-----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, DYfS2k2InDCsXDia2Wiy3yT31k/1DL2iktUf2tbq49QiuWhjvYo4K91yiEkCyBLq RtPPM9OuGzCSKT3hauG9yQ== 0001019056-04-000749.txt : 20040517 0001019056-04-000749.hdr.sgml : 20040517 20040517160835 ACCESSION NUMBER: 0001019056-04-000749 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25056 FILM NUMBER: 04812537 BUSINESS ADDRESS: STREET 1: ONE SEAPORT PLAZA STREET 2: 19TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10038 BUSINESS PHONE: 6463467000 MAIL ADDRESS: STREET 1: ONE SEAPORT PLAZA STREET 2: 19TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10038 FORMER COMPANY: FORMER CONFORMED NAME: FINANCIAL SERVICES ACQUISITION CORP /DE/ DATE OF NAME CHANGE: 19941020 10-Q 1 maxcor_q.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 March 31, 2004 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 May 13, 2004 was 7,121,855. The Exhibit Index is on Page 27. Page 1 of 59 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 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 24 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 26 Exhibit Index 27 Page 2 of 59 Pages PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- MARCH 31, 2004 -------------- (Unaudited) Page 3 of 59 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ---------------------------------------------- (Unaudited) -----------
ASSETS March 31, 2004 December 31, 2003 - ------ ----------------- ----------------- Cash and cash equivalents $ 42,959,472 $ 67,170,247 Securities purchased under agreements to resell 351,677,161 1,446,677,977 Deposits with clearing organizations 11,322,895 8,848,729 Receivable from broker-dealers and customers 37,359,047 22,324,106 Securities failed-to-deliver 82,434,525 90,669,388 Securities owned 42,344,619 6,687,124 Prepaid expenses and other assets 6,507,957 7,003,794 Deferred tax asset 719,310 734,408 Fixed assets 12,718,555 13,010,863 ----------------- ----------------- Total assets $ 588,043,541 $ 1,663,126,636 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Liabilities: Securities sold under agreements to repurchase $ 342,336,436 $ 1,470,461,908 Payable to broker-dealers and customers 6,270,471 Securities failed-to-receive 77,379,365 66,544,835 Securities sold, not yet purchased 47,374,070 22,428 Accounts payable and accrued liabilities 19,973,815 21,137,048 Accrued compensation payable 19,730,184 30,198,757 Income taxes payable 2,341,211 1,469,456 Deferred taxes payable 4,854,012 5,043,758 Obligations under capitalized leases 469,179 703,944 Revolving credit facility 5,000,000 7,500,000 ----------------- ----------------- 525,728,743 1,603,082,134 ----------------- ----------------- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value, 1,000,000 shares authorized; none issued at March 31, 2004 and December 31, 2003 Common stock, $.001 par value, 30,000,000 shares authorized; 12,847,876 and 12,794,626 shares issued at March 31, 2004 and December 31, 2003, respectively 12,848 12,795 Additional paid-in capital 38,972,722 38,718,445 Treasury stock at cost; 5,680,903 and 5,655,903 shares of common stock held at March 31, 2004 and December 31, 2003, respectively ( 17,052,821) ( 16,771,571) Retained earnings 38,336,634 36,178,583 Accumulated other comprehensive income: Foreign currency translation adjustments 2,045,415 1,906,250 ----------------- ----------------- Total stockholders' equity 62,314,798 60,044,502 ----------------- ----------------- Total liabilities and stockholders' equity $ 588,043,541 $ 1,663,126,636 ================= =================
The accompanying notes are an integral part of these consolidated financial statements. Page 4 of 59 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (Unaudited) -----------
For the Three Months Ended -------------------------------- March 31, 2004 March 31, 2003 -------------- -------------- Revenue: Commission income $ 48,050,301 $ 41,149,353 Principal transactions 3,500,510 ( 4,081,752) Interest income 1,926,968 639,716 Other ( 375,616) ( 319,478) -------------- -------------- Gross revenue 53,102,163 37,387,839 Interest expense on securities indebtedness 1,695,279 45,098 -------------- -------------- Net revenue 51,406,884 37,342,741 -------------- -------------- Costs and expenses: Compensation and related costs 33,975,005 29,807,150 Communication costs 3,406,872 3,240,791 Travel and entertainment 2,774,983 1,911,897 Occupancy and equipment rental 2,538,472 1,108,520 Clearing and execution fees 1,012,354 869,471 Depreciation and amortization 809,143 765,735 Other interest expense 53,249 36,477 General, administrative and other expenses 1,904,804 1,682,724 -------------- -------------- 46,474,882 39,422,765 -------------- -------------- Income (loss) before provision for income taxes, minority interest and extraordinary item 4,932,002 ( 2,080,024) Provision (benefit) for income taxes 2,326,562 ( 1,079,919) -------------- -------------- Income (loss) before minority interest and extraordinary item 2,605,440 ( 1,000,105) Minority interest in income of consolidated subsidiary ( 175,985) -------------- -------------- Income (loss) before extraordinary item 2,605,440 ( 1,176,090) Extraordinary gain on purchase of minority interest 2,957,547 -------------- -------------- Net income $ 2,605,440 $ 1,781,457 ============== ============== Basic earnings (loss) per share: Income (loss) before extraordinary item $ .36 ($ .16) Extraordinary gain on purchase of minority interest .41 -------------- -------------- Net income $ .36 $ .25 ============== ============== Diluted earnings (loss) per share: Income (loss) before extraordinary item $ .32 ($ .16) Extraordinary gain on purchase of minority interest .41 -------------- -------------- Net income $ .32 $ .25 ============== ============== Cash dividends per share of common stock $ .0625 $ ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. Page 5 of 59 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- FOR THE PERIODS ENDED DECEMBER 31, 2003 AND MARCH 31, 2004 ---------------------------------------------------------- (Unaudited)
Accumulated Additional Other Comprehensive Common Paid-in Treasury Retained Comprehensive Income Stock Capital Stock Earnings Income Total ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2002 $ 12,233 $ 36,517,908 ($ 11,208,967) $ 20,741,779 $ 1,530,133 $ 47,593,086 Comprehensive income Net income for the year ended December 31, 2003 $ 16,314,792 16,314,792 16,314,792 Foreign currency translation adjustment (inclusive of income tax benefit of $2,712) 376,117 376,117 376,117 ------------ Comprehensive income $ 16,690,909 ============ Exercise of stock options, including tax benefit of $763,293 562 2,200,537 ( 826,303) 1,374,796 Acquisition of treasury stock ( 4,736,301) ( 4,736,301) Common stock dividends ( 877,988) ( 877,988) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2003 12,795 38,718,445 ( 16,771,571) 36,178,583 1,906,250 60,044,502 Comprehensive income Net income for the three months ended March 31, 2004 $ 2,605,440 2,605,440 2,605,440 Foreign currency translation adjustment (inclusive of income tax benefit of $172,864) 139,165 139,165 139,165 ------------ Comprehensive income $ 2,744,605 ============ Exercise of stock options, including tax benefit of $63,619 53 254,277 254,330 Acquisition of treasury stock ( 281,250) ( 281,250) Common stock dividends ( 447,389) ( 447,389) ------------ ------------ ------------ ------------ ------------ ------------ Balance at March 31, 2004 $ 12,848 $ 38,972,722 ($ 17,052,821) $ 38,336,634 $ 2,045,415 $ 62,314,798 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. Page 6 of 59 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited)
For the Three Months Ended ------------------------------------ March 31, 2004 March 31, 2003 ---------------- ---------------- Cash flows from operating activities: Net income $ 2,605,440 $ 1,781,457 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 809,143 765,735 Provision for doubtful accounts 11,064 1,403 Gain on purchase of minority interest ( 2,957,547) Gain on disposal of fixed assets ( 37,267) Minority interest in net earnings of consolidated subsidiary 175,985 Unreimbursed losses of contractual arrangements 318,561 529,348 Deferred income taxes ( 158,090) ( 31,569) Change in assets and liabilities: Decrease in securities purchased under agreements to resell 1,095,000,816 (Increase) decrease in deposits with clearing organizations ( 2,474,166) 2,047 Increase in receivable from broker-dealers and customers ( 14,851,496) ( 1,879,810) Decrease (increase) in securities failed-to-deliver 8,234,863 ( 14,688,312) (Increase) decrease in securities owned ( 35,654,326) 9,585,405 Decrease (increase) in prepaid expenses and other assets 599,668 ( 1,646,479) Decrease in securities sold under agreements to repurchase ( 1,128,125,472) Increase (decrease) in payable to broker-dealers and customers 6,270,471 ( 6,553,339) Increase in securities failed-to-receive 10,834,530 14,540,884 Increase in securities sold, not yet purchased 47,351,642 Decrease in accounts payable and accrued liabilities ( 1,614,896) ( 1,713,652) Decrease in accrued compensation payable ( 10,915,804) ( 7,646,665) Increase (decrease) in income taxes payable 891,582 ( 432,415) ---------------- ---------------- Net cash used in operating activities ( 20,903,737) ( 10,167,524) ---------------- ---------------- Cash flows from investing activities: Purchase of fixed assets ( 866,567) ( 5,688,342) Purchase of minority interest ( 2,613,156) Proceeds from the sale of fixed assets 220,593 ---------------- ---------------- Net cash used in investing activities ( 645,974) ( 8,301,498) ---------------- ----------------
The accompanying notes are an integral part of these consolidated financial statements. Page 7 of 59 Pages MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited) (Continued)
For the Three Months Ended -------------------------------- March 31, 2004 March 31, 2003 -------------- -------------- Cash flows from financing activities: Proceeds from exercise of options 190,711 142,610 (Repayments) borrowings under revolving credit facility, net ( 2,500,000) 15,000,000 Repayment of obligations under capitalized leases ( 29,510) ( 46,923) Common stock dividends ( 447,389) Proceeds from asset sales under sale-leaseback transactions 5,220,658 Acquisition of treasury stock ( 281,250) ( 1,256,077) -------------- -------------- Net cash (used in) provided by financing activities ( 3,067,438) 19,060,268 -------------- -------------- Effect of exchange rate changes on cash 406,374 ( 179,009) -------------- -------------- Net (decrease) increase in cash and cash equivalents ( 24,210,775) 412,237 Cash and cash equivalents at beginning of period 67,170,247 52,781,616 -------------- -------------- Cash and cash equivalents at end of period $ 42,959,472 $ 53,193,853 ============== ============== Supplemental disclosures of cash flow information: Interest paid $ 1,667,619 $ 171,738 Income taxes paid 990,612 453,847 Income tax benefit on option exercises 63,619 14,110
The accompanying notes are an integral part of these consolidated financial statements. Page 8 of 59 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 and trading operations in various fixed income and equity securities and institutional securities financing operations. The consolidated financial statements include the accounts of MFGI and its majority-owned subsidiaries and other entities over which it exercises control (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. 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 period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. 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, 2003 ("2003 Form 10-K"). Page 9 of 59 Pages NOTE 2 - EARNINGS PER SHARE: - --------------------------- In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," the control number for determining the dilutive impact of common stock equivalents on earnings per share is the amount before extraordinary item. Since this amount for the three months ended March 31, 2003 was a loss, the impact of common stock equivalents on earnings per share for the prior period was considered antidilutive, even though the impact solely on net income per share was dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three months ended March 31, 2004 and March 31, 2003:
Three Months Ended ------------------------------- March 31, 2004 March 31, 2003 -------------- -------------- Income (loss) before extraordinary item $ 2,605,440 ($ 1,176,090) Extraordinary gain on purchase of minority interest 2,957,547 -------------- -------------- Net income $ 2,605,440 $ 1,781,457 ============== ============== Weighted average common shares outstanding - basic calculations 7,153,981 7,130,991 Dilutive effect of stock options and warrants 928,533 -------------- -------------- Weighted average common shares outstanding - diluted calculations 8,082,514 7,130,991 Basic earnings per share: Income (loss) before extraordinary item $ .36 ($ .16) Extraordinary gain on purchase of minority interest .41 -------------- -------------- Net income $ .36 $ .25 ============== ============== Diluted earnings per share: Income (loss) before extraordinary item $ .32 ($ .16) Extraordinary gain on purchase of minority interest .41 -------------- -------------- Net income $ .32 $ .25 ============== ============== Antidilutive common stock equivalents: Options 1,715,000 Warrants 425,000
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, plus accrued interest. These amounts are presented on a net-by-counterparty basis when the requirements of Financial Accounting Standards Board (FASB) Interpretation No. 41 are satisfied. Income and expense on these agreements are recognized as interest over the life of the transaction. Page 10 of 59 Pages NOTE 3 - REPURCHASE AND REVERSE REPURCHASE AGREEMENTS (Continued): - ----------------------------------------------------------------- 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 March 31, 2004, the fair value of securities received as collateral under reverse repurchase agreements of $593.3 million was repledged under repurchase agreements. 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, 2003, the Company had 7,138,723 shares of common stock outstanding and held 5,655,903 shares in treasury. During the three months ended March 31, 2004 the Company repurchased 25,000 shares under its existing share repurchase program for an aggregate purchase price of $281,250. This program was authorized by the Board of Directors in July 2001 and was expanded in September 2001 and again in April 2004. As of March 31, 2004, the remaining authorization under this expanded program was 669,193 shares. In addition, during the three months ended March 31, 2004, the Company issued 53,250 shares pursuant to options exercised under the Company's 1996 Stock Option Plan and 2002 Stock Option Plan. As a result of these activities, at March 31, 2004, the Company had 7,166,973 shares of common stock outstanding and held 5,680,903 shares in treasury. In January 2004, the Company cancelled all 425,000 warrants issued and outstanding under a warrant program established to provide employee inducements and incentives in connection with the formation of a leveraged finance department. The warrants had been issued in April 2002 at an exercise price of $5.875 per warrant, with vesting over four years at the rate of 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries. 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 Page 11 of 59 Pages NOTE 4 - STOCKHOLDERS' EQUITY (Continued): - ----------------------------------------- Disclosure-an Amendment of FASB Statement No. 123," the Company has disclosed below its estimated pro forma net income and earnings per share if compensation for awards issued under its option and warrant plans had been recognized using the fair value method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," with such fair value estimated using the Black-Scholes option pricing model. The pro forma benefit for stock-based compensation during the three months ended March 31, 2004 includes the reversal of the aggregate pro forma expense of $444,153 previously determined for prior periods for the cancelled leveraged finance warrants. Three Months Ended ------------------------------- March 31, 2004 March 31, 2003 -------------- -------------- Net income, as reported $ 2,605,440 $ 1,781,457 Total stock-based compensation benefit (expense) determined under fair value based method for all awards, net of related tax effects 212,516 ( 213,563) -------------- -------------- Pro forma net income $ 2,817,956 $ 1,567,894 ============== ============== Three Months Ended ------------------------------- March 31, 2004 March 31, 2003 -------------- -------------- Earnings per share: Basic, as reported $ .36 $ .25 Basic, pro forma $ .39 $ .22 Diluted, as reported $ .32 $ .25 Diluted, pro forma $ .35 $ .22 Dividends: - --------- On March 16, 2004, the Company paid a quarterly common stock dividend of $.0625 per share to holders of record on February 27, 2004. Based upon 7,158,223 total shares outstanding on February 27, 2004, this payment totaled $447,389. NOTE 5 - NTL WHEN-ISSUED EQUITY TRADES: - -------------------------------------- On January 10, 2003, NTL Inc. ("NTL") emerged from Chapter 11 bankruptcy under an amended plan of reorganization providing for the issuance of 50 million shares of common stock. MFI and other participants in the when-issued trading market for NTL shares, which began in September 2002 after confirmation of NTL's prior plan of reorganization that contemplated the issuance of 200 million shares, expected the settlement of their when-issued trades would be adjusted to reflect the equivalent of a one-for-four reverse stock split. A number of buyers of NTL when-issued shares, seizing upon a Nasdaq advisory issued on January 14, 2003 that Nasdaq would neither cancel nor adjust such trades, either have retained the full, unadjusted number of shares delivered to them as a result of certain automated settlement processes or are demanding compensation for the remaining unadjusted number of shares not delivered to them if settlement was made on an adjusted basis. Page 12 of 59 Pages NOTE 5 - NTL WHEN-ISSUED EQUITY TRADES (Continued): - -------------------------------------------------- In February 2003, MFI filed a suit in the Supreme Court of the State of New York, naming all of its counterparties to its NTL when-issued trades, in order to seek a uniform, adjusted settlement of these trades. Similar proceedings, some seeking settlement on an adjusted basis, others on an unadjusted basis, have been commenced by other parties to NTL when-issued trades against their counterparties, including MFI, both in this Court and before NASD. Included in principal transactions for the three months ended March 31, 2003 is a loss of $5.9 million recorded on the settlement of MFI's 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. This loss was partially offset by an $800,000 principal transaction gain recorded during the three months ended June 30, 2003 on NTL shares determined no longer to constitute a hedge against such an outcome. In March 2004, the New York State Supreme Court granted a summary judgment motion made by MFI and issued a decision stating that all NTL when-issued trades among the parties before the Court should be settled on an adjusted and uniform basis. Following this decision, MFI in March 2004 reached a permanent settlement of this dispute with its one NTL counterparty who had brought a claim before NASD, resulting in the reversal of $625,000 of the $5.1 million net loss recorded by MFI during 2003. This reversal is included as a gain in principal transactions for the three months ended March 31, 2004. As a result of this settlement, MFI's dispute with its remaining NTL counterparties is now fully centralized in only one forum (New York State Supreme Court). However, because the Court's summary judgment decision remains subject to the entry of a final order implementing its terms and possible appeal, MFI only intends to reverse additional portions of the 2003 net loss to the extent it achieves additional permanent resolutions, whether by mutual consent, completion of the appeals process or otherwise, with any of its remaining counterparties. General, administrative and other expenses for the three months ended March 31, 2004 and March 31, 2003 include legal fees related to the NTL when-issued trade disputes of $118,000 and $200,000, respectively. NOTE 6 - 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 or loss from contractual arrangement. Page 13 of 59 Pages NOTE 6 - TOKYO BASED VENTURE (Continued): - ---------------------------------------- Summarized operating results of the Tokyo Venture for the three month periods ended March 31, 2004 and March 31, 2003, along with the Company's share of those results, are presented below: Three Months Ended -------------------------------- March 31, 2004 March 31, 2003 -------------- -------------- Revenues $ 1,074,965 $ 1,666,459 Expenses 1,631,404 2,591,084 -------------- -------------- Loss ($ 556,439) ($ 924,625) ============== ============== Company's share ($ 318,561) ($ 529,348) ============== ============== NOTE 7 - NET CAPITAL REQUIREMENTS: - --------------------------------- MFI, as a U.S. broker-dealer, is subject to the Uniform Net Capital Rule (rule 15c3-1) of the Securities and Exchange Commission ("SEC"), which requires the maintenance of minimum regulatory net capital. MFI has elected to use the alternative method, as permitted by the rule, which requires that MFI maintain minimum regulatory net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined; or 4% of the funds required to be segregated pursuant to the Commodity Exchange Act and regulations thereunder. MFI's membership in the Government Securities Division of the Fixed Income Clearing Corporation ("GSD-FICC") requires it to maintain minimum excess regulatory net capital of $10,000,000 and minimum net worth (including subordinated borrowing) of $25 million. At March 31, 2004, MFI had regulatory net capital of $43.9 million, a regulatory net capital requirement of $250,000 and net worth of $55.1 million. Euro Brokers Ltd. ("EBL"), a U.K. brokerage subsidiary of the Company, is a Type D registered firm of the Financial Services Authority ("FSA"), required to maintain a financial resources requirement generally equal to six weeks' average expenditures plus the amount of less liquid assets on hand. At March 31, 2004, EBL had financial resources in accordance with FSA's rules of (pound)4.5 million ($8.3 million) and a financial resources requirement of (pound)3.5 million ($6.4 million). NOTE 8 - 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-month periods respectively ended March 31, 2004 and March 31, 2003 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 the three months ended March 31, 2003 reflecting the Page 14 of 59 Pages NOTE 8 - SEGMENT REPORTING (Continued): - -------------------------------------- net loss of $5.9 million recorded in that quarter on NTL when-issued equity trades (see Note 5). The net income for the United Kingdom segment for the three months ended March 31, 2003 reflects the $3.0 million extraordinary gain realized on the February 2003 purchase of the minority interest in EBL and includes the results for EBL, for periods prior to the purchase, net of such minority interest. Japan amounts primarily reflect the non-equity losses from contractual arrangement (Tokyo Venture). See Note 6 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, 2003 and which are not expected to meet these thresholds for the year ended December 31, 2004 have been included in "All Other."
United States United Kingdom Japan All Other Total Three months ended ------------- ------------- ------------- ------------- ------------- March 31, 2004 Operating revenues $ 27,790,960 $ 21,242,184 $ $ 2,517,667 $ 51,550,811 Net income (loss) 1,469,343 755,534 ( 318,560) 699,123 2,605,440 Assets 575,318,487 31,565,404 183,190 6,572,103 613,639,184 Three months ended March 31, 2003 Operating revenues $ 19,153,515 $ 16,792,169 $ $ 1,246,918 $ 37,192,602 Net income (loss) ( 2,029,204) 4,141,266 ( 545,312) 214,707 1,781,457 Assets 124,814,640 24,410,009 176,432 3,553,580 152,954,661
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 March 31, 2003. As of March 31, ------------------------------ 2004 2003 ------------- ------------- Total for reportable segments $ 607,067,081 $ 149,401,081 Other assets 6,572,103 3,553,580 Elimination of intersegment receivables ( 12,499,659) ( 6,526,733) Elimination of investments in other segments ( 13,095,984) ( 13,095,984) ------------- ------------- $ 588,043,541 $ 133,331,944 ============= ============= Page 15 of 59 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, 2003 in the 2003 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 positions are carried at fair values generally based on quoted market prices. From time to time quoted market prices are not available for certain municipal or other securities positions. For such securities, we, with the assistance of independent pricing services, determine fair values by analyzing securities with similar characteristics that have quoted market prices. Consideration is given to the size of our individual positions relative to the overall market activity in such positions when determining the impact our sale would have on fair values. The assumptions used in valuing our securities positions may be incorrect and the actual value realized upon disposition could be different from the current carrying value. Included in accounts payable and accrued liabilities are reserves for certain contingencies to which we may have exposure, such as the employer portion of National Insurance Contributions in the U.K., interest and claims on securities settlement disputes, such as the NTL matter, and reserves for certain income tax contingencies. The determination of the amounts of these reserves requires significant judgment on our part. We consider many factors in determining the amount of these reserves, such as legal precedent and case law and historic experience. The assumptions used in determining the estimates of reserves may be incorrect and the actual costs of resolution of these items could be greater or less than the reserve amounts. Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 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 March 31, 2004, these revenues increased $6,900,948 to $48,050,301, compared to $41,149,353 for the comparable period in 2003, reflecting increases in London and New York. In London, the increase primarily reflected increased commissions generated by our inter-dealer brokerage operations, which included improved brokerage of derivatives products and the expansion during 2003 of our securities brokerage operations, and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. The increase in New York was primarily attributable to increased commissions generated by our inter-dealer brokerage operations, which included improved brokerage of money market products. Page 16 of 59 Pages 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 March 31, 2004, these activities resulted in a gain of $3,500,510, compared to a loss of $4,081,752 for the three months ended March 31, 2003. This change primarily reflected the $5.9 million loss recorded by MFI during the three months ended March 31, 2003 on the settlement of its NTL when-issued equity trades and, during the three months ended March 31, 2004, the reversal of $625,000 of this loss, as well as a $1.5 million gain resulting from the resolution of contingencies associated with the settlement of certain principal transactions in the aftermath of the September 11th attacks. As discussed in Note 5 to the Consolidated Financial Statements included in this report, the recording of this $5.9 million loss during the first quarter of 2003 (which was partially offset by a gain of $800,000 recorded during the second quarter of 2003) reflected the contingency that all of MFI's NTL when-issued trades, other than permanently adjusted settlements by mutual agreement, should have settled on an unadjusted basis. In March 2004, the New York State Supreme Court granted a summary judgment motion made by MFI and issued a decision stating that all NTL when-issued trades among the parties before the Court should be settled on an adjusted and uniform basis. Following this decision, MFI in March 2004 reached a permanent settlement of this dispute with its one NTL counterparty who had brought a claim before NASD, resulting in the reversal of $625,000 of the $5.1 million net loss recorded by MFI during 2003. As a result of this settlement, MFI's dispute with its remaining NTL counterparties is now fully centralized in only one forum (New York State Supreme Court). However, because the Court's summary judgment decision remains subject to the entry of a final order implementing its terms and possible appeal, MFI only intends to reverse additional portions of the 2003 net loss to the extent it achieves additional permanent resolutions, whether by mutual consent, completion of the appeals process or otherwise, with any of its remaining counterparties. Interest income for the three months ended March 31, 2004 increased $1,287,252 to $1,926,968, compared to $639,716 for the three months ended March 31, 2003, primarily reflecting financing income earned on reverse repurchase agreements in connection with the institutional securities financing operations we started in 2003 and coupon and financing income associated with securities positions taken by our restructured institutional corporate bond sales and trading operations. Other items for the three months ended March 31, 2004 resulted in a loss of $375,616, as compared to a loss of $319,478 for the three months ended March 31, 2003. This increased loss resulted from the expiration of an information licensing agreement in the second half of 2003, which generated $125,000 of licensing income during the three months ended March 31, 2003, and foreign exchange losses during the first quarter of 2004, as compared to foreign exchange gains during the first quarter of 2003. Offsetting these decreases was a narrowing of the losses incurred by the Tokyo Venture. For the three months ended March 31, 2004, we recorded a loss of $318,561 on our 57.25% interest in this venture, as compared to a loss of $529,348 for the three months ended March 31, 2003. Page 17 of 59 Pages For the three months ended March 31, 2004, interest expense on securities indebtedness increased $1,650,181 to $1,695,279, compared to $45,098 for the three months ended March 31, 2003, primarily as a result of interest expense incurred on repurchase agreements in connection with our institutional securities financing operations and coupon and financing expense on securities positions taken by our institutional corporate bond sales and trading operations. Compensation and related costs for the three months ended March 31, 2004 increased $4,167,855 to $33,975,005, compared to $29,807,150 for the three months ended March 31, 2003, primarily as a result of increased brokerage staff in connection with the expansion of products in London and New York, the overall increase in net revenues (resulting in higher incentive-based compensation), and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Communication costs for the three months ended March 31, 2004 increased $166,081 to $3,406,872, compared to $3,240,791 for the three months ended March 31, 2003, primarily as a result of the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Travel and entertainment costs for the three months ended March 31, 2004 increased $863,086 to $2,774,983, compared to $1,911,897 for the three months ended March 31, 2003, reflective in part of expansion efforts in New York and London and the overall increase in net revenues. Occupancy and equipment rental represent expenses incurred in connection with our office premises, including base rent and related escalations, maintenance, electricity and real estate taxes, as well as rental costs for equipment under operating leases. For the three months ended March 31, 2004, these costs increased $1,429,952 to $2,538,472, compared to $1,108,520 for the three months ended March 31, 2003, primarily due to an increase of $673,000 to an accrual in London for excess office space (arising from a terminated sublet) designated for sublease. This adjustment was based upon a reassessment of the length of time it will take to generate sublease income on this space. Also contributing to the increase in these costs were increased costs for office space in London and rental costs on new equipment in New York leased from General Electric Capital Corporation. 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 March 31, 2004, these costs increased $142,883 to $1,012,354, compared to $869,471 for the three months ended March 31, 2003, primarily as a result of the increase in transaction volumes from our institutional sales and trading businesses and our emerging market debt brokerage business. 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 March 31, 2004, depreciation and amortization increased $43,408 to $809,143, compared to $765,735 for the three months ended March 31, 2003, primarily as a result of the depreciation and amortization in New York of furniture and leasehold improvements purchased for our new headquarters. Page 18 of 59 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 March 31, 2004 and the three months ended March 31, 2003, these costs were $53,249 and $36,477, respectively. 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 March 31, 2004, these expenses increased $222,080 to $1,904,804, as compared to $1,682,724 for the three months ended March 31, 2003, primarily as a result of increases in various general and administrative costs such as corporate insurance, securities licensing fees and office expenses. These costs also included professional fees incurred during the three months ended March 31, 2004 and the three months ended March 31, 2003 in connection with the NTL when-issued trade disputes of $118,000 and $200,000, respectively. During the three months ended March 31, 2004, the Company recorded a provision for income taxes of $2,326,562, as compared to a benefit for income taxes during the three months ended March 31, 2003 of $1,079,919. The benefit reflected the Company's pre-tax loss, before extraordinary item, during the first quarter of 2003, incurred primarily as a result of the $5.9 million loss recorded for the NTL when-issued trade disputes. For the three months ended March 31, 2003, minority interest in consolidated subsidiary resulted in a reduction of the net income from EBL of $175,985. The lack of minority interest in the current period is the result of the Company's purchase of the minority interest of EBL in February 2003. During the three months ended March 31, 2003, we recorded an extraordinary gain of $2,957,547 as the result of our February 2003 discounted purchase of the 50% minority shareholding held in EBL. We purchased this interest, pursuant to the terms of an EBL shareholders agreement that we enforced in a U.K. court proceeding, as a result of the failure of the minority shareholder to provide certain requested funding to EBL in late 2000. The discounted purchase price, calculated under the agreement as 70% of the book value attributable to this shareholding as of December 2000, resulted in an extraordinary gain of $2,957,547. The gain reflected the excess of $5,570,703, the amount recorded for the 50% interest in EBL as of the February 2003 purchase date, over the purchase price of $2,613,156. Page 19 of 59 Pages 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. Cash and cash equivalents at March 31, 2004 reflect a reduction from the level at December 31, 2003, principally due to the timing of employee bonus payments, which occurred in February 2004, and cash resources used for securities positions (including repurchase and reverse repurchase agreements) in connection with our institutional sales and trading operations and our institutional securities financing operations. U.S. Treasury and federal agency securities purchased under agreements to resell (reverse repurchase agreements) and U.S. Treasury and federal agency securities sold under agreements to repurchase (repurchase agreements) are collateralized financings on which we seek to earn an interest spread. The balances recorded on these transactions, reflected on the Consolidated Statements of Financial Condition respectively as "securities purchased under agreements to resell" and "securities sold under agreements to repurchase," are the contracted amounts, plus accrued interest. The reduction in these balances from those at December 31, 2003 reflect the increased customer demand for financing that occurs at a calendar year end. We monitor the fair value of the securities purchased and sold under these agreements and obtain additional collateral or return excess collateral where appropriate. Securities owned and securities sold, not yet purchased reflect securities positions taken in connection with sales and trading operations and in our firm investment account. Securities positions taken by our sales and trading businesses are often for the purpose of facilitating anticipated customer needs and are typically hedged with offsetting positions of a similar nature. Securities owned are financed either from cash resources, by margin borrowings (if available) from broker-dealers that clear certain of these transactions on our behalf or by repurchase agreements. We are able to make delivery on securities sold, not yet purchased by borrowing such securities either from clearing firms that clear certain of these transactions on our behalf or through reverse repurchase agreements. 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. As reflected on the Consolidated Statements of Financial Condition, and as detailed in the table below, we had net assets relating to securities positions (including repurchase and reverse repurchase agreements) of $15.3 million at March 31, 2004, an increase of $8.2 million as compared to net assets relating to securities positions of $7.1 million at December 31, 2003. Page 20 of 59 Pages
(in millions) March 31, 2004 December 31, 2003 ----------------- ----------------- Securities purchased under agreements to resell $ 351.7 $ 1,446.7 Receivable from clearing firm(1) 12.3 Securities failed-to-deliver 82.4 90.7 Securities owned 42.3 6.7 Securities sold under agreements to repurchase ( 342.3) ( 1,470.5) Payable to broker-dealers and customers(2) ( 6.3) Securities failed to receive ( 77.4) ( 66.5) Securities sold, not yet purchased ( 47.4) ----------------- ----------------- Net assets relating to securities positions $ 15.3 $ 7.1 ================= =================
(1) Included in receivable from broker-dealers and customers on the Consolidated Statements of Financial Condition and comprised of cash proceeds received against short sales in our firm investment account and the cash margin requirement maintained with our clearing firm for sales and trading positions. (2) Trade date adjustment for the net purchase on March 31, 2004 of U.S. Treasury securities (which are self-cleared). MFI is a member of the GSD-FICC for the purpose of clearing transactions in U.S. Treasury and federal agency securities and repurchase agreements collateralized by such instruments. Pursuant to such membership, MFI is required to maintain excess regulatory net capital of $10,000,000 and a minimum net worth (including subordinated borrowing) of $25 million. In addition, MFI is required to maintain a clearing deposit with GSD-FICC, based upon the level and nature of its trading activity (with a minimum deposit of $5,000,000), as well as certain minimum collateral deposits with MFI's clearing brokers. 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 FSA in the U.K., required to maintain a financial resources requirement generally equal to six weeks average expenditures plus the amount of less liquid assets on hand (a $6.4 million requirement at March 31, 2004). At March 31, 2004, we had $5,000,000 outstanding under a three-year revolving credit facility entered into by Euro Brokers Inc. ("EBI"), a U.S. subsidiary, with The Bank of New York ("BONY") in March 2003. This facility, as amended in November 2003, provides for borrowings of up to $10 million and is secured by EBI's receivables and the stock issued by EBI to its direct parent. The agreement with BONY contains certain covenants which require EBI separately, and MFGI on a consolidated basis, 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 facility. As of March 31, 2004, we had authorization remaining for the repurchase of up to 669,193 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 Page 21 of 59 Pages 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 April 2004, our Board of Directors declared a common stock cash dividend of $.0625 per share for our fiscal first quarter. The dividend is payable on June 15, 2004 to holders of record on May 28, 2004. 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 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 Page 22 of 59 Pages Financial Condition and Results of Operations" and the "Quantitative and Qualitative Disclosures about Market Risk" sections of the 2003 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 In January 2004, we restructured our institutional corporate bond sales and trading operations. The table below provides information at March 31, 2004, about the securities positions associated with these operations. Our market risk analysis did not otherwise materially change from the market risk analysis as of December 31, 2003 presented in the 2003 Form 10-K.
As of March 31, 2004: - -------------------- 2004 2005 2006 2007 2008 After 2008 Total Fair Value ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Trading: - ------- Interest rate sensitivity: Securities owned: Corporate bonds $ 2,083,000 $ 2,086,000 $ 1,882,000 $ 1,521,000 $ 16,640,000 $ 24,212,000 $ 26,136,653 (weighted average interest rate-6.12%) U.S. Treasury securities 1,353,000 580,000 8,273,000 10,206,000 10,510,219 (weighted average interest rate-3.81%) Securities sold, not yet purchased: Corporate bonds (490,000) (1,226,000) (1,733,000) (3,415,000) (16,897,000) (23,761,000) (24,593,950) (weighted average interest rate-6.09%) U.S. Treasury securities (565,000) (3,834,000) (7,185,000) (11,584,000) (12,592,193) (weighted average interest rate-4.25%)
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 March 31, 2004. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our periodic SEC reports has been appropriately recorded, processed, summarized and reported. 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 March 31, 2004, 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 23 of 59 Pages PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 5 to the Consolidated Financial Statements (unaudited) included as a part of this report for a discussion of the proceedings in the Supreme Court of the State of New York involving the disputed settlement of our NTL Inc. when-issued equity trades. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (e) Issuer Purchases of Equity Securities The following table is a summary of all purchases made by us of our common stock during the three months ended March 31, 2004 and, as of each month end during such three-month period, the maximum number of shares that could still be purchased under our share repurchase program: Issuer Purchase of Equity Securities (1)
Total Number of Maximum Number of Shares Purchased Shares that May Yet Total Number of Average as Part of Publicly be Purchased Under Shares Price Paid Announced Plans the Plans or Period Purchased Per Share or Programs Programs ------ --------- --------- -------- -------- January 1 to January 31, 2004 -- -- -- 694,193 February 1 to February 29, 2004 -- -- -- 694,193 March 1 to March 31, 2004 25,000 $ 11.25 25,000 669,193 --------- --------- -------- Total: 25,000 $ 11.25 25,000
- --------------------------- (1) Following the full utilization of earlier share repurchase authorizations announced on May 15, 2000 (833,744 shares) and January 26, 2001 (787,869 shares), we announced on July 26, 2001, a further authorization by our Board of Directors of a share repurchase program for up to 709,082 shares (10% of our then-outstanding shares). On September 18, 2001, in the immediate aftermath of the September 11th attacks, we announced the expansion of this authorization to bring the total repurchase authorization up to 1,200,000 shares. On April 24, 2003, we announced the further expansion of this authorization by an additional 700,000 shares, for a total repurchase authorization of 1,900,000 shares. These authorizations have no expiration date and delegate to our senior management the discretion to purchase shares, through open market, privately negotiated and/or block transactions, at times, amounts and prices it deems financially prudent in light of prevailing market, business and financial conditions. Page 24 of 59 Pages Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description - ----------- ----------- 10.1.1 Agreement for Securities Clearance Services, dated as of April 1, 2004, by and between Refco Securities, LLC and Maxcor Financial Inc. (1) 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 March 31, 2004, we filed one current report on Form 8-K, dated February 17, 2004. The Form 8-K attached two press releases, one announcing the declaration by our Board of Directors of a quarterly dividend on our common stock of $.0625 per share, and the other announcing our unaudited financial results for the full year and fourth quarter ended December 31, 2003. - ------------------------ (1) Portions of this exhibit have been redacted and confidential treatment requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Page 25 of 59 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: May 14, 2004 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 26 of 59 Pages EXHIBIT INDEX Exhibit Description Page - ------- ----------- ---- 10.1 Agreement for Securities Clearance Services, dated as of 28 April 1, 2004, by and between Refco Securities, LLC and Maxcor Financial Inc. (1) 31.1 Rule 13a-14(a) Certification of Principal Executive Officer 57 31.2 Rule 13a-14(a) Certification of Principal Financial Officer 58 32 18 U.S.C. Section 1350 Certifications of Principal Executive 59 and Financial Officers - ------------------------ (1) Portions of this exhibit have been redacted and confidential treatment requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Page 27 of 59 Pages EX-10.1 2 ex10_1.txt EXHIBIT 10.1 Agreement for Securities Clearance Services Maxcor Financial Inc. --------------------- This letter sets forth our agreement (the "Agreement"), made as of April 1, 2004, concerning certain clearing services to be performed by Refco Securities, LLC. ("Refco") for Maxcor Financial Inc. ("Introducing Firm") with respect to transactions of Approved Counterparties (as defined below) in the securities specified in Exhibit A hereto ("Specified Securities"). It is understood and agreed that this Agreement is contingent upon the approval of the National Association of Securities Dealers Inc. ("NASD") 1. Certain Definitions ------------------- A. "Applicable Rules" are, to the extent applicable, the Securities Act of 1933 and The Exchange Act of 1934, all rules and regulations thereunder and interpretations by the Securities and Exchange Commission ("SEC") and the rules and regulations of the NASD, all as in effect from time to time. B. An "Approved Counterparty" is a dealer trading with Introducing Firm or a customer of Introducing Firm, which Refco as of the date of this Agreement is accepting as a counterparty for trades brokered by Introducing Firm or to which Refco hereafter sends a letter in the form of Exhibit B and which, in either case, Refco continues to consider acceptable; provided, however, that (i) Refco will make no material changes to the form of Exhibit B without the prior consent of Introducing Firm and (ii) any decision by Refco to change the status of an Approved Counterparty will be communicated either orally and followed by fax or in writing to Introducing Firm in advance of its implementation. C. A "Back-to-Back Transaction" occurs where Introducing Firm (i) has executed a sale by an Approved Counterparty to be settled by Refco, ("Side One") of Specified Securities and a buy to be settled by Refco, by another Approved Counterparty of Specified Securities ("Side Two"), (ii) has confirmed that Side One and Side Two agree on all details of the trade that must be met in order to settle (i.e. that Side One and Side Two are Validated Transactions) and (iii) has transmitted Side One and Side Two to Refco on the same day. D. "Clearing Corporation" means CEDEL/Euroclear or any other clearing organization that settles Transactions that Refco clears for Introducing Firm. E. A "Matching Back-to-Back Transaction" is a Back-to-Back Transaction with respect to which the counterparty to Side One and Side Two have both submitted instructions to the Clearing Corporation in the form required to settle Side One and Side Two, and a "Matching Transaction" is a Back-to-Back Transaction with respect to which only one counterparty has submitted instructions to the Clearing Corporation in the form required to settle the side to which such counterparty is a party. Page 28 of 59 Pages F. "Transactions" are any trades transmitted by Introducing Firm hereunder to Refco for clearing and settlement. G. A "Validated Transaction" is a sale or purchase of Specified Securities with an Approved Counterparty for which the Introducing Firm has confirmed all of the trade details necessary for settlement. 2. Responsibilities of Introducing Firm ------------------------------------ A. Transmitting Transactions ------------------------- Introducing Firm shall execute orders for purchases and sales of Specified Securities by Approved Counterparties and transmit the Transactions to Refco three times a day, at approximately 12:00 p.m. and 3:00 p.m., and by no later than 6:00 p.m. Eastern Standard Time (EST), (the last of which being referred to as the "Cut-Off Time"). Any Transactions that Refco receives after the Cut-Off Time shall be subject to the additional fees set forth on Schedule A hereto. (i) Transmitting Back-to-Back Transactions -------------------------------------- Introducing Firm shall not transmit to Refco any Transaction that, by the Cut-Off Time, is not a Back-to-Back Transaction, with the following exception. Notwithstanding anything to the contrary in the Additional Terms forming a part of Exhibit B (the "Additional Terms"), Introducing Firm may transmit only Side One or Side Two, if at the end of the trading day one of the two sides is not a Validated Transaction, subject to the aggregate amount of such one-sided Transactions not exceeding a limit established by Refco and communicated to Introducing Firm from time to time. If the Transaction was intended to be a Back-to-Back Transaction, Introducing Firm shall exert reasonable best efforts to transmit a Validated Side One or Side two the following business day. If Introducing Firm has not done so by the end of the day after the settlement date, Refco may, upon prior notice to Introducing Firm, on the second day after settlement date buy in or sell out the securities to settle the other side. Introducing Firm shall be liable for all loss, costs and expenses relating thereto to the extent set forth in Sections 2.D. and 5.A. The foregoing right of Introducing Firm to delay the transmission of one side is subject to (i) termination at any time that Refco deems that it is no longer prudent to accept only one side and (ii) satisfactory amounts on deposit in the Collateral Account, in Refco's sole discretion. In any event, such one-sided Transactions shall give rise to the additional fees established in Section 3.A. (iii) and Schedule A, regardless of when after trade date Introducing Firm transmits to Refco the other side of the Transaction. B. Responsibility for Accounts --------------------------- Except as otherwise specified in this Agreement, Introducing Firm shall be solely responsible for the opening, approving and monitoring of counterparties (the "Accounts"), and ensuring that Page 29 of 59 Pages Transactions are in compliance with the Applicable Rules. Such responsibility, where applicable, includes, but is not limited to: (i) Using due diligence to learn and on a continuing basis to know the essential facts of each customer, knowing all persons holding power of attorney over any Account, being familiar with each order in any Account and at all times to comply fully with the Conduct Rules of the NASD, and any interpretations thereof, and all similar Applicable Rules; (ii) selecting, investigating, training and supervising all personnel who open, approve or authorize transaction in the Accounts; (iii) establishing written procedures for the conduct of the Accounts and ongoing review of all Transactions in Accounts, and maintaining compliance and supervisory personnel adequate to implement such procedures; (iv) determining the suitability of all Transactions; (v) ensuring that there is a reasonable basis for all recommendations made; (vi) determining the appropriateness of the frequency of trading in Accounts; (vii) determining the authorization and legality of each transaction in the Account; (viii) determining the amount of any difference between the prices paid or received by an Account for a Specified Security and the prices paid or received by Refco for said Specified Security; (ix) obtaining and maintaining all documents necessary for the performance of Introducing Firm's responsibilities under this Agreement and retaining such documents in accordance with all the Applicable Rules; (x) responding to all its customer inquiries and complaints, and promptly notifying Refco in writing of complaints concerning Refco; (xi) arranging for completion of all Refco forms and providing any supporting documents required for the opening and maintenance of the Account and (xii) promptly furnishing Refco with all information concerning its customer and Introducing Firm's relationship with its customer and any related documents that Refco may reasonably require. Nothing herein shall restrict Refco from making any further inquiry or investigation, as Refco deems necessary. Introducing Firm authorizes and directs Refco to (i) furnish promptly any written customer complaint received by Refco, regarding Introducing Firm or its associated persons and relating to functions and responsibilities allocated to Introducing Firm, directly to Introducing Firm and to Introducing Firm's designated examining authority, and (ii) notify the customer, in writing, that Refco has received the complaint and that the complaint has been furnished to Introducing Firm and Introducing Firm's designated examining authority. All other correspondence in the nature of customer inquiries or customer complaints relating to functions and responsibilities allocated to Refco is to be directed to and responded to by Refco. All such correspondence (including customer inquiries and complaints) is to be reviewed and replied to by Refco or Introducing Firm depending on who is responsible for the function which is the subject matter of the correspondence. If such correspondence is not directed to the appropriate party initially, Refco or Introducing Firm shall promptly forward such correspondence to the appropriate party. Page 30 of 59 Pages C. Volume Limitations ------------------ Introducing Firm shall not transmit to Refco more than the number of Transactions per day that Refco informs Introducing Firm from time to time constitute the Introducing Firm's volume limit, as set by Refco in its reasonable discretion, acting in good faith. Any Transactions in excess of the volume limitation, as in effect from time to time, may be rejected by Refco unless Refco has earlier indicated orally or in writing in the course of the applicable day that it will accept such Transactions. D. Indemnification --------------- Introducing Firm agrees to indemnify and hold harmless Refco, its officers, directors, employees and affiliates, against any and all losses, costs, claims and expenses (including reasonable attorneys' fees), as incurred, (a) arising out of (i) Refco acting as clearing broker for Introducing Firm pursuant to this Agreement, (ii) Introducing Firm's failure to perform its obligations under this Agreement or the willful misconduct of Introducing Firm, and (b) constituting Introducing Firm Failure Costs or Counterparty Failure Costs (all referred to as "Indemnified Losses"), but excluding Credit Failure Costs, as defined in Section 5.B., any indirect or consequential losses, lost opportunity costs, or any Indemnified Loss caused by Refco's negligence, Refco's failure to perform its obligations under this Agreement, or Refco's willful misconduct. Refco shall give Introducing Firm prompt written notice of any matter that may constitute an Indemnified Loss hereunder, and, if the Indemnified Loss involves a third-party claim, the Introducing Firm may, but shall not be obligated to, assume the defense thereof with counsel of its own choosing and at its own expense. E. Recording, Retaining Tapes -------------------------- Absent good reason or unforeseen circumstances, Introducing Firm shall record every trading conversation with counterparties to Transactions and shall retain tapes of all such conversations for at least thirty business days, and longer with respect to specified days, Approved Counterparties or Transactions if Refco so requests, either orally and confirmed by fax or in writing. 3. Responsibilities of Refco ------------------------- A. Clearing -------- Subject to the exception described in Section 2. A. (i), Refco, is obligated to clear only Matching Back-to-Back Transactions and Matching Transactions with Approved Counterparties in Specified Securities, which entails Refco, taking a position as a fully disclosed principal on Side One and on Side Two of Matching Back-to-Back Transactions (or, in the case of Matching Transactions on the side that is matched) pursuant to the following procedure. Page 31 of 59 Pages (i) Upon receipt of a transmission of Back-to-Back Transactions from Introducing Firm, Refco may, but is not obligated to, check whether all or any number of such Transactions fail to meet the definition of a Back-to-Back Transaction. Subject to the exception established in Section 2.A. (i), any Transaction that does not meet the definition of a Back-to-Back Transaction may be rejected by Refco, and Refco shall not, unless the Transaction is subsequently accepted by Refco, be principal to the counterparty nor carry the position on its books. (ii) Refco shall download to the Clearing Corporation by either the end of the day of trade date or, with respect to Transactions transmitted after the Cut-Off Time, on T +1, the trade details received from Introducing Broker for each Transaction that Refco has not rejected pursuant to subsection (i) above. (iii) On the business day following the download of information regarding any Transaction to the Clearing Corporation, Refco shall review a report from the Clearing Corporation indicating whether any Transactions were not Back-to-Back Transactions or were not Matching Back-to-Back Transactions. In either case, if Introducing Firm has transmitted any Transaction to Refco other than a Back-to-Back Transaction, Introducing Firm shall pay to Refco the applicable fees set forth in Schedule A, and, as set forth in Section 5.A., Introducing Firm shall reimburse Refco for all Introducing Firm Failure Costs. Refco, shall settle as fully disclosed principal any Transactions for which Refco has sent a confirmation, pursuant to Section 3.B. The sending of a confirmation shall mean that Refco has taken a position as principal and is therefore carrying such Transactions on its books, notwithstanding that Introducing Firm remains financially responsible to Refco hereunder for any Introducing Firm Failure Costs and Counterparty Failure Costs except in the case of insolvency of an introduced account. Upon prior notice to Introducing Firm, Refco may take commercially reasonable action to settle or liquidate any unmatched Back-to-Back Transactions for which it has sent a confirmation to the counterparty and has submitted settlement instructions to the Clearing Corporation. B. Confirmations ------------- No later than T+1 or one day after Refco has received a Transaction, whichever is later, Refco shall deliver confirmations to all counterparties on Transactions that Refco has not rejected pursuant to Section 3.A. (i) hereof and that Refco is obligated to transmit to the Clearing Corporation, pursuant to Section 3.A. (ii). From the time that Refco transmits a confirmation with respect to a Transaction pursuant to this Section 3.B, Refco shall be acting as principal for and carrying such Transaction on its books for regulatory capital purposes. For the avoidance of doubt with respect to any Transaction transmitted to Refco pursuant to the exception described in Section 2.A (i), Refco shall act as principal for and carry such Transaction on its books for regulatory capital purposes, provided that it is a Validated Transaction, notwithstanding anything to the contrary in the Additional Terms. Page 32 of 59 Pages C. Revenue; Fees ------------- Refco shall receive on settled Matching Back-to-Back Transactions and Matching Transactions revenue in the form of commissions of Introducing Firm or the spread between Side One and Side Two. Refco shall remit to Introducing Firm within five business days of the end of each calendar month such amounts remaining after Refco deducts (i) its fee, as established in Schedule A, including any additional fees set forth therein for transmissions after the Cut-Off Time pursuant to Section 2.A. and for transmissions of non Back-to-Back Transactions pursuant to Section 3.A (iii) ("Fees"), (ii) Introducing Firm Failure Costs, (iii) Counterparty Failure Costs and (iv) amounts for any Indemnified Losses. Refco shall furnish Introducing Firm with a detailed supporting schedule with each revenue payment. Refco's determination of the amount payable to Introducing Firm with respect to any calendar month shall be conclusive and binding on the parties hereto if Introducing Firm does not object thereto in writing, with details of its objections, within thirty (30) days after its receipt of such supporting schedule and any reasonably requested additional information with respect thereto, provided such request is made no later than 15 days after initial receipt of the supporting schedule. D. Safekeeping/Credit ------------------ Refco shall be responsible for (i) the delivery and receipt of funds and/or Specified Securities to and from Accounts, as applicable, and for the transfer of Specified Securities to and from Accounts and (ii) the receipt, timely delivery and safeguarding of funds and securities and maintenance of books and records (including preparation and timely transmittal of the trade confirmations and statements) relating to all Transactions settled by Refco pursuant to Section 3.A. Although Refco in no way undertakes to extend credit to any Approved Counterparty, if it were to do so, any credit shall be extended in compliance with Regulation T and any other applicable margin regulations. E. Indemnification --------------- Refco agrees to indemnify and hold harmless Introducing Firm, its officers, directors, employees and affiliates, against any and all losses, costs, claims and expenses, reasonable legal fees (including reasonable legal fees incurred in the enforcement of this provision), as incurred, (a) caused by (i) Refco's failure to perform its obligations under this Agreement or (ii) Refco's negligence or willful misconduct or (b) constituting Credit Failure Costs, as defined in Section 5.B. (all referred to as "IF Indemnified Losses"), but excluding any indirect or consequential losses, or lost opportunity costs. The Introducing Firm shall give Refco prompt written notice of any matter that may constitute an IF Indemnified Loss hereunder, and, if the IF Indemnified Loss involves a third party claim, Refco may, but shall not be obligated to, assume the defense thereof with counsel of its own choosing and at its own expense. Page 33 of 59 Pages F. Reports ------- Refco will provide Introducing Firm with same-day reports of Transactions that do not constitute Back-to-Back Transactions and with daily morning reports, starting with T+1, of Transactions that are not Matching Transactions. Simultaneously with the execution of this Agreement, and annually thereafter, Refco shall furnish to Introducing Firm a list substantially in the form of Exhibit C hereto, of all reports (i.e., exception and other types of reports) which it offers to Introducing Firm to assist Introducing Firm to supervise and monitor its introduced accounts in order for Introducing Firm to carry out its functions and responsibilities pursuant to this Agreement. These reports are in addition to the data, information or reports provided to Introducing Firm in the ordinary course of providing clearing Services to Introducing Firm. Introducing Firm shall notify Refco promptly, in writing, of those specific reports offered by Refco that Introducing Firm requires to supervise and monitor its introduced accounts. Annually, within 30 days of July 1 of each year, Refco shall give written notice to Introducing Firm's chief executive and compliance officers, indicating, as of the date of such notice, the list of reports offered to Introducing Firm pursuant to this paragraph and specifying those reports that were actually requested by and/or supplied to Introducing Firm as of such date. At the same time, Refco shall provide a copy of this written notice to Introducing Firm's designated examining authority. Simultaneously with the execution of this Agreement, Introducing Firm shall furnish Refco with a list of its chief executive and compliance officers and the name of its designated examining authority. 4. Separate Responsibilities ------------------------- Pursuant to NASD Rule 3230, the parties have allocated between themselves in this Agreement responsibility for compliance with all applicable laws, rules and regulations of the SEC and NASD. In addition, for purposes of the SEC's financial responsibility rules and SIPC, the Introducing Firm's customers will be considered customers of Refco and not customers of the Introducing Firm; provided, however, that nothing in this Section shall cause the Introducing Firm's customers to be construed or interpreted as customers of Refco for any other purpose or to negate the intent of any other Section of this Agreement, including, but not limited to, the delineation of responsibilities as set forth elsewhere in this Agreement. Each party shall be solely responsible for (i) adherence to Applicable Rules and for the supervision of its own operations area and personnel; (ii) compliance with all restricted/control stock requirements, as applicable to it; (iii) compiling and filing its respective regulatory reports, as applicable; and (iv) supplying the other with reasonable access to its relevant records and supplying any information in its possession reasonably requested by such party in order for both parties to properly perform their respective functions under the Agreement. Each party shall be responsible for its own errors with respect to this Section 4. Page 34 of 59 Pages 5. Failure to Match; Failure to Settle; Responsibilities of the Parties -------------------------------------------------------------------- A. Not Back-to-Back Transactions/Introducing Firm Failure ------------------------------------------------------ In the event Refco receives a Transaction that does not meet the definition of a Back-to-Back Transaction for any reason, including without limitation, (i) the failure of Introducing Firm to transmit to Refco Validated Transactions or (ii) the failure of Introducing Firm to transmit to Refco Side One and Side Two on the same day, Introducing Firm shall have full responsibility for, and shall pay to Refco upon demand, all amounts constituting Refco's reasonable out-of-pocket costs (whether or not already paid), losses and expenses (including reasonable attorneys' fees) arising therefrom including, without limitation, costs to buy-in, borrow or sell-out the securities, to compel performance by the counterparty, or to pay additional personnel or overtime, but only if such additional personnel or overtime costs are beyond the ordinary course of business. All of the foregoing is referred to as "Introducing Firm Failure Costs". B. Settlement Failure/Counterparty Failure --------------------------------------- In the event Refco has transmitted a Back-to-Back Transaction to the Clearing Corporation that becomes a Matching Back-to-Back Transaction but that (i) fails on settlement date due to failure of the counterparty to deliver securities or cash or (ii) fails to become a Matching Back-to-Back Transaction because of the failure of the counterparty to either Side One or Side Two to send to the Clearing Corporation adequate instructions required for settlement, but excluding in either case counterparty failure due to actual or impending bankruptcy or similar insolvency proceedings or credit issues ("Credit Failure Costs"), Introducing Firm shall be responsible for, and shall pay to Refco upon demand, all amounts constituting Refco's reasonable out-of-pocket costs (whether or not already paid), losses and expenses (including reasonable attorneys' fees) arising from such fail, including, without limitation, costs to buy-in, borrow or sell-out securities, to compel performance by the counterparty, to pay additional personnel or to pay overtime, but only if such personnel or overtime costs are beyond the ordinary course of business. All of the foregoing costs, losses, and expenses are referred to herein as the "Counterparty Failure Costs". C. Suspension of Certain Trading ----------------------------- If at any time the number of Transactions (either Side One or Side Two), with respect to which the counterparty has not provided Clearing Corporation with matching instructions, reaches an amount that Refco finds unacceptable Refco may, acting in good faith, suspend accepting Transactions from Introducing Firm, with respect to that counterparty, immediately upon written or oral notice, until such time that Refco decides that it is prudent to resume accepting such Transactions hereunder. If at any time the number of Transactions that are not Page 35 of 59 Pages Back-to-Back Transactions reaches an amount that Refco finds unacceptable (subject to Section 2.A. (i)), Refco may, acting in good faith, suspend accepting Transactions from Introducing Firm immediately upon written or oral notice, until such time that Refco decides that it is prudent to resume accepting Transactions hereunder. D. Regulatory Capital ------------------ It is understood that in no event shall Introducing Firm Failure Costs, Counterparty Failure Costs or Indemnified Losses include any costs or expenses of Refco incurred in connection with capital charges for Transactions. In conformity with the SEC No-Action Letter dated November 3, 1998 and publicly available November 10, 1998 ("No-Action Letter") relating to the capital treatment of assets in the proprietary account of an introducing broker ("PAIB") and to permit Introducing Firm to use PAIB assets in its net capital computations, Refco and Introducing Firm agree as follows: 1) Introducing Firm shall identify to Refco in writing all accounts that are, or from time to time may be, proprietary accounts of Introducing Firm. Refco shall perform a computation for PAIB assets of Introducing Firm ("PAIB Reserve Computation") in accordance with the customer reserve computation set forth in Rule 15c3-3 under the Securities Exchange Act of 1934 ("Customer Reserve Formula") with the following modifications: A) Any credit (including a credit applied to reduce a debit) that is included in the customer reserve formula may not be included as a credit in the PAIB Reserve Computation; B) Note E (3) to Rule 15c3-3a which reduces debit balances by 1% under the basic method and subparagraph (a)(1)(ii)(A) of Rule 15c3-1 which reduces debit balances by 3% under the alternative method shall not apply; and C) Neither Note E (1) to Rule 15c3-3a nor Exchange Interpretation /04 to Item 10 of Rule 15c3-3a regarding securities concentration charges shall be applied to the PAIB Reserve Computation. 2) The PAIB Reserve Computation shall include all proprietary accounts of introducing Firm. All PAIB assets shall be kept separate and distinct from customer assets under the Customer Reserve Formula in Rule 15c3-3. 3) The PAIB Reserve Computation shall be prepared within the same time frames as those prescribed by Rule 15c3-3 for the Customer Reserve Formula. 4) Refco shall establish and maintain a separate "Special Reserve Account for the Exclusive Benefit of Customers" with a bank in conformity with the standards of paragraph (f) of Rule 15c3-3 ("PAIB Reserve Account"). Cash and/or qualified securities as defined in the Customer Reserve Formula shall be maintained in the PAIB Reserve Account in an amount equal to the PAIB reserve requirement. Page 36 of 59 Pages 5) If the PAIB Reserve Computation results in a deposit requirement, the requirement may be satisfied to the extent of any excess debit in the Customer Reserve Formula of the same date. However, a deposit requirement resulting from the Customer Reserve Formula shall not be satisfied with excess debits from the PAIB Reserve Computation. 6) Within two business days of entering into this Agreement, Introducing Firm shall notify its designated examining authority in writing (with a copy to Refco) that it has entered into this Agreement regarding the capital treatment of Introducing Firm's PAIB assets. 7) Commissions receivable and other receivables of Introducing Firm from Refco (excluding clearing deposits) that are otherwise allowable assets under Rule 15c3-1 may not be included in the PAIB Reserve Computation, provided the amounts have been clearly identified as receivables on the books and records of Introducing Firm and as payables on the books of Refco. 8) If Introducing Firm is a guaranteed subsidiary of Refco or if Introducing Firm guarantees Refco (i.e., guarantees all liabilities and obligations) then the proprietary accounts of Introducing Firm shall be excluded from the PAIB Reserve Computation. 9) Upon discovery that any deposit made to the PAIB Reserve Account did not satisfy its deposit requirement, Refco shall by facsimile or telegram immediately notify its designated examining authority and the SEC. Unless a corrective plan is found acceptable by the SEC and the designated examining authority, Refco shall provide written notification within 5 business days of the date of discovery to Introducing Firm that PAIB assets held by Refco shall not be deemed allowable assets for net capital purposes. The notification shall also state that if Introducing Firm wishes to continue to count its PAIB assets as allowable, it has until the last business day of the month following the month in which the notification was made to transfer all PAIB assets to another clearing broker. However, if the deposit deficiency is remedied before the time at which Introducing Firm must transfer its PAIB assets to another clearing broker, Introducing Firm may choose to keep its assets at Refco. 10) Refco and Introducing Firm shall adhere to the terms of the No Action Letter, including the Interpretations as set forth therein, in all respects. 6. Fees and Charges ---------------- Introducing Firm agrees to pay Refco the fees and charges set forth in Schedule A hereto. 7. Introducing Firm Representations and Covenants ---------------------------------------------- Introducing Firm represents, warrants and covenants to Refco as follows: (i) It is a member in good standing of the NASD. (ii) It is and during the term of this Agreement will remain duly registered or licensed and in good standing as a broker/dealer under the Applicable Rules. Page 37 of 59 Pages (iii) It has all the requisite authority in conformity with all Applicable Rules to enter into this Agreement and to retain the services of Refco in accordance with the terms hereof and has taken all necessary action to authorize the execution of this Agreement and the performance of the obligations hereunder. (iv) It is in compliance, and during the term of this Agreement will remain in compliance with (a) the capital and financial reporting requirements of any and all national securities exchange or other securities exchange and/or securities association of which it is a member, (b) the capital requirements of the SEC and (c) the NASD Conduct Rules. (v) It shall provide representatives of any governmental body having jurisdiction over the respective businesses of the parties with reasonable access to the records relating to Accounts and their owners. (vi) It shall keep confidential any information it may acquire as a result of this Agreement regarding the business and affairs of Refco, which requirements shall survive the termination of this Agreement. 8. Refco Representations and Covenants ----------------------------------- Refco represents, warrants and covenants to Introducing Firm, in addition to the matters set forth in Exhibit D to this Agreement, as follows: (i) Refco is a member in good standing of the NASD. (ii) Refco is and during the term of this Agreement will remain duly licensed and in good standing as a broker/dealer under the Applicable Rules. (iii) Refco has all the requisite authority, in conformity with all Applicable Rules to enter into and perform this Agreement and has taken all necessary action to authorize the execution of this Agreement and the performance of the obligations hereunder. (iv) Refco is in compliance, and during the term of this Agreement will remain in compliance with (a) the capital and financial reporting requirements of every national securities exchange and/or other securities exchange or association of which it is a member, (b) the capital requirements of the SEC and (c) the NASD Conduct Rules. (v) The names and addresses of Introducing Firm's customers which have or which may come to Refco's attention in connection with the clearing and related functions it has assumed under this Agreement are confidential and shall not be utilized by Refco except in connection with the functions performed by Refco pursuant to this Agreement. Notwithstanding the foregoing, should any customer of Introducing Firm request, on an unsolicited basis that Refco become its broker, acceptance of such Account by Refco shall in no way violate this representation and warranty, nor result in a breach of this Agreement. (vi) Refco shall keep confidential any information it may acquire as a result of this Agreement regarding Introducing Firm's business and affairs, which requirement together with Refco's obligations under the separate confidentiality agreement between Refco's parent, Refco Group Ltd., LLC and Introducing Firm, dated January 28, 2004 (the "Confidentiality Agreement"), shall survive the termination of this Agreement. Page 38 of 59 Pages 9. Nature of Relationship ---------------------- A. Refco shall limit its services pursuant to the terms of this Agreement to that of the clearing and the specified related functions described herein, and Introducing Firm shall not hold itself out as an agent of Refco or of any subsidiary or company controlled directly or indirectly by or affiliated with Refco. Neither this Agreement nor any operation hereunder shall create a general or limited partnership, association or joint venture or agency relationship between the parties. B. Introducing Firm shall not, without the prior written approval of Refco, place any advertisement in any newspaper, publication, periodical or any other media if such advertisement in any manner makes reference to Refco or to the clearing arrangements set forth in this Agreement; provided, however, that the public parent company of Introducing Firm may name Refco and accurately describe this Agreement in any filing such company makes with the SEC pursuant to either the Securities Act of 1933 or the Securities Exchange Act of 1934. C. Should Introducing Firm in any way hold itself out as, advertise or represent that it is the agent of Refco, Refco may, at its option, terminate this Agreement and Introducing Firm shall be liable for any loss, liability, damage, claim, cost or expense (including but not limited to reasonable fees and expenses of legal counsel) sustained or incurred by Refco as a result of such a representation of agency or apparent authority to act as an agent of Refco or agency by estoppel. 10. Deposit of Collateral --------------------- A. To ensure Introducing Firm's performance of its obligations under this Agreement (including, without limitation, the payment of Fees, Introducing Firm Failure Costs, Counterparty Failure Costs and Indemnified Losses), there shall be established a securities holding account with Refco to be opened in the name of Introducing Firm and designated as the Introducing Firm Collateral Account (the "Collateral Account"). The Collateral Account shall at all times contain cash, securities, or a combination of both, having a market value of not less than the sum required by Refco as of the date of this Agreement; provided that Refco shall have the right, in its reasonable discretion, to increase upon not less than three business days notice to Introducing Firm, the Collateral Amount to reflect materially changed conditions relating to the Introducing Firm or its business or an unusually high number or value of unresolved errors or fails with respect to Transactions (the "Collateral Amount"). Said securities shall consist only of direct obligations issued by or guaranteed as to principal and interest by the United States and such other securities as Refco may in writing consent to, in its sole discretion, from time to time. As collateral security for all of its obligations to Refco under and with respect to this Agreement, Introducing Firm hereby pledges, Page 39 of 59 Pages assigns and grants a first priority security interest and lien to Refco in and upon all property from time to time now or hereafter in the Collateral Account, and Refco shall have all rights and remedies with respect thereto of a secured party under the New York Uniform Commercial Code or other applicable law, as well as its other rights hereunder. Introducing Firm represents and warrants that any Collateral shall be free of any lien, pledge or interest other than that of Refco. Introducing Firm shall be entitled to receive all cash distributions made on or in respect of the securities unless the market value of the cash and/or securities in the Collateral Account is less than the Collateral Amount. If the Collateral Account consists of cash, Refco shall pay interest to the Introducing Firm on this cash held from time to time at an agreed upon rate. If at any time the market value of the cash and/or securities in the Collateral Account fall below 90% of the Collateral Amount, as determined by Refco, Refco may, by notice to Introducing Firm, demand that Introducing Firm deliver additional collateral to the Collateral Account no later than the third following business day to increase the market value to the full Collateral Amount. B. Except as provided herein, Introducing Firm shall not have access to, nor have any right to transfer or withdraw any cash or securities from, the Collateral Account without the prior written consent of Refco. The Collateral Account shall not be deemed to be margin for any Approved Counterparty accounts. Neither the Collateral Account nor the Collateral Amount shall constitute or reflect any ownership interest by Refco in Introducing Firm. C. Refco shall have the right to deduct the amount of any and all amounts owed to Refco hereunder, including without limitation, Fees, Introducing Firm Failure Costs and Counterparty Failure Costs and Indemnified Losses, from the securities collateral, and, in such event, Refco shall have the right to liquidate the securities in a commercially reasonable manner; provided, however, Refco agrees to deduct the foregoing amounts first from revenue, pursuant to Section 3.C. and then, to the extent revenue is insufficient, from the Collateral Account. Any amounts deducted from revenue or the Collateral Account, which are subsequently determined (by Refco, mutual agreement, arbitration or otherwise) to be incorrect, excessive or otherwise not the responsibility of Introducing Firm, shall be promptly reimbursed by Refco to Introducing Firm together with interest thereon (from the date of deduction to the date of reimbursement) calculated at a comparable Treasury rate. D. Within thirty (30) days of the termination of this Agreement, Refco will (a) effect the payment and delivery to Introducing Firm of the funds and/or securities in the Collateral Account, less any amounts Refco is entitled to withdraw under the preceding paragraph; provided, however, that Refco may retain in the Collateral Account such amount as it reasonably deems appropriate for its protection from any claim or proceeding of any type then threatened or pending, until the final determination thereof is made, and (b) deliver or cause to be delivered to Introducing Firm (without the reproduction or other copying thereof) all documents and other materials, including customer lists, prepared in connection with this Agreement or the Page 40 of 59 Pages business of Introducing Firm, except for such documents and other materials as Refco may have destroyed in the normal course of its business or may be required to keep for regulatory purposes or otherwise as may be required by law. In any event, Refco agrees that no such documents or other materials will be distributed by it to any person or group in or outside Refco that does not have responsibility for the administration, legal or audit review of this Agreement or transactions thereunder. 11. USA PATRIOT Act and Anti-Money Laundering Regulatory Obligations ---------------------------------------------------------------- Each of the parties hereto agrees that it is responsible for complying with all applicable anti-money laundering ("AML") legal and regulatory rules and reporting requirements, including but not limited to the USA PATRIOT Act and its implementing regulations. Without limiting the generality of the foregoing, the parties agree as follows: A. Introducing Firm's AML Responsibilities 1. Introducing Firm represents and warrants to Refco that: a. To the best of Introducing Firm's knowledge, it is not doing business with foreign shell banks and is in compliance, as of the date of this Agreement and shall continue to be in compliance in the future, with Section 313 of the USA PATRIOT Act (Prohibition on United States Correspondent Accounts With Foreign Shell banks) and, to the extent applicable, any corresponding regulations issued by the Department of the Treasury on foreign banks and foreign shell banks in furtherance of Section 313; b. it is responsible for and has appropriate procedures for: (i) determining which of its Approved Counterparties are foreign banks; (ii) obtaining the required ownership and agent information from any such Approved Counterparties; (iii) determining whether any of its Approved Counterparties are, or are acting on behalf of, foreign shell banks; (iv) closing, or refusing to accept as applicable, accounts where Introducing Firm determines that an Approved Counterparty is, or is acting on behalf of, a foreign shell bank, or where Introducing Firm is unable to obtain the required information; and (v) providing prompt notice to Refco of any circumstances requiring Introducing Firm to terminate an Account pursuant to USA PATRIOT Act (e.g., ss. ss. 313, 319); and c. it has obtained from each foreign bank for which it currently maintains an Account, and shall obtain from any such Accounts opened in the future, a completed certification/re-certification (in the form set forth in the USA PATRIOT Act and its implementing regulations) identifying: (i) the owners of such foreign bank; and (ii) the name and address of a person who resides in the United States and is authorized to accept service of legal process for records regarding the foreign bank. Introducing Firm shall collect and maintain all such certifications/re-certifications and forward copies to Refco. Refco shall review certifications/re-certifications received from Introducing Firm for completeness. Introducing Firm agrees that, in addition to any other rights Refco has under the Agreement, Refco has the right to close or restrict an Account should such certification not be obtained. Refco will use reasonable efforts to notify Introducing Firm prior to taking such action. Page 41 of 59 Pages 2. Introducing Firm is, and shall remain throughout the term of this Agreement, in compliance with the Bank Secrecy Act ("BSA") and any amendments thereto, to the extent applicable, which now requires, or in the future may require, among other things: a. reports of any transaction over $10,000 in currency, including multiple transactions occurring during the course of the same day, on a Currency Transaction Report, Form 4789 ("CTR"); b. record-keeping, including collecting and maintaining records concerning wire fund transfers of $3,000 or more and verification of the identity of transmitters and recipients of such funds that are not established customers; and c. reports of any transaction of more than $10,000 in currency or monetary instruments into or outside of the U.S., on a Report of International Transportation of Currency or Monetary Instruments Form 4790 ("CMIR"). 3. Introducing Firm will consult with Refco, if reasonably feasible under the circumstances, when required to file any AML reports concerning an Account and will provide Refco, where permitted by applicable law, with any information Refco requests relating to such reports. Introducing Firm shall provide Refco, where permitted by applicable law, with a copy of all Forms CTR, CMIR and SAR-SF it files and any other reports Introducing Firm is required to file, in each case pursuant to applicable AML laws, rules and regulations, concerning any Account, and shall attach an explanation of the action Introducing Firm has taken with respect to the Account internally. 4. Introducing Firm will file on an annual basis a notice with the U.S. Treasury Department for purposes of sharing information, as described in ss. 314(b) of the USA Patriot Act. Introducing Firm will provide Refco with a copy of such notice. 5. Introducing Firm represents and warrants that it is responsible for conducting, to the extent applicable, any special due diligence with respect to any private banking accounts and correspondent accounts as described in USA PATRIOT Actss.312 and other types of Accounts it introduces to Refco pursuant to this Agreement and that it has appropriate procedures for: (i) determining which of its Approved Counterparties are subject to special due diligence requirements; (ii) determining the appropriate level of due diligence to apply to various types of private banking customers, if any (iii) performing the necessary due diligence; (iv) closing (or refusing to accept, as applicable) Accounts where Introducing Firm is unable to perform adequate due diligence, or as otherwise appropriate; (v) preventing, detecting, investigating and reporting suspicious or unusual activity relating to such Accounts; and (vi) making and keeping the necessary documentation for such Accounts. 6. Introducing Firm is responsible for obtaining and verifying all necessary customer identification information and documentation and otherwise conducting all AML "know your customer" measures. Introducing Firm is responsible for providing notice (prior to new Account opening as described in the final rule under USA PATRIOT Act ss. 326) to such Page 42 of 59 Pages customers that it is requesting applicable information to verify their identities. Introducing Firm is responsible for maintaining appropriate identification and verification procedures and implementing a customer identification program that takes into account, among other things, the following factors: Introducing Firm's size; location and customer base; the method by which customers open accounts; and the types of accounts and transactions offered by Introducing Firm. USA PATRIOT Act ss. 326. 7. Introducing Firm is responsible for compliance with any applicable special measures imposed by the Secretary of the Treasury for jurisdictions, financial institutions, or international transactions of primary money laundering concern (USA PATRIOT Act ss. 311). B. Refco's AML Responsibilities 1. Refco shall perform, where practicable, a non-documentary "negative verification" function by screening customer names against a fraud database. Refco shall provide any adverse information obtained from such screening to Introducing Firm. 2. Refco shall make available to Introducing Firm a package of AML reports in order to assist Introducing Firm in identifying suspicious activity with respect to its Accounts. Such reports are included in those described in Section 3.F of this Agreement. Introducing Firm shall be responsible for setting relevant parameters with respect to such reports based upon its business and present and anticipated customer activity. Refco will provide training to Introducing Firm in the use of systems made available to Introducing Firm by Refco. 3. Refco will also, where practicable, make available to Introducing Firm various AML tools, such as new account forms. 4. Refco will be in compliance with all record-keeping requirements in connection with its responsibilities pursuant to this Agreement. 5. Refco is, and shall remain throughout the term of this Agreement, in compliance with the Bank Secrecy Act ("BSA") and any amendments thereto, to the extent applicable. 6. Refco will consult with Introducing Firm, if reasonably feasible under the circumstances, when required to file any AML reports concerning an Account and will provide Introducing Firm, where permitted by applicable law, with any information Introducing Firm requests relating to such reports. Refco shall provide Introducing Firm, where permitted by applicable law, with a copy of all Forms CTR, CMIR and SAR-SF it files and any other reports Refco is required to file, in each case pursuant to applicable AML laws, rules and regulations, concerning any Account, and shall attach an explanation of the action Refco has taken with respect to the Account internally. C. Further Allocations and Agreements regarding AML Responsibilities: Page 43 of 59 Pages 1. Each of the parties agrees to comply with the BSA and its requirement to report suspicious transactions to FinCEN by filing an SAR-SF. Introducing Firm has the primary responsibility for monitoring for suspicious activity of its Approved Counterparties and filing any SAR-SF where warranted pursuant to Section 356 of the USA Patriot Act. To the extent Refco identifies any suspicious activity, it will communicate the same to Introducing Firm, where permitted by law. In the event Refco identifies to Introducing Firm a transaction that appears to be suspicious, Introducing Firm is responsible for undertaking the appropriate follow-up measures, such as performing an investigation, blocking or closing an Account, notifying law enforcement, or filing a SAR-SF or other report. Introducing Firm agrees to report the results of any such follow-up measures, upon request and where permitted by law, to Refco or, if applicable, provide an explanation as to why it chose not to take any action. Not withstanding the foregoing, Refco reserves the right to undertake whatever follow-up measures it deems appropriate, including but not limited to, filing a SAR-SF, in which event, it will report such measures, upon request and where permitted by law, to Introducing Firm. 2. Each of the parties agrees to comply with the applicable rules of the SEC and applicable self-regulatory organizations relating to currency reporting, suspicious activity reporting and related record-keeping requirements; applicable state reporting and record keeping requirements with regard to certain currency transactions, transportation of currency or monetary instruments, or reports of suspicious activity; and to comply with applicable federal, state and international criminal and civil prohibitions against money laundering; 3. Refco and Introducing Firm have each established, implemented and shall enforce and maintain a written anti-money laundering compliance program ("AML Program") as required by the USA PATRIOT Actss.352 and the rules of any applicable self-regulatory organizations (NASD Rule 3011). Such program is reasonably designed to achieve and monitor such party's ongoing compliance, to the extent applicable, with the BSA and implementing regulations promulgated thereunder. Such program consists of, at a minimum: establishment of policies, procedures and controls that can be reasonably expected to detect and cause the reporting of suspicious transactions; designation of an employee responsible for implementing and monitoring the program; employee training; and independent testing for compliance. Introducing Firm and Refco shall notify such party's relevant self-regulatory organization of its designated AML officer. 4. Each of the parties agrees to respond to requests made by FinCEN on behalf of a federal law enforcement agency investigating terrorist activity or money laundering; and submitting a notice to FinCEN concerning voluntary information sharing, and complying with all requirements concerning the confidentiality of shared information (USA PATRIOT Act ss. 314). 5. Refco agrees that it will screen for Office of Foreign Assets Control ("OFAC") purposes for all new Accounts and for third party outgoing and incoming wires. If it is readily apparent from the initial screening that the individual or entity is subject to OFAC restrictions, Refco will not permit the Account to be opened or an outgoing wire to be sent, and inform Introducing Firm of same. In the case of an incoming wire, the funds will Page 44 of 59 Pages be frozen in the client's account, and Refco will inform Introducing Firm of same. If it is not readily apparent that it is subject to restriction, Refco will forward the information to Introducing Firm whose responsibility it is, in accordance with this Agreement and applicable laws, to determine whether the individual/entity is identified on the OFAC list and whether it is permissible for Introducing Firm to open an Account and transact business. 6. In no way does such screening by Refco lessen or relieve Introducing Firm from its obligation to have policies, procedures and systems to screen for and to take reasonable steps to monitor that Introducing Firm is not dealing with individuals, entities or countries on the OFAC list. Introducing Firm's continuing to do business with such individual/entity certifies to Refco that Introducing Firm has complied with all applicable laws, rules and regulations regarding Introducing Firm's ability to transact business with the identified individual/entity. 12. Assignment ---------- This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. Introducing Firm may not assign its rights and/or obligations hereunder without the prior written consent of Refco, which consent shall not be unreasonably withheld. 13. Amendments; Waiver; Integration ------------------------------- Any amendment or supplement to this Agreement and any waiver of any rights hereunder must be in writing signed by the Parties. Further, without limiting the foregoing, no failure to enforce a right, no act or pattern of conduct shall constitute an amendment, supplement or waiver. This Agreement supersedes all other prior dated agreements between the parties with respect to the subject matter hereof, other than the Confidentiality Agreement. 14. Governing Law ------------- This agreement shall be construed and interpreted in accordance with the internal laws of the state of New York without reference to choice of law principles. 15. Arbitration ----------- Each party agrees that any claim, dispute, grievance or controversy arising under this Agreement or any Transactions executed or arising therefrom or thereunder shall be settled by arbitration pursuant to and in accordance with the NASD Uniform Code of Arbitration. Each party further agrees to service of process in any arbitration proceeding by mailing of copies thereof (by registered or certified mail, if practicable) postage prepaid, or by telex, to it at an address for notices under this Agreement; and agrees that nothing herein shall affect the other party's right to effect service of process in any other manner permitted by NASD Arbitration Rules, and that each party shall have the right to bring a proceeding for enforcement of a judgment entered by any arbitration panel against the other party in any court or jurisdiction in accordance with applicable law. Page 45 of 59 Pages 16. Termination ----------- This Agreement may be terminated by either party upon ninety days' written notice given to the other party at any time, or immediately upon written notice following an Event of Default which event shall occur if (i) either party shall fail to perform or observe any term, covenant or condition to be performed or observed by it hereunder and such failure shall continue to be un-remedied for a period of five business days after written notice from the non-defaulting party to the defaulting party specifying the failure and demanding that the same be remedied; (ii) any material representation or warranty made by either party shall prove to be incorrect at any time in any material respect; (iii) a receiver, liquidator or trustee of either party, or of any material property held by either party, is appointed by court order; or either party is adjudicated bankrupt or insolvent; or any of its material property is sequestered by court order and such order is not appealed and stayed within fifteen days of its entrance; or a petition is filed against either party under the bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect and is not dismissed within fifteen days of such filing, or (iv) either party makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of either party, or of any property held by either party. 17. Notices ------- Written notices shall be properly made if hand delivered, mailed (registered mail) or telecopied ("faxed") to the party entitled to receive such notices at the following address or telephone number: To Introducing Firm: Maxcor Financial Inc One Seaport Plaza - 9th floor New York, N.Y. 10038 Tel. No: (646) 346-7215 Fax No.: (646) 346-6920 Attn.: Steven Vigliotti, Chief Financial Officer To Refco: Refco Securities, LLC 200 Liberty Street - 24th floor One World Financial Center New York, New York 10281 Tel. No.: 212 - 693-7684 Fax No.: 212 - 693- Attn. Thomas S. Dillon, Executive Vice President Page 46 of 59 Pages 18. Miscellaneous ------------- There will be no Account opened on behalf of any employee or officer of any New York Stock Exchange member organization, self-regulatory organization or other financial institution without the prior written consent of Refco. This Agreement and all transactions in the Accounts, will be subject to the applicable constitution, rules, by-laws, regulations and customs of any securities market, association, exchange or clearing house where such transactions are effected, and also to all applicable NASD Rules and to all U.S. federal and state laws and regulations. All telephone conversations in connection with Transactions under the Agreement may be electronically recorded and may be used to resolve any uncertainty or any dispute arising in connection with this Agreement or any transaction hereunder. Page 47 of 59 Pages Please indicate your agreement with the foregoing by signing and returning the enclosed copy of this letter. Very truly yours, REFCO SECURITIES LLC By: /s/ THOMAS S. DILLON ------------------------------- Name: Thomas S. Dillon ---------------------------- Title: Executive Vice President ---------------------------- ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE: MAXCOR FINANCIAL INC. By: /s/ KEITH E. REIHL -------------------------------------------------- Name: Keith E. Reihl ----------------------------------------------- Title: Chief Operating Officer ----------------------------------------------- Page 48 of 59 Pages Schedule A ---------- Schedule A has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as amended. Page 49 of 59 Pages Exhibit A --------- Schedule of Specified Securities -------------------------------- 1. Securitized Adjustable Rate Mortgages 2. Asset-backed Securities bearing a credit rating of AA or better 3. Collateralized Mortgage Obligations bearing a credit rating Have AA or better 4. GNMA, FNMA and Freddie Mac Securities 5. Brady Bonds 6. U.S. Government and Agency Securities 7. Sovereign Debt - EuroClear/CEDEL/DTC Eligible 8. Euro Bonds 9. Corporate Securities 10. Convertible Bonds 11. Municipal Securities 12. High Yield Corporate Bonds Page 50 of 59 Pages Exhibit B --------- RE: Maxcor Financial Inc. Allocation of Brokerage Account Responsibilities ------------------------------------------------ Ladies and Gentlemen: As you know, your account has been introduced to Refco Securities, LLC ("Refco"), by your brokerage firm, Maxcor Financial Inc. ("Maxcor"), for the purpose of Refco clearing trades, as fully disclosed principal, in certain specified securities pursuant to the clearing services agreement between Maxcor and Refco. Once Refco enters a trade on its books, you will be considered a customer of Refco for purposes of the SEC's financial responsibility rules and the Securities Investor Protection Act. Nothing herein shall cause customers of Maxcor to be construed as customers of Refco for any other purpose.. In establishing this relationship, Maxcor is acting solely on your behalf and not on behalf of, or as agent of, Refco. Maxcor shall remain responsible for the ongoing relationship that it has with you, and for the following: o Learning your investment objectives and opening, approving and monitoring your account and in all respects complying with Rule 405 of the New York Stock Exchange. o Reviewing your account and all orders in it and supervising all investment advice. o Accepting or rejecting your orders and correcting errors in trade details in order to transmit only matching transactions to Refco. o Ensuring that all the transactions conducted in your account are in compliance with all applicable law and rules. o Responding to any inquiries or complaints you may make concerning your account. o Supervising all functions performed by Maxcor's employees, including investment advisory, sales, trading and account opening and approving activities. Additionally, Maxcor is responsible to Refco for supplying all documentation required by Refco, notwithstanding the fact that Refco has at all times the right to contact you directly regarding its information requirements. Refco has at all times the right, exercisable in its sole discretion, to refuse to accept orders for your account. Refco will be responsible for the following areas: Page 51 of 59 Pages o Clearing as a principal, transactions in your account pursuant to Maxcor's instruction. o Maintaining books and records and filing regulatory reports. o Delivering and receiving funds and securities to or from your account, transfers of securities, payment of dividends or interest and the handling of exchange or tender offers, rights, warrants and redemptions in accordance with the last instructions received either from you or Maxcor. o Safeguarding funds and securities. o Preparing and transmitting confirmations and statements. Any questions you may have concerning the conduct of your account should be addressed directly to Maxcor. You agree that any and all telephone conversations between us with respect to the contemplated transactions may be tape recorded and we each authorize the other to do so and we each hereby waive further notice of tape recording. In the event of any dispute, tapes can be used in any forum in which a dispute is sought to be resolved. THE ATTACHED ADDITIONAL TERMS SET FORTH ADDITIONAL INFORMATION, PROCEDURES AND LIMITATIONS APPLICABLE TO TRANSACTIONS IN YOUR ACCOUNT. PLEASE READ IT CAREFULLY. UNLESS AND UNTIL OTHERWISE AGREED AMONG YOU, REFCO AND MAXCOR, THE TERMS OF THIS LETTER, INCLUDING THE ATTACHED ADDITIONAL TERMS, WILL GOVERN ANY TRADES THAT MAXCOR INTRODUCES TO REFCO ON YOUR BEHALF. Very truly yours, REFCO SECURITIES, LLC By: -------------------------------- Thomas S. Dillon Executive Vice President Page 52 of 59 Pages ADDITIONAL TERMS ---------------- The following are procedures for trades in the specified securities below which will be initiated by Maxcor Financial Inc. ("Maxcor"), and in which you and Refco Securities, LLC ("Refco"), will act as principals. In general, Refco will be responsible for the booking of trades initiated by Maxcor and approved by Refco and for maintaining appropriate records of all such transactions and sending you confirmation. Maxcor. is responsible for adherence to those securities laws, regulations and rules, that apply to it regarding its own operations and for supervision of its own personnel. Authorized employees of Maxcor may, by telephone, directly contact your trading desk to initiate transactions between you and Refco. However, such employees of Maxcor will not be acting as agent for Refco and no proposed transaction will be deemed approved or confirmed by Refco and no such transaction will be consummated by Refco until your trading desk compares the transaction by telephone with Refco's authorized personnel and Refco directly confirms by telephone the transaction. Refco, will act as a principal in each of these back-to-back transactions only after each side, i.e., the purchase side and the sell side is independently and severally confirmed by Refco's authorized personnel. Exceptions to telephonic confirmation will be if trades are confirmed via GSCC for Government Securities; MBSCC for Mortgage-backed Securities; Central Comparison by EMCC, or EuroClear, or CEDEL for Euro Bonds and Emerging Debt Securities (LDC's); or EuroClear or CEDEL for Brady Bonds. Refco agrees that once a transaction has been so confirmed, Refco, is thereafter acting as principal in the trade, and you agree that you will always act as principal on the other side of the trade. All your customary documentation for trades in which you act as principal, regardless of how initiated, should be sent directly to Refco and Refco will send you its usual documentation. The specified securities are: Securitized Adjustable Rate Mortgages; Asset-backed Securities bearing a credit rating of AA or better; CMO's bearing a credit rating of AA or better; GNMA, FNMA and Freddie Mac Securities; Brady Bonds; U.S. Government and Agency Securities; Sovereign Debt/ EuroClear/CEDEL eligible; Euro Bonds; Corporate Bonds; Convertible Bonds; Municipal Securities; High Yield Corporate Bonds. Euro and Brady Bond transactions should be submitted to Herb Whalen for comparison. Our number is (212) 693- ; FAX (212) 693- ; Confirmations should be sent to Refco Securities, LLC, Attn: Herb Whalen, World Financial Center, 200 Liberty Street, Tower A, New York, N.Y. 10281-1098. Mortgage trades should be submitted to Len Bialous for comparison. Our number is (212) 693- ; FAX (212) 693- ; Confirmations of such trades should be sent to Refco Securities, LLC, Attn: Len Bialous, World Financial Center, 200 Liberty Street, Tower A, New York, N.Y. 10281-1098. Government trades should be submitted to Maryanne Alfano for comparison. Our number is (212) 693- ; Confirmations of such trades should be sent to: Refco Securities, LLC, Attn: Maryanne Alfano, World Financial Center, 200 Liberty Street, Tower A, New York, N.Y. 10281-1098. Page 53 of 59 Pages Corporate and Equity transactions should be submitted to John Lombardi for comparison. Our number is (212) 693- ; FAX (212) 693- ; Confirmations should be sent to Refco Securities, LLC, Attn: World Financial Center, 200 Liberty Street, Tower A, New York, N.Y. 10281-1098. Attached please find a complete list of all delivery instructions. Page 54 of 59 Pages Exhibit C --------- Attached is a list of reports offered to Maxcor Financial Inc. to assist Maxcor to supervise and monitor its introduced accounts in order for Maxcor to carry out its functions and responsibilities. Yes No Price Broker Registration Tracking System ____ ____ And /or Blue Sky Validation Reports ____ ____ $600 per month Trade Blotter ____ ____ $500 per month Mutual Fund Switch Supervision ____ ____ $200 per month Options Exceptions Report ____ ____ $200 per month Active Accounts Report ____ ____ $200 per month Anti-Money Laundering Reports ___ ____ FREE Incomplete and Missing Client Profile ____ ____ FREE Maxcor understands that Refco will not be reviewing any of the exception reports and/or systems for any purpose and that Maxcor is responsible for using these systems and reports to help comply with Maxcor's statutory and regulatory responsibilities. Please supply the following names: Designated Examining Authority: ______________________________ Chief Executive Officer: ______________________________ Chief Compliance Officer: ______________________________ Page 55 of 59 Pages Exhibit D --------- Refco hereby represents that it maintains, and shall enforce, written supervisory procedures with respect to the issuance of negotiable instruments (checks, wires) for which Refco is the maker or drawer. Refco hereby represents that its supervisory procedures include the following minimum standards: o all checks and check stock are maintained in a secure location; o the cashiering staff is adequately trained and that each person is responsible and accountable for their specific duties relative to the distributions of assets from customer accounts; o only designated individuals are authorized to sign checks; o two authorized signatures are required on each check; o ensures that a written letter of authorization will be requested and obtained from the client prior to the disbursement of customer funds to a third - party for further delivery to the customer; o will mail to the customer's address of record, a confirmation or charge advice, indicating that funds were disbursed via check from the customer's account based on the written instructions received. (Refco will mail advices to Maxcor' s customers with respect to wire transfers out of their accounts); o that all voided checks will be recorded as such and returned to Refco' s Bank Control Department; o will immediately place stop payments on any check that cannot be accounted for by client notification or self audit of check stock; o will retain serial registers in the form of the NCR copies of checks prepared each day; management shall conduct unannounced self-audits of the entire cashiering process and check stock to ensure that these procedures are being adhered to and that the check stock is accounted for Page 56 of 59 Pages EX-31.1 3 ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 ------------ Certification Of Principal Executive Officer I, Gilbert D. Scharf, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, of Maxcor Financial Group Inc. ("registrant"); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2004 /s/ GILBERT D. SCHARF -------------------------------------- Gilbert D. Scharf, Chief Executive Officer Page 57 of 59 Pages EX-31.2 4 ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 ------------ Certification Of Principal Financial Officer I, Steven R. Vigliotti, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, of Maxcor Financial Group Inc. ("registrant"); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 14, 2004 /s/ STEVEN R. VIGLIOTTI ----------------------------------- Steven R. Vigliotti, Chief Financial Officer Page 58 of 59 Pages EX-32 5 ex_32.txt EXHIBIT 32 Exhibit 32 ---------- Certifications pursuant to Section 1350, Chapter 63 of Title 18 of the United States Code Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, each of the undersigned officers of Maxcor Financial Group Inc., a Delaware corporation ("registrant"), does hereby certify to the best of such officer's knowledge, that: 1. This Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (the "Form 10-Q") of the registrant fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the registrant. Dated: May 14, 2004 /s/ GILBERT D. SCHARF ------------------------------------ Gilbert D. Scharf Chief Executive Officer Dated: May 14, 2004 /s/ STEVEN R. VIGLIOTTI ------------------------------------ Steven R. Vigliotti Chief Financial Officer Page 59 of 59 Pages -----END PRIVACY-ENHANCED MESSAGE-----