10-Q 1 maxcor_10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2003 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 incorporation or organization) Identification Number) One Seaport Plaza - 19th Floor New York, New York 10038 --------------------------------------- (Address of principal executive office) (646) 346-7000 ---------------------------- (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares of common stock, par value $.001 per share, of the registrant outstanding as of November 12, 2003 was 7,021,350. The Exhibit Index is on Page 29. Page 1 of 32 Pages MAXCOR FINANCIAL GROUP INC. INDEX ----- Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): 3 Consolidated Statements of Financial Condition 4 Consolidated Statements of Operations 5 Consolidated Statements of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to the Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 Item 4. Controls and Procedures 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 Exhibit Index 29 Page 2 of 32 Pages PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- SEPTEMBER 30, 2003 ------------------ (Unaudited) Page 3 of 32 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ---------------------------------------------- (Unaudited)
ASSETS September 30, 2003 December 31, 2002 ------ ------------------ ------------------ Cash and cash equivalents $ 63,054,085 $ 52,781,616 Securities purchased under agreements to resell 455,261,625 Deposits with clearing organizations 6,738,882 6,318,529 Receivable from broker-dealers and customers 27,290,651 19,523,426 Securities failed-to-deliver 51,322,326 Securities held at clearing firms and trading contracts 38,023,726 29,526,028 Prepaid expenses and other assets 5,677,997 4,085,934 Deferred tax asset 488,472 364,419 Fixed assets 12,683,627 10,878,007 ------------------ ------------------ Total assets $ 660,541,391 $ 123,477,959 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities: Securities sold under agreements to repurchase $ 458,459,000 $ Payable to broker-dealers and customers 33,775,615 17,337,560 Securities failed-to-receive 50,537,592 Securities sold, not yet purchased and trading contracts 144,153 Accounts payable and accrued liabilities 22,198,209 24,168,384 Accrued compensation payable 19,810,273 26,875,249 Income taxes payable 1,742,920 543,897 Deferred taxes payable 5,297,694 566,003 Obligations under capitalized leases 723,458 842,399 Revolving credit facility 10,000,000 ------------------ ------------------ 602,544,761 70,477,645 ------------------ ------------------ Minority interest in consolidated subsidiary 5,407,228 ------------------ ------------------ Stockholders' equity: Preferred stock, $.001 par value, 1,000,000 shares authorized; none issued at September 30, 2003 and December 31, 2002 Common stock, $.001 par value, 30,000,000 shares authorized; 12,664,314 and 12,232,564 shares issued at September 30, 2003 and December 31, 2002, respectively 12,664 12,233 Additional paid-in capital 37,934,686 36,517,908 Treasury stock at cost; 5,642,964 and 4,977,404 shares of common stock held at September 30, 2003 and December 31, 2002, respectively ( 16,603,717) ( 11,208,967) Retained earnings 35,076,782 20,741,779 Accumulated other comprehensive income: Foreign translation adjustments 1,576,215 1,530,133 ------------------ ------------------ Total stockholders' equity 57,996,630 47,593,086 ------------------ ------------------ Total liabilities and stockholders' equity $ 660,541,391 $ 123,477,959 ================== ==================
The accompanying notes are an integral part of these consolidated financial statements. Page 4 of 32 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (Unaudited)
For the Three Months Ended For the Nine Months Ended ------------------------------ ------------------------------ September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Revenue: Commission income $ 44,237,822 $ 38,502,990 $ 133,519,551 $ 111,658,633 Insurance recoveries 11,106,063 645,297 11,106,063 830,985 Interest income 2,247,976 532,767 3,562,792 1,333,372 Principal transactions 1,979,315 4,656,236 1,721,983 7,101,232 Other ( 333,984) 207,402 ( 810,661) ( 356,314) ------------- ------------- ------------- ------------- Gross revenue 59,237,192 44,544,692 149,099,728 120,567,908 Interest expense on securities indebtedness 1,701,742 43,318 2,006,891 89,265 ------------- ------------- ------------- ------------- Net revenue 57,535,450 44,501,374 147,092,837 120,478,643 ------------- ------------- ------------- ------------- Costs and expenses: Compensation and related costs 31,705,605 29,081,451 93,777,318 79,841,100 Communication costs 3,357,682 3,028,810 9,536,265 8,169,949 Travel and entertainment 2,548,869 1,884,396 6,817,843 5,211,729 Occupancy and equipment rental 1,885,924 1,125,509 4,918,845 3,398,068 Clearing and execution fees 1,030,670 820,207 2,852,294 2,379,131 Depreciation and amortization 840,314 649,737 2,420,460 1,759,590 Other interest expense 67,892 49,936 300,391 105,277 Charity Day contributions 982,300 1,219,233 Costs related to World Trade Center attacks 358,300 876,342 General, administrative and other expenses 1,505,925 1,379,568 5,249,478 3,814,363 ------------- ------------- ------------- ------------- 42,942,881 38,377,914 126,855,194 106,774,782 ------------- ------------- ------------- ------------- Income before provision for income taxes, minority interest and extraordinary item 14,592,569 6,123,460 20,237,643 13,703,861 Provision for income taxes 6,144,263 2,507,685 8,245,368 6,207,260 ------------- ------------- ------------- ------------- Income before minority interest and extraordinary item 8,448,306 3,615,775 11,992,275 7,496,601 Minority interest in income of consolidated subsidiary ( 505,574) ( 175,985) ( 909,791) ------------- ------------- ------------- ------------- Income before extraordinary item 8,448,306 3,110,201 11,816,290 6,586,810 Extraordinary gain on purchase of minority interest 2,957,547 ------------- ------------- ------------- ------------- Net income $ 8,448,306 $ 3,110,201 $ 14,773,837 $ 6,586,810 ============= ============= ============= ============= Basic earnings per share: Income before extraordinary item $ 1.23 $ .42 $ 1.70 $ .90 Extraordinary gain on purchase of minority interest .42 ------------- ------------- ------------- ------------- Net income $ 1.23 $ .42 $ 2.12 $ .90 ============= ============= ============= ============= Diluted earnings per share: Income before extraordinary item $ 1.04 $ .38 $ 1.45 $ .80 Extraordinary gain on purchase of minority interest .36 ------------- ------------- ------------- ------------- Net income $ 1.04 $ .38 $ 1.81 $ .80 ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. Page 5 of 32 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- FOR THE PERIODS ENDED DECEMBER 31, 2002 AND SEPTEMBER 30, 2003 -------------------------------------------------------------- (Unaudited)
Accumulated Additional Other Comprehensive Common Paid-in Treasury Retained Comprehensive Income Stock Capital Stock Earnings Income Total ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2001 $ 11,613 $ 33,731,266 ( $ 8,992,281) $ 8,195,155 $ 1,371,150 $ 34,316,903 Comprehensive income Net income for the year ended December 31, 2002 $ 12,546,624 12,546,624 12,546,624 Foreign translation adjustment (inclusive of income tax benefit of $148,909) 158,983 158,983 158,983 ------------ Comprehensive income $ 12,705,607 ============ Exercise of common stock purchase warrants 493 2,463,482 2,463,975 Exercise of stock options including tax benefit of $53,749 127 323,160 ( 96,525) 226,762 Acquisition of treasury stock ( 2,120,161) ( 2,120,161) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2002 12,233 36,517,908 ( 11,208,967) 20,741,779 1,530,133 47,593,086 Comprehensive income Net income for the nine months ended September 30, 2003 $ 14,773,837 14,773,837 14,773,837 Foreign translation adjustment (inclusive of income tax benefit of $7,850) 46,082 46,082 46,082 ------------ Comprehensive income $ 14,819,919 ============ Exercise of stock options including tax benefit of $395,165 431 1,416,778 ( 658,449) 758,760 Acquisition of treasury stock ( 4,736,301) ( 4,736,301) Common stock dividends ( 438,834) ( 438,834) ------------ ------------ ------------ ------------ ------------ ------------ Balance at September 30, 2003 $ 12,664 $ 37,934,686 ( $16,603,717) $ 35,076,782 $ 1,576,215 $ 57,996,630 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. Page 6 of 32 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited)
For the Nine Months Ended ------------------------------ September 30, September 30, 2003 2002 ------------- ------------- Cash flows from operating activities: Net income $ 14,773,837 $ 6,586,810 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,420,460 1,759,590 Provision for doubtful accounts ( 90,803) ( 3,170) Gain on purchase of minority interest ( 2,957,547) Minority interest in net earnings of consolidated subsidiaries 175,985 909,791 Unreimbursed losses of equity affiliates and contractual arrangements 688,056 356,770 Deferred income taxes 4,600,071 ( 163,946) Change in assets and liabilities: Increase in securities purchased under agreements to resell ( 455,261,625) (Increase) decrease in deposits with clearing organizations ( 420,353) 11,001 Increase in receivable from broker-dealers and customers ( 7,421,677) ( 6,131,223) (Increase) decrease in securities failed-to-deliver ( 51,322,326) 172,457,513 Increase in securities owned, held at clearing firm ( 8,495,202) ( 17,972,030) Increase in prepaid expenses and other assets ( 1,507,943) ( 283,438) Increase in securities sold under agreements to repurchase 458,459,000 Increase in payable to broker-dealer 16,438,055 12,971,763 (Decrease) increase in securities sold, not yet purchased ( 144,153) 2,349,821 Increase (decrease) in securities failed-to-receive 50,537,592 ( 171,149,392) Decrease in accounts payable and accrued liabilities ( 3,518,027) ( 1,304,639) Decrease in accrued compensation payable ( 7,359,782) ( 3,864,037) Increase in income taxes payable 1,565,378 1,519,683 ------------- ------------- Net cash provided by (used in) operating activities 11,158,996 ( 1,949,133) ------------- ------------- Cash flows from investing activities: Purchase of fixed assets ( 8,757,387) ( 3,849,391) Purchase of minority interest ( 2,613,156) Proceeds from asset sales under sale-leaseback transactions 5,220,658 ------------- ------------- Net cash used in investing activities ( 6,149,885) ( 3,849,391) ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. Page 7 of 32 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited) (Continued)
For the Nine Months Ended ------------------------------ September 30, September 30, 2003 2002 ------------- ------------- Cash flows from financing activities: Proceeds from the exercise of options 363,595 107,462 Proceeds from the exercise of warrants 2,463,975 Repayment of notes payable ( 447,978) Repayment of obligations under capitalized leases ( 141,754) ( 128,423) Common stock dividends ( 438,834) Borrowings under revolving credit facility 10,000,000 Acquisition of treasury stock ( 4,736,301) ( 1,178,194) ------------- ------------- Net cash provided by financing activities 5,046,706 816,842 ------------- ------------- Effect of exchange rate changes on cash 216,652 814,039 ------------- ------------- Net increase (decrease) in cash and cash equivalents 10,272,469 ( 4,167,643) Cash and cash equivalents at beginning of period 52,781,616 49,565,284 ------------- ------------- Cash and cash equivalents at end of period $ 63,054,085 $ 45,397,641 ============= ============= Supplemental disclosures of cash flow information: Interest paid $ 1,550,994 $ 139,639 Income taxes paid 2,783,115 3,985,992 Income tax benefit on option exercises 395,165 40,291 Non-cash financing activities: Capital lease obligations incurred 730,837 Receipt of shares in treasury for exercise price of stock options 658,449
The accompanying notes are an integral part of these consolidated financial statements. Page 8 of 32 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: ----------------------------------------------- Maxcor Financial Group Inc. ("MFGI") is a publicly-held financial services holding company that was incorporated in Delaware in 1994. In August 1996, MFGI acquired Euro Brokers Investment Corporation ("EBIC"), a privately held international and domestic inter-dealer broker. EBIC, incorporated in December 1986 in connection with a management buyout of predecessor operations dating to 1970, through its subsidiaries and businesses is primarily an inter-dealer broker of money market instruments, derivative products and selected securities, with principal offices in New York, London and Tokyo, other offices in Stamford (CT), Switzerland and Mexico, as well as correspondent relationships with other brokers throughout the world. Maxcor Financial Inc. ("MFI"), a U.S. registered broker-dealer subsidiary, also conducts institutional sales, trading and research operations in various fixed income and equity securities and institutional securities financing operations. The consolidated financial statements include the accounts of MFGI and its majority-owned subsidiaries and other entities over which it exercises control (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Certain reclassifications have been made to previously reported balances to conform with the current presentation. Operating results for the interim periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the audited consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 ("2002 Form 10-K"). Page 9 of 32 Pages NOTE 2 - EARNINGS PER SHARE: --------------------------- The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and nine month periods respectively ended September 30, 2003 and September 30, 2002:
Three Months Ended Nine Months Ended --------------------------------------- --------------------------------------- September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 ------------------ ------------------ ------------------ ------------------ Income before extraordinary item $ 8,448,306 $ 3,110,201 $ 11,816,290 $ 6,586,810 Extraordinary gain on purchase of minority interest 2,957,547 ------------------ ------------------ ------------------ ------------------ Net income 8,448,306 3,110,201 14,773,837 6,586,810 Weighted average common shares outstanding - basic calculations 6,889,677 7,425,138 6,964,395 7,309,591 Dilutive effect of stock options and warrants 1,264,327 843,255 1,208,220 919,670 ------------------ ------------------ ------------------ ------------------ Weighted average common shares outstanding - diluted calculations 8,154,004 8,268,393 8,172,615 8,229,261 Basic earnings per share: Income before extraordinary item $ 1.23 $ .42 $ 1.70 $ .90 Extraordinary gain on purchase of minority interest .42 ------------------ ------------------ ------------------ ------------------ Net income $ 1.23 $ .42 $ 2.12 $ .90 ================== ================== ================== ================== Diluted earnings per share: Income before extraordinary item $ 1.04 $ .38 $ 1.45 $ .80 Extraordinary gain on purchase of minority interest .36 ------------------ ------------------ ------------------ ------------------ Net income $ 1.04 $ .38 $ 1.81 $ .80 ================== ================== ================== ================== Antidilutive common stock equivalents: Options 260,000 445,000 260,000
NOTE 3 - REPURCHASE AND REVERSE REPURCHASE AGREEMENTS: ------------------------------------------------------ Transactions involving the purchase of U.S. Treasury and federal agency securities under agreements to resell (reverse repurchase agreements) and the sale of U.S. Treasury and federal agency securities under agreements to repurchase (repurchase agreements) are treated as collateralized financings and recorded at contracted amounts. These amounts are presented on a net-by-counterparty basis when the requirements of Financial Accounting Standards Board (FASB) Interpretation No. 41 are satisfied. Income and expense on these agreements are recognized as interest over the life of the transaction. The company monitors the fair value of the securities purchased and sold under these agreements daily and obtains additional collateral or returns excess collateral when appropriate. Securities received as collateral for reverse repurchase agreements are used to secure repurchase agreements. As of September 30, 2003, the fair value of securities received as collateral under reverse repurchase agreements of $1,328.2 million was repledged under repurchase agreements. Page 10 of 32 Pages NOTE 4 - STOCKHOLDERS' EQUITY: ----------------------------- Preferred stock: --------------- Pursuant to the Company's adoption of a shareholder rights plan (the "Plan") in December 1996, the Company authorized the creation of Series A Junior Participating Preferred Stock and reserved 300,000 shares thereof for issuance upon exercise of the rights that, pursuant to the Plan, were at the time dividended to holders of common stock. Common stock, options and warrants: ---------------------------------- At December 31, 2002, the Company had 7,255,160 shares of common stock outstanding and held 4,977,404 shares in treasury. In April 2003, the Board of Directors expanded by 700,000 shares the existing share repurchase program authorized in July 2001 and initially expanded in September 2001. During the nine months ended September 30, 2003, the Company repurchased 616,300 shares under this expanded program for $4,736,301. As of September 30, 2003, the remaining authorization under this expanded program was 694,193 shares. In addition, during the nine months ended September 30, 2003, the Company issued 431,750 shares pursuant to options exercised under the Company's 1996 Stock Option Plan. In connection with certain exercises, the Company received 49,260 shares into treasury as consideration for exercise prices aggregating $658,449. As a result of these activities, at September 30, 2003, the Company had 7,021,350 shares of common stock outstanding and held 5,642,964 shares in treasury. The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its option and warrant plans. Accordingly, the Company has not recognized any compensation cost associated with these instruments 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 Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123," the Company has disclosed below its estimated pro forma net income and earnings per share if compensation costs for awards issued under its option and warrant plans had been recognized using the fair value method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," with such fair value estimated using the Black-Scholes option pricing model.
Three Months Ended Nine Months Ended --------------------------------------- --------------------------------------- September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 ------------------ ------------------ ------------------ ------------------ Net income, as reported $ 8,448,306 $ 3,110,201 $ 14,773,837 $ 6,586,810 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects 306,837 247,613 663,980 563,104 ------------------ ------------------ ------------------ ------------------ Pro forma net income $ 8,141,469 $ 2,862,588 $ 14,109,857 $ 6,023,706 ================== ================== ================== ==================
Page 11 of 32 Pages NOTE 4 - STOCKHOLDERS' EQUITY (Continued): -----------------------------------------
Three Months Ended Nine Months Ended ---------------------------------------- ---------------------------------------- September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 ------------------ ------------------ ------------------ ------------------ Earnings per share: Basic, as reported $ 1.23 $ .42 $ 2.12 $ .90 Basic, pro forma $ 1.18 $ .39 $ 2.03 $ .82 Diluted, as reported $ 1.04 $ .38 $ 1.81 $ .80 Diluted, pro forma $ 1.00 $ .35 $ 1.73 $ .73
Dividends: ---------- On September 12, 2003, the Company paid its first quarterly common stock dividend of $.0625 per share to holders of record on August 29, 2003. Based upon 7,021,350 total shares outstanding on August 29, 2003, this payment totaled $438,834. In November 2003, the Board of Directors declared another quarterly common stock dividend of $.0625 per share, payable on December 16, 2003 to holders of record on November 28, 2003. NOTE 5 - PROPERTY INSURANCE RECOVERY: ------------------------------------ During the three months ended September 30, 2003, the Company settled in full its property insurance claim against Kemper Insurance Companies ("Kemper") for losses incurred for destroyed property as a result of the September 11, 2001 terrorist attacks on the World Trade Center, where the Company's headquarters were formerly located. As a result of this settlement, during the three and nine months ended September 30, 2003, the Company recognized a net gain of $11,106,063. This net gain reflected the gross insurance proceeds received of $13,868,210, less $2,762,147, representing the aggregate of the net book value of owned property destroyed in the attacks, termination costs associated with operating leases of equipment destroyed in the attacks and claim-related expenses. NOTE 6 - PURCHASE OF MINORITY INTEREST: -------------------------------------- In February 2003, the Company recognized a pre-tax and post-tax extraordinary gain of $2,957,547 on the purchase by Euro Brokers Holdings Limited ("EBHL") of the minority shareholding held by Monecor (London) Limited ("Monecor") in Euro Brokers Finacor Limited ("EBFL"), a U.K. subsidiary engaged in the brokering of interest rate derivatives and deposits. This purchase resulted from a ruling by the London Court of Appeals in February 2003 that dismissed Monecor's appeal of the May 2002 judgment of the London High Court of Justice. That judgment permitted EBHL to purchase Monecor's interest at a 30% discount to the book value attributable to this shareholding as of December 2000. Monecor's direct petition to the House of Lords for leave to appeal this ruling was subsequently denied. EBHL obtained the May 2002 judgment under the terms of the EBFL shareholders agreement as a result of Monecor's failure to provide certain requested funding to EBFL in late 2000. Upon completion of the purchase in February 2003, EBFL was renamed as Euro Brokers Limited ("EBL"). The extraordinary gain on the purchase equaled the excess of the amount recorded for Monecor's interest in EBFL of $5,570,703 over the purchase price of $2,613,156. Page 12 of 32 Pages NOTE 7 - LOSS ON NTL WHEN-ISSUED EQUITY TRADES: ---------------------------------------------- Prior to the emergence from Chapter 11 bankruptcy by NTL Inc. ("NTL") in early January 2003, MFI entered into various when-issued equity trades for the common stock of NTL. The trades involved sales with notional values of $4.1 million and purchases with notional values of $1.2 million. On January 10, 2003, NTL emerged from bankruptcy under a plan of reorganization providing for the issuance of one-fourth the number of shares previously contemplated. MFI and other participants in the when-issued trading market expected the settlement of these trades would be adjusted to reflect a one-for-four reverse stock split. A number of buyers of NTL when-issued shares, seizing upon a Nasdaq advisory issued on January 14, 2003 that Nasdaq would not cancel the when-issued trades for NTL common stock, either have retained the full, unadjusted number of shares delivered to them as a result of certain automated settlement processes or are demanding compensation for the remaining unadjusted number of shares not delivered to them if settlement was made on an adjusted basis. On January 16, 2003, MFI sought and obtained from the Bankruptcy Court handling NTL's case a temporary order that required and caused many of its when-issued trades to settle on an adjusted basis reflecting a one-for-four reverse stock split. Because the relief was temporary and not all of the trades settled on this basis, MFI has subsequently filed a suit in the Supreme Court of the State of New York, naming all of its counterparties to its NTL when-issued trades, that seeks a permanent and uniform adjusted settlement of these trades. Similar proceedings, some seeking settlement on an adjusted basis, others on an unadjusted basis, have been commenced by other parties to NTL when-issued trades against their counterparties, including MFI, in both of these Courts, as well as before NASD. In September 2003, the Bankruptcy Court abstained from further exercise of its jurisdiction in the cases before it in favor of centralizing proceedings in the New York State Supreme Court. Included in principal transactions for the nine months ended September 30, 2003 is a loss of $5.1 million recorded for the settlement of the NTL when-issued trades. This loss includes the estimated damages payable if the above proceedings conclude that all of MFI's NTL when-issued trades, other than permanently adjusted settlements by mutual agreement, should have settled on an unadjusted basis. The loss could be higher to the extent that the proceedings conclude that MFI as a purchaser of NTL when-issued shares should have settled its transactions on an adjusted basis, but, as seller of such shares, should have settled its transactions on an unadjusted basis. The loss also could be higher if such proceedings require the effect of unadjusted settlement be achieved through the payment of damages at a level higher than MFI's recorded estimate of damages potentially payable, or through the delivery of additional NTL shares at a time when their market value exceeds such damages estimate. On the other hand, the loss also could be lower in the reverse of such scenarios or to the extent that MFI prevails in the proceedings above. In addition, general, administrative and other expenses include legal fees incurred during the three and nine months ended September 30, 2003 related to this matter of $100,000 and $600,000, respectively. Page 13 of 32 Pages NOTE 8 - LOAN PAYABLE: --------------------- In March 2003, Euro Brokers Inc. ("EBI"), a U.S. subsidiary, terminated its $5 million revolving credit facility with General Electric Capital Corporation ("GECC") and entered into an agreement 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 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. The credit 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. As of September 30, 2003, EBI had $10 million outstanding under this new facility. In November 2003, this facility was amended to expand the permitted use of borrowings and to establish a fixed availability of $10 million through maturity. NOTE 9 - COMMITMENTS: -------------------- In March 2003, EBI entered into various sale-leaseback transactions for equipment and furniture under a master lease agreement with GECC. Since these leases do not meet one or more of the criteria for capital lease treatment, they are classified as operating leases and are not recorded on the Consolidated Statements of Financial Condition. The future minimum rental commitments for these leases as of September 30, 2003 including the amounts owed at the end of the initial lease terms if the underlying assets are returned, are as follows: Year 2003 $ 386,561 2004 1,546,932 2005 979,113 2006 1,009,185 ----------- $ 3,921,791 =========== NOTE 10 - TOKYO BASED VENTURE: ----------------------------- Since 1994, the Company has held an interest in a Tokyo-based derivatives brokering venture (the "Tokyo Venture") structured under Japanese law as a Tokumei Kumiai ("TK"). A TK is a contractual arrangement in which an investor invests in a business of a TK operator by making a capital contribution to the TK operator and, in return, becomes entitled to a specified percentage of the profits of the business while also becoming obligated to fund a specified percentage of the losses of the business. The Company has a 57.25% interest in the Tokyo Venture, with Nittan Capital Group Limited ("Nittan"), the TK operator, holding a 42.75% interest. Although the operations of the Tokyo Venture have always been run and managed by persons appointed by the Company, it does not operate in a legal entity separately distinguishable from Nittan, and accordingly, the Company accounts for its share of the results of operations of the Tokyo Venture in other income as non-equity income (loss) from contractual arrangement. Page 14 of 32 Pages NOTE 10 - TOKYO BASED VENTURE (Continued): ----------------------------------------- Summarized operating results of the Tokyo Venture for the three and nine month periods respectively ended September 30, 2003 and September 30, 2002, along with the Company's share of those results, are presented below:
Three Months Ended Nine Months Ended ---------------------------------------- ---------------------------------------- September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002 ------------------ ------------------ ------------------ ------------------ Revenues $ 842,539 $ 3,104,409 $ 4,166,336 $ 8,459,715 Expenses 1,520,167 3,042,535 6,292,804 9,401,988 ------------------ ------------------ ------------------ ------------------ (Loss) income ($ 677,628) $ 61,874 ($ 2,126,468) ($ 942,273) ================== ================== ================== ================== Company's share ($ 387,942) $ 35,423 ($ 1,217,403) ($ 539,451) ================== ================== ================== ==================
NOTE 11 - NET CAPITAL REQUIREMENTS: ----------------------------------- MFI, as a U.S. broker-dealer, is subject to the Uniform Net Capital Rule (rule 15c3-1) of the Securities and Exchange Commission ("SEC"), which requires the maintenance of minimum regulatory net capital. MFI has elected to use the alternative method, as permitted by the rule, which requires that MFI maintain minimum regulatory net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined; or 4% of the funds required to be segregated pursuant to the Commodity Exchange Act and regulations thereunder. MFI's membership in the Government Securities Division of the Fixed Income Clearing Corporation ("GSD-FICC"), requires it to maintain minimum excess regulatory net capital of $10,000,000 and, as a result of its recent upgrade in membership status at GSD-FICC in March 2003, combined stockholder's equity and subordinated borrowing of $25,000,000. At September 30, 2003, MFI had regulatory net capital of $46.3 million, a regulatory net capital requirement of $250,000 and combined stockholder's equity and subordinated borrowing of $55.2 million. EBL is a Type D registered firm of the Financial Services Authority ("FSA") in the U.K., required to maintain a financial resources requirement equal to six weeks' average expenditures. At September 30, 2003, EBL had financial resources in accordance with FSA's rules of (pound)3.9 million ($6.4 million) and a financial resources requirement of (pound)2.4 million ($4.0 million). NOTE 12 - SEGMENT REPORTING: --------------------------- In accordance with the requirements for interim period reporting under Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), the Company is reporting the operating revenues (commission income, principal transactions and information sales revenue) and net income (loss) attributable to its operating segments. The Company has defined its operating segments based upon geographic location. Although all segments are engaged in the brokerage business, they are managed separately to reflect their unique market, employment and regulatory environments. The reportable segments for the three and nine month periods respectively ended September 30, 2003 and September 30, 2002 as defined by SFAS 131 consist of the United States, United Kingdom and Japan. United States amounts are principally derived from the Company's New York office, but include all U.S. based operations, with operating revenues and net income for 2003 reflecting the Page 15 of 32 Pages NOTE 12 - SEGMENT REPORTING (Continued): --------------------------------------- net loss recorded on NTL when-issued equity trades (see Note 7) and net income for 2003 reflecting the gain recorded on property insurance settlement (see Note 5). United Kingdom amounts include the results for EBL, with net income for the nine months ended September 30, 2003 reflecting the extraordinary gain on the purchase of Monecor's minority interest (see Note 6), and for periods prior to the purchase, net of such minority interest. 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 did not meet the SFAS 131 materiality thresholds for the year ended December 31, 2002 and which are not expected to meet these thresholds for the year ended December 31, 2003 have been included in "All Other."
United States United Kingdom Japan All Other Total -------------- -------------- -------------- -------------- -------------- Three months ended September 30, 2003 Operating revenues $ 27,413,892 $ 17,039,422 $ $ 1,805,489 $ 46,258,803 Net income (loss) 7,992,825 553,665 ( 396,506) 298,322 8,448,306 Assets 651,363,173 27,212,654 175,521 5,698,397 684,449,745 Three months ended September 30, 2002 Operating revenues $ 26,451,290 $ 15,798,544 $ $ 1,046,327 $ 43,296,161 Net income 1,903,205 1,133,661 1,796 71,539 3,110,201 Assets 119,791,712 25,246,106 214,182 3,118,882 148,370,882 Nine months ended September 30, 2003 Operating revenues $ 78,321,235 $ 52,725,725 $ $ 4,486,236 $ 135,533,196 Net income (loss) 8,659,824 6,557,498 ( 1,210,441) 766,956 14,773,837 Nine months ended September 30, 2002 Operating revenues $ 75,920,483 $ 39,168,799 $ $ 3,807,518 $ 118,896,800 Net income (loss) 5,168,631 1,608,393 ( 609,594) 419,380 6,586,810
Included below are reconciliations of reportable segment assets to the Company's consolidated totals as reported in the Consolidated Statements of Financial Condition in this report and in the Company's Form 10-Q for the quarterly period ended September 30, 2002. As of September 30, ------------------------------ 2003 2002 ------------- ------------- Total for reportable segments $ 678,751,348 $ 145,252,000 Other assets 5,698,397 3,118,882 Elimination of intersegment receivables ( 10,812,370) ( 4,658,879) Elimination of investments in other segments ( 13,095,984) ( 13,095,984) ------------- ------------- $ 660,541,391 $ 130,616,019 ============= ============= Page 16 of 32 Pages 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies The following is a discussion of certain of our significant accounting policies (see Note 2 to the Consolidated Financial Statements for the fiscal year ended December 31, 2002 in the 2002 Form 10-K) that we consider to be of particular importance because they require difficult, complex or subjective judgments on matters that are often inherently uncertain. 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 trades, we defer any gains resulting from adjusting the costs of these trades 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., 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. Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 Commission income represents revenues generated on brokerage transactions conducted on an agency (including name give-up) or matched riskless principal basis. For the three months ended September 30, 2003, these revenues increased $5,734,832 to $44,237,822, compared to $38,502,990 for the comparable period in 2002, reflecting increases in New York and London. The increase in New York was attributable to increased commissions generated by the institutional sales, trading and research operations we started during 2002 (leveraged finance-high yield and distressed debt, institutional equities and convertible securities) Page 17 of 32 Pages and increased commissions generated by our inter-dealer brokerage operations. In London, the increase was attributable to increased revenues from our inter-dealer brokerage operations, commissions generated by our newly-started sales, trading and research operations and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. During the three months ended September 30, 2003, we recognized a net gain of $11,106,063 on the settlement of our property insurance claim against Kemper for losses incurred for destroyed property as a result of the September 11, 2001 terrorist attacks on the World Trade Center, where the Company's headquarters were formerly located. This net gain reflected the gross insurance proceeds received of $13,868,210, less $2,762,147, representing the aggregate of the net book value of owned property destroyed in the attacks, termination costs associated with operating leases of equipment destroyed in the attacks and claim related expenses. Insurance recoveries of $645,297 during the three months ended September 30, 2002 represent the balance of the settlement of our insurance claim for the impact of the September 11th attacks on London operations under our U.K. business interruption and extra expense insurance policy with Norwich Union. Interest income for the three months ended September 30, 2003 increased $1,715,209 to $2,247,976, compared to $532,767 for the three months ended September 30, 2002, primarily reflecting financing income earned on reverse repurchase agreements in connection with our newly-started institutional securities financing operations and an increase in the average inventory of securities held. This financing income, however, is in large part offset by interest expense incurred on associated repurchase agreements. Accordingly, to reflect more clearly the net impact of our securities financing operations, which are designed to generate income from the net spread of such financing income over interest expense, we have presented interest expense on securities indebtedness on the Consolidated Statements of Operations as a reduction to gross revenues. Principal transactions represent the net gains or losses generated from securities transactions involving the assumption of market risk for a period of time. For the three months ended September 30, 2003, these activities resulted in a gain of $1,979,315, compared to a gain of $4,656,236 for the three months ended September 30, 2002. This change reflected a decrease from the significant gains recognized in the prior period from our sales, trading and research operations, partially offset by improved results in our firm investment account. Other items for the three months ended September 30, 2003 resulted in a loss of $333,984, as compared to a gain of $207,402 for the three months ended September 30, 2002. This change resulted primarily from the loss of $387,942 on our interest in the Tokyo Venture for the three months ended September 30, 2003, as compared to a gain of $35,423 for the three months ended September 30, 2002, an increase in foreign exchange losses during the current period and a decrease in income during the current period from the licensing of financial information derived from our brokerage business. This licensing income decreased to $42,000, as compared to $137,000, due to the expiration of a licensing agreement on July 31, 2003. For the three months ended September 30, 2003, interest expense on securities indebtedness increased $1,658,424 to $1,701,742, compared to $43,318 for the three months ended September 30, 2002, primarily as a result of interest expense incurred on repurchase agreements in connection with our newly-started institutional securities financing operations discussed above. The other type of interest expense included in this classification, interest incurred on margin borrowings to finance securities positions, decreased slightly. Page 18 of 32 Pages Compensation and related costs for the three months ended September 30, 2003 increased $2,624,154 to $31,705,605, compared to $29,081,451 for the three months ended September 30, 2002, primarily as a result of increased brokerage staff in connection with the expansion of products in New York, the overall increase in commission income (resulting in higher commission-based payouts), and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Communication costs for the three months ended September 30, 2003 increased $328,872 to $3,357,682, compared to $3,028,810 for the three months ended September 30, 2002, primarily as a result of the expansion of products and customers in New York and London and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Travel and entertainment costs for the three months ended September 30, 2003 increased $664,473 to $2,548,869, compared to $1,884,396 for the three months ended September 30, 2002, reflective in part of expansion efforts in New York and London and the overall increase in commission income. Occupancy and equipment rental represent expenses incurred in connection with the Company's office premises, including base rent and related escalations, maintenance, electricity and real estate taxes, as well as rental costs for equipment under operating leases. For the three months ended September 30, 2003, these costs increased $760,415 to $1,885,924, compared to $1,125,509 for the three months ended September 30, 2002, primarily due to increased costs for office space associated with our new headquarters at One Seaport Plaza in lower Manhattan, increased costs for office space in London and rental costs on new equipment in New York leased from GECC. Clearing and execution fees are fees paid to clearing organizations for transaction settlements and credit enhancements and to other broker-dealers (including ECNs) for providing access to various markets and exchanges for executing transactions. For the three months ended September 30, 2003, these costs increased $210,463 to $1,030,670, compared to $820,207 for the three months ended September 30, 2002, primarily as a result of the increase in transaction volumes from our institutional equities desk and other areas started in 2002. Depreciation and amortization expense consists principally of depreciation of communication and computer equipment and automobiles under capitalized leases and amortization of leasehold improvements and software. For the three months ended September 30, 2003, depreciation and amortization increased $190,577 to $840,314, compared to $649,737 for the three months ended September 30, 2002, primarily as a result of the depreciation and amortization in New York of furniture and leasehold improvements purchased for our new headquarters. Page 19 of 32 Pages Other interest expense represents interest costs incurred on non-securities related indebtedness, such as revolving credit facilities and capital lease obligations. For the three months ended September 30, 2003, these costs increased slightly to $67,892, compared to $49,936 for the three months ended September 30, 2002, primarily as a result of increased costs associated with our revolving credit facility, which was expanded with the change from GECC to BONY. During the three months ended September 30, 2002, we recorded $358,300 of net costs as a result of the September 11th attacks on the World Trade Center, reflecting gross costs incurred of $922,055, reduced by the portion of these expenses, $563,755, that at the time was considered probable of recovery under the extra expense portion of the insurance coverage. These costs included the use of outside professionals, hiring costs and lost sublet income on additional space in London re-allocated for use by New York employees in the aftermath of the attacks. General, administrative and other expenses include such expenses as corporate insurance, office supplies and expenses, professional fees, food costs and dues to various industry associations. For the three months ended September 30, 2003, these expenses increased $126,357 to $1,505,925, as compared to $1,379,568 for the three months ended September 30, 2002, primarily as a result of professional fees of $100,000 incurred in connection with the NTL when-issued trade disputes, increased costs for corporate insurance coverage and increases in other general, administrative and other expenses. These increases were offset in part by a decrease in other professional fees. Provision for income taxes for the three months ended September 30, 2003 increased $3,636,578 to $6,144,263, compared to $2,507,685 for the three months ended September 30, 2002, as a result of an increase in pre-tax income, offset in part by a reduction of $500,000 to income tax reserves as the result of the favorable resolution to certain contingencies. For the three months ended September 30, 2002, minority interest in consolidated subsidiary resulted in a reduction of the net income from EBL (formerly EBFL) of $505,574. The lack of minority interest in the current period is the result of EBHL's purchase of Monecor's minority interest in February 2003. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 For the nine months ended September 30, 2003, commission income increased $21,860,918 to $133,519,551, compared to $111,658,633 for the comparable period in 2002, reflecting increases in New York and London. The increase in New York was attributable to increased commissions generated by the institutional sales, trading and research operations we started during 2002 and increased commissions generated by our inter-dealer brokerage operations. In London, the increase was attributable to increased revenues from our inter-dealer brokerage operations, commissions generated by our newly-started sales, trading and research operations and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Page 20 of 32 Pages During the nine months ended September 30, 2003, we recognized a net gain of $11,106,063 on the settlement of our property insurance claim against Kemper for losses incurred for destroyed property as a result of the September 11, 2001 terrorist attacks on the World Trade Center, where the Company's headquarters were formerly located. This net gain reflected the gross insurance proceeds received of $13,868,210, less $2,762,147, representing the aggregate of the net book value of owned property destroyed in the attacks, termination costs associated with operating leases of equipment destroyed in the attacks and claim related expenses. Insurance recoveries of $830,985 during the nine months ended September 30, 2002 represent the settlement of our insurance claim for the impact of the September 11th attacks on London operations under our U.K. business interruption and extra expense insurance policy with Norwich Union. Interest income for the nine months ended September 30, 2003 increased $2,229,420 to $3,562,792, compared to $1,333,372 for the nine months ended September 30, 2002, primarily reflecting financing income earned on reverse repurchase agreements in connection with our newly-started institutional securities financing operations and an increase in the average inventory of securities held. For the nine months ended September 30, 2003, principal transactions resulted in a gain of $1,721,983, compared to a gain of $7,101,232 for the nine months ended September 30, 2002. This change primarily reflected a net loss of $5.1 million recorded by MFI during 2003 on the disputed settlement of its NTL when-issued equity trades. As discussed in Note 7 to the Consolidated Financial Statements included in this report, the recording of this $5.1 million net loss includes the estimated damages payable if the NTL-related legal proceedings conclude that all of MFI's NTL when-issued trades, other than permanently adjusted settlements by mutual agreement, should have settled on an unadjusted basis. However, the final net loss could be materially higher or lower based on the ultimate outcome of such proceedings. This loss in principal transactions was partially offset by improved results in our firm investment account. Other items for the nine months ended September 30, 2003 resulted in a loss of $810,661, as compared to a loss of $356,314 for the nine months ended September 30, 2002. This change resulted primarily from the loss of $1,217,403 on our interest in the Tokyo Venture for the nine months ended September 30, 2003, as compared to a loss of $539,451 for the nine months ended September 30, 2002, offset in part by income of $292,000 during the current nine-month period from the licensing of financial information derived from our brokerage business, as compared to $137,000 during the prior nine-month period, and an increase in foreign exchange gains during the current nine-month period. For the nine months ended September 30, 2003, interest expense on securities indebtedness increased $1,917,626 to $2,006,891, compared to $89,265 for the nine months ended September 30, 2002, primarily as a result of interest expense incurred on repurchase agreements in connection with our newly-started institutional securities financing operations. Compensation and related costs for the nine months ended September 30, 2003 increased $13,936,218 to $93,777,318, compared to $79,841,100 for the nine months ended September 30, 2002, primarily as a result of increased brokerage staff in connection with the expansion of products in New York, the overall increase in commission income (resulting in higher commission-based payouts) and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Page 21 of 32 Pages Communication costs for the nine months ended September 30, 2003 increased $1,366,316 to $9,536,265, compared to $8,169,949 for the nine months ended September 30, 2002, primarily as a result of the expansion of products and customers in New York and London and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars, offset in part by a reduction to communication accruals established in prior periods in London of $250,000 that were no longer considered necessary. Travel and entertainment costs for nine months ended September 30, 2003 increased $1,606,114 to $6,817,843, compared to $5,211,729 for the nine months ended September 30, 2002, reflective in part of the expansion efforts in New York and London and the overall increase in commission income. Occupancy and equipment rental for the nine months ended September 30, 2003 increased $1,520,777 to $4,918,845, compared to $3,398,068 for the nine months ended September 30, 2002, primarily due to increased costs for office space associated with our new headquarters at One Seaport Plaza in lower Manhattan, increased costs for office space in London and rental costs on new equipment in New York leased from GECC. Clearing and execution fees for the nine months ended September 30, 2003 increased $473,163 to $2,852,294, compared to $2,379,131 for the nine months ended September 30, 2002, primarily as a result of the increase in transaction volumes from our institutional equities desk and other areas commenced in 2002. For the nine months ended September 30, 2003, depreciation and amortization increased $660,870 to $2,420,460, compared to $1,759,590 for the nine months ended September 30, 2002, primarily as a result of the depreciation and amortization in New York of furniture and leasehold improvements purchased for our new headquarters. For the nine months ended September 30, 2003, other interest costs increased $195,114 to $300,391, compared to $105,277 for the nine months ended September 30, 2002 primarily as a result of increased costs associated with our revolving credit facility, which was expanded with the change from GECC to BONY. All the revenues generated on our Charity Days by our New York, Stamford, Mexico, London and Switzerland offices are donated to designated charities. All participating brokerage employees waive any entitlement to commissions from such revenues. The proceeds of $982,300 raised on our May 12, 2003 Charity Day were designated for The Euro Brokers Relief Fund, Inc. and the firm's recently-established Maxcor Foundation Inc., which in turn designated three principal recipients: Marine Corps-Law Enforcement Foundation, Inc., Columbia University, College of Physicians & Surgeons and The Great Ormond Street Hospital for Children in London. Our March 11, 2002 Charity Day resulted in a contribution of $1,219,233 entirely to The Euro Brokers Relief Fund, Inc. Page 22 of 32 Pages During the nine months ended September 30, 2002, we recorded $876,342 of net costs as a result of the September 11th attacks on the World Trade Center, reflecting gross costs incurred of $2,580,602, reduced by the portion of these expenses, $1,704,260, that at the time was considered probable of recovery under the extra expense portion of the insurance coverage. These costs included the use of outside professionals, hiring costs and lost sublet income on additional space in London re-allocated for use by New York employees in the aftermath of the attacks. For the nine months ended September 30, 2003, general, administrative and other expenses increased $1,435,115 to $5,249,478, as compared to $3,814,363 for the nine months ended September 30, 2002, primarily as a result of professional fees of $600,000 incurred in connection with the NTL when-issued equity trade disputes previously discussed, an increase to the reserve for the employer portion of National Insurance Contributions in the U.K. of $465,000, increased costs for corporate insurance coverage and increases in other general, administrative and other expenses. These increases were offset in part by a rebate received in London for consumption taxes previously paid of $160,000 and a decrease in other professional fees. Provision for income taxes for the nine months ended September 30, 2003 increased $2,038,108 to $8,245,368, compared to $6,207,260 for the nine months ended September 30, 2002, as a result of an increase in pre-tax income, offset in part by a reduction of $500,000 to income tax reserves as the result of the favorable resolution to certain contingencies. For the nine months ended September 30, 2003, minority interest in consolidated subsidiaries resulted in a reduction of the net income from such subsidiaries of $175,985, as compared to a reduction of $909,791 for the nine months ended September 30, 2002. The decrease is the result of EBHL's purchase of the minority interest in EBL (formerly EBFL) in February 2003. During the nine months ended September 30, 2003, we recorded an extraordinary gain of $2,957,547 on the purchase by EBHL of the 50% shareholding held by Monecor in EBFL. This purchase resulted from a ruling by the London Court of Appeals in February 2003 that dismissed Monecor's appeal of the May 2002 judgment of the London High Court of Justice. That judgment permitted EBHL to purchase Monecor's interest at a 30% discount to the book value attributable to this shareholding as of December 2000. Monecor's direct petition to the House of Lords for leave to appeal this ruling was subsequently denied. EBHL obtained the May 2002 judgment under the terms of the EBFL shareholders agreement as a result of Monecor's failure to provide certain requested funding to EBFL in late 2000. This discounted purchase price resulted in an extraordinary gain of $2,957,547, equal to the excess of the amount recorded for Monecor's interest in EBFL of $5,570,703 over the purchase price of $2,613,156. Liquidity and Capital Resources 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 owned. Page 23 of 32 Pages At September 30, 2003, the Consolidated Statements of Financial Condition include U.S. Treasury and federal agency securities purchased under agreements to resell (reverse repurchase agreements) of $455.3 million and U.S. Treasury and federal agency securities sold under agreements to repurchase (repurchase agreements) of $458.5 million. These transactions are collateralized financings on which we seek to earn an interest spread. The balances recorded on these transactions are the contract amounts. We monitor the fair value of the securities purchased and sold under these agreements daily and obtain additional collateral or return excess collateral when appropriate. In the ordinary course of settling our U.S. Treasury and federal agency securities transactions (including repurchase and reverse repurchase agreements) we have securities failed-to-deliver and failed-to-receive obligations. These fails are generally resolved shortly afterwards through proper receipt/delivery. At September 30, 2003 we had securities failed-to-deliver of $51.3 million, offset by securities failed-to-receive of $50.5 million. Securities held at clearing firms and trading contracts reflect securities positions taken in connection with sales, trading and research operations and in our firm investment account. Positions are financed either from cash resources or by margin borrowings (if available) from broker-dealers that clear these transactions on our behalf on a fully-disclosed basis. At September 30, 2003, as reflected on the Consolidated Statements of Financial Condition, we had net assets relating to securities positions of $4.2 million, reflecting securities owned of $38.0 million, offset by margin borrowings from a clearing broker of $33.8 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, including a minimum deposit of $5,000,000, and minimum net worth (including subordinated borrowings) of $25 million (reflecting an increase in March 2003 as a result of upgrading MFI's GSD-FICC membership status). To the extent MFI conducts transactions with non-netting members of GSD-FICC, MFI may have to post additional clearing deposits with GSD-FICC (which may be satisfied in part through the collection of margin deposits from such non-netting members). In addition, MFI's clearing brokers require certain minimum collateral deposits. The aforementioned deposits have been reflected as deposits with clearing organizations on the Consolidated Statements of Financial Condition. EBL is a Type D registered firm of the Financial Services Authority in the U.K., required to maintain a financial resources requirement generally equal to six weeks' average expenditures ($4.0 million at September 30, 2003). In March 2003, EBI terminated its $5 million revolving credit facility with GECC and entered into an agreement with BONY 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. The credit agreement contains certain covenants which require EBI separately, and our entire company as a whole, to maintain certain financial ratios and conditions. Borrowings under this facility bear Page 24 of 32 Pages 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. As of September 30, 2003, EBI had $10 million outstanding under this new facility. In November 2003, this facility was amended to expand the permitted use of borrowings and to establish a fixed availability of $10 million through maturity. As of September 30, 2003, we had authorization remaining for the repurchase of up to 694,193 shares of our common stock under our existing share repurchase program authorized by our Board of Directors in July 2001. The program originally authorized the repurchase of up to 709,082 shares (10% of the then-outstanding shares), was initially expanded in the immediate aftermath of the September 11th attacks to authorize the repurchase of up to 1,200,000 shares, and was further expanded in April 2003 by an additional 700,000 shares, for a total of 1,900,000 shares. As has been the case with prior repurchase program authorizations, purchases are to be made from time to time as market and business conditions warrant, and accordingly, there is no guarantee as to the timing or number of shares to be repurchased. In November 2003, our Board of Directors declared a common stock cash dividend of $.0625 per share for our fiscal third quarter. The dividend is payable on December 16, 2003 to holders of record on November 28, 2003. In light of the new tax legislation pertaining to dividends and our recent performance, we believe that the dividend, which on an annual basis is anticipated to be $.25 per share, is a tax-efficient way to return value to our shareholders while at the same time enabling us to retain sufficient earnings for growth opportunities. 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 and other resources. Moreover, we have historically met regulatory net capital and stockholders' equity requirements and believe we will be able to continue to do so in the future. Forward-Looking Statements Certain statements contained in this Item 2 and elsewhere in this report, as well as other oral and written statements made by 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 Page 25 of 32 Pages concerning future business conditions and the outlook for our company and business, are subject to significant uncertainties, many of which are beyond our control. Actual results or performance could differ materially from that which we expect. Uncertainties include factors such as: market and economic conditions, including the level of trading volumes in the instruments we broker and interest rate volatilities; the effects of any additional terrorist acts or acts of war and governments' military and other responses to them; the success of our technology development and deployment; the status of our relationships with employees, clients, business partners, vendors and clearing firms; possible third-party litigations or regulatory actions against us or other unanticipated contingencies; the scope of our trading gains and losses; the actions of our competitors; and government regulatory changes. For a fuller description of these and additional uncertainties, reference is made to the "Competition," "Regulation," "Cautionary Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Quantitative and Qualitative Disclosures about Market Risk" sections of the 2002 Form 10-K. 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 3. Quantitative and Qualitative Disclosures about Market Risk As was the case with the terminated revolving credit facility with GECC, borrowings under the new revolving credit facility with BONY bear interest at a variable rate. We will continue to monitor the interest rate environment to determine the necessity of a hedging strategy to guard against increases in market interest rates. Other than the item described above, our market risk analysis did not materially change from the market risk analysis as of December 31, 2002 presented in the 2002 Form 10-K. Item 4. Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2003. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our periodic SEC reports has been appropriately recorded, processed, summarized and reported. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated any changes in our internal control over financial reporting that occurred during the quarterly period ended September 30, 2003, and has concluded that there was no change during this quarterly period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Page 26 of 32 Pages PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 7 to the Consolidated Financial Statements (unaudited) included as a part of this report for a discussion of pending proceedings in the Supreme Court of the State of New York and before NASD involving the disputed settlement of our NTL Inc. when-issued equity trades. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 31.1 Rule 13a-14(a) Certification of Principal Executive Officer 31.2 Rule 13a-14(a) Certification of Principal Financial Officer 32 18 U.S.C. Section 1350 Certifications of Principal Executive and Financial Officers (b) Reports on Form 8-K During the three months ended September 30, 2003, we filed three current reports on Form 8-K: respectively on July 21, 2003, August 11, 2003 and August 19, 2003. The first filed report attached our press release pre-announcing our anticipated unaudited financial results for our fiscal second quarter ended June 30, 2003, as well as the declaration by our Board of Directors of an initial quarterly dividend on our common stock of $0.0625 per share. The second filed report attached our press release confirming our earlier-announced anticipated unaudited financial results for our fiscal second quarter ended June 30, 2003. The third filed report attached our press release announcing that we would recognize a significant one-time, pre-tax gain during our fiscal third quarter in connection with our September 11th-related property insurance claim. Page 27 of 32 Pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 2003 MAXCOR FINANCIAL GROUP INC. (Registrant) /s/ GILBERT D. SCHARF -------------------------------------------- Gilbert D. Scharf, Chief Executive Officer /s/ STEVEN R. VIGLIOTTI -------------------------------------------- Steven R. Vigliotti, Chief Financial Officer Page 28 of 32 Pages EXHIBIT INDEX Exhibit Description Page ------- ----------- ---- 31.1 Rule 13a-14(a) Certification of Principal Executive Officer 31 31.2 Rule 13a-14(a) Certification of Principal Financial Officer 32 32 18 U.S.C. Section 1350 Certifications of Principal Executive 33 and Financial Officers Page 29 of 32 Pages