction or disposition. We believe that both our paperless confirmation system and our electronic blotter system, because of their ability to confirm trade details rapidly and identify unbalanced trade conditions as they occur, serve to help limit the market risk exposure when out trades or other errors occur. To limit our exposure further in such situations, our policy is to correct or dispose of any resulting unmatched positions promptly after their discovery. We do not consider our exposure to fixed interest rates significant at December 31, 2002, due to the low level of debt outstanding. Any borrowings under the facility with GECC and in the future with BONY bear interest at variable rates. We will monitor the level of borrowings under the new BONY facility as well as the interest rate environment to determine the necessity of a hedging strategy to guard against increases in market interest rates. The tables below provide information, at each of December 31, 2002 and December 31, 2001, about our financial instruments that are used either for trading purposes or other than trading purposes and that are sensitive to either changes in interest rates or changes in foreign exchange rates. Except as noted above, our market risk analysis at December 31, 2002 did not materially change from the market risk analysis at December 31, 2001. For loan and note payable the table presents principal cash flows with expected maturity dates. For municipal securities and corporate bonds, the table presents the aggregate par values with maturity dates and the weighted average interest rate based upon the par amount of bonds held. Corporate bonds not making regularly scheduled interest payments were assigned an interest rate of 0%. As of December 31, 2002: - -----------------------
2003 2004 2005 2006 2007 After 2007 Total Fair Value ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Other - ----- than trading: $ $ $ $ $ $ $ $ - ----------- Interest rate sensitivity: Loan payable Trading: - ------- Interest rate sensitivity: Municipal securities 50,000 90,000 470,000 22,305,000 22,915,000 22,350,511 (weighted average interest rate-7.1%) Corporate bonds 10,725,000 1,000,000 23,094,000 34,819,000 6,793,364 (weighted average interest rate-3.1%)
41 As of December 31, 2001: - -----------------------
Fair 2002 After 2006 Total Value ----------- ----------- ----------- ----------- Other than trading: $ $ $ $ - ----------- Interest rate sensitivity: Loan payable 7.9% note secured by certain equipment 447,978 447,978 447,978 Trading: - ------- Interest rate sensitivity: Municipal securities 12,135,000 12,135,000 10,860,649 (weighted average interest rate -6.4%) Corporate bonds 1,000,000 1,000,000 870,625 (weighted average interest rate-13.5%)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item 8 is included as a separate section of this report. See Item 14 and the F-pages that follow. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This Item 9 is not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to our definitive proxy statement for our upcoming 2003 Annual Meeting of Stockholders (the "Proxy Statement"). We intend to file the Proxy Statement with the SEC on or prior to April 30, 2003. 42 ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the Proxy Statement, except that such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(9) of Regulation S-K. We intend to file the Proxy Statement with the SEC on or prior to April 30, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the Proxy Statement. We intend to file the Proxy Statement with the SEC on or prior to April 30, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the Proxy Statement. We intend to file the Proxy Statement with the SEC on or prior to April 30, 2003. Nothing in this Part III, or elsewhere in this report, shall be deemed to specifically incorporate by reference any of the information required by Item 306 of Regulation S-K or referred to in Item 402(a)(9) of Regulation S-K. ITEM 14. CONTROLS AND PROCEDURES Within 90 days prior to the date of this annual report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended). Based on this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our company (including our consolidated subsidiaries) required to be included in our periodic SEC reports. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. 43 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements Listed on page F-2 of the Consolidated Financial Statements included in this report. (a)(2) Financial Statement Schedules All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements. (a)(3) Exhibits Listed in the Exhibit Index appearing at page X-1 of this report. (b) Reports on Form 8-K During the fourth quarter of our fiscal year ended December 31, 2002, we filed two current reports on Form 8-K, respectively dated November 14, 2002 and December 17, 2002. The earlier filed report furnished certifications of our Chief Executive Officer and Chief Financial Officer given pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 with respect to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. The later filed report announced the settlement of our business interruption insurance claim stemming from the September 11th terrorist attacks. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAXCOR FINANCIAL GROUP INC. By: /s/ GILBERT D. SCHARF ------------------------------------- Gilbert D. Scharf, Chairman of the Board, President and Chief Executive Officer Dated: March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ GILBERT D. SCHARF Chairman of the Board, President March 28, 2003 - --------------------------------- and Chief Executive Officer(1) Gilbert D. Scharf (Principal Executive Officer) /s/ KEITH E. REIHL Chief Operating Officer and March 28, 2003 - --------------------------------- Director Keith E. Reihl /s/ STEVEN R. VIGLIOTTI Chief Financial Officer(1) and March 28, 2003 - --------------------------------- Treasurer (Principal Financial and Steven R. Vigliotti Accounting Officer) /s/ LARRY S. KOPP Director March 28, 2003 - --------------------------------- Larry S. Kopp /s/ MICHAEL J. SCHARF Director March 28, 2003 - --------------------------------- Michael J. Scharf Director March 28, 2003 - --------------------------------- James W. Stevens /s/ FREDERICK B. WHITTEMORE Director March 28, 2003 - --------------------------------- Frederick B. Whittemore /s/ WILLIAM B. WIGTON Director March 28, 2003 - --------------------------------- William B. Wigton /s/ OSCAR M. LEWISOHN Director March 28, 2003 - --------------------------------- Oscar M. Lewisohn /s/ ROBIN A. CLARK Director March 28, 2003 - --------------------------------- Robin A. Clark
(1) In connection with this annual report, each of these officers has separately furnished the SEC with the certification required to be furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350). 45 CERTIFICATION I, Gilbert D. Scharf, Chief Executive Officer of Maxcor Financial Group Inc. (the "Company"), certify that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ GILBERT D. SCHARF ----------------------------------------- Gilbert D. Scharf, Chief Executive Officer 46 CERTIFICATION I, Steven R. Vigliotti, Chief Financial Officer of Maxcor Financial Group Inc. (the "Company"), certify that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ STEVEN R. VIGLIOTTI ----------------------------------------- Steven R. Vigliotti, Chief Financial Officer 47 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- DECEMBER 31, 2002, 2001 AND 2000 -------------------------------- F-1 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- DECEMBER 31, 2002, 2001 AND 2000 -------------------------------- Contents Page ================================================================================ Report of Independent Accountants F-3 Consolidated Financial Statements: Consolidated Statements of Financial Condition F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Changes in Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to the Consolidated Financial Statements F-9 F-2 [Letterhead of PricewaterhouseCoopers LLP] REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of Maxcor Financial Group Inc. In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Maxcor Financial Group Inc. and its subsidiaries (the "Company") at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP New York, New York March 21, 2003 F-3
MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ---------------------------------------------- December 31, December 31, ASSETS 2002 2001 - ------ ------------ ------------ Cash and cash equivalents $ 52,781,616 $ 49,565,284 Deposits with clearing organizations 6,318,529 6,336,080 Receivable from broker-dealers and customers 19,523,426 18,035,532 Securities failed-to-deliver 184,768,776 Securities held at clearing firms and trading contracts 29,526,028 12,090,074 Prepaid expenses and other assets 4,085,934 3,504,000 Deferred tax asset 364,419 221,112 Fixed assets 10,878,007 4,796,434 ------------ ------------ Total assets $123,477,959 $279,317,292 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Liabilities: Payable to broker-dealer $ 17,337,560 $ 6,638,824 Trading contracts 144,153 Securities failed-to-receive 183,649,730 Accounts payable and accrued liabilities 24,168,384 27,467,826 Accrued compensation payable 26,875,249 21,187,513 Income taxes payable 543,897 1,010,907 Deferred taxes payable 566,003 414,068 Obligations under capitalized leases 842,399 204,252 Note payable 447,978 ------------ ------------ 70,477,645 241,021,098 ------------ ------------ Minority interest in consolidated subsidiary 5,407,228 3,979,291 ------------ ------------ Stockholders' equity: Preferred stock, $.001 par value, 1,000,000 shares authorized; none issued at December 31, 2002 and 2001 Common stock, $.001 par value, 30,000,000 shares authorized; 12,232,564 and 11,612,769 shares issued at December 31, 2002 and 2001, respectively 12,233 11,613 Additional paid-in capital 36,517,908 33,731,266 Treasury stock at cost; 4,977,404 and 4,586,540 shares of common stock held at December 31, 2002 and 2001, respectively (11,208,967) (8,992,281) Retained earnings 20,741,779 8,195,155 Accumulated other comprehensive income: Foreign translation adjustments 1,530,133 1,371,150 ------------ ------------ Total stockholders' equity 47,593,086 34,316,903 ------------ ------------ Total liabilities and stockholders' equity $123,477,959 $279,317,292 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4
MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- For the Year Ended December 31, December 31, December 31, 2002 2001 2000 ------------- ------------- ------------- Revenue: Commission income $ 149,428,132 $ 138,003,085 $ 122,613,654 Insurance recoveries 11,098,135 4,498,144 Principal transactions 8,720,422 8,932,861 2,627,169 Interest income 2,147,274 2,306,044 1,823,285 Other income (843,142) 1,083,431 4,741,415 ------------- ------------- ------------- 170,550,821 154,823,565 131,805,523 ------------- ------------- ------------- Costs and expenses: Compensation and related costs 107,024,194 106,619,297 92,061,672 Communication costs 11,033,342 10,465,852 11,643,857 Travel and entertainment 7,406,116 6,493,462 6,620,974 Occupancy costs 4,054,140 3,156,568 4,406,215 Clearing and execution fees 3,311,759 3,511,712 3,307,802 Costs related to World Trade Center attacks 3,204,468 1,590,060 Depreciation and amortization 2,405,834 3,598,580 4,008,937 Contribution to The Euro Brokers Relief Fund, Inc. 1,219,233 Interest expense 299,079 666,387 594,957 Restructuring costs 541,961 General, administrative and other expenses 4,933,483 6,834,579 5,246,444 ------------- ------------- ------------- 144,891,648 142,936,497 128,432,819 ------------- ------------- ------------- Income before provision for income taxes, minority interest and income from equity affiliate 25,659,173 11,887,068 3,372,704 Provision for income taxes 12,130,758 2,174,673 2,710,482 ------------- ------------- ------------- Income before minority interest and income from equity affiliate 13,528,415 9,712,395 662,222 Minority interest in (income) loss of consolidated subsidiaries (981,791) (683,985) 1,203,987 Income from equity affiliate 9,992 135,890 ------------- ------------- ------------- Net income $ 12,546,624 $ 9,038,402 $ 2,002,099 ============= ============= ============= Weighted average common shares outstanding - basic 7,304,284 7,357,017 8,374,166 Weighted average common shares outstanding - diluted 8,210,638 7,764,667 8,374,166 Basic earnings per share $ 1.72 $ 1.23 $ .23 Diluted earnings per share $ 1.53 $ 1.16 $ .23
The accompanying notes are an integral part of these consolidated financial statements. F-5
MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 ---------------------------------------------------- Retained Accumulated Additional Earnings Other Comprehensive Common Paid-in Treasury (Accumulated Comprehensive Income Stock Capital Stock Deficit) Income Total ----------- -------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 1999 $ 11,392 $33,187,415 ($ 5,454,036) ($2,608,011) $ 2,282,836 $27,419,596 Comprehensive income Net income for the year ended December 31, 2000 $ 2,002,099 2,002,099 2,002,099 Foreign translation adjustment (net of income tax benefit of $171,940) (788,517) (788,517) (788,517) Deferred hedging gain (net of income tax expense of $12,519) 50,050 50,050 50,050 ----------- Comprehensive income $ 1,263,632 =========== Acquisition of treasury stock (894,494) (894,494) Issuance of shares from treasury stock 669,522 (177,335) 492,187 Redeemable preferred stock dividends (40,000) (40,000) -------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 2000 11,392 33,187,415 (5,679,008) (823,247) 1,544,369 28,240,921 Comprehensive income Net income for the year ended December 31, 2001 $ 9,038,402 9,038,402 9,038,402 Foreign translation adjustment (inclusive of income tax expense of $882) (123,169) (123,169) (123,169) Deferred hedging Reclassification to earnings (net of income tax benefit of $12,519) (50,050) (50,050) (50,050) ----------- Comprehensive income $ 8,865,183 =========== Exercise of stock options, including tax benefit of $101,822 221 543,851 (220,000) 324,072 Acquisition of treasury stock (3,093,273) (3,093,273) Redeemable preferred stock dividends (20,000) (20,000) -------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 2001 11,613 33,731,266 (8,992,281) 8,195,155 1,371,150 34,316,903 Comprehensive income Net income for the year ended December 31, 2002 $12,546,624 12,546,624 12,546,624 Foreign translation adjustment (inclusive of income tax benefit of $148,909) 158,983 158,983 158,983 ----------- Comprehensive income $12,705,607 =========== Exercise of common stock purchase warrants 493 2,463,482 2,463,975 Exercise of stock options, including tax benefit of $53,749 127 323,160 (96,525) 226,762 Acquisition of treasury stock (2,120,161) (2,120,161) -------- ----------- ------------ ----------- ----------- ----------- Balance at December 31, 2002 $ 12,233 $36,517,908 ($ 11,208,967) $20,741,779 $ 1,530,133 $47,593,086 ======== =========== ============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6
MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- For the Year Ended December 31, December 31, December 31, 2002 2001 2000 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 12,546,624 $ 9,038,402 $ 2,002,099 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,405,834 3,598,580 4,008,937 Write-off of intangible assets 943,080 Provision for doubtful accounts (77,136) (43,794) (50,635) Gain on sale of equity affiliate (390,081) Gain on partial sale of interest in the Tokyo Venture (2,235,511) In-process research and development from acquisition 477,000 Net loss on disposal of fixed assets 38,717 79,420 Unreimbursed losses (undistributed earnings) of equity affiliates and contractual arrangements 1,001,552 331,080 (373,737) Minority interest in net earnings (loss) of consolidated subsidiaries 981,791 683,985 (1,203,987) Deferred hedging (50,050) 50,050 Deferred income taxes (22,517) 1,238,353 1,666,251 Change in assets and liabilities, net of effect from purchase of subsidiary: Decrease (increase) in deposits with clearing organizations 17,551 (1,987) 466,297 (Increase) decrease in receivable from broker-dealers and customers (807,736) (2,593,297) 52,248 Decrease (increase) in securities failed-to-deliver 184,768,776 (184,768,776) Increase in securities held at clearing firm and trading contracts (17,287,342) (1,369,863) (1,240,517) (Increase) decrease in prepaid expenses and other assets (418,766) 978,592 1,793,188 Increase (decrease) in payable to broker-dealer 10,698,736 (477,416) 1,138,311 (Decrease) increase in securities failed-to-receive (183,649,730) 183,649,730 (Decrease) increase in accounts payable and accrued liabilities (4,413,181) 15,202,441 (2,516,711) Increase in accrued compensation payable 4,631,660 5,566,282 3,305,835 Increase (decrease) in income taxes payable (511,862) 890,786 (652,977) ------------- ------------- ------------- Net cash provided by operating activities 9,864,254 32,464,764 6,765,561 ------------- ------------- ------------- Cash flows from investing activities: Purchase of fixed assets (7,611,516) (2,108,112) (2,493,760) Proceeds from the sale of fixed assets 244,525 266,745 Insurance proceeds recognized for destroyed fixed assets 1,524,124 Proceeds from sale of equity affiliate 1,939,516 Proceeds from partial sale of interest in the Tokyo Venture 2,399,002 Purchase of subsidiary, net of cash acquired (2,131,896) ------------- ------------- ------------- Net cash (used in) provided by investing activities (7,611,516) 1,600,053 (1,959,909) ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-7
MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Continued) For the Year Ended December 31, December 31, December 31, 2002 2001 2000 ------------- ------------- ------------- Cash flows from financing activities: Cash contribution from minority interest 40,000 Proceeds from exercise of options 226,762 222,250 Proceeds from the exercise of warrants 2,463,975 Issuance of note payable to minority shareholder 149,300 Net repayments under revolving credit facility (674,282) Repayment of notes payable (447,978) (1,252,151) (972,501) Redemption of preferred stock (2,000,000) Redeemable preferred stock dividends (20,000) (40,000) Repayment of obligations under capitalized leases (137,559) (260,527) (223,774) Acquisition of treasury stock (2,120,161) (3,011,540) (894,494) ------------- ------------- ------------- Net cash used in financing activities (14,961) (6,321,968) (2,615,751) ------------- ------------- ------------- Effect of exchange rate changes on cash 978,555 357,431 (779,172) ------------- ------------- ------------- Net increase in cash and cash equivalents 3,216,332 28,100,280 1,410,729 Cash and cash equivalents at beginning of year 49,565,284 21,465,004 20,054,275 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 52,781,616 $ 49,565,284 $ 21,465,004 ============= ============= ============= Supplemental disclosures of cash flow information: Interest paid $ 229,750 $ 733,922 $ 622,080 Income taxes paid 10,639,955 3,413,784 1,103,001 Non-cash financing activities: Capital lease obligations incurred 706,094 138,375 97,762 Conversion of account payable to note payable 737,700 Issuance of shares from treasury stock to acquire subsidiary 492,187 Receipt of shares in treasury for exercise price of stock options 96,525 220,000 Receipt of shares in treasury for receivable due 81,733
The accompanying notes are an integral part of these consolidated financial statements. F-8 MAXCOR FINANCIAL GROUP INC. --------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- DECEMBER 31, 2002, 2001 AND 2000 -------------------------------- NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: - ----------------------------------------------- Maxcor Financial Group Inc. ("MFGI") is a publicly-held financial services holding company that was incorporated in Delaware in 1994. In August 1996, MFGI acquired Euro Brokers Investment Corporation ("EBIC"), a privately held international and domestic inter-dealer broker. EBIC, incorporated in December 1986 in connection with a management buyout of predecessor operations dating to 1970, through its subsidiaries and businesses is primarily an inter-dealer broker of money market instruments, derivative products and selected securities, with principal offices in New York, London and Tokyo, and other offices in Stamford (CT), Switzerland and Mexico, as well as correspondent relationships with other brokers throughout the world. Maxcor Financial Inc. ("MFI"), a U.S. registered broker-dealer subsidiary, also conducts institutional sales and trading brokerage operations in municipal bonds, high-yield and distressed debt, equities and convertible securities. The consolidated financial statements include the accounts of MFGI and its majority-owned subsidiaries and other entities over which it exercises control (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated affiliates where the Company may exercise significant influence over operating and financial policies have been accounted for using the equity method. Certain reclassifications have been made to the 2001 and 2000 balances to conform to the current year presentation. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: - ---------------------------------------- Revenue recognition: - ------------------- Commission income, principal transactions and related expenses are recorded on a trade date basis. Revenue from the sale of pricing and volume data sourced from the Company's brokerage business is included in other income and is recognized on a pro-rata basis over the terms of the respective agreements. Any payments received in advance are deferred and are included in accounts payable and accrued liabilities. Securities and trading contracts: - -------------------------------- Transactions in securities and trading contracts are recorded on a trade date basis. Securities are carried at market value, generally based upon quoted prices. To the extent quoted prices are not available, securities are valued at fair value as determined by management generally based upon quoted prices of securities with similar characteristics. When-issued equity trading contracts are reflected in the statement of financial condition as assets or liabilities based upon the difference between the contract price and the quoted market price. If the difference between the contract price and the quoted market price results in a gain and the completion of the contract is not assured beyond a reasonable doubt, such gain is deferred from revenue until the uncertainty is eliminated. Principal transactions represent the net gains generated from the Company's securities transactions that involve the assumption of market risk for a period of time and include mark-to-market gains and losses on positions held. Revenues derived from matched riskless principal transactions are included in commission income. F-9 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued): - ---------------------------------------------------- Cash and cash equivalents: - ------------------------- The Company considers all short-term investments with an initial maturity of three months or less to be cash equivalents. Allowance for doubtful accounts: - ------------------------------- The Company maintains an allowance for doubtful accounts to reduce its billed receivables on name give-up brokerage transactions to the amount expected to be collected on such receivables. Fixed assets: - ------------ Depreciation and amortization of furniture, equipment and software is computed on a straight-line basis using estimated useful lives of 3 to 5 years. Leasehold improvements are amortized over the lesser of the terms of the related leases or the estimated useful lives of the improvements. Foreign currency translation: - ---------------------------- Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using exchange rates at the end of the year; revenues and expenses are translated at average monthly rates during the year. Gains and losses on foreign currency translation of the financial statements of foreign operations whose functional currency is other than the U.S. dollar, together with related hedges and tax effects and the effect of exchange rate changes on intercompany transactions of a long-term investment nature, are reflected as foreign translation adjustments in the accumulated other comprehensive income section of stockholders' equity. Foreign currency exchange gains and losses from transactions and balances denominated in a currency other than the related foreign operation's functional currency are recorded in operations. Fair value of financial instruments: - ----------------------------------- The financial instruments of the Company are reported in the consolidated statements of financial condition at market or fair values, or at carrying amounts that management estimates approximate fair values as such financial instruments are short-term in nature or bear interest at rates approximating current market. Income taxes: - ------------ Income taxes are accounted for using the asset and liability method. Deferred taxes are recognized for the tax consequences of temporary differences between the recognition of tax effects for financial statement purposes and income tax reporting purposes by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is recorded to reduce the deferred tax asset to only that portion that is judged more likely than not to be realized. F-10 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued): - ---------------------------------------------------- Stock-based compensation: - ------------------------ The Company accounts for stock-based compensation using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the Company has not recognized any compensation cost associated with stock-based compensation since the market prices of the underlying stock on the option and warrant grant dates were not greater than the exercise prices. The following table presents net income and earnings per share, as reported and on a pro forma basis as if the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") had been applied to all stock-based compensation granted since the standard's effective date: 2002 2001 2000 ------------ ------------ ------------ Net income, as reported $ 12,546,624 $ 9,038,402 $ 2,002,099 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 813,362 652,994 752,941 ------------ ------------ ------------ Pro forma net income $ 11,733,262 $ 8,385,408 $ 1,249,158 ============ ============ ============ Earnings per share: Basic, as reported $ 1.72 $ 1.23 $ 0.23 Basic, pro forma $ 1.61 $ 1.14 $ 0.14 Diluted, as reported $ 1.53 $ 1.16 $ 0.23 Diluted, pro forma $ 1.43 $ 1.08 $ 0.14 Use of estimates: - ---------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Recently issued accounting standards: - ------------------------------------ In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a rollforward of the entity's product warranty liabilities. The Company adopted the disclosure provisions of FIN 45 effective December 31, 2002 and is presently evaluating the recognition and measurement provisions of FIN 45 that are required to be adopted in 2003. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123" ("SFAS 148"). F-11 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued): - ---------------------------------------------------- SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS No. 148 effective December 31, 2002, and continues to follow APB 25 for the purpose of recognizing compensation cost. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires consolidation of a variable interest entity ("VIE") if the Company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. Prior to FIN 46, VIEs were commonly referred to as special purpose entities. As the Company does not have any VIEs, the adoption of this statement will not have an effect on the consolidated financial statements. NOTE 3 - ATTACKS ON WORLD TRADE CENTER: - -------------------------------------- On September 11, 2001, the Company's headquarters on the 84th Floor of Two World Trade Center in downtown New York were destroyed when two commercial jet planes hijacked by terrorists crashed into the World Trade Center towers. As a result of these attacks, 61 employees and staff members, out of a New York work force approximating 300, were killed. The Company also lost all of the property and technological infrastructure maintained at Two World Trade Center and experienced a total disruption of its New York based operations. On September 18, 2001, the Company relocated its entire New York-based operations to temporary facilities provided by Prudential Securities, the parent company of one of the Company's clearing firms, at One New York Plaza in lower Manhattan. During 2002 the Company made a charitable contribution to The Euro Brokers Relief Fund, Inc. of $1,219,233, an amount equal to all the revenue generated by the New York, Stamford, Mexico, London and Switzerland offices of the Company on its 2002 charity day. All participating brokerage employees waived any entitlement to commissions from such revenues. The Euro Brokers Relief Fund, Inc. is a 501(c)(3) tax-exempt corporation (HTTP://RELIEF.EBI.COM), established to provide charitable aid to the families and other financial dependents of the Company's 61 employees and staff members killed as a result of the September 11th attacks. The Company maintained insurance coverages that mitigated the financial impacts of the attacks. Its U.S. insurance policies, underwritten by Kemper Insurance Companies ("Kemper"), covered replacement costs of destroyed property and losses from interruption of business operations, including lost revenues (net of saved expenses) and extra expenses incurred in New York. Its U.K. policy, underwritten by Norwich Union ("Norwich"), covered lost revenues (net of saved expenses) and extra expenses incurred in London. During 2002 the Company settled its claims against Kemper and Norwich for lost revenues (net of saved expenses) and extra expenses incurred for an aggregate amount of $20 million. The portion of these settlements relating to lost revenues (net of saved expenses) is reflected on the statement of operations in revenues as insurance recoveries. In 2002, the amount recorded as insurance recoveries of $11,098,135 represents the gross settlements relating to lost revenues (net of saved expenses) of $15,596,279, less the $4,498,144 amount recorded in 2001. The portion of the settlements relating to extra expenses incurred has been reflected on the statement of operations in 2002 and 2001 as reductions to costs related to World Trade Center attacks. These offsets are recordable as the extra expenses are incurred and the related recovery is considered probable or has been recovered. The gross amount of the extra expenses in 2002 and 2001 of $7,020,331 and $2,187,281, respectively, have been reduced by offsets of $3,815,863 and $597,221, respectively, resulting in net charges in 2002 and 2001 of $3,204,468 and $1,590,060, respectively. Included in gross costs during 2002 was the cost of foregoing an extension of a sublease on additional space in London that was re-allocated for potential use by New York employees. This gross cost of $2.7 million ($2.4 million net after applying the portion of insurance proceeds from Norwich Union allocable to this cost) was based upon management's estimate of the length of time it will take to generate sublet income on this space and the difference between the amount management believes it will then be able to sublet the space for and the Company's cost associated with the space. F-12 NOTE 3 - ATTACKS ON WORLD TRADE CENTER (Continued): - -------------------------------------------------- Other gross extra expenses incurred include additional occupancy costs in New York, the purchase of equipment solely compatible with the Company's temporary facilities in New York, the use of outside professionals, interest on failed securities settlements, recruitment fees and benefits for the families of deceased employees. The Company's U.S. property casualty insurance policy with Kemper has an aggregate limit of approximately $14 million. The Company has recorded receivables against this policy of $1.5 million in 2001 for the net book value of property owned by the Company destroyed in the attacks and of $1.0 million in 2002 for the termination costs associated with operating leases of equipment destroyed in the attacks. Since the proceeds from claims relating to this property damage are based upon full replacement cost of assets replaced, such amounts are expected to exceed the aggregate amount of the net book value of the property written off and lease termination costs. The anticipated gain will be recorded as the claim is settled or otherwise resolved. Included in accounts payable and accrued liabilities at December 31, 2002 is $5.5 million, representing the portion of the $8 million of cash advances received from Kemper under the property casualty policy not yet recognized. NOTE 4 - ACQUISITION OF TRADESOFT TECHNOLOGIES, INC.: - ---------------------------------------------------- On August 11, 2000, the Company acquired Tradesoft Technologies, Inc. ("Tradesoft"), a privately held software developer and technology provider in a transaction accounted for as a purchase, for approximately $2.1 million in cash and the issuance of 375,000 shares of MFGI stock from treasury. As a result of the acquisition, approximately $988,000 in goodwill was recorded by the Company, which reflects the adjustments necessary to allocate the purchase price to the fair value of assets acquired (including certain identifiable intangibles) and includes an amount approximating $738,000, offset by an equal amount in deferred taxes payable, to account for the differences between these assigned values and their respective tax bases. The Company also recorded a one-time charge of $477,000 relating to Tradesoft's in-process research and development initiatives ongoing at the date of acquisition. This charge was included in general, administrative and other expenses during the year ended December 31, 2000. As a result of a changes in the business climate for interactive brokerage for the Company's product base, the Company determined that the goodwill, identifiable intangibles and certain other assets obtained in the Tradesoft acquisition no longer have ongoing value. Accordingly, the Company included in general, administrative and other expenses during 2001, a charge of approximately $1.1 million related to the write-off of these assets. The following details the unaudited pro forma consolidated revenues, net income and earnings per share of the Company for the year ended December 31, 2000 assuming the Tradesoft acquisition occurred on January 1, 2000. For the Year Ended December 31, 2000 ----------------- Revenues $ 131,898,654 Net income 1,763,224 Earnings per share: Basic .21 Diluted .21 These results reflect Tradesoft's actual results during the 2000 interim period up to the date of acquisition with certain adjustments to eliminate software development fees between the Company and Tradesoft and the costs incurred by Tradesoft to develop such software, to depreciate and amortize Tradesoft's assets (including intangibles) based upon the fair values assigned in recording the combination, to record incremental interest on the additional revolving debt needed to finance the acquisition and to eliminate the one-time charge for in-process research and development. These results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis noted above, nor are they indicative of future combined operations. F-13 NOTE 5 - EARNINGS PER SHARE: - --------------------------- The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 ----------- ----------- ----------- Numerator (basic and diluted calculation): Net income $12,546,624 $ 9,038,402 $ 2,002,099 Less redeemable preferred stock dividends (20,000) (40,000) ----------- ----------- ----------- Net income available to common stockholders 12,546,624 9,018,402 1,962,099 Denominator: Weighted average common shares outstanding - basic calculation 7,304,284 7,357,017 8,374,166 Dilutive effect of stock options and warrants 906,354 407,650 ----------- ----------- ----------- Weighted average common shares outstanding - diluted calculation 8,210,638 7,764,667 8,374,166 Earnings per share: Basic 1.72 1.23 .23 Diluted 1.53 1.16 .23 Antidilutive common stock equivalents: Options 270,000 240,000 1,755,000 Warrants 734,980 734,980
NOTE 6 - DEPOSITS WITH CLEARING ORGANIZATIONS: - --------------------------------------------- Deposits with clearing organizations at December 31, 2002 and 2001 consist of the following: December 31, December 31, 2002 2001 ------------ ------------ Cash $ 407,197 $ 429,209 U.S. Treasury obligations 5,911,332 5,906,871 ------------ ------------ $ 6,318,529 $ 6,336,080 ============ ============ Pursuant to its membership in the Government Securities Division of the Fixed Income Clearing Corporation ("GSD-FICC"), MFI is required to maintain a minimum deposit of $5,000,000. The balance of the deposits is required pursuant to MFI's clearing firm relationships. NOTE 7 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CUSTOMERS: - -------------------------------------------------------------------- At December 31, 2002 and 2001, receivable from and payable to broker-dealers and customers consists of the following:
December 31, 2002 December 31, 2001 --------------------------- --------------------------- Receivable Payable Receivable Payable ------------ ------------ ------------ ------------ Commissions receivable $ 17,273,968 $ $ 16,384,225 $ Receivable from clearing firms 2,249,458 1,651,307 Payable to clearing firm 17,337,560 6,638,824 ------------ ------------ ------------ ------------ $ 19,523,426 $ 17,337,560 $ 18,035,532 $ 6,638,824 ============ ============ ============ ============
The Company clears its matched riskless principal brokerage transactions and its securities sales and trading transactions through other broker-dealers on a fully-disclosed basis pursuant to clearing agreements. F-14 NOTE 7 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CUSTOMERS - -------------------------------------------------------------------- (Continued): - ----------- The receivable from clearing firms primarily represents commissions due on matched riskless principal brokerage transactions, net of transaction fees, while the payable to clearing firm represents the net amount owed for financing the Company's securities positions. This clearing firm provides a range of borrowing availability on securities positions from 0% for certain corporate bonds to 85% for municipal securities. Commissions receivable represent amounts billed on the Company's name give-up brokerage transactions, net of allowances for doubtful accounts of approximately $531,000 and $599,000 at December 31, 2002 and 2001 respectively. NOTE 8 - SECURITIES HELD AT CLEARING FIRMS AND TRADING CONTRACTS: - ---------------------------------------------------------------- Securities held at clearing firms and trading contracts at December 31, 2002 and 2001 consist of the following: December 31, 2002 December 31, 2001 ----------------- ----------------- Assets Liabilities Assets ------------ ------------ ------------ Municipal obligations $ 22,350,511 $ $ 10,860,649 Corporate bonds 6,793,364 870,625 Corporate stocks 57,500 358,800 When-issued equity trading contracts 324,653 144,153 ------------ ------------ ------------ $ 29,526,028 $ 144,153 $ 12,090,074 ============ ============ ============ Securities positions are held by one of the Company's clearing firms as a pledge against the amount owed (See Note 7) and may be rehypothecated by this clearing firm. NOTE 9 - EQUITY AFFILIATES AND MINORITY INTERESTS: - ------------------------------------------------- Yagi Euro Nittan Corporation: - ---------------------------- The Company's equity in affiliated company at December 31, 2000 consisted of its 15% interest in Yagi Euro Nittan Corporation ("Yagi Euro"). Due to the significant influence maintained by the Company over Yagi Euro as a result of the presence of the Company's Chairman and Chief Executive Officer on Yagi Euro's Board of Directors as Vice Chairman and the control the Company maintained over a derivatives brokering venture (see Note 10) which represented a significant portion of Yagi Euro's results, the Company accounted for this investment under the equity method. Effective January 1, 2000, Yagi Euro completed an agreement to contribute its money market and forward foreign exchange businesses to a 50-50 joint venture with Nittan Capital Group Limited ("Nittan"). Included in income from equity affiliate for the year ended December 31, 2000 is the Company's approximately $86,000 share of an after-tax gain realized by Yagi Euro on its restructuring activities. Effective June 30, 2001, the Company sold its 15% equity interest in Yagi Euro to Yagi Euro's other shareholder, Yagi Tanshi Company, Limited, resulting in a gain of approximately $390,000. This gain was determined by subtracting from the sale price of approximately $1.94 million transaction fees of approximately $50,000 and the carrying value of the investment under the equity method of approximately $1.5 million. Euro Brokers Finacor Limited: - ---------------------------- On January 1, 1999, Euro Brokers International Limited ("EBIL"), a U.K. subsidiary, completed a Sale and Purchase Agreement with Monecor (London) Limited ("Monecor"), issuing 50% of its share capital to Monecor in exchange for net assets approximating $5.4 million, consisting of all the shares of Monecor's subsidiary, Finacor Limited, and the assets and undertaking of its Finacor Peter branch in Paris. This transaction combined the existing interest rate options, U.S. dollar deposit and the euro, British pound sterling and Japanese yen swaps operations of EBIL with the euro and Scandanavian swaps businesses of Finacor Limited and the euro swaps business of Finacor Peter. Simultaneously, EBIL changed its name to Euro Brokers Finacor Limited ("EBFL"). The Company is deemed to have management control of EBFL because of the Company's mandated 3 to 2 majority on EBFL's Board of Directors and the fact that the day-to-day operations of EBFL are principally run by the Chief Executive Officer of Euro Brokers Holdings Ltd. ("EBHL"), the Company's U.K. based holding company. Accordingly, the assets and liabilities and results of operations of EBFL are F-15 NOTE 9 - EQUITY AFFILIATES AND MINORITY INTERESTS (Continued): - ------------------------------------------------------------- consolidated in the Company's consolidated financial statements, with Monecor's interest presented as minority interest. In February 2003, the London Court of Appeals upheld the May 2002 judgment of the London High Court of Justice enabling EBHL to purchase Monecor's 50% shareholding in EBFL at a 30% discount to the book value attributable to this shareholding as of December 2000 and refused Monecor's request for leave to appeal further to the House of Lords. The Company sought this judgment under the terms of the EBFL shareholders agreement as a result of Monecor's failure to provide certain requested funding to EBFL in late 2000. As a result, in February 2003 the Company acquired Monecor's shareholding at the discounted price and recorded a one-time extraordinary gain of approximately (pound)1.8 million ($3.0 million), the excess of the amount recorded for Monecor's interest in EBFL over the purchase price. NOTE 10 - TOKYO-BASED VENTURE: - ----------------------------- Since 1994 the Company has held an interest in a Tokyo-based derivatives brokering venture (the "Tokyo Venture"). Originally, the Company held a 50% interest in a venture with Yagi Euro. This venture was structured under Japanese law as a Tokumei Kumiai ("TK"). A TK is a contractual arrangement in which a TK investor invests in a business of a TK operator by making a capital contribution to the TK operator and, in return, becomes entitled to a specified percentage of the profits of the business while also becoming obligated to fund a specified percentage of the losses of the business. Effective January 1, 2000, the operations of this venture were merged with the off-balance sheet operations of Nittan. This transaction, which included a cash payment of approximately $2.4 million to the Company by Nittan, reduced the Company's direct interest in the Tokyo Venture to 40% and Yagi Euro's interest to 30%, with Nittan acquiring the remaining 30% interest. Included in other income for 2000 is a gain recognized by the Company on this transaction of approximately $2.2 million, calculated by subtracting from the cash proceeds received transaction costs of approximately $125,000 and 20% of the Company's capital contribution, which approximated $38,000. Effective June 30, 2001, this venture disbanded and a new, substantially similar TK venture with Nittan was formed, in which the Company has a 57.25% interest and Nittan a 42.75% interest. The interests maintained by the Company and Nittan in the new venture are proportional to the direct interest each held in the original venture, once Yagi Euro's 30% interest was excluded. Although the operations of the Tokyo Venture have always been managed and run by persons appointed by the Company, it does not operate in a legal entity separately distinguishable from the TK operator, and accordingly, the Company accounts for its share of the results of operations of the Tokyo Venture in other income as non-equity earnings (losses) from a contractual arrangement. Summarized operating results of the Tokyo Venture for the years ended December 31, 2002, 2001 and 2000, along with the Company's share of those results, are presented below: 2002 2001 2000 ------------ ------------ ------------ Revenues $ 10,405,376 $ 15,218,117 $ 20,310,361 Expenses 12,473,906 16,670,071 19,001,101 ------------ ------------ ------------ (Loss) earnings ($ 2,068,530) ($ 1,451,954) $ 1,309,260 ============ ============ ============ Company's share ($ 1,184,233) ($ 694,083) $ 523,704 ============ ============ ============ F-16 NOTE 11 - RESTRUCTURING COSTS: - ----------------------------- During the year ended December 31, 2000, the Company incurred certain restructuring costs detailed below. These costs related to the ceasing of operations in June 2000 by the Company's Toronto-based subsidiary and the notice given in December 2000 to close EBFL's branch operations in Paris effective January 2001. A portion of the business previously conducted in Toronto was relocated to New York. 2000 -------- Employee severance costs $441,021 Loss on disposal of fixed assets 77,992 Occupancy costs 17,750 Other 5,198 -------- $541,961 ======== All of the amounts represent costs that are not associated with future revenues and are either incremental or contractual with no economic benefit. The employee severance costs for 2000 relate to the termination of nine employees. All of the restructuring reserve outstanding at December 31, 2000 was paid as of December 31, 2002. NOTE 12 - FIXED ASSETS: - ---------------------- Fixed assets at December 31, 2002 and 2001 are summarized below: December 31, December 31, 2002 2001 ------------ ------------ Furniture and telephone equipment $ 9,458,109 $ 7,182,545 Leasehold improvements 8,318,899 4,000,882 Computer and related equipment 7,122,245 5,235,150 Software 7,664,033 7,094,308 Automobiles 1,192,485 345,804 ------------ ------------ 33,755,771 23,858,689 Less - Accumulated depreciation and amortization (22,877,764) (19,062,255) ------------ ------------ $ 10,878,007 $ 4,796,434 ============ ============ NOTE 13 - OBLIGATIONS UNDER CAPITALIZED LEASES: - ---------------------------------------------- The Company, primarily in the U.K., has purchased automobiles under capitalized leases. The lease terms generally do not exceed three years. The following is a schedule of future minimum lease payments under capitalized leases together with the present value of the net minimum lease payments as of December 31, 2002: For the Year Ending December 31, 2003 $ 290,550 2004 297,878 2005 438,807 ----------- Total minimum lease payments 1,027,235 Less - Amount representing interest (184,836) ----------- Present value of total minimum lease payments $ 842,399 =========== The gross amounts of assets under capitalized leases are approximately $1,040,000 and $222,000 at December 31, 2002 and 2001, respectively. Such amounts are included in fixed assets in the consolidated statements of financial condition. The charges to income resulting from the amortization of assets recorded under capitalized leases were approximately $219,000, $80,000 and $133,000 for the years ended December 31, 2002, 2001 and 2000, respectively. F-17 NOTE 14 - BORROWING ARRANGEMENTS: - -------------------------------- Loan Payable: - ------------ In June 1999, Euro Brokers Inc. ("EBI"), a U.S. subsidiary, entered into a Loan and Security Agreement with General Electric Capital Corporation ("GECC") for a five year revolving credit facility of up to $5 million. This facility, which was not drawn upon at December 31, 2002 or 2001, is secured by substantially all of EBI's assets. The borrowing availability under this facility (which approximated $3.7 million at December 31, 2002) is determined based upon the level and condition of EBI's billed accounts receivable. Interest is charged on borrowings under this facility at variable rates based upon the published rate for commercial paper plus a margin. Commitment fees of .15% per annum are charged on the unused portion of this facility. In March 2003, EBI terminated the facility with GECC and entered into a Credit Agreement with The Bank of New York for a three year revolving credit facility of up to $15 million. This facility is secured by EBI's receivables and the stock issued by EBI to its direct parent and has mandatory reductions to availability of $5 million on each of the eighteenth and thirtieth months following the closing date. This agreement contains certain covenants which require EBI separately, and the Company as a whole, to maintain certain financial ratios and conditions. Borrowings under this facility bear interest at a variable rate based upon two types of borrowing options, (1) an Alternate Base Rate option which incurs interest at the Prime Rate plus a margin or (2) a Eurodollar option which incurs interest at rates quoted in the London interbank market plus a margin. Commitment fees of .35% per annum are charged on the unused portion of this new facility. Note Payable: - ------------ At December 31, 2001, the Company had outstanding $447,978 of a 7.9% note secured by certain equipment representing the remaining amount due on a $2,140,000 note issued in December 1997 to GECC. The note was secured by all owned equipment of EBI and was payable in monthly installments through December 2002. As a result of the September 11th attacks on the World Trade Center, the equipment securing this note was destroyed. Pursuant to the terms of the note, the Company retired the note early in 2002 without penalty. NOTE 15 - EMPLOYEE BENEFIT PLAN: - ------------------------------- The Company maintains a 401(k) defined contribution plan for the Company's U.S. operations covering substantially all salaried employees. The Company's contributions to the 401(k) plan are, subject to a maximum limit, based upon a percentage of employee contributions. Total 401(k) plan expense approximated $213,000, $230,000 and $270,000 for the years ended December 31, 2002, 2001 and 2000. NOTE 16 - INCOME TAXES: - ---------------------- Income before provision for income tax, minority interest and income from equity affiliate is subject to tax under the following jurisdictions: For the Year Ended December 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ Domestic $ 22,801,450 $ 8,196,893 $ 4,392,815 Foreign 2,857,723 3,690,175 (1,020,111) ------------ ------------ ------------ Total $ 25,659,173 $ 11,887,068 $ 3,372,704 ============ ============ ============ F-18 NOTE 16 - INCOME TAXES (Continued): - ---------------------------------- The components of the provision for income taxes are as follows: For the Year Ended December 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ Current Federal $ 7,980,966 $ 2,307,130 $ 1,012,798 State and local 2,291,478 (3,384,531) 75,190 Foreign 1,880,831 1,981,160 (139,143) ------------ ------------ ------------ Total 12,153,275 903,759 948,845 ------------ ------------ ------------ Deferred Federal (746,432) 1,602,678 797,989 State and local 906,825 (149,310) (49,643) Foreign (182,910) (182,454) 1,013,291 ------------ ------------ ------------ (22,517) 1,270,914 1,761,637 ------------ ------------ ------------ Total $ 12,130,758 $ 2,174,673 $ 2,710,482 ============ ============ ============ Deferred tax assets (liabilities) are comprised of the following: December 31, December 31, 2002 2001 ------------ ------------ Assets Bad debt reserve $ 164,510 $ 187,077 Occupancy reserves 53,888 121,488 Depreciation and amortization 898,574 1,029,962 Net operating losses ("NOLs") 255,715 853,921 Foreign tax credits 96,517 72,726 Capital loss carryforwards 627,446 615,132 Other 107,918 77,479 Deferred tax asset valuation allowance (979,678) (952,768) ------------ ------------ Gross deferred tax asset, after valuation allowance 1,224,890 2,005,017 Jurisdictional deferred taxes payable offset (860,471) (1,783,905) ------------ ------------ Deferred tax asset $ 364,419 $ 221,112 ============ ============ Liabilities Differential on assigned values and tax basis for acquired assets ($ 331,474) ($ 457,752) Unrealized gains (766,390) (1,395,016) Other (328,610) (345,205) ------------ ------------ Gross deferred taxes payable (1,426,474) (2,197,973) Jurisdictional deferred tax asset offset 860,471 1,783,905 ------------ ------------ Deferred taxes payable ($ 566,003) ($ 414,068) ============ ============ The valuation allowance for deferred tax assets has been established for assets arising from various timing differences to reduce the amounts to only that portion that is judged more likely than not to be realized. Foreign tax credit carryforwards of approximately $73,000 and $24,000 expire in 2005 and 2007, respectively. Foreign NOLs approximating $509,000, $238,000 and $958,000 expire in 2007, 2008 and 2009, respectively. F-19 NOTE 16 - INCOME TAXES (Continued): - ---------------------------------- The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income from continuing operations as a result of the following differences:
For the Year Ended December 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ Tax at U.S. statutory rate $ 8,724,119 $ 4,041,603 $ 1,146,719 Increase (decrease) in tax resulting from: Higher effective rates on earnings of foreign operations and tax benefit of foreign losses not recognized 610,115 283,351 482,398 Nondeductible meals and entertainment 955,536 828,500 1,020,421 Nondeductible in-process research and development 162,180 Nondeductible goodwill amortization/write-off 310,663 25,189 Reduction of income tax reserves (2,359,511) Non-taxable interest income (336,974) (228,378) (104,977) (Decrease) increase to deferred tax asset valuation allowance (1,157,056) 153,958 State and local taxes, net 2,110,880 657,993 16,860 Other 67,082 (202,492) (192,266) ------------ ------------ ------------ $ 12,130,758 $ 2,174,673 $ 2,710,482 ============ ============ ============
NOTE 17 - STOCKHOLDERS' EQUITY: - ------------------------------ Preferred stock: - --------------- Pursuant to the Company's adoption of a shareholder rights plan (the "Plan") in December 1996, the Company authorized the creation of Series A Junior Participating Preferred Stock, par value $.001 per share ("Series A Preferred Stock"), and reserved 300,000 shares thereof for issuance upon exercise of the preferred stock purchase rights (each, a "Right") that, pursuant to the Plan, were at the time dividended to holders of common stock on the basis of one Right, expiring December 6, 2006, for each share of common stock. Each Right will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock for $22.50, subject to adjustment. The Rights, however, generally do not become exercisable until ten days after a person or group acquires (or commences a tender or exchange offer to acquire) 15% or more beneficial ownership of the common stock. Upon occurrence of such event (subject to certain conditions and exceptions more fully described in the Plan), and subject to the Rights no longer being redeemable, each Right would entitle the holder thereof (other than the person or group triggering such exercisability) to buy (with certain limited exceptions) common stock of the Company (or, if the Company is acquired, common shares of the surviving entity) having a market value equal to twice the exercise price of the Right. The Rights may be redeemed by the Company, generally at any time prior to the triggering events described above, at a price of $.01 per Right. On October 1, 1998 the Company issued 2,000 shares of a newly created Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") to Yagi Euro at a purchase price of $1,000 per share ("Stated Value"), with cumulative dividends at the annual rate of 2% of the Stated Value, payable quarterly in arrears. In accordance with the terms of the Series B Preferred Stock, upon the sale of the Company's investment in Yagi Euro in June 2001 (See Note 9 above), the Company redeemed the Series B Preferred Stock from Yagi Euro at the Stated Value, together with accrued and unpaid dividends thereon of $10,000. F-20 NOTE 17 - STOCKHOLDERS' EQUITY (Continued): - ------------------------------------------ Common stock and warrants: - ------------------------- At December 31, 1999, the Company had outstanding 8,337,437 shares of common stock and held 3,054,832 shares of common stock in treasury. At December 31, 1999, the Company also had outstanding 685,948 redeemable purchase warrants issued in connection with the Company's 1994 initial public offering (the "IPO Warrants") and 49,032 Series B redeemable common stock purchase warrants issued in connection with the acquisition of EBIC (the "Acquisition Warrants"). Both series of Warrants entitled the holder to purchase from the Company one share of common stock at an exercise price of $5.00 per share. In May 2000, the Company's Board of Directors authorized a repurchase program for up to 10% of its then outstanding common stock, or 833,744 shares, with purchases to be made from time to time as market and business conditions warranted, in open market, negotiated or block transactions. Through December 31, 2000, the Company had purchased 591,602 shares of its common stock under this program at an aggregate purchase price of $894,494. On August 11, 2000, the Company issued 375,000 shares from treasury in connection with the Tradesoft acquisition (see Note 4). This issuance resulted in an increase in accumulated deficit of $177,335, equal to the difference between the fair value of these shares on August 11, 2000 and the average cost of shares in treasury on that date. In January 2001, the Company purchased the remaining 242,142 shares under the May 2000 authorization at an aggregate purchase price of $293,156, and the Board of Directors authorized an additional repurchase of up to 787,869 shares, or 10% of the then outstanding common stock, which was completed in July 2001 at an aggregate purchase price of $1,907,660. In July 2001 the Board of Directors authorized an additional repurchase of up to 709,082 shares, again representing 10% of the then-outstanding common stock. This authorization was further expanded by 490,918 shares, to 1,200,000 shares, by the Board of Directors in late September 2001. Through December 31, 2001, the Company had purchased 214,000 shares under this expanded authorization at an aggregate purchase price of $810,725. In August 2001, the Company received 22,528 shares into treasury in settlement of an $81,733 obligation owed the Company in connection with the settlement of escrow arrangements related to the Company's acquisition of Tradesoft. During the year ended December 31, 2001, 220,500 shares were issued pursuant to options exercised under the Company's 1996 Stock Option Plan. In connection with certain exercises, the Company received 48,567 shares into treasury as consideration for exercise prices aggregating $220,000. During the year ended December 31, 2002, the Company purchased an additional 375,507 shares under its repurchase program at an aggregate purchase price of $2,120,161 and issued 127,000 shares pursuant to options exercised under the Company's 1996 Stock Option Plan. In connection with certain exercises, the Company received 15,357 shares into treasury as consideration for exercise prices aggregating $96,525. During April 2002, the Company issued 492,795 shares of common stock upon the exercise of an aggregate like number of IPO Warrants and Acquisition Warrants and received total proceeds of $2,463,975. The remaining IPO Warrants and Acquisition Warrants expired on April 12, 2002. As a result of the foregoing activity, at December 31, 2002 and 2001, the Company had outstanding 7,255,160 and 7,026,229 shares of common stock, respectively, and held 4,977,404 and 4,586,540 shares of common stock in treasury, respectively. F-21 NOTE 17 - STOCKHOLDERS' EQUITY (Continued): - ------------------------------------------ At December 31, 2002, the Company had 1,452,500 shares of common stock reserved for issuance upon exercise of options pursuant to the Company's 1996 Stock Option Plan, 1,500,000 shares reserved for issuance in connection with awards pursuant to the 2002 Stock Option Plan and 1,000,000 shares reserved in treasury for the exercise of warrants pursuant to a warrant program established to provide inducements and incentives in connection with the formation of a new leveraged finance department. NOTE 18 - STOCK OPTION AND WARRANT PLANS: - ---------------------------------------- Stock Options: - ------------- The Company's 1996 Stock Option Plan, as amended, provides for the granting of stock options to directors, executive officers and key employees of the Company and its subsidiaries, generally as determined by the compensation committee of the Company's Board of Directors. Options to purchase a maximum of 1,800,000 shares of common stock are available under the 1996 Stock Option Plan. The Company's 2002 Stock Option Plan (together with the 1996 Stock Option Plan, the "Plans") provides for incentive awards to directors, officers, employees and consultants of the Company and its subsidiaries, including the granting of stock options, stock appreciation rights, restricted stock and stock bonus awards as determined by the compensation committee of the Company's Board of Directors. A total of 1,500,000 shares were authorized for awards under the 2002 Stock Option Plan. Options under the Plans may be in the form of incentive stock options ("ISOs") and non-qualified stock options. In the case of ISOs, the duration of the option may not exceed 10 years (five years for a 10% or more stockholder) and the exercise price must be at least equal to the fair market value of a share of common stock on the date of grant (110% of the fair market value for a 10% or more stockholder). Employee options granted to date vest and become exercisable in equal installments on each anniversary of the date of grant for periods of four or five years. Non-employee director grants granted to date vest in equal 50% installments on the dates that are six and twelve months following the date of grant. Upon a change in control of the Company, as defined in the Plans, all unvested options automatically vest. Under the Plans, unless otherwise determined by the compensation committee, options may only be exercised during the period of employment or service with the Company or the 30-day period thereafter (or, in the case of death, disability or retirement, the one-year period thereafter). A summary of the Company's stock option activity follows:
December 31, 2002 December 31, 2001 December 31, 2000 ------------------------ ------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 1,470,750 $ 2.29 1,755,000 $ 2.14 1,670,000 $ 2.03 Granted 426,250 5.79 335,000 2.88 335,000 2.61 Exercised (127,000) 2.12 (220,500) 2.01 Canceled (70,000) 3.23 (398,750) 2.28 (250,000) 2.02 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at end of year 1,700,000 $ 3.14 1,470,750 $ 2.29 1,755,000 $ 2.14 ========== ========== ========== ========== ========== ========== Exercisable at end of year 1,030,625 $ 2.20 978,313 $ 2.12 1,079,750 $ 2.04 ========== ========== ========== ========== ========== ========== Weighted average fair value of options granted during the year $ 4.47 $ 2.05 $ 1.83 ========== ========== ==========
F-22 NOTE 18 - STOCK OPTION AND WARRANT PLANS (Continued): - ---------------------------------------------------- At December 31, 2002 there were 1,293,750 options outstanding with exercise prices ranging from $2.00 to $3.00 and 406,250 options outstanding with exercise prices ranging from $5.14 to $6.00. The weighted-average remaining contractual life of all options outstanding approximates 6.5 years. During 2002, the Company issued 500,000 common stock purchase warrants to employees under a newly established warrant program to provide inducements and incentives in connection with the formation of a new leveraged finance department (the "Leveraged Finance Warrants"). The Leveraged Finance Warrants issued have an exercise price of $5.875 and vest at the rate of 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries. This warrant program provides for the granting of up to an additional 500,000 common stock purchase warrants upon the achievement of specific performance goals, with the same vesting schedule and with exercise prices equal to the higher of book value per share or the fair market value per share of the Company's common stock at the time of grant. The Company has elected to continue to follow APB 25 in accounting for the Plans and the Leveraged Finance Warrants. Accordingly, the Company has not recognized any compensation cost associated with the Plans and the Leveraged Finance Warrants since the market prices of the underlying stock on the option and warrant grant dates were not greater than the option exercise prices. As required by SFAS 123, however, the Company has disclosed below its estimated pro forma net income and earnings per share if compensation costs under the Plans and the Leveraged Finance Warrants had been recognized using the fair value method of SFAS 123. Because stock options under the Plans and the Leveraged Finance Warrants have characteristics significantly different from those of traded options and warrants and because changes in subjective assumptions can materially affect the fair value estimated, the Company used the Black-Scholes pricing model for 2002, 2001 and 2000 with the following weighted average assumptions: expected volatility of 101%, 89% and 83%, respectively; risk free interest rate of 4.5%, 4.9% and 6.7%, respectively; and an expected option life of five years.
For the Year Ended December 31, December 31, December 31, 2002 2001 2000 ------------ ------------ ------------ Net income As reported $ 12,546,624 $ 9,038,402 $ 2,002,099 Pro forma 11,733,262 8,385,408 1,249,158 Basic earnings per share As reported 1.72 1.23 .23 Pro forma 1.61 1.14 .14 Diluted earnings per share As reported 1.53 1.16 .23 Pro forma 1.43 1.08 .14
NOTE 19 - COMMITMENTS: - --------------------- The Company is obligated under certain non-cancelable leases for office space and equipment and under telecommunication services contracts. The Company has executed various operating leases in respect of premises which contain escalation clauses for base rent, maintenance, electricity and real estate tax increases. F-23 NOTE 19 - COMMITMENTS (Continued): - --------------------------------- Future minimum rental commitments for operating leases that have initial or remaining terms in excess of one year approximate the following: Year ---- 2003 $ 10,194,732 2004 6,267,970 2005 5,558,448 2006 5,141,433 2007 5,051,885 Thereafter 43,730,997 ------------ Total $ 75,945,465 ============ Rental expense, net of sub-rental income, amounted to approximately $3,642,000, $3,416,000 and $2,878,000 in 2002, 2001 and 2000, respectively. In March 2003, EBI entered into various sale-leaseback transactions for equipment and furniture under a master lease agreement with GECC. These leases contain options at the end of the terms to purchase the assets at a percentage of their original cost or to return the assets and either (1) pay GECC the amount by which EBI's termination obligation exceeds the proceeds on GECC's disposition of the assets or (2) receive the amount by which the proceeds on GECC's disposition exceeds the cost of EBI's purchase option. Since these leases do not meet one or more of the criteria for capital lease treatment, they are classified as operating leases and will not be recorded on the statement of financial condition. The future minimum rental commitments for these leases, including the maximum amounts owed at the end of the lease terms if the underlying assets are returned, are as follows: Year 2003 $ 1,476,807 2004 1,546,932 2005 979,113 2006 1,009,185 ------------ $ 5,012,037 ============ NOTE 20 - CONTINGENCIES: - ----------------------- Counterparty Risk and Guarantees: - -------------------------------- The Company clears certain of its securities transactions through clearing firms on a fully disclosed basis. Pursuant to the terms of the agreements between the Company and the clearing firms, the clearing firms generally have the right to charge the Company for losses that result from a counterparty's failure to fulfill its contractual obligations. As there is no contractual limitation on these charges, the Company believes there is no maximum amount assignable to this risk. At December 31, 2002, the Company has recorded no liabilities with regards to this risk. During 2002, the Company made no payments to its clearing firms related to these rights. The Company has the right to pursue collection or performance from counterparties who do not perform under their contractual obligations. The Company and its clearing firms have a policy of reviewing, on an ongoing basis, the credit standing of the Company's counterparties, which are institutions. F-24 NOTE 20 - CONTINGENCIES (Continued): - ----------------------------------- When-issued Equity Trading Contracts: - ------------------------------------ When-issued equity trading contracts represent a contract between two parties to receive (purchase) and deliver (sell) a specified amount of equity securities that have not yet been issued for an agreed upon price. Such contracts subject the Company to credit risk and market risk. Credit risk is limited to the unrealized market valuation gains recorded as assets in the statement of financial condition, offset by any deferral accruals for completion uncertainties. Market risk is substantially dependent upon the perceived volatility of the future issue. At December 31, 2002, the Company had outstanding when-issued equity trading contracts for the common stock of NTL Inc. ("NTL"), at the time a Chapter 11 debtor, with notional values of $2.0 million of sales and $1.0 million of purchases. Since these contracts were not assured of settling as of December 31, 2002, the net mark-to-market gain of $180,499 was deferred from revenue. In early January 2003 (prior to NTL's emergence from bankruptcy), the Company entered into additional when-issued equity trading contracts for NTL common stock with notional values of $2.1 million of sales and $150,000 of purchases, for a total of $4.1 million notional sales values and $1.2 million notional purchases values. On January 10, 2003, NTL emerged from bankruptcy under a plan of reorganization providing for the issuance of one-fourth the number of shares as was previously contemplated. The Company and other participants in the when-issued trading market expected the settlement of these trades would be adjusted to reflect a one-for-four reverse stock split. A number of buyers of NTL when-issued shares, seizing upon a Nasdaq advisory issued on January 14, 2003 that Nasdaq would not cancel the when-issued trades for NTL common stock, are demanding (or because of certain automated settlement processes have received) full delivery of the shares at the original contract price. On January 16, 2003, the Company sought and obtained from the Bankruptcy Court handling NTL's case a temporary order that required and caused many of the Company's when-issued trades to settle on an adjusted basis reflecting a one-for-four reverse stock split. Because the relief was temporary and not all of the trades settled on this basis, the Company has subsequently filed a suit in the Supreme Court of the State of New York, naming all of its counterparties to its NTL when-issued trades, that seeks a permanent and uniform adjusted settlement of these trades. Similar proceedings, some seeking settlement on an adjusted basis, others on an unadjusted basis, have been commenced by other parties to NTL when-issued trades against their counterparties, including the Company, in both of these Courts, as well as before NASD. If all of the Company's when-issued trades were required to settle on an unadjusted basis, the Company estimates it would incur a 2003 after-tax loss relating to this matter in the neighborhood of $4 million. However, this exposure could be higher to the extent that any of the proceedings above require the Company, as a purchaser of NTL when-issued shares, to accept their delivery on a one-for-four adjusted basis, but, as a seller of such shares, to make their delivery on a fully unadjusted basis. Conversely, the exposure could also be lower to the extent that the Company prevails in its suit. U.K. National Insurance: - ----------------------- The Company has received demands from the Inland Revenue in the United Kingdom for the employer portion of National Insurance Contributions ("NIC") related to employee bonuses paid during the period from August 1994 to February 1998 in the amount of approximately (pound)1.7 million (approximately $2.8 million at December 31, 2002), plus interest estimated at approximately (pound)481,000 through December 31, 2002 (approximately $774,000). The Company has formally challenged these demands as it feels the respective bonus payment methods used did not require NIC payments under existing legislation. At December 31, 2002, the Company had reserved approximately $2.7 million against this demand and future demands from the Inland Revenue for NIC related to employee bonuses paid after February 1998. Based upon this level of reserves, management does not anticipate the ultimate outcome of this or future NIC matters will have a material adverse effect on its consolidated financial condition or results of operations. F-25 NOTE 21 - DERIVATIVE FINANCIAL INSTRUMENTS USED FOR HEDGING ACTIVITIES: - ---------------------------------------------------------------------- On July 1, 2000, the Company elected to early-adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"). SFAS 133 requires that all derivative instruments, including certain derivatives embedded in other contracts, be recorded on the statement of financial condition at their fair value. Changes in the fair value of derivatives are to be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Since the Company did not have any outstanding unrecorded derivative instruments or ongoing hedging activities at June 30, 2000, there was no transition adjustment necessary as a result of the early adoption of SFAS 133. From time to time, the Company utilizes foreign currency forward contracts to reduce its exposure to exchange rate risk associated with anticipated commissions on transactions denominated in a currency other than the functional currency (foreign currency cash flow hedge). Pursuant to these foreign currency forward contacts, the Company receives or pays the difference between the contracted forward exchange rate (for the purchase or sale of one currency for another) and the prevailing exchange rate at settlement date. In July 2000, the Company entered into foreign currency forward contacts with equal notional amounts maturing at successive month-end dates through December 31, 2001 based upon a portion of such commission revenues the Company reasonably anticipated realizing during this time period. In accordance with SFAS 133, the Company excluded from its assessment of hedge effectiveness the portion of the fair value of the foreign currency forward contracts attributable to the spot-forward difference and has recorded the present value of the changes in such amounts in earnings. For the year ended December 31, 2001 and the six months ended December 31, 2000, the changes in these excluded portions approximated $15,000 and $41,000, respectively. Under SFAS 133, the fair value of these foreign currency forward contracts attributable to the present value of the forecasted cash flows based on the spot rate was considered a highly effective hedge. Therefore, in order to coincide with the forecasted revenue streams, no amounts related to the changes in these amounts were included in earnings until such contracts matured. These deferred amounts were included in the accumulated other comprehensive income section of stockholders' equity. At December 31, 2002 and 2001, the Company had no foreign currency forward contracts outstanding for hedging activities. NOTE 22 - NET CAPITAL REQUIREMENTS: - ---------------------------------- MFI, as a U.S. broker-dealer, is subject to the Securities and Exchange Commission's Uniform Net Capital Rule (rule 15c3-1), which requires the maintenance of minimum regulatory net capital. MFI has elected to use the alternative method, as permitted by the rule, which requires that MFI maintain minimum regulatory net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined; or 4% of the funds required to be segregated pursuant to the Commodity Exchange Act and regulations thereunder. MFI's membership in GSD-FICC requires it to maintain minimum excess regulatory net capital of $10,000,000. In addition, as a result of the upgrade of MFI's GSD-FICC membership to dealer status in March 2003, MFI is required to maintain combined stockholder's equity and subordinated borrowing equal to $25 million. At December 31, 2002, MFI had regulatory net capital of $23.9 million, a regulatory net capital requirement of $250,000 and combined stockholder's equity and subordinated borrowing of $31.9 million. EBFL is a Type D registered firm of the Financial Services Authority ("FSA"), required to maintain a financial resources requirement equal to six weeks average expenditures. At December 31, 2002, EBFL had financial resources in accordance with FSA's rules of (pound)5.1 million ($8.3 million) and a financial resources requirement of (pound)2.4 million ($3.9 million). NOTE 23 - SEGMENT REPORTING: - --------------------------- In accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), the Company is reporting certain information relating to its operating segments. For the purpose of this disclosure, operating revenues include commission income, principal transactions and information sales revenue. The Company has defined its operating segments based upon geographic location as such units are managed separately to reflect their unique market, employment and regulatory environments. The reportable segments, as defined by SFAS 131, consist of the United States, United Kingdom, Switzerland and Japan. United F-26 NOTE 23 - SEGMENT REPORTING (Continued): - --------------------------------------- States amounts are principally derived from the Company's New York office, but include the balances for all its U.S. based operations. United Kingdom amounts include the consolidated balances for EBFL, with net income (loss) amounts net of Monecor's minority interest. Switzerland amounts are derived from the Company's Swiss office. Japan amounts primarily reflect the non-equity earnings (loss) from contractual arrangement (Tokyo Venture). See Note 10 for additional disclosure of the revenues and expenses of the Tokyo Venture. Other geographic segments which do not meet the SFAS 131 materiality thresholds for reportable segments have been included in "All Other". The accounting policies of the segments are the same as those described in Note 2.
United United All States Kingdom Switzerland Japan Other Total ------------ ------------ ------------ ------------ ------------ ------------ 2002 Operating revenues $101,096,048 $ 52,717,957 $ 1,076,945 $ $ 3,519,537 $158,410,487 Interest income 1,781,994 411,917 1,446 18 391 2,195,766 Interest expense 292,237 55,334 347,571 Depreciation and amortization 1,413,595 905,006 8,635 78,598 2,405,834 Provision for income taxes 10,432,832 1,549,168 13,558 135,200 12,130,758 Non-equity loss from contractual arrangement (1,184,233) (1,184,233) Net income (loss) 12,368,617 1,064,250 226,240 (1,287,064) 174,581 12,546,624 Assets 113,025,397 28,297,516 1,417,682 196,825 1,363,614 144,301,034 Capital expenditures 6,839,528 664,444 8,987 98,557 7,611,516 2001 Operating revenues $ 93,295,842 $ 50,239,021 $ 1,479,737 $ $ 3,538,170 $148,552,770 Interest income 1,881,779 641,814 737 77 3,172 2,527,579 Interest expense 582,834 305,088 887,922 Depreciation and amortization 2,606,071 822,768 27,524 142,217 3,598,580 Provision (benefit) for income taxes 420,636 1,723,759 12,067 (51,130) 69,341 2,174,673 Income from unconsolidated affiliates 9,992 9,992 Non-equity loss from contractual arrangement (694,083) (694,083) Net income (loss) 7,762,756 1,711,372 163,013 (622,924) 24,185 9,038,402 Assets 271,556,251 22,967,639 1,016,935 7,106,600 1,596,115 304,243,540 Capital expenditures 1,715,285 325,660 67,167 2,108,112
F-27 NOTE 23 - SEGMENT REPORTING (Continued): - ---------------------------------------
United United All States Kingdom Switzerland Japan Other Total ------------ ------------ ------------ ------------ ------------ ------------ 2000 Operating revenues $ 76,309,398 $ 46,669,303 $ 603,624 $ $ 3,662,277 $127,244,602 Interest income 1,578,110 541,475 1,030 208 8,576 2,129,399 Interest expense 528,406 333,484 39,181 901,071 Depreciation and amortization 2,722,509 1,061,304 62,210 162,914 4,008,937 Provision (benefit) for income taxes 1,166,757 522,008 (2,221) 1,088,543 (64,605) 2,710,482 Income from unconsolidated affiliates 135,890 135,890 Non-equity earnings from contractual arrangement 523,704 523,704 Net income (loss) 1,745,148 (681,634) (508,509) 1,392,576 54,518 2,002,099 Assets 67,029,462 22,313,776 603,276 8,201,126 1,465,366 99,613,006 Capital expenditures 1,981,620 496,892 15,248 2,493,760 Investment in unconsolidated affiliates 1,552,757 1,552,757
Included below are reconciliations of reportable segment items to the Company's consolidated totals as reported in the consolidated financial statements. 2002 2001 2000 ------------- ------------- ------------- Interest income: Total for reportable segments $ 2,195,375 $ 2,524,407 $ 2,120,823 Other interest 391 3,172 8,576 Elimination of intersegment interest income (48,492) (221,535) (306,114) ------------- ------------- ------------- Consolidated total $ 2,147,274 $ 2,306,044 $ 1,823,285 ============= ============= ============= Interest expense: Total for reportable segments $ 347,571 $ 887,922 $ 901,071 Elimination of intersegment interest expense (48,492) (221,535) (306,114) ------------- ------------- ------------- Consolidated total $ 299,079 $ 666,387 $ 594,957 ============= ============= ============= Assets: Total for reportable segments $ 142,937,420 $ 302,647,425 $ 98,147,640 Other assets 1,363,614 1,596,115 1,465,366 Elimination of intersegment receivables (6,273,360) (10,376,533) (12,968,505) Elimination of investments in other segments (14,549,715) (14,549,715) (15,738,154) ------------- ------------- ------------- Consolidated total $ 123,477,959 $ 279,317,292 $ 70,906,347 ============= ============= ============= F-28 NOTE 24 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited): - ------------------------------------------------------- The following table reflects the unaudited quarterly results of operations of the Company for 2002 and 2001.
For the Three Months Ended 2002 March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ Total revenues $ 37,518,213 $ 38,505,003 $ 44,544,692 $ 49,982,913 Total expenses 36,151,014 36,395,593 41,434,491 44,023,099 Income before provision for income taxes and minority interest 3,029,011 4,551,390 6,123,460 11,955,312 Net income 1,367,199 2,109,410 3,110,201 5,959,814 Weighted average common shares outstanding-basic 7,026,385 7,472,870 7,425,138 7,288,535 Weighted average common shares outstanding-diluted 7,959,720 8,447,869 8,268,393 8,159,599 Basic earnings per share .19 .28 .42 .82 Diluted earnings per share .17 .25 .38 .73 2001 Total revenues $ 40,891,633 $ 40,528,176 $ 37,681,166 $ 35,722,590 Total expenses 38,563,475 37,803,125 35,712,988 33,715,567 Income (loss) before provision for income taxes, minority interest and income from equity affiliate 4,482,372 4,586,390 2,848,953 (20,655) Net income 2,344,282 2,718,919 1,968,178 2,007,023 Weighted average common shares outstanding-basic 7,825,912 7,525,809 7,082,859 7,005,517 Weighted average common shares outstanding-diluted 7,825,912 7,781,977 7,717,083 7,673,498 Basic earnings per share .30 .36 .28 .29 Diluted earnings per share .30 .35 .26 .26
F-29 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Merger, dated as of March 8, 1996, as amended, by and among the Registrant, EBIC Acquisition Corp. and Euro Brokers Investment Corporation, without exhibits and schedules (incorporated herein by reference to Exhibit 2.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996) 2.2 Stock Purchase Agreement, dated as of August 11, 2000, by and between the Registrant and the stockholders of Tradesoft Technologies, Inc., without exhibits and schedules (incorporated herein by reference to Exhibit 2.6 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000) 3.1 Restated Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 Form 10-K")) 3.2 Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K")) 4.1 Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 of Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (No. 33-85346), dated November 23, 1994) 4.2 Warrant Agreement, dated as of April 19, 2002, by and between the Registrant and certain employees (incorporated herein by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K, dated April 23, 2003) 4.3 Rights Agreement, dated as of December 6, 1996, between the Registrant and Continental Stock Transfer & Trust Company, as rights agent (the "Rights Agreement") (incorporated herein by reference to Exhibit 1 of the Registrant's Registration Statement on Form 8-A, dated December 6, 1996) 4.4 Amendment No. 1, dated July 26, 2001, to the Rights Agreement (incorporated herein by reference to Exhibit 4.6a of the Registrant's Current Report on Form 8-K, dated July 27, 2001) X-1 10.1 Sublease Agreement, dated as of August 1, 2002, by and between Prudential Securities Incorporated, as sublessor, and Euro Brokers Inc., as sublessee (without exhibits) (incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 (the "September 2002 Form 10-Q")) 10.2 Subordination, Recognition and Attornment Agreement, dated as of August 16, 2002, by and among Resnick Seaport, LLC, as landlord, Prudential Securities Incorporated, as sublandlord, and Euro Brokers Inc., as subtenant (incorporated herein by reference to Exhibit 10.2 of the September 2002 Form 10-Q) 10.3 Underlease of Premises, dated 28 May 1993, between Chestermount Properties Limited and Euro Brokers Holdings Limited (the "London Underlease") (incorporated herein by reference to Exhibit 10.4 of the 1996 Form 10-K) 10.4 Supplemental Deed to the London Underlease, dated 28 May 1993 (incorporated herein by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.5+ Maxcor Financial Group Inc. 1996 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.6 of the 1999 Form 10-K) 10.6+ Maxcor Financial Group Inc. 2002 Stock Option Plan (incorporated herein by reference to Appendix A of the Registrant's Definitive Proxy Statement on Schedule 14A, dated April 30, 2002 (the "Proxy Statement")) 10.7+ Maxcor Financial Group Inc. Key Executive Incentive Bonus Plan (incorporated herein by reference to Appendix B of the Proxy Statement) 10.8+ Amended and Restated Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Gilbert Scharf* 10.9+ Amended and Restated Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Keith Reihl* 10.10+ Amended and Restated Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Roger Schwed* 10.11+ Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Steven Vigliotti* 10.12+ Employment Agreement, dated 1 October 2000, by and between Euro Brokers Finacor Limited and Robin Adrian Clark (the "Clark Employment Agreement") (incorporated herein by reference to Exhibit 10.10 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000) X-2 10.13+ Amendment, dated 1 October 2002, to the Clark Employment Agreement* 10.14+ Change in Control Severance Agreement, dated as of October 1, 2002, by and between the Registrant and Robin Adrian Clark* 10.15 Agreement for Securities Clearance Services, dated as of March 20, 2000, by and between Wexford Clearance Services Corporation and Maxcor Financial Inc. (incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000) (1) 10.16 Securities Clearance Agreement, dated as of August 15, 2002, between Maxcor Financial Inc. and The Bank of New York (incorporated herein by reference to Exhibit 10.3 to the September 2002 Form 10-Q) (1) 21 Subsidiaries of the Registrant* 23 Consent of PricewaterhouseCoopers LLP* - -------------------------- * Filed herewith + Connotes a management contract or compensatory plan or arrangement in which a director or executive officer of the Registrant participates. (1) Portions of this exhibit have been redacted and confidential treatment granted pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. X-3 EX-10.8 5 ex10_8.txt EXHIBIT 10.8 Exhibit 10.8 ------------ AMENDED AND RESTATED EMPLOYMENT AGREEMENT by and between MAXCOR FINANCIAL GROUP INC. and Gilbert Scharf TABLE OF CONTENTS ----------------- SECTION PAGE - ------- ---- 1. Employment...........................................................1 2. Term.................................................................1 3. Position and Duties; Place of Performance............................1 4. Compensation and Related Matters.....................................2 (a) Base Salary....................................................2 (b) Bonuses........................................................2 (c) Expenses.......................................................2 (d) Other Benefits.................................................2 (e) Life Insurance.................................................2 (f) Vacation.......................................................3 (g) Services Furnished.............................................3 5. Offices..............................................................3 6. Termination..........................................................3 (a) Death.........................................................3 (b) Disability....................................................3 (c) Cause.........................................................3 (d) Good Reason...................................................4 (e) Change in Control.............................................5 7. Termination Procedure................................................7 (a) Notice of Termination.........................................7 (b) Date of Termination...........................................7 (c) Compensation During Dispute...................................7 8. Compensation upon Termination or During Disability...................8 (a) Disability; Death.............................................8 (b) By Company without Cause or by the Executive for Good Reason..8 (c) By Company for Cause or by the Executive Other than for Good Reason...............................................9 (d) Compensation Plans............................................9 (e) Gross-Up Payment..............................................9 9. Mitigation..........................................................10 10. Confidential Information; Noncompetition Requirement................11 (a) Confidential Information.....................................11 (b) Noncompetition Requirement...................................11 (c) Salary Continuation..........................................11 (d) Injunctive Relief............................................12 i 11. Indemnification; Legal Fees.........................................12 12. Successors; Binding Agreement.......................................12 (a) Company's Successors.........................................12 (b) Executive's Successors.......................................13 13. Notice..............................................................13 14. Miscellaneous.......................................................14 15. Validity............................................................14 16. Counterparts........................................................14 17. Entire Agreement....................................................15 ii AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of October 1, 2002 (this "AGREEMENT") by and between Gilbert Scharf (the "EXECUTIVE"), and Maxcor Financial Group Inc., a Delaware corporation (the "COMPANY"), amending and restating the amended and restated employment agreement between the parties hereto, dated as of August 14, 1998 (the "1998 AGREEMENT"). WHEREAS, the Board of Directors of the Company (the "BOARD") currently employs the Executive and the Executive currently furnishes services to the Company on the terms and conditions set forth in the 1998 Agreement; and WHEREAS, the Board and the Executive mutually desire to extend the term of the Executive's employment with the Company beyond that provided for in the 1998 Agreement and to make certain other changes in the terms and conditions set forth in the 1998 Agreement; NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties hereby agree to amend and restate the 1998 Agreement as follows: 1. Employment. ---------- The Company hereby agrees to continue to employ the Executive, which period of continuous employment began on August 16, 1996, and the Executive hereby accepts such continued employment, on the terms and conditions hereinafter set forth. 2. Term. ---- The period of employment of the Executive by the Company pursuant to this Agreement (the "EMPLOYMENT PERIOD") shall commence on the date first written above (the "COMMENCEMENT DATE"), and shall continue in effect through August 16, 2006, unless further extended as provided in this Section 2 or sooner terminated as provided in Section 6. Commencing on August 16, 2005 and on each successive anniversary thereafter, the contract term of the Executive's employment shall be automatically extended for one (1) additional year unless, on or prior to such date or anniversary, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the term of the Executive's employment hereunder will not be extended (the initial term, as it may be so extended, the "CONTRACT TERM"); PROVIDED, HOWEVER, that, if a Change in Control shall have occurred during the original or extended term of this Agreement, the Contract Term shall continue in effect for at least twenty-four (24) months subsequent to the month in which such Change in Control occurs. 3. Position and Duties; Place of Performance. ----------------------------------------- During the Employment Period, the Executive shall serve as Chairman of the Board and President and Chief Executive Officer of the Company. The Executive shall report directly to the Board. The Executive's responsibilities and authority shall include such responsibilities and authority as may from time 1 to time be assigned to the Executive by the Board, provided that such responsibilities and authority are consistent with the Executive's position with the Company. In connection with the Executive's employment by the Company, the Executive shall be based at the Company's principal executive offices in Manhattan, New York, except for reasonably required travel on the Company's business. 4. Compensation and Related Matters. -------------------------------- (a) BASE SALARY. As compensation for the performance by the Executive of his obligations hereunder, during the Employment Period the Company shall pay the Executive a base salary at the rate of $450,000 per annum ("BASE SALARY"). Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. Base Salary may be increased from time to time in accordance with the normal business practices of the Company and, if so increased, shall not thereafter during the Employment Period be decreased. (b) BONUSES. During the Employment Period, the Executive shall be eligible to receive such semi-annual bonuses (the "BONUS") as may be awarded to him as the Board or the Compensation Committee of the Board shall determine, or if an incentive plan is adopted by the Company or a subsidiary thereof, in accordance with the terms of such plan. (c) EXPENSES. The Company shall promptly reimburse the Executive for all reasonable business expenses incurred during the Employment Period by the Executive in performing services hereunder, including all expenses of travel and living expenses while traveling on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (d) OTHER BENEFITS. The Executive shall be entitled to participate in all of the employee benefit plans and arrangements currently maintained by the Company or a subsidiary thereof, in accordance with the terms of such plans and arrangements, and shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company or a subsidiary thereof in the future to its executives and key management employees (including without limitation each incentive plan, pension and retirement plan and arrangement, supplemental pension and retirement plan and arrangement, stock option plan, life insurance and health-and-accident plan and arrangement, medical insurance plan, disability plan, survivor income plan, relocation plan and vacation plan), subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future (including subsection (e) of this Section 4) shall be deemed to be in lieu of the salary payable to the Executive pursuant to subsection (a) of this Section 4. 2 (e) LIFE INSURANCE. During the Employment Period, the Company shall obtain and maintain a term life insurance policy on and for the benefit of the Executive, including paying all premiums for the policy that come due within the Employment Period. The policy shall have a death benefit amount of not less than $5 million payable to the beneficiary or beneficiaries designated by the Executive. The policy shall be in addition to any coverage the Executive has under any group life insurance plan maintained by the Company or a subsidiary thereof. (f) VACATION. The Executive shall be entitled to 25 vacation days in each calendar year; PROVIDED, HOWEVER, that vacation not taken shall not accrue from year-to-year or be compensated for at the end of the Employment Period. The Executive shall also be entitled to all paid holidays given by the Company to its executives. (g) SERVICES FURNISHED. During the Employment Period, the Company shall furnish the Executive with office space, stenographic assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. 5. Offices. ------- Subject to Section 3 hereof, the Executive agrees to serve without additional compensation, if elected or appointed thereto, as a director of the Company or any subsidiaries of the Company and as a member of any committees of the board of directors of any such corporations, and in one or more executive positions of any of the Company's subsidiaries, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided to any other director of the Company or any of its subsidiaries, or any such executive position, as the case may be. 6. Termination. ----------- The Executive's employment hereunder (and the Employment Period) may be terminated without any breach of this Agreement only under the circumstances set forth in the following subsections (a), (b), (c) and (d). (a) DEATH. The Executive's employment hereunder (and the Employment Period) shall terminate upon his death. (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of his duties hereunder for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination (as defined in Section 7 hereof) is given shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder (and the Employment Period) for "DISABILITY." (c) CAUSE. The Company may terminate the Executive's employment hereunder (and the Employment Period) for Cause. For purposes of this Agreement, the Company shall have "CAUSE" to terminate the Executive's employment hereunder upon the occurrence of any of the following events: 3 (i) the conviction of the Executive for the commission of a felony; or (ii) the willful and continuing failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company in writing that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (iii) the willful misconduct by the Executive (including, but not limited to, breach by the Executive of the provisions of Section 10 hereof) that is demonstrably and materially injurious to the Company or its subsidiaries, whether monetarily or otherwise. Cause shall not exist unless and until the Company has delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the entire membership of the Board of Directors of the Company (not counting the Executive) at a meeting of such board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before such board), finding that in the good faith opinion of such board, the Executive was guilty of the conduct set forth in this Section 6(c) and specifying the particulars thereof in detail. For purposes of this Section 6(c), no act or failure to act on the Executive's part shall be considered "WILLFUL" unless done or failed to be done by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. (d) GOOD REASON. The Executive may terminate his employment hereunder (and the Employment Period) during the Contract Term hereunder for "GOOD REASON" after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within ten (10) days after written notice thereof has been given by the Executive to the Company, provided that, without limiting the generality of the foregoing, on and after a Change in Control, any one of the following events shall be deemed a material breach of this Agreement: (i) the assignment to the Executive of any duties inconsistent with the Executive's status as Chief Executive Officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control, including, without limitation, if the Executive was, immediately prior to the Change in Control, an executive officer of a public company, the Executive ceasing to be an executive officer of a public company, or being required to report to anyone other than the Board; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in Control; 4 (iii) the relocation of the Executive's principal place of employment to a location outside of Manhattan, New York; (iv) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within fifteen (15) days of the date such compensation is due; (v) the failure by the Company to provide the Executive with compensation plans which, in the aggregate, provide the Executive with substantially comparable compensation opportunities to those compensation opportunities for which the Executive was eligible immediately prior to the Change in Control; (vi) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material perquisite or other fringe benefit, or secretarial service and office space at the level, enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled under this Agreement; (vii) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(a) or that does not comply with Section 6(c), if applicable (and for purposes of this Agreement, no such purported termination shall be effective); or (viii) the failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 12(a) hereof. The Executive's right to terminate his employment hereunder for Good Reason shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) Change in Control ----------------- A "CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) or (C) of paragraph (iii) below; or 5 (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Commencement Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the Commencement Date or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a re-capitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the combined voting power of the Company's then outstanding securities, or (C) a merger or consolidation which would result in any individual, entity or group which includes, is affiliated with or is wholly or partly controlled by the Executive being the Beneficial Owner of at least 50% of the combined voting power of the voting securities of the Company, the entity surviving such merger of consolidation or any parent thereof outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 50% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. 6 For purposes of this Section 6(e) and Section 8(e) hereof, "PERSON" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any individual, entity or group which includes, is affiliated with or is wholly or party controlled by the Executive. 7. Termination Procedure. --------------------- (a) NOTICE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (b) Date of Termination. ------------------- "DATE OF TERMINATION" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated for Disability pursuant to Section 6(b), thirty (30) days after Notice of Termination (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (iii) if the Executive's employment is terminated for Cause pursuant to Section 6(c), the date specified in the Notice of Termination, which shall not be earlier than the date of the Notice of Termination, and (iv) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within 30 days) set forth in such Notice of Termination; PROVIDED, HOWEVER, that if a purported termination occurs on or after a Change in Control and during the Contract Term and either party notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); PROVIDED FURTHER, HOWEVER, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. (c) COMPENSATION DURING DISPUTE. If a purported termination occurs on or after a Change in Control and during the Contract Term, and such termination is disputed in accordance with subsection (b) of this Section 7, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit 7 and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, determined in accordance with subsection (b) of this Section 7. Amounts paid under this Section 7(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation upon Termination or During Disability. -------------------------------------------------- (a) DISABILITY; DEATH. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("DISABILITY PERIOD"), the Executive shall continue to receive his full Base Salary at the rate in effect at the beginning of such period and continue as a participant in all compensation and employee benefit plans in which the Executive was participating pursuant to Sections 4(d) and 4(e) until his employment is terminated pursuant to Section 6(b) and shall continue to receive such Base Salary for a period of six months thereafter. Subsequent to the six-month period following termination of the Executive's employment pursuant to Section 6(b), or in the event the Executive's employment is terminated by reason of his death, the Company shall have no further obligations to the Executive under this Agreement and the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (b) BY COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON. If during the Contract Term the Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive for Good Reason, then -- (i) in addition to any amounts due the Executive pursuant to Sections 4(a) or 4(b) hereof, the Company shall continue to pay to the Executive (or his legal representatives or estate) his Base Salary (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination) for the remainder of the Contract Term or, if greater, for one year; PROVIDED, HOWEVER, that if such termination occurs on or after a Change in Control, then the Company shall, within five (5) days following the Date of Termination, pay to the Executive, in an undiscounted cash lump sum, an amount equal to three (3) times the sum of Base Salary (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination) and the highest Bonus (annualized if paid for less than a full year) awarded in respect of any bonus period falling entirely within the twenty-four month period preceding the Change in Control or the Date of Termination, whichever resulting Bonus is greater, provided that, solely for purposes of this Section 8(b)(i), such annualized Bonus shall not be less than $550,000; and (ii) the Company or a subsidiary thereof shall maintain in full force and effect, for the continued benefit of the Executive and his dependents for the remainder of the Contract Term or, if greater, for one year or, if such termination occurs on or after a Change in Control, for the duration of the Executive's life, all medical, dental and life insurance benefit plans and programs in which the Executive was entitled to participate immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and 8 programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive and his dependents with benefits substantially similar to those which the Executive and his dependents would otherwise have been entitled to receive under such plans and programs from which their continued participation is barred; and (iii) the Executive shall be deemed to continue as an employee of the Company during the remainder of the Contract Term for purposes of the exercise and/or vesting of outstanding stock and stock option awards and cash incentive awards. (c) BY COMPANY FOR CAUSE OR BY THE EXECUTIVE OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason, then the Company shall pay the Executive his Base Salary (at the rate in effect at the time Notice of Termination is given) through the Date of Termination, and the Company shall have no additional obligations to the Executive under this Agreement except as set forth in subsection (d) of this Section 8. (d) COMPENSATION PLANS. Following any termination of the Executive's employment, the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due. (e) Gross-Up Payment. ---------------- (i) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement (the "SEVERANCE PAYMENTS") or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "TOTAL PAYMENTS") would be subject (in whole or part) to the excise tax ("EXCISE TAX") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), then the Company shall pay to the Executive an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the payment provided for by this Section 8(e), shall be equal to the Total Payments. (ii) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the ExecutivE ("TAX 9 COUNSEL"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of Tax Counsel such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which occurs the Date of Termination (or such earlier date on which any payment or benefit becomes subject to the Excise Tax) and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or such earlier date on which any payment or benefit becomes subject to the Excise Tax), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (iii) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Executive's employment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in the Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment) the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. 9. Mitigation. ---------- The Executive shall not be required to mitigate the amount of any payment provided for the Executive by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for the Executive hereunder be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise except as is hereinafter specifically provided in this Section 9. To the extent that the Executive, during the relevant period described in Section 8(b)(ii) hereof, shall receive from a subsequent employer or from Medicare/Medicaid (or similar successor programs) benefits similar to those to be provided under Section 8(b)(ii), the benefits to be provided under the provisions of said Section shall be correspondingly reduced. 10 10. Confidential Information; Noncompetition Requirement. ---------------------------------------------------- (a) CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets and confidential information relating to the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Company and which shall not have been or now or hereafter have become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets or information to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 10(a). (b) NONCOMPETITION REQUIREMENT. During (1) any period that the Executive is performing services hereunder, (2) a period of one (1) year following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason (if the Company so requests, notifies and pays the Executive as provided in paragraph (c) of this Section 10), (3) on or after a Change in Control, a period of six (6) months following a termination of the Executive's employment by the Executive for Good Reason, and (4) with respect to clauses (i) and (ii) of this Section 10(b), any period with respect to which the Executive is entitled to payment pursuant to Section 8(b)(i) or, if shorter, a period of one year, the Executive agrees that, without the prior written consent of the Company, he shall not, directly or indirectly, with or without pay, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, manager, investor, lender, advisor, owner, associate or in any other individual or representative capacity, (i) solicit, entice, encourage or otherwise attempt to procure or service by telephone or otherwise accounts from any customers (determined as of the Date of Termination) of the Company or a subsidiary thereof for a business that is directly competitive (a "COMPETITIVE BUSINESS") with the business in which the Company is then engaged, (ii) solicit, entice or encourage any employee (determined as of the Date of Termination) of the Company or a subsidiary thereof to terminate such employee's employment in order to work in a Competitive Business, or (iii) upon the written request of the Company, engage or participate in any Competitive Business unless such Competitive Business is located more than seventy-five (75) miles from the site, as of the Date of Termination, of the Company's executive offices in New York; PROVIDED, HOWEVER, that (x) trading by the Executive for his own benefit or in proprietary accounts shall not constitute a Competitive Business and (y) the Executive may engage or participate in a business which has a Competitive Business as a component or portion thereof if the Executive himself does not engage or participate in the component or portion comprising the Competitive Business. 11 (c) SALARY CONTINUATION. Following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason, the Company may elect, by written notice given to the Executive within 14 days of such notice of termination, to require the Executive to perform the covenant provided in subsection (b)(iii) of this Section 10 during the twelve-month period following the effectiveness of such termination. As additional consideration for the Executive's performance of such covenant during such period, but only for so long as the Executive shall continue to perform such covenant, the Company shall pay the Executive for each month during such twelve-month period an amount equal to one-twelfth (1/12th) of the Executive's Base Salary. It is agreed and understood that such payment constitutes full and fair consideration to the Executive for observance of such covenant. (d) INJUNCTIVE RELIEF. In the event of a breach or threatened breach of subsections (a), (b) or (c) of this Section 10, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. 11. Indemnification; Legal Fees. --------------------------- The Company shall indemnify the Executive to the full extent permitted by law for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of his duties hereunder. The Company shall also (a) if the Date of Termination occurs prior to a Change in Control, reimburse the Executive for any reasonable legal fees and expenses incurred by the Executive in contesting or disputing any termination of the Executive's employment hereunder or in seeking to obtain or enforce any right or benefit provided by this Agreement, but only if the Executive shall substantially prevail with respect to the preponderance of the matters at issue and (b) if the Date of Termination occurs following a Change in Control, pay as incurred all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of his employment, in seeking in good faith to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. The payments under clause (a) above shall be made within five (5) days after the Executive's request for payment accompanied with such evidence of his having prevailed (as described in the preceding sentence) and such evidence of the fees and expenses incurred as the Company may reasonably require; the payments under clause (b) shall be made within five (5) business days after delivery of the Executive's written request for payments accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 11. 12. Successors; Binding Agreement. ----------------------------- (a) Company's Successors. -------------------- The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession 12 had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if the Company had terminated his employment other than for Cause, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "COMPANY" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Executive's Successors. ---------------------- This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 13. Notice. ------ For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Gilbert Scharf 120 East End Avenue, Apt 8-C New York, New York 10028 With a copy to the Executive at the offices of the Company; and If to the Company: (until February 28, 2003): Maxcor Financial Group Inc. One New York Plaza, 16th Floor New York, New York 10292 Attn: Chief Operating Officer 13 (from and after March 1, 2003): Maxcor Financial Group Inc. One Seaport Plaza, 19th Floor New York, New York 10038 Attn: Chief Operating Officer or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. Miscellaneous. ------------- No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer of the Company as may be specifically designated by its Board of Directors or its compensation committee. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be binding on all successors to the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company and the Executive under this Section 14 and Sections 7, 8, 9, 10, 11 and 12 hereof shall survive the expiration of the term of or the termination of this Agreement. The compensation and benefits payable to the Executive under this Agreement shall be in lieu of any other severance benefits to which the Executive may otherwise be entitled upon his termination of employment under any severance plan, program, policy or arrangement of the Company. 15. Validity. -------- The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 16. Counterparts. ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14 17. Entire Agreement. ---------------- This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein, including, but not limited to, the 1998 Agreement, is hereby terminated and cancelled. 15 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. MAXCOR FINANCIAL GROUP INC. By: /s/ KEITH E. REIHL ------------------------------------- Name: Keith E. Reihl Title: Chief Operating Officer /s/ GILBERT SCHARF ------------------------------------- Gilbert Scharf ("Executive") 16 EX-10.9 6 ex10_9.txt EXHIBIT 10.9 Exhibit 10.9 ------------ AMENDED AND RESTATED EMPLOYMENT AGREEMENT by and between MAXCOR FINANCIAL GROUP INC. and Keith E. Reihl TABLE OF CONTENTS ----------------- SECTION PAGE - ------- ---- 1. Employment...........................................................1 2. Term.................................................................1 3. Position and Duties; Place of Performance............................1 4. Compensation and Related Matters.....................................2 (a) Base Salary....................................................2 (b) Bonuses........................................................2 (c) Expenses.......................................................2 (d) Other Benefits.................................................2 (e) Life Insurance.................................................3 (f) Vacation.......................................................3 (g) Services Furnished.............................................3 5. Offices..............................................................3 6. Termination..........................................................3 (a) Death..........................................................3 (b) Disability.....................................................3 (c) Cause..........................................................4 (d) Good Reason....................................................4 (e) Change in Control..............................................6 7. Termination Procedure................................................7 (a) Notice of Termination..........................................7 (b) Date of Termination............................................7 (c) Compensation During Dispute....................................8 8. Compensation upon Termination or During Disability...................8 (a) Disability; Death..............................................8 (b) By Company without Cause or by the Executive for Good Reason...8 (c) By Company for Cause or by the Executive Other than for Good Reason................................................9 (d) Compensation Plans.............................................9 (e) Gross-Up Payment...............................................9 9. Mitigation..........................................................11 10. Confidential Information; Noncompetition Requirement................11 (a) Confidential Information......................................11 (b) Noncompetition Requirement....................................11 (c) Salary Continuation...........................................12 (d) Injunctive Relief.............................................12 i 11. Indemnification; Legal Fees.........................................12 12. Successors; Binding Agreement.......................................13 (a) Company's Successors..........................................13 (b) Executive's Successors........................................13 13. Notice..............................................................13 14. Miscellaneous.......................................................14 15. Validity............................................................15 16. Counterparts........................................................15 17. Entire Agreement....................................................15 ii AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of October 1, 2002 (this "AGREEMENT") by and between Keith E. Reihl (the "EXECUTIVE"), and Maxcor Financial Group Inc., a Delaware corporation (the "COMPANY"), amending and restating the employment agreement between the parties hereto, dated as of August 14, 1998 (the "1998 AGREEMENT"). WHEREAS, the Board of Directors of the Company (the "BOARD") currently employs the Executive and the Executive currently furnishes services to the Company on the terms and conditions set forth in the 1998 Agreement; and WHEREAS, the Board and the Executive mutually desire to extend the term of the Executive's employment with the Company beyond that provided for in the 1998 Agreement and to make certain other changes in the terms and conditions set forth in the 1998 Agreement; NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties hereby agree to amend and restate the 1998 Agreement as follows: 1. Employment. ----------- The Company hereby agrees to continue to employ the Executive, which period of continuous employment began on August 19, 1997, and the Executive hereby accepts such continued employment, on the terms and conditions hereinafter set forth. 2. Term. ---- The period of employment of the Executive by the Company pursuant to this Agreement (the "EMPLOYMENT PERIOD") shall commence on the date first written above (the "COMMENCEMENT DATE"), and shall continue in effect through August 14, 2006, unless further extended as provided in this Section 2 or sooner terminated as provided in Section 6. Commencing on August 14, 2005 and on each successive anniversary thereafter, the contract term of the Executive's employment shall be automatically extended for one (1) additional year unless, on or prior to such date or anniversary, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the term of the Executive's employment hereunder will not be extended (the initial term, as it may be so extended, the "CONTRACT TERM"); PROVIDED, HOWEVER, that, if a Change in Control shall have occurred during the original or extended term of this Agreement, the Contract Term shall continue in effect for at least twenty-four (24) months subsequent to the month in which such Change in Control occurs. 3. Position and Duties; Place of Performance. ----------------------------------------- During the Employment Period, the Executive shall serve as Chief Operating Officer of the Company. The Executive shall have the full responsibilities and authority attendant to such position and report directly to the Chairman, President and Chief Executive Officer of the Company. The 1 Executive's responsibilities and authority shall include such responsibilities and authority as may from time to time be assigned to the Executive by the Chairman, President and Chief Executive Officer of the Company, provided that such responsibilities and authority are consistent with the Executive's position with the Company. During the Employment Period, the Executive shall also serve as Chief Operating Officer of various of the Company's subsidiaries, including, but not limited to, Euro Brokers Investment Corporation, Euro Brokers Inc. and Maxcor Financial Inc. (collectively, the "SUBSIDIARIES"). During the Employment Period, the Executive agrees to devote substantially all of his working time and efforts to the performance of his duties for the Company and the Subsidiaries. In connection with the Executive's employment by the Company, the Executive shall be based at the Company's principal executive offices in Manhattan, New York, except for reasonably required travel on the Company's business. 4. Compensation and Related Matters. -------------------------------- (a) BASE SALARY. As compensation for the performance by the Executive of his obligations hereunder, during the Employment Period the Company shall pay the Executive a base salary at the rate of $300,000 per annum ("BASE SALARY"). Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. Base Salary may be increased from time to time in accordance with the normal business practices of the Company and, if so increased, shall not thereafter during the Employment Period be decreased. (b) BONUSES. During the Employment Period, the Executive shall be eligible to receive such semi-annual bonuses (the "BONUS") as may be awarded to him as the Board or the Compensation Committee of the Board shall determine, or if an incentive plan is adopted by the Company or a subsidiary thereof, in accordance with the terms of such plan. (c) EXPENSES. The Company shall promptly reimburse the Executive for all reasonable business expenses incurred during the Employment Period by the Executive in performing services hereunder, including all expenses of travel and living expenses while traveling on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (d) OTHER BENEFITS. The Executive shall be entitled to participate in all of the employee benefit plans and arrangements currently maintained by the Company or a subsidiary thereof, in accordance with the terms of such plans and arrangements, and shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company or a subsidiary thereof in the future to its executives and key management employees (including without limitation each incentive plan, pension and retirement plan and arrangement, supplemental pension and retirement plan and arrangement, stock option plan, life insurance and health-and-accident plan and arrangement, medical insurance plan, disability plan, survivor income plan, relocation plan and vacation plan), subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. 2 Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future (including subsection (e) of this Section 4) shall be deemed to be in lieu of the salary payable to the Executive pursuant to subsection (a) of this Section 4. (e) LIFE INSURANCE. During the Employment Period, the Company shall obtain and maintain a term life insurance policy on and for the benefit of the Executive, including paying all premiums for the policy that come due within the Employment Period. The policy shall have a death benefit amount of not less than $2 million payable to the beneficiary or beneficiaries designated by the Executive. The policy shall be in addition to any coverage the Executive has under any group life insurance plan maintained by the Company or a subsidiary thereof. (f) VACATION. The Executive shall be entitled to 25 vacation days in each calendar year; PROVIDED, HOWEVER, that vacation not taken shall not accrue from year-to-year or be compensated for at the end of the Employment Period. The Executive shall also be entitled to all paid holidays given by the Company to its executives. (g) SERVICES FURNISHED. During the Employment Period, the Company shall furnish the Executive with office space, stenographic assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. 5. Offices. ------- Subject to Section 3 hereof, the Executive agrees to serve without additional compensation, if elected or appointed thereto, as a director of the Company or any subsidiaries of the Company and as a member of any committees of the board of directors of any such corporations, and in one or more executive positions of any of the Company's subsidiaries, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided to any other director of the Company or any of its subsidiaries, or any such executive position, as the case may be. 6. Termination. ----------- The Executive's employment hereunder (and the Employment Period) may be terminated without any breach of this Agreement only under the circumstances set forth in the following subsections (a), (b), (c) and (d). (a) DEATH. The Executive's employment hereunder (and the Employment Period) shall terminate upon his death. (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of his duties hereunder for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination (as defined in Section 7 hereof) is given shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder (and the Employment Period) for "Disability." 3 (c) CAUSE. The Company may terminate the Executive's employment hereunder (and the Employment Period) for Cause. For purposes of this Agreement, the Company shall have "CAUSE" to terminate the Executive's employment hereunder upon the occurrence of any of the following events: (i) the conviction of the Executive for the commission of a felony; or (ii) the willful and continuing failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company in writing that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (iii) the willful misconduct by the Executive (including, but not limited to, breach by the Executive of the provisions of Section 10 hereof) that is demonstrably and materially injurious to the Company or its subsidiaries, whether monetarily or otherwise. Cause shall not exist unless and until the Company has delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (2/3) of the entire membership of the Board of Directors of the Company (not counting the Executive) at a meeting of such board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before such board), finding that in the good faith opinion of such board, the Executive was guilty of the conduct set forth in this Section 6(c) and specifying the particulars thereof in detail. For purposes of this Section 6(c), no act or failure to act on the Executive's part shall be considered "willful" unless done or failed to be done by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. (d) GOOD REASON. The Executive may terminate his employment hereunder (and the Employment Period) during the Contract Term hereunder for "GOOD REASON" after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within ten (10) days after written notice thereof has been given by the Executive to the Company, provided that, without limiting the generality of the foregoing, on and after a Change in Control, any one of the following events shall be deemed a material breach of this Agreement: 4 (i) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control, including, without limitation, if the Executive was, immediately prior to the Change in Control, an executive officer of a public company, the Executive ceasing to be an executive officer of a public company, or being required to report to anyone other than the Chairman, President and Chief Executive Officer; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in Control; (iii) the relocation of the Executive's principal place of employment to a location outside of Manhattan, New York; (iv) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within fifteen (15) days of the date such compensation is due; (v) the failure by the Company to provide the Executive with compensation plans which, in the aggregate, provide the Executive with substantially comparable compensation opportunities to those compensation opportunities for which the Executive was eligible immediately prior to the Change in Control; (vi) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material perquisite or other fringe benefit, or secretarial service and office space at the level, enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled under this Agreement; (vii) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(a) or that does not comply with Section 6(c), if applicable (and for purposes of this Agreement, no such purported termination shall be effective); or (viii) the failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 12(a) hereof. The Executive's right to terminate his employment hereunder for Good Reason shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. 5 (e) Change in Control. ----------------- A "CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) or (C) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Commencement Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the Commencement Date or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a re-capitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the combined voting power of the Company's then outstanding securities, or (C) a merger or consolidation which would result in any individual, entity or group which includes, is affiliated with or is wholly or partly controlled by the individual who, as of the Commencement Date, is the Chief Executive Officer of the Company (the "Chief Executive Officer") being the Beneficial Owner of at least 50% of the combined voting power of the voting securities of the Company, the entity surviving such merger of consolidation or any parent thereof outstanding immediately after such merger or consolidation; or 6 (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 50% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of this Section 6(e) and Section 8(e) hereof, "PERSON" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any individual, entity or group which includes, is affiliated with or is wholly or party controlled by the Chief Executive Officer. 7. Termination Procedure. --------------------- (a) NOTICE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (b) Date of Termination. ------------------- "DATE OF TERMINATION" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated for Disability pursuant to Section 6(b), thirty (30) days after Notice of Termination (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (iii) if the Executive's employment is terminated for Cause pursuant to Section 6(c), the date specified in the Notice of Termination, which shall not be earlier than the date of the Notice of Termination, and (iv) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within 30 days) set forth in such Notice of Termination; PROVIDED, HOWEVER, that if a purported termination occurs on or after a Change in Control and during the Contract Term and either party notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the 7 date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); PROVIDED FURTHER, HOWEVER, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. (c) COMPENSATION DURING DISPUTE. If a purported termination occurs on or after a Change in Control and during the Contract Term, and such termination is disputed in accordance with subsection (b) of this Section 7, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, determined in accordance with subsection (b) of this Section 7. Amounts paid under this Section 7(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation upon Termination or During Disability. -------------------------------------------------- (a) DISABILITY; DEATH. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his full Base Salary at the rate in effect at the beginning of such period and continue as a participant in all compensation and employee benefit plans in which the Executive was participating pursuant to Sections 4(d) and 4(e) until his employment is terminated pursuant to Section 6(b) and shall continue to receive such Base Salary for a period of six months thereafter. Subsequent to the six-month period following termination of the Executive's employment pursuant to Section 6(b), or in the event the Executive's employment is terminated by reason of his death, the Company shall have no further obligations to the Executive under this Agreement and the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (b) BY COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON. If during the Contract Term the Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive for Good Reason, then -- (i) in addition to any amounts due the Executive pursuant to Sections 4(a) or 4(b) hereof, the Company shall continue to pay to the Executive (or his legal representatives or estate) his Base Salary (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination) for the remainder of the Contract Term or, if greater, for one year; PROVIDED, HOWEVER, that if such termination occurs on or after a Change in Control, then the Company shall, within five (5) days following the Date of Termination, pay to the Executive, in an undiscounted cash lump sum, an amount equal to three (3) times the sum of Base Salary (at the rate in effect immediately prior to the occurrence of the circumstance 8 giving rise to the Notice of Termination) and the highest Bonus (annualized if paid for less than a full year) awarded in respect of any bonus period falling entirely within the twenty-four month period preceding the Change in Control or the Date of Termination, whichever resulting Bonus is greater, provided that, solely for purposes of this Section 8(b)(i), such annualized Bonus shall not be less than $400,000; and (ii) the Company or a subsidiary thereof shall maintain in full force and effect, for the continued benefit of the Executive and his dependents for the remainder of the Contract Term or, if greater, for one year or, if such termination occurs on or after a Change in Control, for the duration of the Executive's life, all medical, dental and life insurance benefit plans and programs in which the Executive was entitled to participate immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive and his dependents with benefits substantially similar to those which the Executive and his dependents would otherwise have been entitled to receive under such plans and programs from which their continued participation is barred; and (iii) the Executive shall be deemed to continue as an employee of the Company during the remainder of the Contract Term for purposes of the exercise and/or vesting of outstanding stock and stock option awards and cash incentive awards. (c) BY COMPANY FOR CAUSE OR BY THE EXECUTIVE OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason, then the Company shall pay the Executive his Base Salary (at the rate in effect at the time Notice of Termination is given) through the Date of Termination, and the Company shall have no additional obligations to the Executive under this Agreement except as set forth in subsection (d) of this Section 8. (d) COMPENSATION PLANS. Following any termination of the Executive's employment, the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due. (e) Gross-Up Payment. ---------------- (i) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement (the "SEVERANCE PAYMENTS") or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the 9 Severance Payments, being hereinafter called "TOTAL PAYMENTS") would be subject (in whole or part) to the excise tax ("EXCISE TAX") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), then the Company shall pay to the Executive an additional amount (the "GROSS-UP PAYMENT") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the payment provided for by this Section 8(e), shall be equal to the Total Payments. (ii) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive ("TAX COUNSEL"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (B) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of Tax Counsel such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (C) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which occurs the Date of Termination (or such earlier date on which any payment or benefit becomes subject to the Excise Tax) and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or such earlier date on which any payment or benefit becomes subject to the Excise Tax), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (iii) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Executive's employment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in the Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment) the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. 10 9. Mitigation. ---------- The Executive shall not be required to mitigate the amount of any payment provided for the Executive by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for the Executive hereunder be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise except as is hereinafter specifically provided in this Section 9. To the extent that the Executive, during the relevant period described in Section 8(b)(ii) hereof, shall receive from a subsequent employer or from Medicare/Medicaid (or similar successor programs) benefits similar to those to be provided under Section 8(b)(ii), the benefits to be provided under the provisions of said Section shall be correspondingly reduced. 10. Confidential Information; Noncompetition Requirement. ---------------------------------------------------- (a) CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets and confidential information relating to the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Company and which shall not have been or now or hereafter have become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets or information to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 10(a). (b) NONCOMPETITION REQUIREMENT. During (1) any period that the Executive is performing services hereunder, (2) a period of one (1) year following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason (if the Company so requests, notifies and pays the Executive as provided in paragraph (c) of this Section 10), (3) on or after a Change in Control, a period of six (6) months following a termination of the Executive's employment by the Executive for Good Reason, and (4) with respect to clauses (i) and (ii) of this Section 10(b), any period with respect to which the Executive is entitled to payment pursuant to Section 8(b)(i) or, if shorter, a period of one year, the Executive agrees that, without the prior written consent of the Company, he shall not, directly or indirectly, with or without pay, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, manager, investor, lender, advisor, owner, associate or in any other individual or representative capacity, (i) solicit, entice, encourage or otherwise attempt to procure or service by telephone or otherwise accounts from any customers (determined as of the Date of Termination) of the Company or a subsidiary thereof for a business that is directly competitive (a "COMPETITIVE BUSINESS") with the business in 11 which the Company is then engaged, (ii) solicit, entice or encourage any employee (determined as of the Date of Termination) of the Company or a subsidiary thereof to terminate such employee's employment in order to work in a Competitive Business, or (iii) upon the written request of the Company, engage or participate in any Competitive Business unless such Competitive Business is located more than seventy-five (75) miles from the site, as of the Date of Termination, of the Company's executive offices in New York; PROVIDED, HOWEVER, that (x) trading by the Executive for his own benefit or in proprietary accounts shall not constitute a Competitive Business and (y) the Executive may engage or participate in a business which has a Competitive Business as a component or portion thereof if the Executive himself does not engage or participate in the component or portion comprising the Competitive Business. (c) SALARY CONTINUATION. Following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason, the Company may elect, by written notice given to the Executive within 14 days of such notice of termination, to require the Executive to perform the covenant provided in subsection (b)(iii) of this Section 10 during the twelve-month period following the effectiveness of such termination. As additional consideration for the Executive's performance of such covenant during such period, but only for so long as the Executive shall continue to perform such covenant, the Company shall pay the Executive for each month during such twelve-month period an amount equal to one-twelfth (1/12th) of the Executive's Base Salary. It is agreed and understood that such payment constitutes full and fair consideration to the Executive for observance of such covenant. (d) INJUNCTIVE RELIEF. In the event of a breach or threatened breach of subsections (a), (b) or (c) of this Section 10, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. 11. Indemnification; Legal Fees. --------------------------- The Company shall indemnify the Executive to the full extent permitted by law for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of his duties hereunder. The Company shall also (a) if the Date of Termination occurs prior to a Change in Control, reimburse the Executive for any reasonable legal fees and expenses incurred by the Executive in contesting or disputing any termination of the Executive's employment hereunder or in seeking to obtain or enforce any right or benefit provided by this Agreement, but only if the Executive shall substantially prevail with respect to the preponderance of the matters at issue and (b) if the Date of Termination occurs following a Change in Control, pay as incurred all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of his employment, in seeking in good faith to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. The payments under clause (a) above shall be made within five (5) days after the Executive's request for payment accompanied with such evidence of his having prevailed (as described in the preceding sentence) and such evidence 12 of the fees and expenses incurred as the Company may reasonably require; the payments under clause (b) shall be made within five (5) business days after delivery of the Executive's written request for payments accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 11. 12. Successors; Binding Agreement. ----------------------------- (a) Company's Successors. -------------------- The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if the Company had terminated his employment other than for Cause, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "COMPANY" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) Executive's Successors. ---------------------- This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 13. Notice. ------ For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: 13 If to the Executive: Keith E. Reihl 534 Allen Avenue Westfield, New Jersey 07090 With a copy to the Executive at the offices of the Company; and If to the Company: (until February 28, 2003): Maxcor Financial Group Inc. One New York Plaza, 16th Floor New York, New York 10292 Attn: Chairman (from and after March 1, 2003): Maxcor Financial Group Inc. One Seaport Plaza, 19th Floor New York, New York 10038 Attn: Chairman or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. Miscellaneous. ------------- No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer of the Company as may be specifically designated by its Board of Directors or its compensation committee. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be binding on all successors to the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company and the Executive under this Section 14 and Sections 7, 8, 9, 10, 11 and 12 hereof shall survive the expiration of the term of or the termination of this Agreement. The compensation and benefits payable to the Executive under this Agreement shall be in lieu of any other severance benefits to which the Executive may otherwise be entitled upon his termination of employment under any severance plan, program, policy or arrangement of the Company. 14 15. Validity. -------- The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 16. Counterparts. ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. Entire Agreement. ---------------- This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein, including, but not limited to, the 1998 Agreement, is hereby terminated and cancelled. 15 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. MAXCOR FINANCIAL GROUP INC. By: /s/ GILBERT D. SCHARF ------------------------------------- Name: Gilbert D. Scharf Title: Chief Executive Officer /s/ KEITH E. REIHL ------------------------------------- Keith E. Reihl ("Executive") 16 EX-10.10 7 ex10_10.txt EXHIBIT 10.10 Exhibit 10.10 ------------- AMENDED AND RESTATED EMPLOYMENT AGREEMENT by and between MAXCOR FINANCIAL GROUP INC. and Roger E. Schwed TABLE OF CONTENTS ----------------- SECTION PAGE - ------- ---- 1. Employment...........................................................1 2. Term.................................................................1 3. Position and Duties; Place of Performance............................1 4. Compensation and Related Matters.....................................2 (a) Base Salary....................................................2 (b) Guaranteed Bonus...............................................2 (c) Other Bonuses..................................................2 (d) Proration......................................................2 (e) Expenses.......................................................2 (f) Other Benefits.................................................3 (g) Life Insurance.................................................3 (h) Vacation.......................................................3 (i) Services Furnished.............................................3 5. Offices..............................................................3 6. Termination..........................................................3 (a) Death..........................................................4 (b) Disability.....................................................4 (c) Cause..........................................................4 (d) Good Reason....................................................4 (e) Change in Control..............................................6 (f) Unilateral.....................................................7 7. Termination Procedure................................................7 (a) Notice of Termination..........................................7 (b) Date of Termination............................................7 (c) Compensation During Dispute....................................8 8. Compensation upon Termination or During Disability...................8 (a) Disability; Death..............................................8 (b) By Company without Cause or by the Executive for Good Reason...8 (c) By Company for Cause or by the Executive Other than for Good Reason....................................................9 (d) Compensation Plans.............................................9 (e) Payment Limitation.............................................9 9. Mitigation..........................................................11 10. Confidential Information; Noncompetition Requirement................11 (a) Confidential Information......................................11 i (b) Noncompetition Requirement....................................11 (c) Salary and Bonus Continuation.................................12 (d) Injunctive Relief.............................................12 11. Indemnification; Legal Fees.........................................12 12. Successors; Binding Agreement.......................................13 (a) Company's Successors..........................................13 (b) Executive's Successors........................................13 13. Notice..............................................................13 14. Miscellaneous.......................................................14 15. Validity............................................................14 16. Counterparts........................................................14 17. Entire Agreement....................................................15 ii AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of October 1, 2002 (this "AGREEMENT") by and between Roger E. Schwed (the "EXECUTIVE"), and Maxcor Financial Group Inc., a Delaware corporation (the "COMPANY"), amending and restating the employment agreement between the parties hereto, dated as of August 14, 1998 (the "1998 AGREEMENT"). WHEREAS, the Company currently employs the Executive and the Executive currently furnishes services to the Company on the terms and conditions set forth in the 1998 Agreement; and WHEREAS, the Company and the Executive mutually desire to extend the term of the Executive's employment with the Company beyond that provided for in the 1998 Agreement and to make certain other changes in the terms and conditions set forth in the 1998 Agreement; NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties hereby agree to amend and restate the 1998 Agreement as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ the Executive, which period of continuous employment began on October 1, 1996, and the Executive hereby accepts such continued employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of the Executive by the Company pursuant to this Agreement (the "EMPLOYMENT PERIOd") shall commence on the date first written above (the "COMMENCEMENT DATE"), and shall continue in effect through October 1, 2006, unless further extended as provided in this Section 2 or sooner terminated as provided in Section 6. Commencing on October 1, 2005, and on each successive anniversary thereafter, the contract term of the Executive's employment shall be automatically extended for one (1) additional year unless, on or prior to such date or anniversary, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the term of the Executive's employment hereunder will not be extended (the initial term, as it may be so extended, the "CONTRACT TERM"); PROVIDED, HOWEVER, that, if a Change in Control shall have occurred during the original or extended term of this Agreement, the Contract Term shall continue in effect for at least twenty-four (24) months subsequent to the month in which such Change in Control occurs. 3. POSITION AND DUTIES; PLACE OF PERFORMANCE. During the Employment Period, the Executive shall serve as Executive Vice President, General Counsel, and Secretary of the Company. The Executive shall have the full responsibilities and authority attendant to such position and report directly to the Chairman, President and Chief Executive Officer of the Company. The Executive's responsibilities and authority shall include such responsibilities and authority as may from time to time be assigned to the 1 Executive by the Chairman, President and Chief Executive Officer of the Company, provided that such responsibilities and authority are consistent with the Executive's position with the Company. During the Employment Period, the Executive shall also serve as Executive Vice President, General Counsel and Secretary of various of the Company's subsidiaries, including, but not limited to, Euro Brokers Investment Corporation and Euro Brokers Inc. (collectively, the "SUBSIDIARIES"). During the Employment Period, the Executive agrees to devote substantially all of his working time and efforts to the performance of his duties for the Company and the Subsidiaries. In connection with the Executive's employment by the Company, the Executive shall be based at the Company's principal executive offices in Manhattan, New York, except for reasonably required travel on the Company's business. 4. Compensation and Related Matters. -------------------------------- (a) BASE SALARY. As compensation for the performance by the Executive of his obligations hereunder, during the Employment Period, the Company shall pay the Executive a base salary at the rate of $250,000 per annum ("BASE SALARY"). Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. Base Salary may be increased from time to time in accordance with the normal business practices of the Company and, if so increased, shall not thereafter during the Employment Period be decreased. (b) GUARANTEED BONUS. During the Employment Period, the Company shall pay the Executive a guaranteed minimum bonus at the rate of $100,000 per annum ("MINIMUM BONUS"). Minimum Bonus shall be paid in approximately equal semi-annual installments. Minimum Bonus may be increased from time to time in accordance with the normal business practices of the Company. (c) OTHER BONUSES. During the Employment Period, the Executive shall be eligible to receive, in addition to the Minimum Bonus, such semi-annual bonuses as may be awarded to him as the Board of Directors (the "BOARD") of the Company or the Compensation Committee of the Board shall determine, or if an incentive plan is adopted by the Company or a subsidiary thereof, in accordance with the terms of such plan. (d) PRORATION. The Executive shall be entitled to pro rata payments under Section 4(b) above, and to be considered for pro rata payments under Section 4(c) above, in each case to the extent that the period of his service to the Company at the regular time for the determination for such payments is less than the full period over which the determination of such payments is normally measured. (e) EXPENSES. The Company shall promptly reimburse the Executive for all reasonable business expenses incurred during the Employment Period by the Executive in performing services hereunder, including all expenses of travel and living expenses while traveling on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. 2 (f) OTHER BENEFITS. The Executive shall be entitled to participate in all of the employee benefit plans and arrangements currently maintained by the Company or a subsidiary thereof, in accordance with the terms of such plans and arrangements, and shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company or a subsidiary thereof in the future to its executives and key management employees (including without limitation each incentive plan, pension and retirement plan and arrangement, supplemental pension and retirement plan and arrangement, stock option plan, life insurance and health-and-accident plan and arrangement, medical insurance plan, disability plan, survivor income plan, relocation plan and vacation plan), subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future (including subsection (g) of this Section 4) shall be deemed to be in lieu of the salary or bonus payable to the Executive pursuant to subsections (a) and (b) of this Section 4. (g) LIFE INSURANCE. During the Employment Period, the Company shall obtain and maintain a term life insurance policy on and for the benefit of the Executive, including paying all premiums for the policy that come due within the Employment Period. The policy shall have a death benefit amount of not less than $2 million payable to the beneficiary or beneficiaries designated by the Executive. The policy shall be in addition to any coverage the Executive has under any group life insurance plan maintained by the Company or a subsidiary thereof. (h) VACATION. The Executive shall be entitled to 25 vacation days in each calendar year; PROVIDED, HOWEVER, that vacation not taken shall not accrue from year-to-year or be compensated for at the end of the Employment Period. The Executive shall also be entitled to all paid holidays given by the Company to its executives. (i) SERVICES FURNISHED. During the Employment Period, the Company shall furnish the Executive with office space, stenographic assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. 5. OFFICES. Subject to Section 3 hereof, the Executive agrees to serve without additional compensation, if elected or appointed thereto, as a director of the Company or any subsidiaries of the Company and as a member of any committees of the board of directors of any such corporations, and in one or more executive positions of any of the Company's subsidiaries, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided to any other director of the Company or any of its subsidiaries, or any such executive position, as the case may be. 6. TERMINATION. The Executive's employment hereunder (and the Employment Period) may be terminated without any breach of this Agreement only under the circumstances set forth in the following subsections (a), (b), (c), (d) and (f). 3 (a) DEATH. The Executive's employment hereunder (and the Employment Period) shall terminate upon his death. (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of his duties hereunder for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination (as defined in Section 7 hereof) is given shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder (and the Employment Period) for "DISABILITY." (c) CAUSE. The Company may terminate the Executive's employment hereunder (and the Employment Period) for Cause. For purposes of this Agreement, the Company shall have "CAUSE" to terminate the Executive's employment hereunder upon the occurrence of any of the following events: (i) the conviction of the Executive for the commission of a felony; or (ii) the willful and continuing failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company in writing that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (iii) the willful misconduct by the Executive (including, but not limited to, breach by the Executive of the provisions of Section 10 hereof) that is demonstrably and materially injurious to the Company or its subsidiaries, whether monetarily or otherwise. For purposes of this Section 6(c), no act or failure to act on the Executive's part shall be considered "WILLFUL" unless done or failed to be done by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. (d) GOOD REASON. The Executive may terminate his employment hereunder (and the Employment Period) during the Contract Term hereunder for "GOOD REASON" after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within ten (10) days after written notice thereof has been given by the Executive to the Company, provided that, without limiting the generality of the foregoing, on and after a Change in Control, any one of the following events shall be deemed a material breach of this Agreement: 4 (i) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control, including, without limitation, if the Executive was, immediately prior to the Change in Control, an executive officer of a public company, the Executive ceasing to be an executive officer of a public company, or being required to report to anyone other than the Chairman, President and Chief Executive Officer; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in Control; (iii) the relocation of the Executive's principal place of employment to a location outside of Manhattan, New York; (iv) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within fifteen (15) days of the date such compensation is due; (v) the failure by the Company to provide the Executive with compensation plans which, in the aggregate, provide the Executive with substantially comparable compensation opportunities to those compensation opportunities for which the Executive was eligible immediately prior to the Change in Control; (vi) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material perquisite or other fringe benefit, or secretarial service and office space at the level, enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled under this Agreement; (vii) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(a) or that does not comply with Section 6(c), if applicable (and for purposes of this Agreement, no such purported termination shall be effective); or (viii) the failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 12(a) hereof. The Executive's right to terminate his employment hereunder for Good Reason shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. 5 (e) CHANGE IN CONTROL. A "CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) or (C) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Commencement Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the Commencement Date or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a re-capitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the combined voting power of the Company's then outstanding securities, or (C) a merger or consolidation which would result in any individual, entity or group which includes, is affiliated with or is wholly or partly controlled by the individual who, as of the Commencement Date, is the Chief Executive Officer of the Company (the "CHIEF EXECUTIVE OFFICER") being the Beneficial Owner of at least 50% of the combined voting power of the voting securities of the Company, the entity surviving such merger of consolidation or any parent thereof outstanding immediately after such merger or consolidation; or 6 (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 50% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of this Section 6(e) and Section 8(e) hereof, "PERSON" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any individual, entity or group which includes, is affiliated with or is wholly or party controlled by the Chief Executive Officer. (f) UNILATERAL. The Executive may unilaterally terminate his employment hereunder (and the Employment Period) during the Contract Term other than for Good Reason, and without the Company's consent, upon not less than 60 days' written notice to the Company. 7. Termination Procedure. --------------------- (a) NOTICE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated for Disability pursuant to Section 6(b), thirty (30) days after Notice of Termination (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (iii) if the Executive's employment is terminated for Cause pursuant to Section 6(c), the date specified in the Notice of Termination, which shall not be earlier than the date of the Notice of Termination, and (iv) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within 60 days) set forth in such Notice of Termination; PROVIDED, HOWEVER, that if a purported termination occurs on or after a Change in Control and during the Contract Term and either party notifies the other party that a 7 dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); PROVIDED FURTHER, HOWEVER, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. (c) COMPENSATION DURING DISPUTE. If a purported termination occurs on or after a Change in Control and during the Contract Term, and such termination is disputed in accordance with subsection (b) of this Section 7, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary and Minimum Bonus) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, determined in accordance with subsection (b) of this Section 7. Amounts paid under this Section 7(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation upon Termination or During Disability. -------------------------------------------------- (a) DISABILITY; DEATH. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("DISABILITY PERIOD"), the Executive shall continue to receive his full Base Salary and Minimum Bonus at the rate in effect at the beginning of such period and continue as a participant in all compensation and employee benefit plans in which the Executive was participating pursuant to Sections 4(f) and 4(g) until his employment is terminated pursuant to Section 6(b) and shall continue to receive such Base Salary and Minimum Bonus for a period of six months thereafter. Subsequent to the six-month period following termination of the Executive's employment pursuant to Section 6(b), or in the event the Executive's employment is terminated by reason of his death, the Company shall have no further obligations to the Executive under this Agreement and the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (b) BY COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON. If during the Contract Term the Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive for Good Reason, then -- (i) in addition to any amounts due the Executive pursuant to Sections 4(a), 4(b) or 4(c) hereof, the Company shall continue to pay to the Executive (or his legal representatives or estate) his Base Salary and Minimum Bonus (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination) for the remainder of the Contract Term or, if greater, for one year; PROVIDED, HOWEVER, that if such termination occurs on or after a Change in Control, then the Company shall, within five (5) days following the Date of Termination, pay to the Executive, 8 in an undiscounted cash lump sum, an amount equal to two (2) times the sum of Base Salary (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination) and the highest bonus (inclusive of the Minimum Bonus, and annualized if paid for less than a full year) awarded in respect of any bonus period falling entirely within the twenty-four month period preceding the Change in Control or the Date of Termination, whichever resulting bonus is greater, provided that, solely for purposes of this Section 8(b)(i), such annualized bonus (inclusive of the Minimum Bonus) shall not be less than $250,000; and (ii) the Company or a subsidiary thereof shall maintain in full force and effect, for the continued benefit of the Executive and his dependents for the remainder of the Contract Term or, if greater, for one year or, if such termination occurs on or after a Change in Control, for the greater of two years or the Contract Term, all medical, dental and life insurance benefit plans and programs in which the Executive was entitled to participate immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive and his dependents with benefits substantially similar to those which the Executive and his dependents would otherwise have been entitled to receive under such plans and programs from which their continued participation is barred; and (iii) the Executive shall be deemed to continue as an employee of the Company during the remainder of the Contract Term for purposes of the exercise and/or vesting of outstanding stock and stock option awards and cash incentive awards. (c) BY COMPANY FOR CAUSE OR BY THE EXECUTIVE OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason, then the Company shall pay the Executive his Base Salary and Minimum Bonus (at the rate in effect at the time Notice of Termination is given) through the Date of Termination, and the Company shall have no additional obligations to the Executive under this Agreement except as set forth in subsection (d) of this Section 8. (d) COMPENSATION PLANS. Following any termination of the Executive's employment, the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due. (e) Payment Limitation. ------------------ (i) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the 9 terms of this Agreement (the "SEVERANCE PAYMENTS") or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "TOTAL PAYMENTS") would be subject (in whole or part), to the excise tax (the "EXCISE TAX") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"), then, after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement, the cash Severance Payments shall first be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income and employment taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income and employment taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments); PROVIDED, HOWEVER, that the Executive may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. (ii) For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (a) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (b) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel ("TAX COUNSEL") reasonably acceptable to the Executive and selected by the accounting firm (the "AUDITOR") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in section 280G(b)(3) of the Code and the regulations promulgated thereunder) allocable to such reasonable compensation, and (c) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (iii) At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the proper application of subsection (i) of this Section 8(e). 10 9. MITIGATION. The Executive shall not be required to mitigate the amount of any payment provided for the Executive by seeking other employment or otherwise, nor, except as is hereinafter specifically provided in this Section 9, shall the amount of any payment or benefit provided for the Executive hereunder be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise. If the Executive's employment is terminated prior to a Change in Control, then to the extent that the Executive, during the relevant period described in Section 8(b)(i) hereof, shall receive from a subsequent employer base salary and/or any bonus similar to the Minimum Bonus, the payments to be provided under the provisions of said Section shall be correspondingly reduced. To the extent that the Executive, during the relevant period described in Section 8(b)(ii) hereof, shall receive from a subsequent employer benefits similar to those to be provided under Section 8(b)(ii), the benefits to be provided under the provisions of said Section shall be correspondingly reduced. 10. Confidential Information; Noncompetition Requirement. ---------------------------------------------------- (a) CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets and confidential information relating to the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Company and which shall not have been or now or hereafter have become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets or information to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 10(a). (b) NONCOMPETITION REQUIREMENT. During (1) any period that the Executive is performing services hereunder, (2) a period of six (6) months following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason (if the Company so requests, notifies and pays the Executive as provided in Section 10(c) below), (3) on or after a Change in Control, a period of six (6) months following a termination of the Executive's employment by the Executive for Good Reason, and (4) with respect to clauses (i) and (ii) of this Section 10(b), any period with respect to which the Executive is entitled to payment pursuant to Section 8(b)(i) or, if shorter, a period of one year, the Executive agrees that, without the prior written consent of the Company, he shall not, directly or indirectly, with or without pay, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, manager, investor, lender, advisor, owner, associate or in any other individual or representative capacity, (i) solicit, entice, encourage or otherwise attempt to procure or service by 11 telephone or otherwise accounts from any customers (determined as of the Date of Termination) of the Company or a subsidiary thereof for a business that is directly competitive (a "COMPETITIVE BUSINESS") with the business in which the Company is then engaged, (ii) solicit, entice or encourage any employee (determined as of the Date of Termination) of the Company or a subsidiary thereof to terminate such employee's employment in order to work in a Competitive Business, or (iii) upon the written request of the Company, directly engage or participate in any Competitive Business unless such Competitive Business is located more than seventy-five (75) miles from the site, as of the Date of Termination, of the Company's executive offices in New York; PROVIDED, HOWEVER, that (x) trading by the Executive for his own benefit or in proprietary accounts shall not constitute a Competitive Business and (y) the Executive may engage or participate in a business which has a Competitive Business as a component or portion thereof if engaging or participating in such Competitive Business does not constitute a substantial part of the Executive's duties. (c) SALARY AND BONUS CONTINUATION. Following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason, the Company may elect, by written notice given to the Executive within 7 days of such notice of termination, to require the Executive to perform the covenant provided in subsection (b)(iii) of this Section 10 during the six-month period following the effectiveness of such termination. As additional consideration for the Executive's performance of such covenant during such period, but only for so long as the Executive shall continue to perform such covenant, the Company shall pay the Executive for each month during such six-month period an amount equal to one-twelfth (1/12th) of the Executive's Base Salary and Minimum Bonus. It is agreed and understood that such payment constitutes full and fair consideration to the Executive for observance of such covenant. (d) INJUNCTIVE RELIEF. In the event of a breach or threatened breach of subsections (a), (b) or (c) of this Section 10, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. 11. INDEMNIFICATION; LEGAL FEES. The Company shall indemnify the Executive to the full extent permitted by law for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of his duties hereunder. The Company shall also (a) if the Date of Termination occurs prior to a Change in Control, reimburse the Executive for any reasonable legal fees and expenses incurred by the Executive in contesting or disputing any termination of the Executive's employment hereunder or in seeking to obtain or enforce any right or benefit provided by this Agreement, but only if the Executive shall substantially prevail with respect to the preponderance of the matters at issue and (b) if the Date of Termination occurs following a Change in Control, pay as incurred all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of his employment, in seeking in good faith to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. The payments under clause (a) above shall be made within five (5) days after the Executive's request for 12 payment accompanied with such evidence of his having prevailed (as described in the preceding sentence) and such evidence of the fees and expenses incurred as the Company may reasonably require; the payments under clause (b) shall be made within five (5) business days after delivery of the Executive's written request for payments accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 11. 12. Successors; Binding Agreement. ----------------------------- (a) COMPANY'S SUCCESSORS. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if the Company had terminated his employment other than for Cause, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "COMPANY" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 13. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Roger E. Schwed 225 West 106th Street, Apt. 11A New York, New York 10025 With a copy to the Executive at the offices of the Company; and 13 If to the Company: (until February 28, 2003): Maxcor Financial Group Inc. One New York Plaza, 16th Floor New York, New York 10292 Attn: Chairman (from and after March 1, 2003): Maxcor Financial Group Inc. One Seaport Plaza, 19th Floor New York, New York 10038 Attn: Chairman or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and an authorized officer of the Company (other than the Executive). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be binding on all successors to the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company and the Executive under this Section 14 and Sections 7, 8, 9, 10, 11 and 12 hereof shall survive the expiration of the term of or the termination of this Agreement. The compensation and benefits payable to the Executive under this Agreement shall be in lieu of any other severance benefits to which the Executive may otherwise be entitled upon his termination of employment under any severance plan, program, policy or arrangement of the Company. 15. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14 17. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein, including, but not limited to, the 1998 Agreement, is hereby terminated and cancelled. 15 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. MAXCOR FINANCIAL GROUP INC. By: /s/ GILBERT D. SCHARF ------------------------------------- Name: Gilbert D. Scharf Title: Chief Executive Officer /s/ ROGER E. SCHWED ------------------------------------- Roger E. Schwed ("Executive") 16 EX-10.11 8 ex10_11.txt EXHIBIT 10.11 Exhibit 10.11 ------------- EMPLOYMENT AGREEMENT by and between MAXCOR FINANCIAL GROUP INC. and Steven R. Vigliotti TABLE OF CONTENTS ----------------- SECTION PAGE - ------- ---- 1. Employment...........................................................1 2. Term.................................................................1 3. Position and Duties; Place of Performance............................1 4. Compensation and Related Matters.....................................2 (a) Base Salary....................................................2 (b) Bonuses........................................................2 (c) Expenses.......................................................2 (d) Other Benefits.................................................2 (e) Life Insurance.................................................3 (f) Vacation.......................................................3 (g) Services Furnished.............................................3 5. Offices..............................................................3 6. Termination..........................................................3 (a) Death..........................................................3 (b) Disability.....................................................3 (c) Cause..........................................................4 (d) Good Reason....................................................4 (e) Change in Control..............................................5 7. Termination Procedure................................................7 (a) Notice of Termination..........................................7 (b) Date of Termination............................................7 (c) Compensation During Dispute....................................7 8. Compensation upon Termination or During Disability...................8 (a) Disability; Death..............................................8 (b) By Company without Cause or by the Executive for Good Reason...8 (c) By Company for Cause or by the Executive Other than for Good Reason................................................9 (d) Compensation Plans.............................................9 (e) Payment Limitation.............................................9 9. Mitigation..........................................................10 10. Confidential Information; Noncompetition Requirement................11 (a) Confidential Information......................................11 (b) Noncompetition Requirement....................................11 (c) Salary Continuation...........................................11 (d) Injunctive Relief.............................................12 i 11. Indemnification; Legal Fees.........................................12 12. Successors; Binding Agreement.......................................12 (a) Company's Successors..........................................12 (b) Executive's Successors........................................13 13. Notice..............................................................13 14. Miscellaneous.......................................................14 15. Validity............................................................14 16. Counterparts........................................................14 17. Entire Agreement....................................................14 ii EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of October 1, 2002 (this "AGREEMENT") by and between Steven R. Vigliotti (the "EXECUTIVE"), and Maxcor Financial Group Inc., a Delaware corporation (the "COMPANY"), superseding and replacing the employment agreement between the Executive and Euro Brokers Inc., a Delaware corporation and a direct, wholly owned subsidiary of the Company ("EBI"), dated as of May 4, 1998, as amended (the "1998 AGREEMENT"). WHEREAS, EBI currently employs the Executive and the Executive currently furnishes services to EBI (as well as the Company) on the terms and conditions set forth in the 1998 Agreement; and WHEREAS, the Company desires to employ the Executive directly at the Company level and the Executive desires to be so employed; and WHEREAS, the Company and the Executive mutually desire to extend the term of the Executive's employment with the Company beyond that provided for in the 1998 Agreement and to make certain other changes in the terms and conditions set forth in the 1998 Agreement; NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties hereby agree to supersede and replace the 1998 Agreement as follows: 1. EMPLOYMENT. The Company hereby agrees to continue to employ the Executive, which period of continuous employment began on December 1, 1998, and the Executive hereby accepts such continued employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of the Executive by the Company pursuant to this Agreement (the "EMPLOYMENT PERIOD") shall commence on the date first written above (the "COMMENCEMENT DATE"), and shall continue in effect through March 31, 2006, unless further extended as provided in this Section 2 or sooner terminated as provided in Section 6. Commencing on March 31, 2005, and on each successive anniversary thereafter, the contract term of the Executive's employment shall be automatically extended for one (1) additional year unless, on or prior to such date or anniversary, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the term of the Executive's employment hereunder will not be extended (the initial term, as it may be so extended, the "Contract Term"); PROVIDED, HOWEVER, that, if a Change in Control shall have occurred during the original or extended term of this Agreement, the Contract Term shall continue in effect for at least twenty-four (24) months subsequent to the month in which such Change in Control occurs. 1 3. POSITION AND DUTIES; PLACE OF PERFORMANCE. During the Employment Period, the Executive shall serve as Chief Financial Officer and Treasurer of the Company. The Executive shall have the full responsibilities and authority attendant to such position and report directly to the Chairman, President and Chief Executive Officer of the Company. The Executive's responsibilities and authority shall include such responsibilities and authority as may from time to time be assigned to the Executive by the Chairman, President and Chief Executive Officer of the Company, provided that such responsibilities and authority are consistent with the Executive's position with the Company. During the Employment Period, the Executive shall also serve as Chief Financial Officer and Treasurer of various of the Company's subsidiaries, including, but not limited to, Euro Brokers Investment Corporation, EBI and Maxcor Financial Inc. (collectively, the "SUBSIDIARIES"). During the Employment Period, the Executive agrees to devote substantially all of his working time and efforts to the performance of his duties for the Company and the Subsidiaries. In connection with the Executive's employment by the Company, the Executive shall be based at the Company's principal executive offices in Manhattan, New York, except for reasonably required travel on the Company's business. 4. Compensation and Related Matters. -------------------------------- (a) BASE SALARY. As compensation for the performance by the Executive of his obligations hereunder, during the Employment Period, the Company shall pay the Executive a base salary at the rate of $200,000 per annum ("BASE SALARY"). Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. Base Salary may be increased from time to time in accordance with the normal business practices of the Company and, if so increased, shall not thereafter during the Employment Period be decreased. (b) BONUSES. During the Employment Period, the Executive shall be eligible to receive such semi-annual bonuses as may be awarded to him as the Board of Directors (the "BOARD") of the Company or the Compensation Committee of the Board shall determine, or if an incentive plan is adopted by the Company or a subsidiary thereof, in accordance with the terms of such plan. (c) EXPENSES. The Company shall promptly reimburse the Executive for all reasonable business expenses incurred during the Employment Period by the Executive in performing services hereunder, including all expenses of travel and living expenses while traveling on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (d) OTHER BENEFITS. The Executive shall be entitled to participate in all of the employee benefit plans and arrangements currently maintained by the Company or a subsidiary thereof, in accordance with the terms of such plans and arrangements, and shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company or a subsidiary thereof in the future to its executives and key management employees (including without limitation each incentive plan, pension and retirement plan and arrangement, supplemental pension and retirement plan and arrangement, stock option plan, life insurance and health-and-accident plan and arrangement, medical insurance plan, disability plan, survivor income plan, relocation plan and vacation plan), subject to and on a basis consistent with 2 the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future (including subsection (e) of this Section 4) shall be deemed to be in lieu of the salary payable to the Executive pursuant to subsection (a) of this Section 4. (e) LIFE INSURANCE. During the Employment Period, the Company shall obtain and maintain a term life insurance policy on and for the benefit of the Executive, including paying all premiums for the policy that come due within the Employment Period. The policy shall have a death benefit amount of not less than $2 million payable to the beneficiary or beneficiaries designated by the Executive. The policy shall be in addition to any coverage the Executive has under any group life insurance plan maintained by the Company or a subsidiary thereof. (f) VACATION. The Executive shall be entitled to 25 vacation days in each calendar year; PROVIDED, HOWEVER, that vacation not taken shall not accrue from year-to-year or be compensated for at the end of the Employment Period. The Executive shall also be entitled to all paid holidays given by the Company to its executives. (g) SERVICES FURNISHED. During the Employment Period, the Company shall furnish the Executive with office space, stenographic assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. 5. OFFICES. Subject to Section 3 hereof, the Executive agrees to serve without additional compensation, if elected or appointed thereto, as a director of the Company or any subsidiaries of the Company and as a member of any committees of the board of directors of any such corporations, and in one or more executive positions of any of the Company's subsidiaries, provided that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided to any other director of the Company or any of its subsidiaries, or any such executive position, as the case may be. 6. TERMINATION. The Executive's employment hereunder (and the Employment Period) may be terminated without any breach of this Agreement only under the circumstances set forth in the following subsections (a), (b), (c) and (d). (a) DEATH. The Executive's employment hereunder (and the Employment Period) shall terminate upon his death. (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of his duties hereunder for the entire period of six consecutive months, and within thirty (30) days after written Notice of Termination (as defined in Section 7 hereof) is given shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder (and the Employment Period) for "DISABILITY." 3 (c) CAUSE. The Company may terminate the Executive's employment hereunder (and the Employment Period) for Cause. For purposes of this Agreement, the Company shall have "CAUSE" to terminate the Executive's employment hereunder upon the occurrence of any of the following events: (i) the conviction of the Executive for the commission of a felony; or (ii) the willful and continuing failure by the Executive to substantially perform his duties hereunder (other than such failure resulting from the Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company in writing that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (iii) the willful misconduct by the Executive (including, but not limited to, breach by the Executive of the provisions of Section 10 hereof) that is demonstrably and materially injurious to the Company or its subsidiaries, whether monetarily or otherwise. For purposes of this Section 6(c), no act or failure to act on the Executive's part shall be considered "WILLFUL" unless done or failed to be done by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. (d) GOOD REASON. The Executive may terminate his employment hereunder (and the Employment Period) during the Contract Term hereunder for "GOOD REASON" after the occurrence, without the written consent of the Executive, of an event constituting a material breach of this Agreement by the Company that has not been fully cured within ten (10) days after written notice thereof has been given by the Executive to the Company, provided that, without limiting the generality of the foregoing, on and after a Change in Control, any one of the following events shall be deemed a material breach of this Agreement: (i) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control, including, without limitation, if the Executive was, immediately prior to the Change in Control, an executive officer of a public company, the Executive ceasing to be an executive officer of a public company, or being required to report to anyone other than the Chairman, President and Chief Executive Officer; (ii) a reduction by the Company in the Executive's Base Salary as in effect immediately prior to the Change in Control; 4 (iii) the relocation of the Executive's principal place of employment to a location outside of Manhattan, New York; (iv) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within fifteen (15) days of the date such compensation is due; (v) the failure by the Company to provide the Executive with compensation plans which, in the aggregate, provide the Executive with substantially comparable compensation opportunities to those compensation opportunities for which the Executive was eligible immediately prior to the Change in Control; (vi) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material perquisite or other fringe benefit, or secretarial service and office space at the level, enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled under this Agreement; (vii) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(a) or that does not comply with Section 6(c), if applicable (and for purposes of this Agreement, no such purported termination shall be effective); or (viii) the failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 12(a) hereof. The Executive's right to terminate his employment hereunder for Good Reason shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) CHANGE IN CONTROL. A "CHANGE IN CONTROL" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) or (C) of paragraph (iii) below; or 5 (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Commencement Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the Commencement Date or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a re-capitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the combined voting power of the Company's then outstanding securities, or (C) a merger or consolidation which would result in any individual, entity or group which includes, is affiliated with or is wholly or partly controlled by the individual who, as of the Commencement Date, is the Chief Executive Officer of the Company (the "Chief Executive Officer") being the Beneficial Owner of at least 50% of the combined voting power of the voting securities of the Company, the entity surviving such merger of consolidation or any parent thereof outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 50% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. 6 For purposes of this Section 6(e) and Section 8(e) hereof, "Person" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any individual, entity or group which includes, is affiliated with or is wholly or party controlled by the Chief Executive Officer. 7. Termination Procedure. --------------------- (a) NOTICE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (b) DATE OF TERMINATION. "DATE OF TERMINATION" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated for Disability pursuant to Section 6(b), thirty (30) days after Notice of Termination (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period), (iii) if the Executive's employment is terminated for Cause pursuant to Section 6(c), the date specified in the Notice of Termination, which shall not be earlier than the date of the Notice of Termination, and (iv) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within 60 days) set forth in such Notice of Termination; PROVIDED, HOWEVER, that if a purported termination occurs on or after a Change in Control and during the Contract Term and either party notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); PROVIDED FURTHER, HOWEVER, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. (c) COMPENSATION DURING DISPUTE. If a purported termination occurs on or after a Change in Control and during the Contract Term, and such termination is disputed in accordance with subsection (b) of this Section 7, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice 7 giving rise to the dispute was given, until the Date of Termination, determined in accordance with subsection (b) of this Section 7. Amounts paid under this Section 7(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 8. Compensation upon Termination or During Disability. -------------------------------------------------- (a) DISABILITY; DEATH. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("DISABILITY PERIOD"), the Executive shall continue to receive his full Base Salary at the rate in effect at the beginning of such period and continue as a participant in all compensation and employee benefit plans in which the Executive was participating pursuant to Sections 4(f) and 4(g) until his employment is terminated pursuant to Section 6(b) and shall continue to receive such Base Salary for a period of six months thereafter. Subsequent to the six-month period following termination of the Executive's employment pursuant to Section 6(b), or in the event the Executive's employment is terminated by reason of his death, the Company shall have no further obligations to the Executive under this Agreement and the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (b) BY COMPANY WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON. If during the Contract Term the Executive's employment is terminated by the Company other than for Cause or Disability or by the Executive for Good Reason, then -- (i) in addition to any amounts due the Executive pursuant to Sections 4(a), 4(b) or 4(c) hereof, the Company shall continue to pay to the Executive (or his legal representatives or estate) his Base Salary (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination) for the remainder of the Contract Term or, if greater, for one year; PROVIDED, HOWEVER that if such termination occurs on or after a Change in Control, then the Company shall, within five (5) days following the Date of Termination, pay to the Executive, in an undiscounted cash lump sum, an amount equal to two (2) times the sum of Base Salary (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination) and the highest bonus (annualized if paid for less than a full year) awarded in respect of any bonus period falling entirely within the twenty-four month period preceding the Change in Control or the Date of Termination, whichever resulting bonus is greater, provided that, solely for purposes of this Section 8(b)(i), such annualized bonus shall not be less than $300,000; and (ii) the Company or a subsidiary thereof shall maintain in full force and effect, for the continued benefit of the Executive and his dependents for the remainder of the Contract Term or, if greater, for one year or, if such termination occurs on or after a Change in Control, for the greater of two years or the Contract Term, all medical, dental and life insurance benefit plans and programs in which the Executive was entitled to participate immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of 8 such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive and his dependents with benefits substantially similar to those which the Executive and his dependents would otherwise have been entitled to receive under such plans and programs from which their continued participation is barred; and (iii) the Executive shall be deemed to continue as an employee of the Company during the remainder of the Contract Term for purposes of the exercise and/or vesting of outstanding stock and stock option awards and cash incentive awards. (c) BY COMPANY FOR CAUSE OR BY THE EXECUTIVE OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated by the Company for Cause or by the Executive other than for Good Reason, then the Company shall pay the Executive his Base Salary (at the rate in effect at the time Notice of Termination is given) through the Date of Termination, and the Company shall have no additional obligations to the Executive under this Agreement except as set forth in subsection (d) of this Section 8. (d) COMPENSATION PLANS. Following any termination of the Executive's employment, the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due. (e) Payment Limitation. ------------------ (i) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement (the "SEVERANCE PAYMENTS") or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "TOTAL PAYMENTS") would be subject (in whole or part), to the excise tax (the "EXCISE TAX") imposed under section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then, after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement, the cash Severance Payments shall first be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income and employment taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income and employment taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments); PROVIDED, HOWEVER, that the Executive may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. 9 (ii) For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (a) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (b) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel ("TAX COUNSEL") reasonably acceptable to the Executive and selected by the accounting firm (the "AUDITOR") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in section 280G(b)(3) of the Code and the regulations promulgated thereunder) allocable to such reasonable compensation, and (c) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (iii) At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the proper application of subsection (i) of this Section 8(e). 9. MITIGATION. The Executive shall not be required to mitigate the amount of any payment provided for the Executive by seeking other employment or otherwise, nor, except as is hereinafter specifically provided in this Section 9, shall the amount of any payment or benefit provided for the Executive hereunder be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise. If the Executive's employment is terminated prior to a Change in Control, then to the extent that the Executive, during the relevant period described in Section 8(b)(i) hereof, shall receive base salary from a subsequent employer, the payments to be provided under the provisions of said Section shall be correspondingly reduced. To the extent that the Executive, during the relevant period described in Section 8(b)(ii) hereof, shall receive from a subsequent employer benefits similar to those to be provided under Section 8(b)(ii), the benefits to be provided under the provisions of said Section shall be correspondingly reduced. 10 10. Confidential Information; Noncompetition Requirement. ---------------------------------------------------- (a) CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets and confidential information relating to the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Company and which shall not have been or now or hereafter have become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets or information to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 10(a). (b) NONCOMPETITION REQUIREMENT. During (1) any period that the Executive is performing services hereunder, (2) a period of six (6) months following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason (if the Company so requests, notifies and pays the Executive as provided in Section 10(c) below), (3) on or after a Change in Control, a period of six (6) months following a termination of the Executive's employment by the Executive for Good Reason, and (4) with respect to clauses (i) and (ii) of this Section 10(b), any period with respect to which the Executive is entitled to payment pursuant to Section 8(b)(i) or, if shorter, a period of one year, the Executive agrees that, without the prior written consent of the Company, he shall not, directly or indirectly, with or without pay, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, manager, investor, lender, advisor, owner, associate or in any other individual or representative capacity, (i) solicit, entice, encourage or otherwise attempt to procure or service by telephone or otherwise accounts from any customers (determined as of the Date of Termination) of the Company or a subsidiary thereof for a business that is directly competitive (a "COMPETITIVE BUSINESS") with the business in which the Company is then engaged, (ii) solicit, entice or encourage any employee (determined as of the Date of Termination) of the Company or a subsidiary thereof to terminate such employee's employment in order to work in a Competitive Business, or (iii) upon the written request of the Company, directly engage or participate in any Competitive Business unless such Competitive Business is located more than seventy-five (75) miles from the site, as of the Date of Termination, of the Company's executive offices in New York; PROVIDED, HOWEVER, that (x) trading by the Executive for his own benefit or in proprietary accounts shall not constitute a Competitive Business and (y) the Executive may engage or participate in a business which has a Competitive Business as a component or portion thereof if engaging or participating in such Competitive Business does not constitute a substantial part of the Executive's duties. 11 (c) SALARY CONTINUATION. Following a termination of the Executive's employment by the Company for Cause or by the Executive other than for Good Reason, the Company may elect, by written notice given to the Executive within 7 days of such notice of termination, to require the Executive to perform the covenant provided in subsection (b)(iii) of this Section 10 during the six-month period following the effectiveness of such termination. As additional consideration for the Executive's performance of such covenant during such period, but only for so long as the Executive shall continue to perform such covenant, the Company shall pay the Executive for each month during such six-month period an amount equal to one-twelfth (1/12th) of the Executive's Base Salary. It is agreed and understood that such payment constitutes full and fair consideration to the Executive for observance of such covenant. (d) INJUNCTIVE RELIEF. In the event of a breach or threatened breach of subsections (a), (b) or (c) of this Section 10, the Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. 11. INDEMNIFICATION; LEGAL FEES. The Company shall indemnify the Executive to the full extent permitted by law for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of his duties hereunder. The Company shall also (a) if the Date of Termination occurs prior to a Change in Control, reimburse the Executive for any reasonable legal fees and expenses incurred by the Executive in contesting or disputing any termination of the Executive's employment hereunder or in seeking to obtain or enforce any right or benefit provided by this Agreement, but only if the Executive shall substantially prevail with respect to the preponderance of the matters at issue and (b) if the Date of Termination occurs following a Change in Control, pay as incurred all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of his employment, in seeking in good faith to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. The payments under clause (a) above shall be made within five (5) days after the Executive's request for payment accompanied with such evidence of his having prevailed (as described in the preceding sentence) and such evidence of the fees and expenses incurred as the Company may reasonably require; the payments under clause (b) shall be made within five (5) business days after delivery of the Executive's written request for payments accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 11. 12. Successors; Binding Agreement. ----------------------------- (a) COMPANY'S SUCCESSORS. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation 12 from the Company in the same amount and on the same terms as he would be entitled to hereunder if the Company had terminated his employment other than for Cause, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "COMPANY" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 13. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Steven R. Vigliotti 27 Mora Ct. Manhasset, NY 11030 With a copy to the Executive at the offices of the Company; and If to the Company: (until February 28, 2003): Maxcor Financial Group Inc. One New York Plaza, 16th Floor New York, New York 10292 Attn: Chairman (from and after March 1, 2003): Maxcor Financial Group Inc. One Seaport Plaza, 19th Floor New York, New York 10038 Attn: Chairman 13 or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 14. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and an authorized officer of the Company (other than the Executive). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be binding on all successors to the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company and the Executive under this Section 14 and Sections 7, 8, 9, 10, 11 and 12 hereof shall survive the expiration of the term of or the termination of this Agreement. The compensation and benefits payable to the Executive under this Agreement shall be in lieu of any other severance benefits to which the Executive may otherwise be entitled upon his termination of employment under any severance plan, program, policy or arrangement of the Company. 15. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein, including, but not limited to, the 1998 Agreement, is hereby terminated and cancelled. 14 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. MAXCOR FINANCIAL GROUP INC. By: /s/ GILBERT D. SCHARF ------------------------------------- Name: Gilbert D. Scharf Title: Chief Executive Officer /s/ Steven R. Vigliotti ------------------------------------- Steven R. Vigliotti ("Executive") (for purposes of agreeing to the termination of the 1998 Agreement): EURO BROKERS INC. By: /s/ GILBERT D. SCHARF --------------------------------- Name: Gilbert D. Scharf Title: Chief Executive Officer 15 EX-10.13 9 ex10_13.txt EXHIBIT 10.13 Exhibit 10.13 ------------- [Letterhead of Euro Brokers Finacor Limited] PRIVATE AND CONFIDENTIAL - ------------------------ Mr R. Clark 1 Ottley Place Margaretting Essex CM4 9QE Ref: LF/I/P/L/RAC011002 1 October 2002 Dear Robin, I refer to your contract of employment dated 1 October 2000 (the "Contract") and write to confirm our agreement to a variation of the terms of the Contract as follows: With immediate effect, the minimum term under Clause 2.1 of the Contract shall be extended until 30 September 2006 ("the Minimum Term") so that the Contract may be terminated by either party giving six months notice in writing to expire at any time on or after expiry of the Minimum Term. With effect from 1 October 2002 the fixed annual salary payable to you under Clause 3.1 of your Contract was increased to (pound)400,000. The provisions of sub-clauses 2.2 and 2.3 shall be deleted in their entirety and replaced with the following wording: 2.2 Provided always that in the event of the Company suffering a Change of Control you shall, with effect from the effective date of such Change of Control, be entitled if the Company does not at such time make provision to assign this Agreement to another Group Company that is still controlled by Maxcor Financial Group Inc. ("Maxcor"), at any time thereafter to terminate this Agreement by giving to the Company four months notice in writing. For the avoidance of doubt, any Change of Control shall not in any way affect the relevant notice the Company may be required to give to you in order to terminate this Agreement. 2.3 For the purposes of this clause "Change of Control" means the acquisition by any person (or any combination thereof acting together) of the power to secure directly whether by contract, voting rights or otherwise that the affairs of the Company are conducted in accordance with the wishes of that person, such person being a person who did not previously have control and is not a subsidiary of either of the Company or Maxcor. For the avoidance of doubt, an indirect change of control of the Company through a Change of Control of Maxcor shall not be deemed a Change of Control of the Company hereunder." For the avoidance of doubt, all other terms shall remain in full force and effect. THIS CONSTITUTES A VARIATION OF YOUR CONTRACT OF EMPLOYMENT. Accordingly, please confirm your agreement to this amendment by signing and returning the enclosed copy of this letter to personnel, as soon as possible. Yours sincerely, /s/ WILLIAM PASK - ----------------------------- William Pask Finance Director I hereby agree to the above variation to the terms and conditions of my employment. Signed /s/ ROBIN CLARK Date 10/10/02 ---------------------------------- ------------------------------ EX-10.14 10 ex10_14.txt EXHIBIT 10.14 Exhibit 10.14 ------------- CHANGE IN CONTROL SEVERANCE AGREEMENT by and between MAXCOR FINANCIAL GROUP INC. and Robin Adrian Clark TABLE OF CONTENTS ----------------- SECTION PAGE - ------- ---- 1. Term.................................................................1 2. Definitions..........................................................2 (a) Disability.....................................................2 (b) Cause..........................................................2 (c) Good Reason....................................................2 (d) Change in Control..............................................4 3. Compensation upon Termination or During Disability...................5 (a) By the Venture without Cause or by the Executive for Good Reason................................................5 4. Mitigation...........................................................6 5. Confidential Information; Noncompetition Requirement.................6 (a) Confidential Information.......................................6 (b) Noncompetition Requirement.....................................6 (c) Salary and Bonus Continuation..................................7 (d) Injunctive Relief..............................................7 6. Indemnification; Legal Fees..........................................7 7. Successors; Binding Agreement........................................8 (a) Company's Successors...........................................8 (b) Executive's Successors.........................................8 8. Notice...............................................................8 9. Governing Law and Exclusive Jurisdiction.............................9 10. Miscellaneous........................................................9 11. Validity.............................................................9 12. Counterparts........................................................10 13. Entire Agreement....................................................10 i CHANGE IN CONTROL SEVERANCE AGREEMENT CHANGE IN CONTROL SEVERANCE AGREEMENT, dated as of October 1, 2002 (this "Agreement"), by and between Robin Adrian Clark (the "Executive") and Maxcor Financial Group Inc., a Delaware corporation (the "Company"). WHEREAS, the Company currently indirectly owns one hundred percent of Euro Brokers Holdings Limited ("EBHL"), which, in turn, currently directly owns fifty percent of Euro Brokers Finacor Limited (the "Venture"); WHEREAS, the Executive is currently employed by the Venture and furnishes services to the Venture as Joint Managing Director of the Venture pursuant to the terms of an employment agreement with the Venture made as of October 1, 2000 (the "UK 2000 Agreement"); WHEREAS, the Executive additionally serves as Chief Executive Officer of EBHL and as a director of the Company and, in view of his responsibility for managing the Company's London operations, is currently deemed to be an executive officer of the Company; WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; and WHEREAS, concurrently with the execution of this Agreement and in consideration of the benefits he is receiving hereunder, the Executive is executing an amendment to the UK 2000 Agreement that, among other things, extends the term thereof and modifies a change of control provision contained therein (the "UK 2000 Agreement, as so amended, the "UK Agreement"); NOW, THEREFORE, in consideration of the premises and the mutual agreements set forth below, the parties hereby agree as follows: 1. TERM The term of this Agreement (the "Term") shall commence on the date first written above (the "Commencement Date"), and shall continue in effect through October 1, 2006 or, if shorter or longer, the term of employment of the Executive pursuant to the UK Agreement. 1 2. Definitions ----------- (a) DISABILITY Disability shall be deemed the reason for the termination by EBHL or the Venture of the Executive's employment if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of his duties with EBHL or the Venture for the entire period of six consecutive months, and within thirty (30) days after written notice of termination is given shall not have returned to the performance of his duties with EBHL or the Venture on a full-time basis. (b) CAUSE For purposes of this Agreement, EBHL or the Venture shall be deemed to have terminated the Executive's employment for "Cause" if EBHL or the Venture terminates his employment following any of the following events: (i) the conviction of the Executive for the commission of a felony; or (ii) the willful and continuing failure by the Executive to substantially perform his duties with EBHL or the Venture (other than such failure resulting from the Executive's incapacity due to physical or mental illness or subsequent to the issuance of a written notice of termination by the Executive for Good Reason) after demand for substantial performance is delivered by EBHL or the Venture in writing that specifically identifies the manner in which EBHL or the Venture believes the Executive has not substantially performed his duties; or (iii) the willful misconduct by the Executive (including, but not limited to, breach by the Executive of the confidentiality or non-competition provisions of the UK Agreement) that is demonstrably and materially injurious to EBHL, the Venture or the Company or its other subsidiaries, whether monetarily or otherwise. For purposes of this Section 2(b), no act or failure to act on the Executive's part shall be considered "willful" unless done or failed to be done by the Executive in bad faith and without reasonable belief that the Executive's action or omission was in the best interest of EBHL, the Venture or the Company. (c) GOOD REASON For purposes of this Agreement, the Executive shall be deemed to have terminated his employment for "Good Reason" if the Executive terminates his employment with the Venture following any of the following events that occur following a Change in Control and without the written consent of the Executive and that has not been fully cured within ten (10) days after written notice thereof has been given by the Executive to the Venture and the Company: (i) the assignment to the Executive of any duties inconsistent with the Executive's status as Joint Managing Director of Venture or a substantial adverse alteration in the nature of the Executive's responsibilities from those in effect immediately prior to the Change in Control, including, without limitation, the Executive being required to report to anyone other than the Board of Directors of the Venture and/or EBHL, or the Board or Chairman of the Company; 2 (ii) a reduction by the Venture in the Executive's base salary as in effect immediately prior to the Change in Control; (iii) the relocation of the Executive's principal place of employment to a location outside of London, England; (iv) the failure by the Venture to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Venture within fifteen (15) days of the date such compensation is due; (v) the failure by the Venture or the Company to provide the Executive with compensation plans which, in the aggregate, provides the Executive with substantially comparable compensation opportunities to those compensation opportunities for which the Executive was eligible immediately prior to the Change in Control; (vi) the failure by the Venture to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Venture's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating at the time of the Change in Control, the taking of any action by the Venture which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material perquisite or other fringe benefit, or secretarial service and office space at the level, enjoyed by the Executive at the time of the Change in Control; (vii) any material breach by the Venture of the UK Agreement, including, but not limited to, a purported termination of the Executive's employment thereunder which is not effected in accordance with the terms thereof (and, for purposes of this Agreement, no such purported termination shall be effective); or (viii) the failure of a successor to the Company to expressly assume and agree to perform this Agreement pursuant to Section 7(a) hereof. The Executive's right hereunder to have his termination of employment deemed to be for Good Reason shall not be affected by his incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For the avoidance of doubt, a termination by the Executive of his employment pursuant to Clause 2.2 of the UK Agreement upon a change of control (as defined in Clause 2.3 of the UK Agreement) of the Venture (an "Early Termination") shall not be deemed to be a termination for Good Reason. 3 (d) CHANGE IN CONTROL A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) or (C) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the Commencement Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the Commencement Date or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a re-capitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company) representing 50% or more of the combined voting power of the Company's then outstanding securities, or (C) a merger or consolidation which would result in any individual, entity or group which includes, is affiliated with or is wholly or partly controlled by the Chief Executive Officer of the Company (the "Chief Executive Officer") being the Beneficial Owner of at least 50% of the combined voting power of the voting securities of the Company, the entity surviving such merger of consolidation or any parent thereof outstanding immediately after such merger or consolidation; or 4 (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 50% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. For purposes of this Section 2(d), "Person" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries or affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any individual, entity or group which includes, is affiliated with or is wholly or party controlled by the Chief Executive Officer of the Company. 3. Compensation upon Termination or During Disability. -------------------------------------------------- (a) BY THE VENTURE WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON If during the Term and following a Change in Control the Executive's employment is terminated by the Venture other than for Cause or Disability or by the Executive for Good Reason, then -- (i) the Company shall, within five (5) days following the date of termination, pay or cause to be paid to the Executive, in an undiscounted cash lump sum, an amount equal to two (2) times the sum of base salary (at the rate in effect immediately prior to the occurrence of the circumstance giving rise to the notice of termination) and the highest bonus (annualized if paid for less than a full year) awarded in respect of any bonus period falling entirely within the twenty-four month period preceding the Change in Control or the date of termination of the Executive's employment, whichever resulting bonus is greater, provided that, solely for purposes of this Section 3(a)(i), such annualized bonus shall not be less than (pound)350,000; and (ii) the Company or a subsidiary thereof shall maintain in full force and effect, for the continued benefit of the Executive and his dependents for the greater of two years or the remainder of the Term, all medical, dental and life insurance benefit plans and programs in which the Executive was entitled to participate immediately prior to the date of termination, provided that the Executive's continued 5 participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall arrange to provide the Executive and his dependents with benefits substantially similar to those which the Executive and his dependents would otherwise have been entitled to receive under such plans and programs from which their continued participation is barred; and (iii) the Executive shall be deemed to continue as an employee of the Venture during the remainder of the Term for purposes of the exercise and/or vesting of outstanding stock and stock option awards and cash incentive awards of the Company. 4. MITIGATION The Executive shall not be required to mitigate the amount of any payment provided for the Executive by seeking other employment or otherwise, nor, except as is hereinafter specifically provided in this Section 4, shall the amount of any payment or benefit provided for the Executive hereunder be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or the Venture or otherwise. To the extent that the Executive, during the relevant period described in Section 3(a)(ii) hereof, shall receive from a subsequent employer benefits similar to those to be provided under Section 3(a)(ii), the benefits to be provided under the provisions of said Section shall be correspondingly reduced. 5. Confidential Information; Noncompetition Requirement. ---------------------------------------------------- (a) CONFIDENTIAL INFORMATION The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets and confidential information relating to the Venture, EBHL, the Company and its businesses, which shall have been obtained by the Executive during the Executive's employment by the Venture or EBHL and which shall not have been or now or hereafter have become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). The Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such trade secrets or information to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 5(a). (b) NONCOMPETITION REQUIREMENT During (1) the Term, (2) a period of six (6) months following a termination of the Executive's employment by the Venture for Cause or by the Executive other than either for Good Reason or pursuant to an Early Termination (if the Company so requests, notifies and pays or causes to be paid the Executive as provided in Section 5(c) below) and (3) on or after a Change in Control, a period of six (6) months following a termination of the Executive's employment by the Executive for Good Reason, the Executive agrees that, without the prior written consent of the Company, he shall not, directly or indirectly, with or without pay, either as an employee, 6 employer, consultant, agent, principal, partner, stockholder, corporate officer, director, manager, investor, lender, advisor, owner, associate or in any other individual or representative capacity, (i) solicit, entice, encourage or otherwise attempt to procure or service by telephone or otherwise accounts from any customers (determined as of the date of termination) of the Venture or EBHL that is directly competitive (a "Competitive Business") with the business in which the Venture, EBHL or the Company is then engaged (the "Business"), (ii) solicit, entice or encourage any employee (determined as of the date of termination) of the Venture, EBHL or the Company or another subsidiary thereof to terminate such employee's employment in order to work in a Competitive Business, or (iii) upon the written request of the Company, directly engage or participate in any Competitive Business located in London, New York, Geneva or Tokyo; provided, however, that (x) trading by the Executive for his own benefit or in proprietary accounts shall not constitute a Competitive Business and (y) the Executive may engage or participate in a business which has a Competitive Business as a component or portion thereof if the Executive is segregated from and otherwise entirely walled away from engaging or participating in such Competitive Business. (c) SALARY AND BONUS CONTINUATION Following a termination of the Executive's employment by the Venture for Cause or by the Executive other than either for Good Reason or pursuant to an Early Termination, the Company may elect, by written notice given to the Executive within 7 days of such notice of termination, to require the Executive to perform the covenants provided in subsection (b) of this Section 5 during the six-month period following the effectiveness of such termination. As additional consideration for the Executive's performance of such covenants during such period, but only for so long as the Executive shall continue to perform such covenants, the Company shall pay or cause to be paid the Executive for each month during such six-month period an amount equal to one-twelfth (1/12th) of the Executive's base salary with the Venture immediately prior to such termination. It is agreed and understood that such payment, together with the other benefits under this Agreement, constitutes full and fair consideration to the Executive for observance of such covenants. (d) INJUNCTIVE RELIEF In the event of a breach or threatened breach of subsections (a), (b) or (c) of this Section 5, the Executive agrees that the Venture and the Company shall each be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, the Executive acknowledging that damages would be inadequate and insufficient. 6. INDEMNIFICATION; LEGAL FEES The Company shall pay as incurred all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of his employment or in seeking in good faith to obtain or enforce any right or benefit provided by this Agreement. Such payments shall be made within five (5) business days after delivery of the Executive's written request for payments accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. Any termination of the Executive's employment with the Venture or of this Agreement shall have no effect on the continuing operation of this Section 6. 7 7. Successors; Binding Agreement. ----------------------------- (a) COMPANY'S SUCCESSORS The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if the Venture had terminated his employment other than for Cause. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 8. NOTICE For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Robin Adrian Clark 1 Ottley Place Margaretting Essex CM4 9QE With a copy to the Executive in care of the offices of the Venture. If to the Venture: Euro Brokers Finacor Limited 133 Houndsditch London EC3A 7AJ 8 If to the Company: Maxcor Financial Group Inc. One New York Plaza, 16th Floor New York, New York 10292 Attn: Chairman or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9. GOVERNING LAW AND EXCLUSIVE JURISDICTION THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CONFLICTS OF LAW PRINCIPLES. With respect to any claims, disputes or controversies arising from or related to this Agreement, including, but not limited to, the negotiation, interpretation, performance, termination or breach hereof, each of the parties hereto hereby submits to the exclusive jurisdiction of the courts of New York State in and for New York County and/or any Federal court held therein. Each party hereby irrevocably consents to the exercise of personal jurisdiction over such party by such courts, agrees that venue shall be proper in such courts and irrevocably waives and releases any and all defenses in such courts based on lack of personal jurisdiction, improper venue and/or forum non conveniens. 10. MISCELLANEOUS No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and an authorized officer of the Company (other than the Executive). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be binding on all successors to the Company. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company and the Executive under this Section 10 and Sections 3, 4, 5, 6, 7 and 9 hereof shall survive the expiration of the term of or the termination of this Agreement. The compensation and benefits payable to the Executive under this Agreement shall be in lieu of any other severance benefits to which the Executive may otherwise be entitled upon his termination of employment under any severance plan, program, policy or arrangement of the Company. 11. VALIDITY The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9 12. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. ENTIRE AGREEMENT This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. 10 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. MAXCOR FINANCIAL GROUP INC. By: /s/ GILBERT D. SCHARF ------------------------------------- Name: Gilbert D. Scharf Title: Chief Executive Officer /s/ ROBIN ADRIAN CLARK ------------------------------------- Robin Adrian Clark 11 EX-21 11 ex21.txt EXHIBIT 21 Exhibit 21 ---------- MAXCOR FINANCIAL GROUP INC. SUBSIDIARIES OF THE REGISTRANT JURISDICTION SUBSIDIARY OF INCORPORATION - ------------------------------------------ -------------------- Active - ------ EURO BROKERS INVESTMENT CORPORATION DELAWARE EURO BROKERS HOLDINGS, INC. NEW YORK EURO BROKERS INC. NEW YORK MAXCOR FINANCIAL INC. NEW YORK MAXCOR FINANCIAL ASSET MANAGEMENT INC. DELAWARE MAXCOR FINANCIAL SERVICES INC. DELAWARE MAXCOR INFORMATION INC. DELAWARE TRADESOFT TECHNOLOGIES, INC. DELAWARE E-B FUNDING CORPORATION DELAWARE EURO BROKERS TECHNOLOGY INC. DELAWARE EURO BROKERS HOLDINGS LTD. ENGLAND EURO BROKERS LTD. ENGLAND EURO BROKERS SERVICES LTD. ENGLAND EURO BROKERS MEXICO, S.A. de C.V. MEXICO EURO BROKERS (SWITZERLAND) S.A. SWITZERLAND Inactive - -------- EURO BROKERS FINANCIAL SERVICES LTD. ENGLAND EURO BROKERS TOKYO INC. DELAWARE EURO BROKERS CANADA, LTD. CANADA MAXCOR MORTGAGE CORPORATION DELAWARE EX-23 12 ex-23.txt EXHIBIT 23 Exhibit 23 ---------- [Letterhead of PricewaterhouseCoopers LLP] CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-74164) and on Form S-8 (No. 333-67752) of Maxcor Financial Group Inc. of our report dated March 21, 2003 relating to the consolidated financial statements of Maxcor Financial Group Inc., which appears in Maxcor Financial Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002. /s/ PricewaterhouseCoopers LLP New York, NY March 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----