10-K 1 max_10k04.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to____________ Commission File Number 0-25056 MAXCOR FINANCIAL GROUP INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 59-3262958 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Seaport Plaza, 19th Floor, New York, NY 10038 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (646) 346-7000 -------------- Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share --------------------------------------- (Title of class) Preferred Stock Purchase Rights ------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant (assuming directors, executive officers and 10% stockholders are affiliates), based on the Nasdaq Stock Market(R) last sales price of $10.72 on June 30, 2004 (the last business day of the registrant's most recently completed second fiscal quarter), was approximately $51 million. As of March 30, 2005, there were 6,812,232 shares of Common Stock outstanding. Documents Incorporated by Reference: Information required to be included in Part III of this Form 10-K is incorporated by reference into Part III hereof from portions of registrant's Proxy Statement for its 2005 Annual Meeting of Stockholders (which registrant currently intends to file pursuant to Regulation 14A on or before May 2, 2005) that contain such information, but solely to the extent provided therein, or will be filed by amendment to this report by such date. MAXCOR FINANCIAL GROUP INC. INDEX ----- Page ---- PART I Item 1. Business..................................................... 1 Item 2. Properties................................................... 17 Item 3. Legal Proceedings............................................ 17 Item 4. Submission of Matters to a Vote of Security Holders.......... 18 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............ 18 Item 6. Selected Financial Data...................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 34 Item 8. Financial Statements and Supplementary Data.................. 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 36 Item 9A. Controls and Procedures...................................... 36 Item 9B. Other Information............................................ 36 PART III Item 10. Directors and Executive Officers of the Registrant........... 36 Item 11. Executive Compensation....................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.............................. 36 Item 13. Certain Relationships and Related Transactions............... 37 Item 14. Principal Accountant Fees and Services....................... 37 PART IV Item 15. Exhibits and Financial Statement Schedules................... 37 Signatures................................................................ 38 Consolidated Financial Statements and Notes............................... F-1 Index to Consolidated Financial Statements................................ F-2 Exhibit Index............................................................. X-1 [GRAPHIC OMITTED] MAXCOR This report includes certain statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Any statement in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Because these forward-looking statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report in the section entitled "Cautionary Statements." For additional information about forward-looking statements, see page 33. References in this report to "we," "us," and "our" mean Maxcor Financial Group Inc. and its subsidiaries and other businesses, unless the context requires otherwise. PART I ITEM 1. BUSINESS Recent Event On March 4, 2005, we announced that we were holding preliminary business combination discussions with a potential acquirer. As of March 30, 2005 (the last date before this report went to press), we had made substantial progress towards a transaction. However, there are still issues remaining to be resolved and, accordingly, there can be no assurance as to whether we will be successful in reaching agreement on or completing a transaction. See "Cautionary Statements - Risks and uncertainties associated with our current acquisition discussions can damage our business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Subsequent Event." Overview Maxcor Financial Group Inc. is a publicly-held financial services holding company, incorporated in Delaware in August 1994. We maintain a web page at www.maxf.com and our common stock is traded on The Nasdaq Stock Market(R) under the symbol "MAXF." At our web page you can access free-of-charge our filings with the Securities and Exchange Commission (the "SEC"), which are posted there as soon as reasonably practicable after they are made. In August 1996, we acquired Euro Brokers Investment Corporation, a privately held domestic and international inter-dealer broker for a broad range of financial instruments, having operational roots dating back to 1970. Through our various Euro Brokers businesses, we conduct our core business as a domestic and international inter-dealer brokerage firm, specializing in (i) cash deposits and other money market instruments, (ii) interest rate and credit derivatives, (iii) emerging market debt and related products, (iv) various other fixed income securities, including convertible bonds, U.S. Treasury securities and federal agency bonds, and (v) U.S. Treasury, federal agency and mortgage-backed repurchase agreements. Maxcor Financial Inc., our U.S. registered broker-dealer subsidiary, also conducts institutional sales and trading operations in municipal bonds, high-yield and distressed debt, convertible securities and equities. We also maintain certain specialty subsidiaries. Maxcor Financial Asset Management Inc., an investment adviser registered with the SEC, is engaged in securities lending through its Euro Brokers Securities Lending division. Tradesoft Technologies, Inc. ("Tradesoft"), acquired by us in August 2000, augments our existing Maxcor and Euro Brokers software development and technology provision capabilities. We have approximately 500 employees worldwide and conduct our businesses through principal offices in New York, London and Tokyo, other offices in Stamford (CT), Switzerland and Mexico City, and correspondent relationships with other brokers throughout the world. In each financial center other than Tokyo, we currently operate through wholly-owned subsidiaries. With respect to our London capital markets operations, housed in Euro Brokers Limited, this 100% ownership has been the case since February 2003, when we purchased the 50% interest that had been held by Monecor (London) Limited ("Monecor") in those operations (see Note 10 to the Consolidated Financial Statements). In Tokyo, we have a controlling 57.25% financial interest in a brokerage venture conducting yen and dollar denominated derivative businesses (the "Tokyo Venture"), with Nittan Capital Group ("Nittan") holding the other 42.75% (see Note 11 to the Consolidated Financial Statements). Inter-Dealer Brokerage Businesses In our Euro Brokers inter-dealer brokerage businesses, we function primarily as an intermediary, matching up the trading needs of our institutional client base, which is primarily comprised of well-capitalized banks, investment banks, broker-dealers and other financial institutions. We assist our clients in executing trades by identifying counterparties with reciprocal interests. We provide our services through an international network of brokers who service direct phone lines to most of our clients and through proprietary screen systems and other delivery systems that provide clients with real-time bids, offers and pricing information in our various products. Clients use our services for several reasons. First, a client can benefit from the broader access and liquidity provided by our worldwide broker and telecommunications network, which communicates with and services most of the largest banks and securities firms. The result is typically better pricing and faster execution than the client could achieve acting unilaterally. Second, we provide clients with anonymity, both as to their identity and, depending on the product, the size of their proposed trade, thereby enhancing their flexibility and ability to act without signaling their intentions to the marketplace. Third, because of our network, we can provide high-quality pricing and market information, as well as sophisticated analytics and trading and arbitrage opportunities. Our inter-dealer brokerage transactions are principally of two types: (i) "name give-up" transactions, in which we act only as an introducing broker, and (ii) transactions in which we act as a "matched riskless principal." In the first type of transaction, primarily involving money market instruments and derivative products, the trades are arranged while preserving the clients' anonymity, but executed at the last instant on a name give-up basis and settled directly between the counterparties. In these transactions we act solely as an introducing broker who brings the two counterparties together, and not as a counterparty ourselves. Consummation of the transaction may then remain subject to the actual counterparties who have been matched by us accepting the credit of each other. In the second type of transaction, primarily securities transactions, we act as a matched riskless principal, connecting the buyer and seller for the transaction on a fully anonymous basis by acting as the counterparty for each in matching, reciprocal back-to-back trades. This type of transaction is then settled through one of various clearing institutions with which we have contractual arrangements, some of who review and pre-approve the credit of the participating counterparties. 2 Products Our inter-dealer brokerage businesses generally fall into the brokerage of three broad groups of products: (i) money market products, (ii) derivative products and (iii) securities products. Money Market Products In general, money market products take the form of cash deposits or other negotiable instruments placed by one financial institution with another, at an agreed-upon rate of interest, for a fixed period of time. Money market products primarily include offshore deposits (i.e., deposits placed outside the country of denomination), onshore deposits (i.e., deposits placed within the country of denomination), certificates of deposit and short-term commercial paper. U.S. dollars continue to be the most actively traded offshore currency deposit. Other offshore currency deposits may be denominated in Japanese yen, British pounds sterling, Swiss francs, Canadian dollars or the euro. Examples of onshore deposits include term and overnight U.S. federal funds. We broker money market products primarily out of our New York and London centers, to a client base consisting predominantly of multinational banks. Derivative Products A derivative products transaction generally is an agreement entered into by two parties, in which each commits to a series of payments based upon the price performance of an underlying financial instrument or commodity for a specified period of time. This category includes a broad range of sophisticated financial instruments employed by multinational banks, financial institutions, securities dealers and corporations. Some of the types of derivatives we most frequently broker are interest rate swaps, interest rate options and forward rate agreements, in each case conducted in a multitude of different currencies and localized primarily by office. We also broker credit derivatives in the form of default swaps. In an interest rate swap transaction, two parties agree to exchange interest rate payment obligations on a notional principal amount over the term of the swap. No principal is exchanged, and market risk for the parties is limited to differences in the interest payments. The usual format for swaps involves the exchange of fixed rate payments based on the term of the swap for a series of floating rate payments based on a shorter-term rate. Interest rate options, which include "cap," "floor" and "swaption" transactions, are transactions in which one party grants the other the right (but not the obligation) to receive a payment equal to the amount by which an interest rate either exceeds (for call options) or is less than (for put options) a specified strike rate. Forward rate agreements ("FRAs") are over-the-counter, off-balance sheet instruments designed to give the counterparties protection against a future shift in interest rates for time deposits. The buyer, or borrower, of a FRA agrees to pay the seller, or lender, at some specified future settlement date, an amount of interest based on a notional principal at a fixed rate for a specified period of time. The seller agrees to pay the buyer, on the same future settlement date, an amount of interest based on the same amount of notional principal and the same period of time, but based on the then-prevailing market rate for the time period. No actual principal is exchanged. On the settlement date, the buyer and the seller calculate the present value of the net interest owed, and one party pays the other accordingly. 3 In a default swap transaction, a counterparty who is seeking to buy credit protection pays a periodic fee or premium to the other counterparty (or seller of protection) in order to transfer or hedge credit risk with respect to a particular issuer or security. If the reference issuer suffers a specified credit event within the term of the swap, such as an event of default under its loan agreements or indentures, then the seller of protection pays the loss on the reference security to the buyer, generally either by buying bonds or loans of the issuer from the buyer at par or making a cash payment to the buyer based on the difference between such par amount and the market value of the reference security at the time of default. We broker derivative products out of all of our financial centers. Our client base for most of these products is predominantly multinational banks and investment banks. Securities Products Products that we broker in this category consist primarily of a variety of debt obligations issued by governments, government agencies, banks and corporations. We broker transactions in emerging market debt, U.S. Treasury and federal agency securities and repurchase agreements, U.S. domestic convertible bonds, floating rate notes and other corporate securities. Emerging market debt, including Brady bonds, global bonds, Eurobonds, local issues and loans, as well as options on the foregoing, is brokered by specialized teams located in New York, London and Mexico City and through correspondent broker relationships in Argentina, Brazil and Uruguay. The market coverage of the teams from these locations is worldwide. Our brokerage of emerging market debt utilizes direct communication phone lines and provides real-time pricing through proprietary, computerized screen systems located in clients' offices or through direct digital feeds. In most emerging markets transactions, we act as matched riskless principal and settle trades through a clearing firm, although we broker some transactions on a name give-up basis. Repurchase agreements are contractual obligations entered into by two counterparties, first to sell securities and then to repurchase those same securities (or the reverse in the case of a buyer) at an agreed upon future date and price. We act as an intermediary mainly for the U.S. primary government dealer community (banks and dealers licensed to participate in auctions of U.S. Treasury securities), as well as for a number of U.S. regional banks and dealers, in the negotiation and execution of U.S. Treasury, federal agency and mortgaged-backed repurchase agreements. As is the case with emerging markets, we disseminate repurchase agreement market information via our proprietary, computerized screens and digital data feeds. Most of the repurchase agreements that we execute for dealers are cleared through the Government Securities Division of the Fixed Income Clearing Corporation ("GSD-FICC") in which our broker-dealer subsidiary, Maxcor Financial Inc., is a member, although some transactions are brokered on a name give-up basis. Our brokerage of U.S. Treasury and federal agency securities is also generally conducted on a riskless principal basis and with the same client base that participates in U.S. Treasury and federal agency repurchase agreements. The clearance of these transactions also occurs at GSD-FICC. Dissemination of market information to clients for these securities similarly relies on our proprietary screen system and digital data feeds. We also use a proprietary front-end broker interface developed by Tradesoft to monitor and manage trading activity and market information, which has the capability of providing fully-automated client execution capability if and when client demand for it grows. We broker securities products to a broad institutional client base, but mostly to banks, investment banks, broker-dealers and other financial institutions. 4 Institutional Sales and Trading Businesses In our Maxcor institutional sales and trading businesses, we provide research and execution to the institutional money management community, as well as to corporations with publicly-traded securities and other institutional clients. In these businesses, we specialize in municipal securities, high yield and distressed debt, convertible securities and equities. Our research analysts provide valuable trading ideas and market insights to our client base. We make this research available by permissioning clients to access our research web links at www.maxf.com and through other distribution methods. In addition, through the communication and coordination among our sales and trading groups, we allow clients to take advantage of trading strategies across multiple asset classes. Our execution services are designed to provide our clients with discreet placement of client orders with minimal market impact. We allocate a portion of our capital to support trading and inventory positions in these businesses, often for the purpose of facilitating anticipated client needs. We manage the risks associated with these positions by placing trading guidelines on their size and number of days held and with certain hedging requirements. They are marked-to-market and monitored on a real time basis. We also utilize a portion of our capital for investment positions in high-yield and distressed debt and municipal and other securities. Institutional Securities Financing In our Maxcor institutional securities financing business, which was discontinued in the first quarter of 2005 after failing to gain traction in slightly over a year of building efforts, we operated a matched-book of offsetting securities purchased under agreements to resell ("reverse repurchase agreements") and securities sold under agreements to repurchase ("repurchase agreements"). In this business, we enabled institutional customers to finance U.S. Treasury, federal agency and mortgage-backed securities in their portfolios and to borrow such securities to make deliveries on short sales. We also enabled institutions with available cash to earn interest through an investment in a secured financing arrangement. In reverse repurchase agreements, we received collateral in the form of securities and lent cash on which we earned interest. The securities received as collateral were then used as collateral to secure repurchase agreements whereby we borrowed funds from another institution and incurred interest. Through the first quarter of 2005, a significant portion of our interest revenues and our interest expense from securities indebtedness resulted from this activity. Other Businesses Through the Euro Brokers Securities Lending division of our SEC-registered investment adviser, Maxcor Financial Asset Management Inc., we conduct a securities lending business, focusing on third-party lending. In third-party lending, we arrange for the lending of securities held in our clients' portfolios to securities dealers and other market participants who need them to manage their own positions. In exchange for such loaned securities, which include U.S. Treasury and federal agency securities, U.S. corporate bonds (but also non-dollar government securities and corporate bonds) and equities, we arrange for our clients or their custodians to receive either (i) cash collateral, for which we then direct the reinvestment to earn a spread over the rebate rate the client is required to pay in connection with the underlying loan, or (ii) non-cash collateral plus fee income from the borrower. Our third-party lending activities are executed solely on an agency basis, so that collateral and cash funds of clients are not received or held by us. 5 Maxcor Financial Services Inc. is a non-regulated subsidiary through which we from time to time develop and initially conduct various new business efforts unrelated to inter-dealer brokerage. It is also charged with managing our firm's investment account. Our information and data subsidiary, Maxcor Information Inc., is charged with exploiting the data generated by our inter-dealer brokerage businesses, including attempting to license such data to third party vendors. Communications Network and Information and Related Systems We conduct our inter-dealer brokerage businesses through a global communications network and sophisticated computerized information systems over which we receive and transmit current market information. Our proprietary screen system and digital data feeds display to all screen-based clients real-time bid, offer and transaction information for various products offered on the system. To ensure rapid and timely access to the most current market bids and offers, the majority of our clients are connected to our brokers and information feeds via dedicated, "always on," point to point telephone and data lines around the world. For products that are screen-brokered, such as emerging market debt and related options, U.S. Treasury and federal agency securities, repurchase agreements and floating rate notes, we maintain an extensive private network to connect our offices and the specific clients who trade in these products. In this way, all such clients have the simultaneous ability to view and act upon market bids and offers. We also have developed and deployed a real-time distribution capability for our data feeds through both the Internet and Bloomberg terminals, which permits us to customize data delivery in accordance with our clients' desires and which also has allowed us to access a broader range of clients without incurring the infrastructure costs associated with expanding our private network. We maintain teams of computer and communications specialists to provide technological support to our network. We are continually upgrading our technological facilities in order to access and collate market information and redistribute it virtually instantaneously throughout our network or these alternative delivery systems. Through the continued development and use of proprietary software, computerized screen displays, vendor relationships, digital networks and interactive capabilities, we strive to keep our communication, technology and information systems as current as possible. On many of our brokerage desks, the Tradesoft(R) system is used to provide a sophisticated and automated broker station, enhancing brokers' ability to monitor trading activity and relevant market information efficiently and communicate analysis and transaction details to their clients. The system also incorporates a paperless ticket and confirmation process, which captures relevant trade details and then generates automatic e-mail or fax confirmations to clients. If and when client demand for it in our products grows, the Tradesoft(R) system also retains the ability to be deployed to display real-time bid, offer and transaction information to clients so that they can initiate bids, offers and trades directly through a dedicated keypad at their workstations, with or without contacting one of our voice brokers, using the system's proprietary matching engine. Our proprietary middle-office trade processing system (the "MEB System"), which incorporates an electronic blotter system for post-trade data input, is integrated with and captures transactions effected through either our proprietary screen system or the Tradesoft(R) system, and thereafter transmits those transactions for back office processing. The MEB System has effectively replaced paper blotters on most securities desks and, by automating a number of manually-intensive processes, has introduced numerous efficiencies to our trade processing and handling, including the ability to handle significantly increased trading volumes, identify unbalanced trade conditions as they occur, impose tighter security and provide clients with more certain and rapid check-outs of their transactions. 6 We have developed and begun to deploy an integrated straight through processing system (the "STP System") that uses Tradesoft(R) technology to capture data from the MEB System and enables clients to electronically access transaction details for paperless updating of front-office position-keeping (risk management) and back-office settlement systems. Consistent with our vision of and commitment to a hybrid approach to servicing our clients, the STP System is intended to enable us to provide the same trade processing services as an electronic trading platform, but without foregoing the front-end execution services of a voice broker. We believe that this is an important service and efficiency desired by our largest and most active clients and provides the enhanced functionality now required in ever-increasing electronic communications. Although we continue to explore whether more of our inter-dealer brokerage businesses should become screen-based or incorporate a higher degree of automation, we believe that our clients' diverse needs in each of our products require us to remain flexible in our approaches. As mentioned above, we currently believe that a hybrid approach, in which we provide both quality voice brokering and advanced screen system and other technology, including the front end Tradesoft(R) broker station, paperless confirmations and the STP System, will best enable us to build liquidity, maintain a satisfied employee base and provide current technology solutions to meet the requirements of our most active clients. Revenues and Expenses Approximately 90% of our net revenues are derived from commissions related to our inter-dealer brokerage businesses. Generally, we receive a commission from both counterparties in a trade, although in trades of certain products only one party pays a commission. The dollar amount of the average transaction generating a commission varies significantly by the type of product and the duration of the transaction. Similarly, the applicable commission will vary according to product and services required and may also reflect discounts for high transaction volumes or other client rebates. We also generate commissions on sales and trading transactions executed on an agency or matched riskless principal basis. Other sources of revenues include (1) the net principal gains or losses from transactions in our sales and trading businesses involving the assumption of market risk for a period of time and from investment positions, (2) profits or losses from the Tokyo Venture, (3) interest income, derived primarily from reverse repurchase agreements (until January 2005), securities positions, cash and cash equivalents and deposits with clearing organizations, and (4) foreign exchange gains and losses. Interest expense on securities indebtedness, primarily on repurchase agreements, short securities positions and margin borrowings, is deducted from gross revenues to arrive at net revenues. The largest single component of our expenses is compensation paid to our brokerage personnel (which includes traders and sales persons in our institutional sales and trading businesses). Attracting and retaining qualified brokerage personnel with strong client relationships is a prerequisite in our business and in the brokerage business in general. Brokerage personnel are generally compensated by a combination of fixed salary and incentive payments based on commissions or credits generated by them or on the net profitability of their respective departments. For this reason, compensation expense frequently will increase or decrease in rough proportion to revenues, although the fixed salary component can skew the correlation in businesses with declining revenues by causing decreases in compensation to lag behind decreases in revenues, and starting salaries for new hires in businesses for which revenue growth is sought can increase compensation expenses in advance of realizing the anticipated revenue growth. To manage this area, we include performance-based salary adjustment provisions in substantially all of our broker contracts and closely track revenues and compensation expenses (as well as other direct costs) by department (which may involve one or more products) and by individual, at each location. 7 Most of the markets in which we operate are highly efficient, offering participants immediate access and enormous liquidity. Some markets are subject to a high degree of volatility. Even the slightest variation in price can make the difference between missing or executing a transaction. Consequently, many of our businesses depend heavily on the use of direct line voice communications, advanced telephone equipment, real-time computerized screen systems and digital feeds and proprietary pricing software in order to ensure rapid trade executions and timely analyses for our clients. For this reason, we continually need to expend significant resources on the maintenance, expansion and enhancement of our communication and information system networks. After compensation, such costs have historically represented our second largest item of expenditure. The costs of maintaining sophisticated trading room environments and a worldwide data and communications network comprise another significant portion of our expenses, and, with the advent of electronic execution and matching systems, the need to invest in new technology has also increased. Our ability to compete effectively is significantly dependent on our ability to maintain a high level of client service, through our proprietary software, computerized screen displays and digital networks, the Tradesoft(R) systems, the MEB System, the STP System and our provision of whatever additional systems are demanded by clients at any given time. It is this infrastructure and technological commitment that enables us to support our existing client base and product lines, as well as provide a platform for offering brokerage or other services in additional or newly developing financial instruments. Although we maintain sizeable management information services and communications departments, we will also license technology from others, or outsource infrastructure or technology projects, where practical and consistent with our business goals, in order to manage our fixed costs in these areas. Direct client contact, including entertainment, is also an integral part of our marketing program and represents another significant component of our expenses. We continuously monitor and make it a priority to manage these expenditures in a focused and coordinated fashion. To grow revenues and stay competitive, we constantly need to analyze and pursue growth opportunities in both new and existing product lines. Product expansion, when undertaken, however, generally leads to an increase in the number of brokerage personnel, and therefore in compensation expense, since the markets usually require brokerage personnel to specialize in a single product or group of related products, rather than function as market generalists. Product expansion, and the effort to grow market share, also typically results in increased entertainment expenses and the increased infrastructure and communication costs associated with configuring a new desk and delivering its product to the necessary client base. Personnel As of February 28, 2005, we and our businesses employed 406 brokerage personnel (including trainees), plus an additional administrative staff, including officers and senior managers, of 111 persons, for a total employee headcount of 517. Of the brokerage personnel, 228 were located in the U.S., 132 were located in Europe, and 30 were located in Japan, with the balance distributed among our other office locations. None of our employees are covered by a collective bargaining agreement. We consider our relations with employees to be good and regard compensation and employee benefits to be competitive with those offered by other inter-dealer brokerage firms. 8 Segment and Geographic Data Note 22 to the Consolidated Financial Statements contains summary financial information, for each year of the three-year period ended December 31, 2004, with respect to each of our reportable operating segments, which are based upon the countries in which they operate. Competition The inter-dealer brokerage industry is highly competitive, with the success of a company within the industry dependent on a variety of key factors. These factors include: o the experience and extent of client relationships developed by the firm and its personnel; o the range of products and value-added services offered; o commission rates; o the quality, speed and reliability of service; o proficiency in and ability to implement current technology, including electronic execution and straight through processing; o salaries and other cost structures; and o capital resources and perceived creditworthiness. While there are not many large international inter-dealer brokerage firms, we encounter intense competition in all aspects of our businesses from a number of companies that have significantly greater resources than us. Recent consolidations in the industry have produced combined entities with even greater resources. Moreover, with the recent advent of electronic brokerage in non-equity markets, new potential competitors have emerged that do not have traditional inter-dealer brokerage roots. In addition, dealer firms within a consortium platform could elect to conduct a disproportionate or increased share of their business between other member firms, or even to deal directly with each other, thus reducing liquidity in the traditional inter-dealer markets and potentially eroding our market shares. The recent pace of consolidation in the banking and financial services community continues to reduce the number of clients in the marketplace and, accordingly, has further increased the competition among inter-dealer brokerage firms and potentially the downward pressure on already low commission rates. As a result, increases in market volumes do not necessarily result in proportionate increases in brokerage commissions and revenues. During the last several years, the industry has seen an acceleration of the development of electronic execution systems that claim to provide fully automated trade matching. The electronic system first deployed by eSpeed, Inc. in late 1999 successfully garnered liquidity in the U.S. Treasury markets, and continues to do so even after the horrendous losses that firm suffered as a result of the September 11th attacks. Another well-financed competitor, ICAP plc, in 2003 acquired BrokerTec, an inter-dealer electronic brokerage exchange formerly owned by a consortium formed by the leading investment banks. In practice, these systems so far have proved most viable in markets involving very standardized products, such as U.S. Treasuries, spot foreign exchange, commodities and U.S. equities. We believe that more complex financial vehicles, in particular derivatives, are less amenable to fully electronic matching, and that clients in these markets are not inclined to forego talking to voice brokers for information and execution. However, various competitors continue to pursue electronic execution platforms for a variety of derivative products, and it can be expected that significant efforts and resources will continue to be devoted by these competitors and others to trying to increase the number and penetration of such automated trading platforms across all profitable brokerage markets. 9 The further development and successful deployment of such electronic systems could negatively affect our business and ultimately have material adverse effects on our businesses. Although we are devoting substantial financial and other resources to ensure the success of our electronic brokerage and technology initiatives (described above under "Communications Network and Information and Related Systems"), our ability to execute successfully thereon is subject to a number of uncertainties, not all of which are within our control. These include, but are not necessarily limited to, the speed, capacity and interfaces of systems performing acceptably under both normal and stress conditions, the availability of sufficient funds to develop, refine and promote further the systems, the retention of sufficient training and maintenance resources, the desire for and acceptance of the systems by clients, both at the trader and the information technology department levels, the internal brokerage personnel support for the systems, the timing and success of deployment of competitive systems, and market conditions at the time of deployment. We are inherently reliant on relationships with clients that develop over time, and certain of our brokerage personnel have established long-term associations with clients. Our success depends to a significant extent on these relationships and the service we provide our clients. The loss of one or more of our key employees, who are often the target of aggressive recruitment efforts by competitors within the industry, could have a material adverse effect on us. Moreover, the highly competitive hiring environment by itself creates upward pressures on compensation that can reduce profit margins. While we have entered into employment agreements with, and granted stock options to, many of our key employees, there can be no assurance that such employment agreements or stock-based compensation will be effective in retaining such persons' services or that other key personnel will remain with us indefinitely. Nor can there be any guarantee that we will be able to attract and retain qualified, experienced individuals, whether to replace current personnel or as a result of expansion, because competition in the brokerage industry for such individuals is intense. Regulation Our businesses are subject to extensive regulation at international, federal and state levels by various regulatory bodies which are charged with safeguarding the integrity of the securities and other financial markets and protecting the interests of clients participating in those markets. Our broker-dealer subsidiary, Maxcor Financial Inc. ("MFI"), is registered with the SEC, all applicable states, and is a member of NASD. Broker-dealers are subject to regulations that cover all aspects of the securities business, including initial licensing requirements, sales and trading practices, safekeeping of clients' funds and securities, capital structure, record-keeping and the conduct of directors, officers and employees. The SEC, other governmental regulatory authorities, including state securities commissions and self-regulatory organizations, such as NASD in the case of MFI, have broad oversight powers, including the ability to institute administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders, the suspension or expulsion of a broker-dealer, its officers or employees or other similar consequences. At the end of 2001, MFI established a new London branch office in order to conduct certain securities businesses that were previously being conducted in a separate, London-based subsidiary. As a result, these operations of MFI, although primarily overseen by NASD, are also subject to oversight by the London-based regulatory body, the Financial Services Authority (the "FSA"). MFI is also a member of the GSD-FICC for the purpose of clearing transactions in U.S. Treasury and federal agency securities and repurchase agreements collateralized by such instruments. Such membership requires MFI to maintain minimum net capital of $10,000,000, including a minimum deposit with 10 GSD-FICC of $5,000,000. In addition, as a result of the upgrading of MFI's GSD-FICC membership to dealer status in 2003, MFI is required to maintain a minimum net worth of $25 million. MFI is also registered with the Commodity Futures Trading Commission as a futures commission merchant and is a member of the National Futures Association. As such, any business activities by MFI in the futures and options-on-futures markets would be subject to regulation by these bodies. Our subsidiary, Maxcor Financial Asset Management Inc. ("MFAM"), is a SEC-registered investment adviser, pursuant to its securities lending activities. As a result, MFAM's investment advisory business is subject to various federal and state laws and regulations that generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict MFAM from carrying on its investment advisory business in the event that it fails to comply with such laws and regulations and/or to impose other censures and fines. Our London capital markets subsidiary, Euro Brokers Limited ("EBL"), is a Type D registered firm with the Financial Services Authority in the U.K., required to maintain a financial resources requirement generally equal to six weeks average expenditures plus the amount of less liquid assets on hand (a $6.7 million requirement at December 31, 2004). Our other foreign businesses are also subject to regulation by the governments and regulatory bodies in their countries, including: (i) the Bank of Japan and the Japanese Ministry of Finance in Japan and (ii) the Banking and Securities National Commission in Mexico. The compliance requirements of these different overseer bodies may include, but are not limited to, net capital or stockholders' equity requirements. We are also subject to SEC rules regarding the regulation of alternative trading systems ("Regulation ATS"). Regulation ATS imposes significant reporting and recordkeeping requirements on so-called "alternative trading systems" and imposes certain substantive requirements, primarily depending upon the scope of coverage and market share of the alternative trading system. Such requirements may include maintaining transparency of certain pricing information, providing fair and equal access to the system, and taking necessary steps to ensure the capacity, integrity and security of the system. A number of our brokerage businesses are subject to Regulation ATS and its requirements. The passage by Congress of the Sarbanes-Oxley Act of 2002 ("SOX") has imposed, and required the promulgation by the SEC of, numerous rules and regulations directly impacting the operation of public companies such as ourselves. These include mandates for: the composition and member qualification of boards of directors and audit committees, the enhanced independence of accounting firms and the manner and content of their communications with audit committees, rigorous certification procedures for financial statements and SEC filings, the establishment and review of and the making of disclosures with respect to internal controls and procedures, the use and reconciliation to generally accepted accounting principles in the United States ("GAAP") of non-GAAP financial information, internal and outside counsel reporting requirements relating to evidence of material violations, disclosures with respect to the adoption of or waivers under codes of ethics, and, generally, significantly expanded, accelerated and more frequent public reporting and disclosure requirements in SEC filings. Specifically, beginning with our annual report for the year ending either December 31, 2005 or 2006, we will be required under Section 404 of SOX and related SEC regulations to include an annual report of management on internal controls over financial reporting and an attestation report of our public accounting firm on management's assessment of the company's internal controls over financial reporting. The Nasdaq Stock Market(R), in the wake of SOX and these SEC actions, also has promulgated significant revisions to its listing standards to encompass many additional requirements related to corporate governance and other matters. 11 The foregoing requirements, and additional legislation and regulations, changes in rules promulgated by the SEC or other U.S. federal and state governmental regulatory authorities, self-regulatory organizations or clearing organizations, as well as non-U.S. governments or governmental regulatory agencies, or changes in the interpretation or enforcement of laws and rules, may directly affect our manner of operation and profitability, including as a result of the costs and management time required for compliance. In addition, any expansion of our activities into new areas may subject us to additional regulatory requirements that could similarly affect our manner of operation and profitability. Available Information Our website is located at www.maxf.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Information contained on our website is not part of this report or any other report filed with the SEC. Our Code of Business Conduct and Ethics that applies to all officers, directors and employees and the charters of the Audit and Nominating Committees of our Board of Directors are also available on our website and are available in print to any stockholder upon request by writing to Maxcor Financial Group Inc., One Seaport Plaza, 19th Floor, New York, New York, 10038, Attention: Investor Relations. Cautionary Statements As provided under the Private Securities Litigation Reform Act of 1995, we wish to caution investors that the following factors, among others (including the factors discussed above under the "Revenues and Expenses," "Competition" and "Regulation" headings, and the factors discussed below under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk"), could affect our results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this report and elsewhere by us or on our behalf to the public. In such an event, the trading price of our common stock could decline and our stockholders may lose part or all of their investment. Please also refer to "Forward-Looking Statements" below, at page 33. Adverse changes in economic and market conditions could negatively impact our business. Our brokerage businesses and, as a result, our revenues and profitability, are directly affected by economic and market conditions out of our control, including the volatility of the securities markets, the volume, size and timing of securities transactions, the level and volatility of interest rates, and the economy in general. Our businesses generally benefit if these factors cause trading volumes in the instruments we broker to increase and, conversely, can suffer if they cause such trading levels to decrease. Lower trading volumes are likely to reduce our revenues, which would generally negatively impact our profitability because a portion of our costs is fixed. Market and economic uncertainties are heightened in the current geopolitical environment. In the current geopolitical environment, with the heightened security and terrorism concerns that have followed in the wake of the September 11th terrorist attacks and the war in Iraq, there is a continued level of uncertainty in the sustained performance of the financial markets and the economy as a whole, as well as in the New York financial community, specifically. Any additional terrorist acts, or the prospect thereof, and governments' military and economic responses to them, may negatively affect the financial markets, the economy and the resulting trading volumes in the financial markets in which we 12 offer our services, which, in turn, could have an adverse effect on our business, financial condition or results of operations. An increase in the occurrence of "out trades" could have a material adverse effect on our financial condition or results. Our inter-dealer brokerage businesses primarily involve one or more of our subsidiaries acting as an intermediary, matching the trading needs of our predominantly institutional client base by providing specialized services. Some of these transactions are executed on a "name give-up" basis, that is, once the specific economic terms of a proposed transaction are agreed, the names of the individual counterparties are disclosed and, subject to acceptance of the credit, the transaction is confirmed to and completed directly between both counterparties. Other transactions are completed with our broker-dealer subsidiary, Maxcor Financial Inc. (MFI), acting as a "matched riskless principal" and serving as the counterparty to both a buyer and a seller in reciprocal, back-to-back trades. In matched riskless principal transactions, the respective buyer and seller know only MFI as the counterparty. The transactions are then settled through one of the clearing firms or organizations with which MFI has a contractual relationship. In the process of executing brokerage transactions, from time to time in the fast moving markets in which our subsidiaries and brokers operate, miscommunications or other errors can arise, such as parties knowing different trade details or transactions being completed with only one counterparty ("out trades"), thereby creating a potential liability for us. If the out trade is promptly discovered, thereby allowing prompt correction or disposition of the unmatched position at or around the same price, the risk to us is usually limited. If discovery is delayed, the risk is heightened by the increased possibility of intervening market movements prior to such correction or disposition. Although out trades usually become known at the time of, or later on the day of, the trade, it is possible that they may not be discovered until later in the settlement process. When out trades occur and are discovered, our policy is to have the resultant position corrected or disposed of promptly. The occurrence of out trades generally rises with increases in the volatility of the market and, depending on their number and amount, have the potential to have a material adverse effect on our financial condition and results of operations. The securities settlement process exposes MFI to credit and other risks that can negatively impact our business and profitability. The securities settlement process for principal trades brokered by MFI exposes MFI to various risks that individually or in combination could have a negative impact on our business, profitability and results of operations. Credit risk exists because there is always the possibility that a counterparty that was solvent or believed to be solvent on trade date has become insolvent and incapable of performing by the time of settlement. This risk is mitigated in part, but not fully, by short settlement cycles, the predominantly institutional nature of MFI's client base, and the fact that some (but not all) of MFI's clearing agreements provide for the relevant clearing firm or organization to assume counterparty risk, including credit risk, once the parties to and the terms of the trade have been confirmed on trade date by the clearing firm or matched through its related settlement facilities. Financing risk exists because if the trade does not settle timely, either because it is not matched immediately or, even if matched, one party fails to deliver the cash or securities it is obligated to, the resulting unbalanced position may need to be financed, either directly by MFI or through one of its clearing firms at MFI's expense. These charges may be recoverable by claiming interest from the failing counterparty, but sometimes are not. Finally, in instances where the unmatched position or failure to deliver is prolonged, there may also be regulatory capital charges required to be taken by MFI, which depending on their size and duration, can limit MFI's business flexibility or even force the curtailment of those portions of MFI's business requiring higher levels of capital. 13 If any of our clearing agents terminate our contracts with them, our business could suffer. Our broker-dealer subsidiary, MFI, has contractual arrangements with a variety of clearing firms and organizations for purposes of clearing and settling the various securities transactions it brokers. Each clearing firm or organization typically handles only certain types of securities for MFI. For example, one firm clears its emerging market debt transactions, another clears its municipal securities, corporate bond and equity transactions and another two collectively clear different aspects of its transactions in U.S. Treasury and federal agency securities and repurchase agreements collateralized by such instruments. Without the capital resources and services of these firms and organizations, which generally step in and act as principal in substitution for MFI, MFI's business, and our financial results, could be materially adversely impacted. Although most of the contractual clearing arrangements have existed for some time, they are generally terminable by the clearing firm upon reasonably short notice. We believe that in each category of securities there are alternative clearing firms or arrangements that could be put into place, but not necessarily with immediate effect or upon as favorable terms. Accordingly, if any of our existing clearing agreements were to be terminated or if one of the clearing firms or organizations declines to clear one or more categories of security products for MFI, and we were unable to establish in timely fashion a new clearing arrangement with another clearing firm or organization on financial and other terms acceptable to MFI, we would suffer an interruption in, or not be able to continue, brokering the particular product that was the subject of the terminated clearing arrangement, and we could suffer a material adverse effect on our results of operations and financial condition. We have market risk exposure from trading and inventory positions held. We allocate a portion of our available capital to our institutional sales and trading operations to support trading and inventory positions. The positions are generally intended to be held short term, often for the purpose of facilitating anticipated client needs. Where available, they are financed by margin loans provided by our clearing firms. As a result, we have market risk exposure on these securities, varying based on the size of the overall positions, the terms of the securities themselves, and the number of days the positions are held. The aggregate market value of such positions is included in the "securities owned, held at clearing firm" line of our Consolidated Statements of Financial Condition. Although such positions are marked to market and carefully monitored on a real-time basis, resulting principal gains and losses from such positions can on occasion have a disproportionate effect, positive or negative, on our results of operations for any particular reporting period. For example, see Note 20 to the Consolidated Financial Statements relating to MFI's trading in when-issued contracts for NTL, Inc. common stock. In addition, from time to time we hold relatively small amounts of high-yield and distressed debt and municipal and other securities in the firm's investment account, which can create similar market risk exposures and effects. The lack of diversification in our business could negatively affect our financial condition or results of operations; conversely, managing our growth and diversification effectively can be difficult. From a revenue perspective, our inter-dealer brokerage businesses account for substantially all of our revenues denoted as "commission income" in our Consolidated Statements of Operations. Accordingly, the prospects for our performance and the market prices for our common stock are highly dependent upon the performance of the inter-dealer brokerage businesses. This lack of diversification could negatively affect our financial condition or results of operations. We have spent considerable time, resources and efforts in attempting to grow and diversify our business operations over the last few years, including by building our institutional sales and trading businesses. However, these efforts place, and are expected to continue to place, strains on our management and other personnel and resources and require timely and continued investment in 14 facilities, personnel and financial and management systems and controls. We may not be successful in implementing all of the processes that are necessary to support our growth and diversification, which could result in our expenses increasing faster than our revenues, causing our operating margins and profitability to be adversely affected. Additionally, maintaining our existing breadth of international operations, and managing any desired future expansion of them, presents its own set of challenges that we may not be able to meet. These include issues associated with managing from a distance and across different time zones, legal and employment law differences that can make it harder to build and retain a work force, working with local partners and regulators, and cultural and other differences. Events that negatively impact our overseas business partners may negatively affect our operations. Some of our overseas brokerage operations are conducted in conjunction with independent business partners, such as Nittan Capital Group in Tokyo, and correspondent brokers, such as Delsur S.A. in Argentina and Brazil. Some of these entities may compete with us in other products, and their business interests may not always coincide with ours. Although such brokerage operations are generally subject to detailed governing arrangements, any event which negatively affects the financial condition or management of any of our partners or correspondent brokers, or their willingness otherwise to conduct such brokerage operations in conjunction with us (or vice versa), may have a negative impact on our operations. Our regulated subsidiaries are subject to risks associated with net capital requirements, and we may not be able to engage in operations that require significant capital. The SEC, NASD, GSD-FICC, FSA and various other regulatory agencies have stringent rules and regulations that apply to us with respect to the maintenance of specific levels of net capital. If we fail to maintain the required net capital, we may be subject to suspension or revocation of registration by the applicable agency, which would have a material adverse effect on our business. If these net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. Also, our ability to withdraw capital from our regulated subsidiaries is subject to restrictions, which in turn could limit our ability to pay dividends, repay any debt and redeem or purchase shares of our common stock. A large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business, which could have a material adverse effect on our business. In addition, we may become subject to net capital requirements in other foreign jurisdictions in which we currently operate or which we may enter. We cannot predict our future capital needs or our ability to obtain additional financing. For a further discussion of our net capital requirements and other regulatory issues, see the "Regulation" heading above. Seasonal fluctuations in trading may cause our quarterly operating results to fluctuate. Our business generally experiences seasonal fluctuations, reflecting reduced trading activity during summer months, particularly in August. We also generally experience reduced activity in December due to seasonal holidays. As a result, our quarterly operating results may not be indicative of the results we expect for the full year. Our operating results may also fluctuate quarter to quarter due to a variety of factors beyond our control, such as conditions in the global financial markets, terrorism, war and other economic and political events. Furthermore, we may experience reduced revenues in a quarter due to a decrease in the number of business days in that quarter. 15 Unanticipated system or technology failures internally or externally could negatively impact our business or financial results. To remain competitive in our industry, we continuously need to expend significant resources on the maintenance, expansion and enhancement of our communication networks, information systems and other technology, and our business is highly reliant on these systems. Many of these systems are internal, but others are provided by third-party suppliers over whom we have no control, such as telephone companies, online data vendors and software and hardware vendors. It is an ongoing risk that the systems we currently have or in the future implement, or the software underlying these systems, will fail in some fashion or be inadequate to the task, either of which could negatively impact our business or financial results. Although we believe that ongoing upgrades to our trade processing systems, together with periodic stress-testing and monitoring, reduces the likelihood of a material failure of our internal systems, there can be no assurance that there will not be unanticipated system or technology failures, internally or externally, that could negatively impact our business or financial results. Moreover, to the extent we deploy technologies, such as straight through processing and electronic trading platforms, that are relied upon by our clients and incorporated into their internal systems, the business reputation and other risks to us of a technology failure may be exacerbated. We may be subject to litigation and arbitration, which could limit our profitability. Many aspects of our businesses involve varying risks of liability. Over the years, participants in the inter-dealer and institutional brokerage industry have been parties to or otherwise involved in numerous litigations, arbitrations, claims and investigations, including employee claims alleging discrimination or defamation in connection with terminations, client claims alleging the occurrence of out trades or other errors in the handling of trade orders, clearing firm claims for financing charges or other liabilities associated with out trades or settlement problems, and competitor claims alleging theft of trade secrets, unfair competition or tortious interference in connection with new employee or desk hires or intellectual property infringement in connection with new product launches. To the extent we become subject to any such claims or actions that are significant, a settlement or judgment related thereto could have a material adverse effect on our financial condition or results of operations. Moreover, regardless of the outcome of these claims or actions, we generally incur significant expense and management time dealing with them. Employee misconduct or errors can hurt our business. It is not always possible to deter employee misconduct, despite the procedures and other checks and balances we have in place, including many that are mandated by regulators, designed to prevent and/or detect such actions. Misconduct by employees could include, among other things, engaging in and/or hiding unauthorized activities, committing improper or unauthorized activities on behalf of a client, or improperly using proprietary or confidential information. Any of the foregoing types of misconduct could subject us to financial losses, regulatory sanctions and/or harm our reputation, and thereby hurt our results of operations and business. Similarly, employee errors, including mistakes recording or executing transactions for clients, may cause us to record transactions that clients later disavow and refuse to settle, exposing us to risk of material loss until the errors in question are detected and resolved. As with out trades, adverse movements in the prices of the instrument involved in an error transaction before it is detected and unwound, reversed or otherwise corrected can increase this risk. 16 Risks and uncertainties associated with our current acquisition discussions can damage our business. There are multiple risks and uncertainties associated with holding publicly-disclosed acquisition discussions. A prospective change in control can be very unsettling to our employees, and we have seen more aggressive efforts by our competitors to recruit away our brokers in the face of the uncertainties presented by a possible acquisition. For example, since our announcement, these effects have contributed to the departure to a competitor of several brokers in our Mexico City office. Further, in our London office, we are aware of several brokers who have signed forward start agreements with one or more of our competitors that are intended to go into effect as soon as those brokers are legally free to change employers. Although we strive to reduce these risks and consequences by having contracts with, and attractive compensation and working conditions for, our employees, they cannot be entirely eliminated, and even the departure of one or two key employees can have a material adverse effect on our business. Moreover, to the extent that the discussions are ultimately not successful, the price of our shares may decline to the extent that the current market price reflects an assumption that an acquisition transaction will be completed. We also will remain responsible for our third-party legal, accounting and financial advisor costs related to the discussions, which are expensed in the periods in which they are incurred and, in the aggregate, could be material to our results of operations for such periods. An additional risk is the substantial time, attention and resources required of management and other employees, which can distract from and impede shorter-term operational focus and efficiency, as well as longer-term strategic planning, either or both of which can have a material adverse effect on our business and results of operations. ITEM 2. PROPERTIES We and our businesses maintain offices in each of the following locations: New York, New York; London, England; Tokyo, Japan; Stamford, Connecticut; Nyon and Zurich, Switzerland (with a registered office in Geneva); and Mexico City, Mexico. Our subsidiaries lease all of their office space, and we have material lease obligations with respect to our New York and London premises. In New York, we rent an aggregate of approximately 62,000 square feet on the 18th and 19th floors at One Seaport Plaza in lower Manhattan under a lease expiring in 2014. In London, we rent approximately 36,000 square feet of space in London's financial center, The City, under a lease expiring in 2018. We believe that all of our other facilities are suitable and adequate for their present and anticipated purposes. See Note 19 to the Consolidated Financial Statements for further information regarding future minimum rental commitments under our existing leases. ITEM 3. LEGAL PROCEEDINGS Our businesses are subject to various legal proceedings, arbitrations and claims that generally arise in the ordinary course. Although the results of such matters cannot be predicted with certainty, based on available information and advice of counsel, management believes that resolving any currently known matters, after taking into account reserves already established, will not have a material adverse impact on our consolidated financial condition (although they may be material to our results of operations for any particular period). For additional discussion of certain pending matters and reserve levels, see Note 20 to the Consolidated Financial Statements. 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2004. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock currently trades on The Nasdaq Stock Market(R) under the symbol "MAXF." The following table sets forth the range of high and low sales prices for our common stock, as reported by The Nasdaq Stock Market(R), for our last two fiscal years. Common Stock: High Low ------- ------- Year Ended December 31, 2004 ---------------------------- First Quarter............................ $ 14.94 $ 11.41 Second Quarter........................... 12.15 9.76 Third Quarter............................ 11.17 8.40 Fourth Quarter........................... 10.30 8.43 Year Ended December 31, 2003 ---------------------------- First Quarter............................ $ 8.09 $ 6.00 Second Quarter........................... 10.66 6.68 Third Quarter............................ 14.50 9.12 Fourth Quarter........................... 16.35 11.93 Holders: As of March 28, 2005, there were 31 holders of record of our common stock. The closing sale price of our common stock on March 28, 2005 was $12.50. Dividends: In 2004, we declared and paid four quarterly dividends and in 2003 we declared and paid our first two quarterly dividends, each at a rate of $.0625 per share ($.25 per share on an annualized basis). It is our current intention to continue this dividend policy in 2005. In addition, we have over the past several years repurchased significant amounts of our common stock, both in privately-negotiated transactions and through an open market repurchase program. Securities Authorized for Issuance Under Equity Compensation Plans: The following table sets forth certain information with respect to all equity compensation plans and arrangements of the Company in effect as of December 31, 2004, broken out based on whether the applicable plan was approved by stockholders or not. 18
Number of securities Number of securities remaining available for to be issued Weighted-average future issuance under upon exercise of exercise price of equity compensation plans outstanding options, outstanding options, (excluding securities Plan Category warrants and rights warrants and rights reflected in column (a)) ------------- ------------------- ------------------- ------------------------- Equity compensation plans approved by security holders 1,592,188(1) $ 5.80 707,500(2) Equity compensation plans not approved by security holders -0- N/A -0- ------------ ----------- Total 1,592,188 N/A 707,500 ============ ===========
(1) Comprised of 785,938 securities to be issued upon exercise of outstanding options under the 1996 Option Plan and 806,250 securities to be issued upon exercise of outstanding options under the 2002 Option Plan. (2) Comprised of 42,500 securities remaining available for future issuance under the 1996 Option Plan and 665,000 securities remaining available for future issuance under the 2002 Option Plan. Issuer Purchases of Equity Securities: The following table is a summary of all purchases made by us of our common stock during the three months ended December 31, 2004 and, as of each month end during such three-month period, the maximum number of shares that could still be purchased under our share repurchase program as then constituted: Issuer Purchase of Equity Securities (1) ----------------------------------------
Total Number of Maximum Shares Purchased Number of as Part of Shares that May Total Number of Average Publicly Yet be Purchased Shares Price Paid Announced Plans Under the Plans Purchased per Share or Programs Programs Period --------- --------- ----------- ---------------- October 1 to October 31, 2004 -0- N/A -0- 949,612 November 1 to November 30, 2004 24,482 $ 8.87 24,482 925,130 December 1 to December 31, 2004 93,806 $ 8.91 92,900 832,230 --------- --------- ----------- Total: 118,288 $ 8.90 117,382
----------------------- (1) Following the full utilization of earlier share repurchase authorizations announced on May 15, 2000 (833,744 shares) and January 26, 2001 (787,869 shares), we announced on July 26, 2001, a further authorization by our Board of Directors of a share repurchase program for up to 709,082 shares (10% of our then-outstanding shares). On September 18, 2001, in the immediate aftermath of the September 11th attacks, we announced the expansion of this authorization to bring the total repurchase authorization up to 1,200,000 shares. Our Board subsequently authorized further expansions of the share repurchase program by an additional 700,000 shares in April 2003 and 500,000 shares in July 2004, for a total authorization of 2,400,000 shares. These authorizations have no expiration date and delegate to our senior management the discretion to purchase shares, through open market, privately negotiated and/or block transactions, at times, amounts and prices it deems financially prudent in light of prevailing market, business and financial conditions. 19 ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each included elsewhere in this report. 20
Year Ended December 31, -------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------- -------------- -------------- -------------- -------------- Statement of Operations Revenues: Commission income $ 182,660,338 $ 176,497,549 $ 149,428,132 $ 138,003,085 $ 122,613,654 Interest income 14,852,760 6,280,695 2,147,274 2,306,044 1,823,285 Principal transactions 8,164,167 6,122,442 8,720,422 8,932,861 2,627,169 Insurance recoveries 11,106,063 11,098,135 4,498,144 Other income ( 1,547,084) ( 1,140,241) ( 843,142) 1,083,431 4,741,415 -------------- -------------- -------------- -------------- -------------- Gross revenues 204,130,181 198,866,508 170,550,821 154,823,565 131,805,523 Interest expense on securities indebtedness 13,752,951 4,117,319 147,865 444,174 329,919 -------------- -------------- -------------- -------------- -------------- Net revenues 190,377,230 194,749,189 170,402,956 154,379,391 131,475,604 -------------- -------------- -------------- -------------- -------------- Costs and expenses: Compensation and related costs 131,033,218 126,323,608 107,024,194 106,619,297 92,061,672 Communication costs 13,778,854 12,989,853 10,597,126 9,870,217 11,007,091 Travel and entertainment 10,824,107 9,833,755 7,406,116 6,493,462 6,620,974 Occupancy and equipment rental 10,698,360 6,623,731 4,490,356 3,967,255 5,127,875 Clearing and execution fees 3,804,372 3,865,514 3,311,759 3,511,712 3,307,802 Depreciation and amortization 3,082,439 3,220,577 2,405,834 3,598,580 4,008,937 Charity Day contributions 1,042,864 982,300 1,219,233 Other interest expense 181,221 406,772 151,214 222,213 265,038 Costs related to World Trade Center attacks 3,204,468 1,590,060 Restructuring costs 541,961 General, administrative and other expenses 7,500,398 7,220,567 4,933,483 6,619,527 5,161,550 -------------- -------------- -------------- -------------- -------------- 181,945,833 171,466,677 144,743,783 142,492,323 128,102,900 -------------- -------------- -------------- -------------- -------------- Income before provision for income taxes, minority interest, income from equity affiliate and extraordinary item 8,431,397 23,282,512 25,659,173 11,887,068 3,372,704 Provision for income taxes 3,895,581 9,749,282 12,130,758 2,174,673 2,710,482 -------------- -------------- -------------- -------------- -------------- Income before minority interest, income from equity affiliate and extraordinary item 4,535,816 13,533,230 13,528,415 9,712,395 662,222 Minority interest ( 175,985) ( 981,791) ( 683,985) 1,203,987 Income from equity affiliate 9,992 135,890 -------------- -------------- -------------- -------------- -------------- Income before extraordinary item 4,535,816 13,357,245 12,546,624 9,038,402 2,002,099 Extraordinary item 2,957,547 -------------- -------------- -------------- -------------- -------------- Net income $ 4,535,816 $ 16,314,792 $ 12,546,624 $ 9,038,402 $ 2,002,099 ============== ============== ============== ============== ============== Year Ended December 31, -------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------------- -------------- -------------- -------------- -------------- Balance Sheet Data: Total assets $ 281,419,078 $1,663,126,636 $ 123,477,959 $ 279,317,292 $ 70,906,347 Obligations under capitalized leases 210,636 703,944 842,399 204,252 335,635 Notes payable 447,978 1,723,169 Revolving credit facility 5,000,000 7,500,000 Total liabilities 221,272,592 1,603,082,134 70,477,645 241,021,098 37,257,798 Minority interest 5,407,228 3,979,291 3,407,628 Redeemable preferred stock 2,000,000 Stockholders' equity 60,146,486 60,044,502 47,593,086 34,316,903 28,240,921 Per Share Information Income before extraordinary item - basic $ .64 $ 1.91 $ 1.72 $ 1.23 $ .23 Extraordinary item - basic .42 Net income - basic .64 2.33 1.72 1.23 .23 Income before extraordinary item - diluted .58 1.62 1.53 1.16 .23 Extraordinary item - diluted .36 Net income - diluted .58 1.98 1.53 1.16 .23 Book value 8.76 8.41 6.56 4.88 3.48 Weighted average common shares outstanding - basic 7,051,720 6,987,415 7,304,284 7,357,017 8,374,166 Weighted average common shares outstanding - diluted 7,798,663 8,228,599 8,210,638 7,764,667 8,374,166
21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended December 31, 2004 The year ended December 31, 2004 was an uneven one for us. After a strong first quarter, in which we achieved year-over-year growth in commission income and profitability, we experienced flat or declining results throughout the remainder of 2004. The falloff reflected a combination of factors, including weaker market activity as compared to the latter half of 2003, costs we incurred for expansion efforts that did not result in corresponding revenue gains, increased employment costs associated with heightened competition to hire and retain brokers, and continued losses from the Tokyo Venture. On a GAAP basis, our net income for the full year was $4.5 million, or $.58 per share. We were profitable in every quarter, thereby extending our consecutive number of such quarters to seventeen, and continued our quarterly dividend policy of $.0625 per share (or $.25 per share annually). Nonetheless, our bottom line results ultimately were disappointing, especially in comparison to our record performance in 2003. A year ago our GAAP net income, aided in part by a $6.0 million, or $.72 per share, gain recognized in connection with our September 11th related property insurance claim settlement, was $16.3 million, or $1.98 per share. In our core Euro Brokers inter-dealer brokerage businesses, a 2004 highlight was our continued ability to grow our commission income revenues. Overall, commission income increased by 3.5% to $182.7 million, from $176.5 million in 2003. In New York, our growing repurchase agreements business, as well as our emerging market debt and cash deposits businesses, showed solid revenue increases. Additionally, as a result of some key broker hires during 2004, we expect the positive trend in foreign currency brokerage, which began late in 2004, to carry over into 2005. In London, we saw revenue increases in a number of areas continuing from 2003, including our floating rate notes and repurchase agreements businesses and in certain established interest rate derivative businesses. Increased costs during 2004, however, largely offset these revenue increases. We experienced upward pressure on our employment costs for hiring and retaining quality brokerage personnel, reflecting the increased competition from and financial strength of larger competitors, such as ICAP plc, GFI Group and the recently merged Tullet/Prebon operations within Collins Stewart Tullet plc, and new players, such as the BGC Partners voice brokerage spin-off from Cantor Fitzgerald. In addition, we made investments in certain initiatives aimed at growing our businesses, including, among others, establishing a representative office in China to explore brokerage opportunities in that market, and increasing our recruiting presence in New York. Our Maxcor Financial Inc. institutional sales and trading operations saw reduced revenues during 2004, primarily reflecting tighter overall market spreads in municipal and other fixed income markets and a change in focus of our institutional corporate bond sales and trading group. Following the departure of our leveraged finance group in January 2004, we began incurring costs to establish a restructured institutional corporate bond sales and trading group focusing on high grade corporate bonds and high yield/crossover corporate bonds. This restructured operation included the use of capital to support large levels of hedged securities positions to facilitate customer needs. However, as a result of trading losses incurred on our bond inventory and operational losses reflecting the lack of a focused sales effort, we discontinued this restructured operation during the third quarter of 2004. Instead, we subsequently expanded the focus of our institutional convertible group to also include high yield and distressed corporate bonds. We expect that our current approach will generate more stable results due to a higher emphasis on serving clients with research and trading ideas, rather than the utilization of capital. 22 We continue to believe that our Maxcor Financial institutional sales and trading businesses provide us with important diversity and contribute to a more balanced mix of operations. For example, our institutional equities sales and trading group established in 2002 continued to grow revenues and contribute to profitability in 2004. We also continued to struggle during 2004 to improve the performance of the Tokyo Venture, where our loss rate was approximately even with 2003. We do not expect a turnaround any time soon in 2005, as market conditions there continue to be difficult for us and recent new broker hires have added to costs without yet generating commensurate revenue growth. Nonetheless, we continue to believe that Tokyo is an important strategic location for our worldwide operations, and accordingly intend to stay the course while continuing to seek measures to improve the operations and lessen their negative impact on our overall results. During 2004 we continued to make progress in resolving our outstanding contingency involving the trading of when-issued contracts in the equity of NTL, Inc. ("NTL") during late 2002 and early 2003. Following the favorable New York Supreme Court decision we obtained in March 2004, we were able to reach permanent, negotiated resolutions of our NTL when-issued trades with certain of our counterparties who were demanding compensation for unadjusted shares that were not delivered to them. These resolutions resulted in the dismissal of the sole proceeding before NASD and the reversal of $3.3 million of estimated damages payable recorded in 2003. This $3.3 million net loss reversal is reflected on the Consolidated Statement of Operations as gains on principal transactions. See Note 20 to the Consolidated Financial Statements for a fuller description of the NTL matter. Another significant item affecting our 2004 results was $3.1 million of costs incurred to increase our reserve related to office space in London that we have designated for sublease. In the aftermath of September 11th, we decided to forego an extension of a tenant's sublease on this space to reallocate it for potential use by some of our New York employees and to accommodate future expansion of our London operations. The increase to our reserve reflects our current intention to sublet the entire space previously occupied by the former subtenant (15,739 square feet vs. the 10,000 square feet we were previously reserving for and intending to sublet) and to amend our estimate of the amount of time it will take to generate sublet income and the amount for which we believe we will be able to sublet the space. These costs are reflected on the Consolidated Statement of Operations in occupancy and equipment rental. We continued our charitable efforts in 2004 by holding our third annual Charity Day. With the full support of our customers and our employees, who waive any entitlement to commissions from the revenues generated that day, our April 19, 2004 Charity Day raised more than $1 million. These proceeds were used as continued support for the Euro Brokers Relief Fund, Inc., which provides charitable aid to the families and other financial dependents of our 61 employees and staff members killed as a result of the September 11th attacks and our Maxcor Foundation Inc., which we established in 2003 to recognize and support organizations that benefit the various communities in which our firm and our employees operate. Grants made by the Maxcor Foundation as a result of the 2004 Charity Day included: Marine Corps-Law Enforcement Foundation; Columbia University Medical Center; Duke University's Fuqua/Coach K Center for Leadership and Ethics; and the Royal Marsden Hospital in London. The year 2004 also saw our continued execution on our common stock repurchase program, which, in addition to our dividend policy, is a key component of our overall effort to increase value to stockholders and intelligently manage our capital structure. In total, we repurchased 361,963 23 shares in 2004, at an aggregate cost of $3.7 million. These repurchases more than offset dilution from stock option exercises during the year, which, net of shares delivered in connection with such exercises, resulted in the issuance of 89,844 shares (see Note 17 to the Consolidated Financial Statements). Subsequent Event On March 4, 2005, we announced that we were holding preliminary business combination discussions with a potential acquirer. The trend of industry consolidation within the inter-dealer brokerage space, briefly noted above, was a factor in our decision to participate in these discussions. As of March 30, 2005 (the last date before this report went to press), we had made substantial progress towards a transaction. However, there are still issues remaining to be resolved and, accordingly, there can be no assurance as to whether we will be successful in reaching agreement on or completing a transaction. Although we are focused on achieving the many likely positive results that would flow from a successful transaction, we are also aware of the multiple risks and uncertainties associated with publicly engaging in this process. These include, among others, the unsettling effect on our employees, more aggressive recruiting efforts directed by our competitors at our brokers, the diversion of management's time and attention, and the costs of legal and other advisory fees being incurred. See "Cautionary Statements - Risks and uncertainties associated with our current acquisition discussions can damage our business." Critical Accounting Policies Note 2 to the Consolidated Financial Statements details the significant accounting policies used in the preparation of those statements. There are certain of these policies that are considered to be of particular importance because they require difficult, complex or subjective judgments on matters that are often inherently uncertain. The following is a discussion of these policies. Securities are carried at fair values generally based on quoted market prices. From time to time quoted market prices are not available for certain municipal or other securities positions. For such securities, we, with the assistance of independent pricing services, determine fair values by analyzing securities with similar characteristics that have quoted market prices. Consideration is given to the size of our individual positions relative to the overall market activity in such positions when determining the impact our sale would have on fair values. The assumptions used in valuing our securities may be incorrect and the actual value realized upon disposition could be different from the current carrying value. Included in accounts payable and accrued liabilities are reserves for certain contingencies to which we may have exposure, such as the employer portion of National Insurance Contributions in the U.K., excess office space, interest and claims on securities settlement disputes and reserves for certain income tax contingencies. The determination of the amounts of these reserves requires significant judgment on our part. We consider many factors in determining the amount of these reserves, such as legal precedent and case law and historic experience. The assumptions used in determining the estimates of reserves may be incorrect and the actual costs of resolution of these items could be greater or less than the reserve amount. Recently Issued Accounting Standards In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities" ("FIN 46(R)"). FIN 46(R) addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through a 24 means other than voting rights and accordingly should consolidate the entity. FIN 46(R) replaced FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which was issued in January 2003. Prior to FIN 46, variable interest entities were commonly referred to as special purpose entities. The adoption of FIN 46(R) in 2004 had no impact on our Consolidated Financial Statements. In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Statement of Financial Accounting Standards No. 123(R) "Shared Based Payment" ("SFAS 123(R)"). SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides services in exchange for the award. SFAS 123(R) replaces SFAS 123 and supersedes APB No. 25. SFAS No. 123(R) will be effective for the Company's third quarter of fiscal 2005. We are currently evaluating the effect of adopting SFAS 123(R). Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Commission income represents revenue generated on our brokerage transactions conducted on an agency (including name give-up) or matched riskless principal basis. For 2004, these revenues increased $6,162,789 to $182,660,338, compared to $176,497,549 for 2003, reflecting increases in London and Switzerland, partially offset by a slight decrease in New York. The increases in London and Switzerland primarily reflected growth in the inter-dealer brokerage and institutional businesses started in 2003 and exchange rate movements. In New York, the decrease primarily reflected a reduction in riskless principal transactions from our institutional corporate bond sales and trading operations that offset increased commissions from our Euro Brokers inter-dealer brokerage businesses. Interest income for 2004 increased $8,572,065 to $14,852,760, compared to $6,280,695 for 2003, primarily reflecting financing income earned on reverse repurchase agreements in connection with our institutional securities financing operations and coupon and financing income associated with securities positions taken by our institutional corporate bond sales and trading operations. These items are largely offset by interest expense incurred on related securities indebtedness (see below). Partially offsetting the increase to interest income during 2004 was reduced interest income on municipal securities positions as a result of lower amounts of municipal securities held during the year. For 2005 we anticipate significantly lower amounts for interest income and interest expense incurred on securities indebtedness as a result of the discontinuation of our institutional securities financing operations and the restructuring of our institutional corporate bond sales and trading operations. Principal transactions represent the net gains or losses generated from securities transactions involving the assumption of market risk for a period of time. For 2004, these activities resulted in a gain of $8,164,167, compared to a gain of $6,122,442 for 2003. This change primarily reflected the effect of a net loss of $5.1 million recorded by MFI during 2003 on the disputed settlement of its NTL when-issued equity trades, the reversal of $3.3 million of this loss during 2004, and a $1.5 million gain recorded during 2004 from the resolution of contingencies associated with the settlement of certain principal transactions in the aftermath of the September 11th attacks. Partially offsetting these improvements were reduced gains on municipal securities transactions and losses incurred during 2004 by our institutional corporate bond sales and trading operations prior to being restructured. We restructured these operations during the third quarter of 2004, replacing its top managers and changing its focus to rely less on the utilization of capital and more on the creation of value-added trading ideas. As discussed in Note 20 to the Consolidated Financial Statements, the $5.1 million net loss recorded during 2003 on the disputed settlement of NTL when-issued trades reflected a $5.9 million loss recorded during the first quarter of 2003 offset in part by an $800,000 gain recorded during the second 25 quarter of 2003 on NTL shares determined to no longer constitute a hedge. The $5.9 million loss recorded reflected the contingency that all of MFI's NTL when-issued trades, other than permanently adjusted settlements by mutual agreement, would be required to settle on an unadjusted basis. In March 2004, the Court granted a summary judgment motion made by MFI and issued a decision stating that all NTL when-issued trades among the parties before the Court should be settled on an adjusted and uniform basis. In July 2004, based upon this decision, MFI obtained a judgment from the Court entitling MFI to collect a total of $3.6 million (inclusive of interest) from those counterparties that received and retained unadjusted deliveries of NTL shares from MFI. The judgment remains subject to collection, however, as both it and the underlying decision have been appealed by a number of MFI's counterparties. Following the Court's favorable decision, MFI has been able to reach permanent, negotiated resolutions of its NTL when-issued trades with certain of its counterparties during 2004. These resolutions resulted in the dismissal of the sole proceeding before NASD (leaving the remaining disputes centralized in one forum - the Court) and the reversal of $3.3 million of estimated damages payable recorded in 2003. Because of the pending appeals and their associated uncertainties, MFI only intends to record gains related to the $3.6 million judgment if and when permanent resolutions, whether by negotiation, completion of the appeals process or otherwise, are reached with counterparties. Other items for 2004 resulted in a loss of $1,547,084, as compared to a loss of $1,140,241 for 2003. This increased loss reflected licensing income of $292,000 earned during 2003 on an information licensing agreement that expired in July 2003 and foreign exchange losses in 2004 as compared to foreign exchange gains in 2003. The losses on our 57.25% interest in the Tokyo Venture for 2004 and 2003 were comparable at $1,553,166 and $1,560,281, respectively. For 2004, interest expense on securities indebtedness increased $9,635,632 to $13,752,951, compared to $4,117,319 for 2003, primarily as a result of increased interest expense incurred on repurchase agreements in connection with our institutional securities financing operations and coupon and financing expense associated with securities positions taken by our institutional corporate bond sales and trading operations. Compensation and related costs for 2004 increased $4,709,610 to $131,033,218, compared to $126,323,608 for 2003, primarily as a result of increases in London and Switzerland from higher revenues (resulting in higher incentive based compensation) and the effect of translating strengthened foreign currency amounts to U.S. dollars. Partially offsetting this increase was a decrease in London to our reserve for the employer portion of National Insurance contributions of $1.3 million based upon a resolution with the Inland Revenue of a portion of this contingency. Communication costs for 2004 increased $789,001 to $13,778,854, compared to $12,989,853 for 2003, primarily as a result of the expansion of products and customers in New York and London and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Travel and entertainment costs for 2004 increased $990,352 to $10,824,107, compared to $9,833,755 for 2003, reflective in part of our increased expansion efforts in the early part of 2004. Occupancy and equipment rental represents expenses incurred in connection with our office premises, including base rent and related escalations, maintenance, electricity and real estate taxes, as well as rental costs for equipment under operating leases. For 2004, these costs increased $4,074,629 to $10,698,360, compared to $6,623,731 for 2003, primarily due to 26 increased costs for office space in London effective the second quarter of 2003, a full period of rental costs on equipment in New York that we started leasing in late March 2003 and a $3.1 million increase to an accrual in London for excess office space designated for sublease. The increase to our London office space reserve reflects our current intention to sublet the entire space previously occupied by a former subtenant (15,739 square feet vs. the 10,000 square feet we were previously reserving for and intending to sublet) and to amend our estimate of the length of time it will take to generate sublet income and the amount for which we believe we will be able to sublet the space. Clearing and execution fees are fees paid to clearing organizations for transaction settlements and credit enhancements and to other broker-dealers (including ECNs) for providing access to various markets and exchanges for executing transactions. For 2004 and 2003, these costs were comparable at $3,804,372 and $3,865,514, respectively. Depreciation and amortization expense consists principally of depreciation of communication and computer equipment and automobiles under capitalized leases and amortization of leasehold improvements and software. For 2004, depreciation and amortization decreased $138,138 to $3,082,439, compared to $3,220,577 for 2003, reflecting the net effects of a reduction in London from certain assets becoming fully depreciated and an increase due to a full year depreciation and amortization of furniture and leasehold improvements for our New York headquarters, which we have occupied since March 2003, and depreciation and amortization of current year purchases in New York. All the revenues generated on our Charity Days by our New York, Stamford, Mexico, London and Switzerland offices are donated to designated charities. All participating brokerage personnel waive any entitlement from such revenues. The proceeds of $1,042,864 raised on our April 19, 2004 Charity Day were designated for The Euro Brokers Relief Fund, Inc., which provides charitable aid to the families and other financial dependents of our 61 employees and staff members killed as a result of the September 11th attacks, and our Maxcor Foundation, Inc. The Maxcor Foundation in turn designated four principal recipients: Marine Corps-Law Enforcement Foundation, Inc., Columbia University Medical Center, Duke University's Fuqua/Coach K Center for Leadership and Ethics and The Royal Marsden Hospital in London. Our May 12, 2003 Charity Day raised a total of $982,300 which was contributed to The Euro Brokers Relief Fund and various charities supported by the Maxcor Foundation. Other interest expense represents interest costs incurred on non-securities related indebtedness, such as revolving credit facilities and capital lease obligations. For 2004, these costs decreased $225,551 to $181,221, compared to $406,772 for 2003, primarily due to decreased borrowings under our revolving credit facility with The Bank of New York ("BONY") and decreased capitalized lease obligations. General, administrative and other expenses include such expenses as corporate insurance, office supplies and expenses, professional fees, food costs and dues to various industry associations. For 2004, these expenses increased $279,831 to $7,500,398, compared to $7,220,567 for 2003, primarily as a result of increased costs for corporate insurance, subscriptions and external accounting and auditing fees, and the effect of an adjustment in 2003 to reduce expenses for the recovery of consumption taxes previously paid of $160,000. These increases were offset by a decrease of $400,000 in legal fees related to the NTL when-issued trade disputes. Provision for income taxes for 2004 decreased $5,853,701 to $3,895,581, compared to $9,749,282 for 2003, primarily as a result of a decrease in pre-tax income. The years ended December 31, 2004 and 2003 included reductions to income 27 tax reserves of $400,000 and $500,000, respectively, as a result of the resolution of certain contingencies. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Commission income for 2003 increased $27,069,417 to $176,497,549, compared to $149,428,132 for 2002, primarily reflecting increased brokerage in New York and London. The increase in New York was attributable to increased commissions generated by the institutional sales and trading operations started during 2002 (leveraged finance - high-yield and distressed debt, convertible securities and equities) and increased commissions generated by our inter-dealer brokerage operations. In London, the increase was attributable to increased revenues from our inter-dealer brokerage operations, commissions generated by our newly-started sales and trading operations and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Interest income for 2003 increased $4,133,421 to $6,280,695, compared to $2,147,274 for 2002, primarily reflecting financing income earned on reverse repurchase agreements in connection with the institutional securities financing operations started in 2003 and an increase in the average inventory of securities held. Principal transactions for 2003 resulted in a gain of $6,122,442, compared to a gain of $8,720,422 for 2002. This change primarily reflected a net loss of $5.1 million recorded by MFI during 2003 on the disputed settlement of its NTL when-issued equity trades, partially offset by improved results in our firm investment account and by an increase in gains on municipal securities. During 2003, we recognized a net gain of $11,106,063 on the settlement of our property insurance claim against Kemper Insurance for losses incurred for destroyed property as a result of the September 11, 2001 terrorist attacks on the World Trade Center, where we were formerly headquartered. This net gain reflected the gross insurance proceeds received since the attacks of $13,868,210, less $2,762,147, representing the aggregate of the net book value of owned property destroyed in the attacks, termination costs associated with operating leases of equipment destroyed in the attacks and claim-related expenses. During 2002, we recorded insurance recoveries of $11,098,135, representing the portions of the settlements of claims under our U.S. business interruption insurance policy with Kemper ($10.3 million) and our U.K. business interruption insurance policy with Norwich Union ($831,000) for losses incurred in New York and London following the September 11th attacks attributable to lost revenues (net of saved expenses). Other items for 2003 resulted in a loss of $1,140,241, as compared to a loss of $843,142 for 2002. The increase in this loss resulted from the loss of $1,560,281 on our interest in the Tokyo Venture for 2003, as compared to a loss of $1,184,233 for 2002, offset in part by income of $292,000 during 2003 from the licensing of financial information derived from our inter-dealer brokerage business, as compared to $262,000 during 2002, and an increase in foreign exchange gains during 2003. For 2003, interest expense on securities indebtedness increased $3,969,454 to $4,117,319, compared to $147,865 for 2002, primarily as a result of interest expense incurred on repurchase agreements in connection with the institutional securities financing operations started in 2003. The other type of interest expense included in this classification, interest expense incurred on margin borrowings to finance securities positions, decreased slightly. 28 Compensation and related costs for 2003 increased $19,299,414 to $126,323,608, compared to $107,024,194 for 2002, primarily as a result of increased brokerage personnel in connection with the expansion of products in New York, the overall increase in revenues which results in higher commission-based payouts, and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Communication costs for 2003 increased $2,392,727 to $12,989,853, compared to $10,597,126 for 2002, primarily as a result of the expansion of products and customers in New York and London and the currency effects of translating strengthened British pound sterling amounts to U.S. dollars. Travel and entertainment costs for 2003 increased $2,427,639 to $9,833,755, compared to $7,406,116 for 2002, reflective in part of the expansion efforts in New York and London and the overall increase in operating revenues. Occupancy and equipment rental for 2003 increased $2,133,375 to $6,623,731, compared to $4,490,356 for 2002, primarily due to increased costs for office space associated with our new headquarters at One Seaport Plaza in lower Manhattan, increased costs for office space in London and rental costs on leasing new equipment in New York. Clearing and execution fees for 2003 increased $553,755 to $3,865,514, compared to $3,311,759 for 2002, primarily as a result of the increase in transaction volumes from our institutional equities desk and other areas commenced in 2002. Depreciation and amortization expense for 2003 increased $814,743 to $3,220,577, compared to $2,405,834 for 2002, principally as a result of the depreciation and amortization in New York of furniture and leasehold improvements purchased primarily with insurance proceeds for our new headquarters. The proceeds of $982,300 raised on our May 12, 2003 Charity Day were designated for The Euro Brokers Relief Fund and our Maxcor Foundation. The Maxcor Foundation in turn designated three principal recipients: Marine Corps-Law Enforcement Foundation, Inc., Columbia University College of Physicians & Surgeons and The Great Ormond Street Hospital for Children in London. Our March 11, 2002 Charity Day resulted in a contribution of $1,219,233 entirely to The Euro Brokers Relief Fund. Other interest expense for 2003 increased $255,558 to $406,772, compared to $151,214 for 2002, primarily as a result of increased costs associated with larger balances outstanding under our new revolving credit facility with BONY. General, administrative and other expenses for 2003 increased $2,287,084 to $7,220,567, compared to $4,933,483 for 2002, primarily as a result of professional fees of $700,000 incurred in connection with the NTL when-issued equity trade disputes previously discussed, increased costs for corporate insurance coverage and increases in other general, administrative and other expenses. Provision for income taxes for 2003 decreased $2,381,476 to $9,749,282, compared to $12,130,758 for 2002, notwithstanding higher net income in 2003 than 2002, primarily as a result of a decrease in income before provision for income taxes, minority interest and extraordinary item, and a reduction of $500,000 to income tax reserves as the result of the favorable resolution to certain contingencies. 29 For 2003, minority interest in consolidated subsidiaries resulted in a reduction of the net income from such subsidiaries of $175,985, as compared to a reduction of $981,791 for 2002. The decrease is the result of our February 2003 purchase of the minority interest in EBL (formerly Euro Brokers Finacor Limited ("EBFL")). During 2003 we recorded an extraordinary gain of $2,957,547 on the purchase of the 50% shareholding held by Monecor in EBFL. This purchase resulted from a ruling by the London Court of Appeals in February 2003 that dismissed Monecor's appeal of the May 2002 judgment of the London High Court of Justice. That judgment permitted Euro Brokers Holdings Limited ("EBHL"), our top U.K. holding company, to purchase Monecor's interest at a 30% discount to the book value attributable to this shareholding as of December 2000. EBHL obtained the May 2002 judgment under the terms of the EBFL shareholders agreement as a result of Monecor's failure to provide certain requested funding to EBFL in late 2000. This discounted purchase price resulted in a gain of $2,957,547, equal to the excess of the amount recorded for Monecor's interest in EBFL of $5,570,703 over the purchase price of $2,613,156. Liquidity and Capital Resources Operating Activities A substantial portion of our assets, similar to other brokerage firms, is liquid, consisting of cash, cash equivalents and assets readily convertible into cash, such as receivables from broker-dealers, customers and clearing organizations, and securities owned, held at clearing firm. U.S. Treasury and federal agency securities purchased under agreements to resell (reverse repurchase agreements) and U.S. Treasury and federal agency securities sold under agreements to repurchase (repurchase agreements) are collateralized financings entered into for the purpose of earning an interest spread. The balances recorded on these transactions, reflected on the Consolidated Statements of Financial Condition respectively as "securities purchased under agreements to resell" and "securities sold under agreements to repurchase," are the contracted amounts, plus accrued interest. The fair value of the securities purchased and sold under these agreements are monitored and additional collateral is obtained or excess collateral is returned where appropriate. At December 31, 2004, the Consolidated Statements of Financial Condition include reverse repurchase agreements and repurchase agreements of $123.6 million. These balances are substantially reduced from December 31, 2003, reflecting the wind-down of our institutional securities financing business, which was completed in the first quarter of 2005. In the ordinary course of settling repurchase agreement transactions and other securities transactions, we have securities failed-to-deliver and failed-to-receive obligations. These fails are generally resolved shortly afterwards through proper receipt and delivery. At December 31, 2004, the Consoliated Statements of Financial Condition include securities failed-to-deliver and securities failed-to-receive of $31.4 million. Securities held at clearing firm reflect securities positions taken in connection with our sales and trading operations and in our investment account. Positions are financed either from our cash resources or by margin borrowings (if available) from broker-dealers that clear these transactions on our behalf on a fully-disclosed basis. At year-end 2004, as reflected on the Consolidated Statements of Financial Condition, we had net assets relating to securities positions (excluding repurchase and reverse repurchase agreements) of $10.6 million, primarily reflecting securities owned of $22.2 million and margin borrowings from a clearing broker of $11.6 million. MFI is a member of the GSD-FICC for the purpose of clearing transactions in U.S. Treasury and federal agency securities and repurchase agreements collateralized by such instruments. Pursuant to such membership, MFI is required to maintain excess regulatory net capital of $10,000,000 and a minimum net worth of $25 million. In addition, MFI is required to maintain a clearing deposit with GSD-FICC based upon its level of trading activity (with a minimum deposit of $5,000,000), which has been reflected as deposits with clearing organizations on the Consolidated Statements of Financial Condition. 30 EBL is a Type D registered firm of the Financial Services Authority in the U.K., required to maintain a financial resources requirement generally equal to six weeks average expenditures plus the amount of less liquid assets on hand (a $6.7 million requirement at December 31, 2004). Net cash used in operations for 2004 was $5.7 million. This decrease in cash was the result of changes in various working capital items such as an increase in net cash used for securities positions and decreases in various payable balances. These cash decreases were offset by net income of $4.5 million adjusted to reflect the net effect of non-cash items of $2.6 million, primarily consisting of depreciation and amortization, unfunded losses from our Tokyo Venture and deferred income taxes. Net cash provided by operations for 2003 (including the remaining cash collection on our property damage insurance claim) was $18.1 million. This increase in cash was the result of net income of approximately $16.3 million adjusted to reflect the net effect of $6.5 million of non-cash items, primarily consisting of depreciation and amortization, unfunded losses from our share of the Tokyo Venture, deferred income taxes and the gain on the purchase of minority interest. These cash increases were reduced by the net effect of other working capital items, including an increase in deposits with clearing organizations, an increase in receivable from broker-dealers and customers and a reduction in accrued liabilities, offset in part by a reduction in net assets related to securities positions. Net cash provided by operations for 2002 was $9.9 million. This increase in cash was the result of net income of $12.5 million adjusted to reflect the net effect of $4.3 million of non-cash items, primarily consisting of depreciation and amortization, unfunded losses from our share of the Tokyo Venture and minority interest in the net earnings of consolidated subsidiaries. These cash increases were reduced by the effect of other working capital items, including increased net assets related to securities positions and decreased liabilities related to insurance advances and other effects of the September 11th attacks, offset in part by increased accrued compensation. In the ordinary course of our businesses, we are subject to extensive regulation at international, federal and state levels by various regulatory bodies which are charged with safeguarding the integrity of the securities and other financial markets and protecting the interest of customers. The compliance requirements of these different regulatory bodies may include, but are not limited to, net capital or stockholders' equity requirements. We believe that all of our ongoing liquidity needs will be met in timely fashion from our cash and cash equivalents or other of our resources. Moreover, we have historically met regulatory net capital and stockholders' equity requirements and believe we will continue to do so in the future. Investing Activities Investing activities in 2004 reduced cash by $2.3 million due primarily to cash outlays for fixed assets purchases. Investing activities in 2003 reduced cash by $12.4 million, due to cash outlays of $9.7 million for fixed asset purchases, primarily associated with the completion of the build-out of our new permanent headquarters at One Seaport Plaza in lower Manhattan and the discounted $2.6 million purchase of Monecor's minority interest in EBFL. Investing activities in 2002 reduced cash by $7.6 million, primarily due to cash outlays associated with the initial build-out of our One Seaport Plaza headquarters. 31 A significant portion of the cash outlays for building out our new headquarters was funded by insurance proceeds from our property casualty policy with Kemper, which covered losses we incurred on September 11, 2001 from the destruction of our former headquarters on the 84th floor of Two World Trade Center. From late 2001 through the third quarter of 2003, we received total proceeds under this policy of $13.9 million, in full settlement of our claim. Financing Activities At December 31, 2004, we had $5,000,000 outstanding under a three-year revolving credit facility entered into by Euro Brokers Inc. ("EBI"), a U.S. subsidiary, with BONY in March 2003. This facility, as subsequently amended in November 2003, provides for borrowings of up to $10 million and is secured by EBI's receivables and the stock issued by EBI to its direct parent. The agreement with BONY contains certain covenants which require EBI separately, and us as a whole, to maintain certain financial ratios and conditions. Upon entering into the agreement with BONY, we terminated our $5 million revolving facility with General Electric Capital Corporation ("GECC"). Net cash used in financing activities for 2004 was $7.9 million, primarily reflecting the net effects of cash used of $3.7 million to acquire treasury stock, repayments of borrowings under the BONY facility of $2.5 million, common stock dividends paid of $1.8 million, obligations repaid under capitalized lease obligations of $297,000 and proceeds of $320,000 received from the exercise of options. Net cash provided by financing activities for 2003 was $7.5 million, primarily reflecting the net effects of net borrowings of $7.5 million under the revolving facility with BONY, proceeds of $5.2 million received from GECC under sale-leaseback transactions and proceeds of $612,000 received from the exercise of options, reduced by cash used of $4.7 million to acquire treasury stock, obligations repaid under capitalized leases of $208,000 and an initial two common stock dividends paid (at a quarterly rate of $.0625 per share) aggregating to $878,000. Net cash used in financing activities for 2002 was approximately $69,000, primarily reflective of the net effect of cash of $2.1 million used to acquire treasury stock, the repayment of a note payable to GECC and obligations under capital leases aggregating $586,000 and proceeds received from the exercise of stock options and warrants of $2.6 million. In July 2001, our Board of Directors continued an existing common stock repurchase program by authorizing the purchase of up to an additional 709,082 shares, or 10% of our then-outstanding shares. In the immediate aftermath of the September 11th terrorist attacks, this authorization was expanded by 490,918 shares (to a total of 1,200,000 shares), and was further expanded in April 2003 by an additional 700,000 shares and in July 2004 by an additional 500,000 shares, for a total of 2,400,000 shares. Through December 31, 2004, we had purchased 1,567,770 shares under this expanded repurchase program. As has been the case with each of our repurchase program authorizations, all purchases of shares are subject to the availability of shares at prices which are acceptable to us, as well as to our assessment of prevailing market and business conditions, and, accordingly, there is no guarantee as to the timing or number of shares to be repurchased. All purchases are anticipated to be funded using our existing resources. Contractual Obligations We have contractual obligations to make future payments in connection with operating and capital leases and information service contracts. The following table sets forth these contractual payment commitments as of December 31, 2004. Additional disclosure relating to our commitments appears in Notes 13 and 19 to the Consolidated Financial Statements. 32
Payments due by period ------------------------------------------------------------------- Less than More than Total 1 year 1-3 years 3-5 years 5 years ----------- ----------- ----------- ----------- ----------- Operating leases $68,785,893 $ 7,079,529 $12,567,202 $11,200,812 $37,938,350 Information service contracts 7,776,531 6,152,044 1,624,487 Obligations under capitalized leases 231,578 231,578 ----------- ----------- ----------- ----------- ----------- Total contractual obligations $76,794,002 $13,463,151 $14,191,689 $11,200,812 $37,938,350 =========== =========== =========== =========== ===========
Effects of Inflation Because our assets are to a large extent liquid in nature, they are not significantly affected by inflation, although the value of any longer-term fixed-income securities held in inventory may decrease. However, to the extent inflation increases certain of our operating expenses, such as employee compensation, travel and entertainment, occupancy and communication costs, such increases may not be readily recoverable in the price of our services, particularly for operations domiciled outside the United States, where there can be increased inflationary pressures. In addition, to the extent inflation increases or decreases volatility in the securities markets, our brokerage business is likely to be affected by corresponding increases or decreases in brokerage transaction volumes. Forward-Looking Statements Certain statements contained in this Item 7 and elsewhere in this report, as well as other oral and written statements made by us to the public, contain and incorporate by reference forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Wherever possible, we have identified these forward-looking statements by words such as "believes," "anticipates," "expects," "may," "intends," "could," "will" and similar phrases. Such forward-looking statements, which describe our current beliefs concerning future business conditions and the outlook for our company and business, are subject to significant uncertainties, many of which are beyond our control. Actual results or performance could differ materially from that which we expect. Uncertainties include factors such as: o market and economic conditions, including the level of trading volumes in the instruments we broker and interest rate volatilities; o the effects of any additional terrorist acts or acts of war and governments' military and other responses to them; o the success of our technology development and deployment; o the status of our relationships with employees, clients, business partners, vendors and clearing firms; o possible third-party litigations or regulatory actions against us or other unanticipated contingencies; 33 o the scope of our trading gains and losses; o the actions of our competitors; o government regulatory changes; and o the outcome of our current, or any future, business combination discussions. For a fuller description of these and additional uncertainties, reference is made to the "Competition," "Regulation" and "Cautionary Statements" captions of Item 1 of this report, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" caption of Item 7 of this report and the "Quantitative and Qualitative Disclosures about Market Risk" caption of Item 7A of this report. The forward-looking statements made herein are only made as of the date of this report and we undertake no obligation to publicly update such forward-looking statements to reflect new information or subsequent events or circumstances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are actively involved in the evaluation of risks associated with certain financial instruments and will from time to time reduce other risks inherent in our businesses through the use of financial instruments. We reduce market risk related to positions in our institutional sales and trading operations by placing guidelines on their size, rating and number of days held and with certain hedging requirements. We closely monitor our securities positions on a real-time basis, including comparisons to independently verified market values. We perform daily reviews of activity reports for all sales and trading operations which detail all executed transactions and resulting commissions and principal gains and losses. In the process of executing brokerage transactions, we sometimes experience "out trades" or other errors in which we may have liability for the resulting unmatched position. Out trades generally increase with increases in the volatility of the market. If an out trade is promptly discovered, thereby allowing prompt correction or disposition of the unmatched position, our risk is usually limited. If discovery (or correction or disposition) is delayed, the risk is heightened by the increased possibility of intervening market movements prior to such correction or disposition. We believe that both our paperless confirmation system and our electronic blotter system, because of their ability to confirm trade details rapidly and identify unbalanced trade conditions as they occur, serve to help limit the market risk exposure when out trades or other errors occur. To limit our exposure further in such situations, our policy is to correct or dispose of any resulting unmatched positions promptly after their discovery. For our non-trading activities we do not consider our exposure to fixed interest rates significant at December 31, 2004, due to the low level of debt outstanding. Any borrowings under the facility with BONY bear interest at variable rates. We will monitor the level of borrowings under the BONY facility as well as the interest rate environment to determine the necessity of a hedging strategy to guard against increases in market interest rates. The tables below provide information, at each of December 31, 2004 and December 31, 2003, about our financial instruments that are used either for trading purposes or other than trading purposes and that are sensitive to either changes in interest rates or changes in foreign exchange rates. Except as noted above, our market risk analysis at December 31, 2004 did not materially change from the market risk analysis at December 31, 2003. For the revolving credit facility, the table presents principal cash flows with expected maturity dates. For municipal securities and corporate bonds, the table presents the aggregate par values with maturity dates and the weighted average interest rate based upon 34 the par amount of bonds held. Bonds not making regularly scheduled interest payments were assigned an interest rate of 0%.
As of December 31, 2004: ----------------------- 2005 2006 2007 2008 2009 After 2009 Total Fair Value ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Other than trading: ------------------ Interest rate sensitivity: Revolving credit facility $ 5,000,000 $ $ $ $ $ $ 5,000,000 $ 5,000,000 (variable interest rate) Trading: ------- Interest rate sensitivity: Municipal securities 245,000 240,000 11,405,000 11,890,000 10,772,112 (weighted average interest rate-6.4%) Corporate bonds (weighted average 4,392,000 3,000,000 1,500,000 6,035,000 14,927,000 11,096,725 average interest rate-1.71%) As of December 31, 2003: ----------------------- 2004 2005 2006 2007 2008 After 2008 Total Fair Value ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Other than trading: ------------------ Interest rate sensitivity: Revolving credit facility $ 7,500,000 $ $ $ $ $ $ 7,500,000 $ 7,500,000 (variable interest rate) Trading: ------- Interest rate sensitivity: Municipal securities 7,315,000 2,575,000 9,890,000 6,028,680 (weighted average interest rate-5.8%) Foreign sovereign debt 2,122,500 2,122,500 551,850 (weighted average interest rate-0%)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item 8 is included as a separate section of this report. See Item 15 and the F-pages that follow. 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This Item 9 is not applicable. ITEM 9A. CONTROLS AND PROCEDURES Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our "disclosure controls and procedures," as that term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2004. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our periodic SEC reports has been appropriately recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated any changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2004, and has concluded that there was no change during this period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION This Item 9B is not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to our Proxy Statement or will be filed by amendment to this report. We currently intend to file the Proxy Statement or such amendment with the SEC on or prior to May 2, 2005. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the Proxy Statement or will be filed by amendment to this report. Any such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(9) of Regulation S-K. We currently intend to file the Proxy Statement or such amendment with the SEC on or prior to May 2, 2005. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the Proxy Statement or will be filed by amendment to this report. We currently intend to file the Proxy Statement or such amendment with the SEC on or prior to May 2, 2005. 36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the Proxy Statement or will be filed by amendment to this report. We currently intend to file the Proxy Statement or such amendment with the SEC on or prior to May 2, 2005. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 14 is incorporated herein by reference to the Proxy Statement or will be filed by amendment to this report. We currently intend to file the Proxy Statement or such amendment with the SEC on or prior to May 2, 2005. Nothing in this Part III, or elsewhere in this report, shall be deemed to specifically incorporate by reference any of the information required by Item 306 of Regulation S-K or referred to in Item 402(a)(9) of Regulation S-K. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) Financial Statements Listed on page F-2 of the Consolidated Financial Statements included in this report. (2) Financial Statement Schedules All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements. (b) Exhibits Listed in the Exhibit Index appearing at page X-1 of this report. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAXCOR FINANCIAL GROUP INC. By: /s/ GILBERT D. SCHARF ------------------------------------- Gilbert D. Scharf, Chairman of the Board, President and Chief Executive Officer Dated: March 31, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ GILBERT D. SCHARF Chairman of the Board, March 31, 2005 ----------------------------- President and Chief Gilbert D. Scharf Executive Officer (Principal Executive Officer) /s/ KEITH E. REIHL Chief Operating Officer and March 31, 2005 ----------------------------- Director Keith E. Reihl /s/ STEVEN R. VIGLIOTTI Chief Financial Officer and March 31, 2005 ----------------------------- Treasurer (Principal Financial Steven R. Vigliotti and Accounting Officer) /s/ LARRY S. KOPP Director March 31, 2005 ----------------------------- Larry S. Kopp /s/ MICHAEL J. SCHARF Director March 31, 2005 ----------------------------- Michael J. Scharf /s/ JAMES W. STEVENS Director March 31, 2005 ----------------------------- James W. Stevens /s/ FREDERICK B. WHITTEMORE Director March 31, 2005 ----------------------------- Frederick B. Whittemore /s/ MARC S. COOPER Director March 31, 2005 ----------------------------- Marc S. Cooper /s/ OSCAR M. LEWISOHN Director March 31, 2005 ----------------------------- Oscar M. Lewisohn 38 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- DECEMBER 31, 2004, 2003 AND 2002 -------------------------------- F-1 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- DECEMBER 31, 2004, 2003 AND 2002 -------------------------------- Contents Page ================================================================================ Report of Independent Auditors F-3 Consolidated Financial Statements: Consolidated Statements of Financial Condition F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Changes in Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to the Consolidated Financial Statements F-9 F-2 [Letterhead of PricewaterhouseCoopers LLP] Report of Independent Registered Public Accounting Firm To the Board of Directors And Stockholders of Maxcor Financial Group Inc. In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Maxcor Financial Group Inc. and its subsidiaries (the "Company") at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP New York, New York March 31, 2005 F-3 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ----------------------------------------------
ASSETS December 31, 2004 December 31, 2003 ------ ----------------- ----------------- Cash and cash equivalents $ 52,075,105 $ 67,170,247 Securities purchased under agreements to resell 123,649,872 1,446,677,977 Deposits with clearing organizations 8,315,307 8,848,729 Receivable from broker-dealers, customers and clearing organizations 24,024,898 22,324,106 Securities failed-to-deliver 31,441,349 90,669,388 Securities owned, held at clearing firm 22,229,002 6,687,124 Prepaid expenses and other assets 6,685,303 7,003,794 Deferred tax asset 826,020 734,408 Fixed assets 12,172,222 13,010,863 ----------------- ----------------- Total assets $ 281,419,078 $ 1,663,126,636 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities: Securities sold under agreements to repurchase $ 123,608,555 $ 1,470,461,908 Payable to broker-dealer 11,578,831 Securities failed-to-receive 31,433,246 66,544,835 Securities sold, not yet purchased 36,255 22,428 Accounts payable and accrued liabilities 18,568,916 21,137,048 Accrued compensation payable 27,007,632 30,198,757 Income tax liability 178,107 1,469,456 Deferred taxes payable 3,650,414 5,043,758 Obligations under capitalized leases 210,636 703,944 Revolving credit facility 5,000,000 7,500,000 ----------------- ----------------- Total liabilities 221,272,592 1,603,082,134 ----------------- ----------------- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value, 1,000,000 shares authorized; none issued at December 31, 2004 and December 31, 2003 Common stock, $.001 par value, 30,000,000 shares authorized; 12,885,376 and 12,794,626 shares issued at December 31, 2004 and December 31, 2003, respectively 12,885 12,795 Additional paid-in capital 39,279,303 38,718,445 Treasury stock at cost; 6,018,772 and 5,655,903 shares of common stock held at December 31, 2004 and December 31, 2003, respectively ( 20,430,471) ( 16,771,571) Retained earnings 38,953,787 36,178,583 Accumulated other comprehensive income: Foreign currency translation adjustments 2,330,982 1,906,250 ----------------- ----------------- Total stockholders' equity 60,146,486 60,044,502 ----------------- ----------------- Total liabilities and stockholders' equity $ 281,419,078 $ 1,663,126,636 ================= =================
The accompanying notes are an integral part of these consolidated financial statements. F-4 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
For the Year Ended ----------------------------------------------- December 31, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- Revenues: Commission income $ 182,660,338 $ 176,497,549 $ 149,428,132 Interest income 14,852,760 6,280,695 2,147,274 Principal transactions, net 8,164,167 6,122,442 8,720,422 Insurance recoveries 11,106,063 11,098,135 Other ( 1,547,084) ( 1,140,241) ( 843,142) ------------- ------------- ------------- Gross revenues 204,130,181 198,866,508 170,550,821 Interest expense on securities indebtedness 13,752,951 4,117,319 147,865 ------------- ------------- ------------- Net revenues 190,377,230 194,749,189 170,402,956 ------------- ------------- ------------- Costs and expenses: Compensation and related costs 131,033,218 126,323,608 107,024,194 Communication costs 13,778,854 12,989,853 10,597,126 Travel and entertainment 10,824,107 9,833,755 7,406,116 Occupancy and equipment rental 10,698,360 6,623,731 4,490,356 Clearing and execution fees 3,804,372 3,865,514 3,311,759 Depreciation and amortization 3,082,439 3,220,577 2,405,834 Charity Day contributions 1,042,864 982,300 1,219,233 Other interest expense 181,221 406,772 151,214 Costs related to World Trade Center attacks 3,204,468 General, administrative and other expenses 7,500,398 7,220,567 4,933,483 ------------- ------------- ------------- 181,945,833 171,466,677 144,743,783 ------------- ------------- ------------- Income before provision for income taxes, minority interest and extraordinary item 8,431,397 23,282,512 25,659,173 Provision for income taxes 3,895,581 9,749,282 12,130,758 ------------- ------------- ------------- Income before minority interest and extraordinary item 4,535,816 13,533,230 13,528,415 Minority interest in income of consolidated subsidiary ( 175,985) ( 981,791) ------------- ------------- ------------- Income before extraordinary item 4,535,816 13,357,245 12,546,624 Extraordinary gain on purchase of minority interest 2,957,547 ------------- ------------- ------------- Net income $ 4,535,816 $ 16,314,792 $ 12,546,624 ============= ============= ============= Basic earnings per share: Income before extraordinary item $ .64 $ 1.91 $ 1.72 Extraordinary gain on purchase of minority interest .42 ------------- ------------- ------------- Net income $ .64 $ 2.33 $ 1.72 ============= ============= ============= Diluted earnings per share: Income before extraordinary item $ .58 $ 1.62 $ 1.53 Extraordinary gain on purchase of minority interest .36 ------------- ------------- ------------- Net income $ .58 $ 1.98 $ 1.53 ============= ============= ============= Cash dividends per share of common stock $ .25 $ .125 $ 0 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-5 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 ----------------------------------------------------
Accumulated Additional Other Comprehensive Common Paid-in Treasury Retained Comprehensive Income Stock Capital Stock Earnings Income Total ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2001 $ 11,613 $ 33,731,266 ($ 8,992,281) $ 8,195,155 $ 1,371,150 $ 34,316,903 Comprehensive income Net income for the year ended December 31, 2002 $ 12,546,624 12,546,624 12,546,624 Foreign currency translation adjustment (inclusive of income tax benefit of $148,909) 158,983 158,983 158,983 ------------ Comprehensive income $ 12,705,607 ============ Exercise of common stock purchase warrants (492,795 shares) 493 2,463,482 2,463,975 Exercise of stock options, including tax benefit of $53,749 (111,643 shares, net) 127 323,160 ( 96,525) 226,762 Acquisition of treasury stock (375,507 shares) ( 2,120,161) ( 2,120,161) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2002 12,233 36,517,908 ( 11,208,967) 20,741,779 1,530,133 47,593,086 Comprehensive income Net income for the year ended December 31, 2003 $ 16,314,792 16,314,792 16,314,792 Foreign currency translation adjustment (inclusive of income tax benefit of $2,712) 376,117 376,117 376,117 ------------ Comprehensive income $ 16,690,909 ============ Exercise of stock options, including tax benefit of $763,293 (499,863 shares, net) 562 2,200,537 ( 826,303) 1,374,796 Acquisition of treasury stock (616,300 shares) ( 4,736,301) ( 4,736,301) Common stock dividends ( 877,988) ( 877,988) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2003 12,795 38,718,445 ( 16,771,571) 36,178,583 1,906,250 60,044,502 Comprehensive income Net income for the year ended December 31, 2004 $ 4,535,816 4,535,816 4,535,816 Foreign currency translation adjustment (inclusive of income tax benefit of $193,856) 424,732 424,732 424,732 ------------ Comprehensive income $ 4,960,548 ============ Exercise of stock options, including tax benefit of $233,131 (89,844 shares, net) 90 560,858 ( 8,063) 552,885 Acquisition of treasury stock (361,963 shares) ( 3,650,837) ( 3,650,837) Common stock dividends ( 1,760,612) ( 1,760,612) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2004 $ 12,885 $ 39,279,303 ($ 20,430,471) $ 38,953,787 $ 2,330,982 $ 60,146,486 ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
For the Year Ended ----------------------------------------------------- December 31, December 31, December 31, 2004 2003 2002 --------------- --------------- --------------- Cash flows from operating activities: Net income $ 4,535,816 $ 16,314,792 $ 12,546,624 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 3,082,439 3,220,577 2,405,834 Provision for doubtful accounts 148,094 ( 63,348) ( 77,136) Gain on purchase of minority interest ( 2,957,547) Net loss on disposal of fixed assets 24,203 Unfunded losses of contractual arrangements 603,627 1,030,933 1,001,552 Minority interest in net earnings of consolidated subsidiaries 175,985 981,791 Deferred income taxes ( 1,451,316) 4,303,936 ( 22,517) Income tax benefit on stock options exercised 233,131 763,293 53,749 Change in assets and liabilities: Decrease (increase) in securities purchased under agreements to resell 1,323,028,105 ( 1,446,677,977) Decrease (increase) in deposits with clearing organizations 533,422 ( 2,530,200) 17,551 Increase in receivable from broker-dealers and customers ( 1,213,395) ( 2,086,906) ( 807,736) Decrease (increase) in securities failed-to-deliver 59,228,039 ( 90,669,388) 184,768,776 (Increase) decrease in securities owned, held at clearing firm ( 15,453,752) 22,847,012 ( 17,431,495) Decrease (increase) in prepaid expenses and other assets 511,843 ( 2,574,640) ( 418,766) (Decrease) increase in securities sold under agreements to repurchase ( 1,346,853,353) 1,470,461,908 Increase (decrease) in payable to broker-dealer 11,578,831 ( 17,337,560) 10,698,736 (Decrease) increase in securities failed-to-receive ( 35,111,589) 66,544,835 ( 183,649,730) Increase (decrease) in securities sold, not yet purchased 13,827 ( 121,725) 144,153 Decrease in accounts payable and accrued liabilities ( 3,799,931) ( 5,303,226) ( 4,413,181) (Decrease) increase in accrued compensation payable ( 4,072,379) 1,943,438 4,631,660 (Decrease) increase in income taxes payable ( 1,270,336) 794,857 ( 511,862) --------------- --------------- --------------- Net cash (used in) provided by operating activities ( 5,704,674) 18,079,049 9,918,003 --------------- --------------- --------------- Cash flows from investing activities: Purchase of fixed assets ( 2,380,029) ( 9,742,244) ( 7,611,516) Purchase of minority interest ( 2,613,156) Proceeds from the sale of fixed assets 55,333 --------------- --------------- --------------- Net cash used in investing activities ( 2,324,696) ( 12,355,400) ( 7,611,516) --------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 MAXCOR FINANCIAL GROUP INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Continued)
For the Year Ended -------------------------------------------- December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Cash flows from financing activities: Proceeds from exercise of options 319,754 611,503 173,013 Proceeds from exercise of warrants 2,463,975 Common stock dividends ( 1,760,612) ( 877,988) (Repayments) borrowings under revolving credit facility, net ( 2,500,000) 7,500,000 Repayment of notes payable ( 447,978) Proceeds from asset sales under sale-leaseback transactions 5,220,658 Repayment of obligations under capitalized leases ( 296,910) ( 208,276) ( 137,559) Acquisition of treasury stock ( 3,650,837) ( 4,736,301) ( 2,120,161) ------------ ------------ ------------ Net cash (used in) provided by financing activities ( 7,888,605) 7,509,596 ( 68,710) ------------ ------------ ------------ Effect of exchange rate changes on cash 822,833 1,155,386 978,555 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ( 15,095,142) 14,388,631 3,216,332 Cash and cash equivalents at beginning of year 67,170,247 52,781,616 49,565,284 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 52,075,105 $ 67,170,247 $ 52,781,616 ============ ============ ============ Supplemental disclosures of cash flow information: Interest paid $ 13,481,393 $ 4,456,755 $ 229,750 Income taxes paid 6,162,719 5,309,227 10,639,955 Non-cash financing activities: Capital lease obligations incurred 706,094 Capital lease obligations cancelled 203,148 Receipt of shares in treasury for exercise price of stock options 8,063 826,303 96,525
The accompanying notes are an integral part of these consolidated financial statements. F-8 MAXCOR FINANCIAL GROUP INC. --------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- DECEMBER 31, 2004, 2003 AND 2002 -------------------------------- NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: ----------------------------------------------- Maxcor Financial Group Inc. ("MFGI") is a publicly-held financial services holding company that was incorporated in Delaware in 1994. In August 1996, MFGI acquired Euro Brokers Investment Corporation ("EBIC"), a privately held international and domestic inter-dealer broker. EBIC, incorporated in December 1986 in connection with a management buyout of predecessor operations dating to 1970, through its subsidiaries and businesses is primarily an inter-dealer broker of money market instruments, derivative products and selected securities, with principal offices in New York, London and Tokyo, other offices in Stamford (CT), Switzerland and Mexico, as well as correspondent relationships with other brokers throughout the world. Maxcor Financial Inc. ("MFI"), a U.S. registered broker-dealer subsidiary, also conducts institutional sales and trading operations in various fixed income and equity securities. The consolidated financial statements include the accounts of MFGI and its majority-owned subsidiaries and other entities over which it exercises control (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: ---------------------------------------- Revenue recognition: ------------------- Commission income, principal transactions and related expenses are recorded on a trade date basis. Principal transactions represent the net gains generated from the Company's securities transactions that involve the assumption of market risk for a period of time and include unrealized mark-to-market gains and losses on positions held. Revenues derived from matched riskless principal transactions are included in commission income. Revenue from the sale of pricing and volume data sourced from the Company's brokerage business is included in other income and is recognized on a pro-rata basis over the terms of the respective agreements. Any payments received in advance are deferred and are included in accounts payable and accrued liabilities. Securities: ---------- Transactions in securities are recorded on a trade date basis. Securities are carried at market value, generally based upon quoted dealer prices. To the extent quoted prices are not available, securities are valued at fair value as determined by management generally based upon quoted prices of securities with similar characteristics. Cash and cash equivalents: ------------------------- The Company considers all short-term investments with an initial maturity of three months or less to be cash equivalents. Allowance for doubtful accounts: ------------------------------- The Company maintains an allowance for doubtful accounts to reduce its billed receivables on name give-up brokerage transactions to the amount expected to be collected on such receivables. F-9 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued): ----------------------------------------------------- Fixed assets: ------------ Depreciation and amortization of furniture, equipment and software is computed on a straight-line basis using estimated useful lives of 3 to 5 years. Leasehold improvements are amortized over the lesser of the terms of the related leases or the estimated useful lives of the improvements. Foreign currencies: ------------------ Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using exchange rates at the end of the year. Revenues and expenses are translated at average monthly rates during the year. Gains and losses on foreign currency translation of the financial statements of foreign operations whose functional currency is other than the U.S. dollar, together with related hedges and tax effects and the effect of exchange rate changes on intercompany transactions of a long-term investment nature, are reflected as foreign translation adjustments in the accumulated other comprehensive income section of stockholders' equity. Foreign currency exchange gains and losses from transactions and balances denominated in a currency other than the related foreign operation's functional currency are recorded in operations. Fair value of financial instruments: ----------------------------------- The financial instruments of the Company are reported in the consolidated statements of financial condition at fair values, or at carrying amounts that management estimates approximate fair values as such financial instruments are short-term in nature or bear interest at rates approximating current market. Income taxes: ------------ Income taxes are accounted for using the asset and liability method. Deferred taxes are recognized for the tax consequences of temporary differences between the recognition of tax effects for financial statement purposes and income tax reporting purposes by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is recorded to reduce the deferred tax asset to only that portion that is judged more likely than not to be realized. Stock-based compensation: ------------------------ The Company accounts for stock-based compensation using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the Company has not recognized any compensation cost associated with stock-based compensation since the market prices of the underlying stock on the option and warrant grant dates were not greater than the exercise prices. As required by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123," the Company has disclosed below its estimated pro forma net income and earnings per share if compensation for awards issued under its option and warrant plans had been recognized using the fair value method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compaensation," with such fair value estimated using the Black Scholes option pricing model. For further information on the assumptions used and the resulting amounts, see Note 18. F-10 NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued): -----------------------------------------------------
2004 2003 2002 -------------- -------------- -------------- Net income, as reported $ 4,535,816 $ 16,314,792 $ 12,546,624 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 390,330 956,048 813,362 -------------- -------------- -------------- Pro forma net income $ 4,145,486 $ 15,358,744 $ 11,733,262 ============== ============== ============== Earnings per share: Basic, as reported $ .64 $ 2.33 $ 1.72 Basic, pro forma $ .59 $ 2.20 $ 1.61 Diluted, as reported $ .58 $ 1.98 $ 1.53 Diluted, pro forma $ .53 $ 1.87 $ 1.43
Use of estimates: ---------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Recently issued accounting standards: ------------------------------------ In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities" ("FIN 46(R)"). FIN 46(R) addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through a means other than voting rights and accordingly should consolidate the entity. FIN 46(R) replaced FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which was issued in January 2003. Prior to FIN 46, variable interest entities were commonly referred to as special purpose entities. The adoption of FIN 46(R) in 2004 had no impact on the Company's consolidated financial statements. In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Statement of Financial Accounting Standards No. 123(R) "Shared Based Payment" ("SFAS 123(R)"). SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides services in exchange for the award. SFAS 123(R) replaces SFAS 123 and supersedes APB No. 25. SFAS No. 123(R) will be effective for the Company's third quarter of 2005. Management is currently evaluating the effect of adopting SFAS 123(R). F-11 NOTE 3 - ATTACKS ON WORLD TRADE CENTER: -------------------------------------- On September 11, 2001, the Company's headquarters on the 84th Floor of Two World Trade Center in downtown New York were destroyed when two commercial jet planes hijacked by terrorists crashed into the World Trade Center towers. As a result of these attacks, 61 employees and staff members, out of a New York work force approximating 300, were killed. The Company also lost all of the property and technological infrastructure maintained at Two World Trade Center and experienced a total disruption of its New York based operations. On September 18, 2001, the Company relocated its entire New York-based operations to temporary facilities provided by Prudential Securities, the parent company of one of the Company's clearing firms, at One New York Plaza in lower Manhattan. The Company maintained insurance coverages that mitigated the financial impacts of the attacks. Its U.S. insurance policies, underwritten by Kemper Insurance Companies ("Kemper"), covered replacement costs of destroyed property and losses from interruption of business operations, including lost revenues (net of saved expenses) and extra expenses incurred in New York. Its U.K. policy, underwritten by Norwich Union ("Norwich"), covered lost revenues (net of saved expenses) and extra expenses incurred in London. During 2002 the Company settled its claims against Kemper and Norwich for lost revenues (net of saved expenses) and extra expenses incurred for an aggregate amount of $20 million. The portion of these settlements relating to lost revenues (net of saved expenses) is reflected on the consolidated statements of operations in revenues as insurance recoveries. In 2002, the amount recorded as insurance recoveries of $11,098,135 represents the gross settlements relating to lost revenues (net of saved expenses) of $15,596,279, less the $4,498,144 amount recorded in 2001. The portion of the settlements described above relating to extra expenses incurred has been reflected on the consolidated statement of operations in 2002 as reductions to costs related to World Trade Center attacks. These offsets were recorded as the extra expenses were incurred and the related recovery was considered probable or had been recovered. The gross amount of the extra expenses in 2002 of $7,020,331 has been reduced by an offset of $3,815,863 resulting in a net charge of $3,204,468. Included in gross costs during 2002 was the cost of foregoing an extension of a sublease on additional space in London that was re-allocated for potential use by New York employees. This gross cost of $2.7 million ($2.4 million net after applying the portion of insurance proceeds from Norwich Union allocable to this cost) was based upon the portion of this space that management intended to sublet (10,000 square feet) and was based upon management's estimate of the length of time it will take to generate sublet income and the difference between the amount management believed it would then be able to sublet the space for and the Company's cost associated with the space. In the 2004 consolidated statements of operations, occupancy and equipment rental include an additional $3.1 million of expenses relating to excess office space in London to reflect management's intent to sublet the entire space previously occupied by the former subtenant (15,739 square feet) and to amend management's estimate of the length of time it will take to generate sublet income and the amount management believes it will then be able to sublet the space for. Other gross extra expenses incurred in 2002 related to the attacks on the World Trade Center include additional occupancy costs in New York, the purchase of equipment solely compatible with the Company's temporary facilities in New York, the use of outside professionals, interest on failed securities settlements, recruitment fees and benefits for the families of deceased employees. During 2003, the Company settled in full its property insurance claim against Kemper resulting in a net gain recognized of $11,106,063, which is reflected on the consolidated statements of operations in revenues as insurance recoveries. This net gain reflected the gross insurance proceeds of $13,868,210 received for the property claim since the September 11th attacks, less $2,762,147, representing the aggregate of the net book value of owned property destroyed in the attacks, termination costs associated with operating leases of equipment destroyed in the attacks and claim-related expenses. NOTE 4 - CHARITY DAY CONTRIBUTIONS: ---------------------------------- During 2004, 2003 and 2002, the Company held Charity Days for which all the revenues generated by the New York, Stamford, London, Switzerland and Mexico offices were donated to designated charities. All participating brokerage employees waived any entitlement to commissions from such revenues. The proceeds of $1,042,864 raised on the 2004 Charity Day were designated for The Euro Brokers Relief Fund, Inc., which provides charitable aid to the families and other financial dependents of the Company's 61 employees and staff members killed as a result of the September 11th attacks, and the firm's Maxcor Foundation Inc. The Maxcor Foundation Inc. in turn F-12 NOTE 4 - CHARITY DAY CONTRIBUTIONS (Continued): ---------------------------------------------- designated four recipients: Marine Corps-Law Enforcement Foundation, Inc., Columbia University Medical Center, Duke University's Fuqua/Coach K Center for Leadership and Ethics and The Royal Mardsden Hospital in London. The 2003 Charity Day raised a total of $982,300, which was contributed to The Euro Brokers Relief Fund, Inc. and various charities supported by the Maxcor Foundation Inc., and the $1,219,233 raised on the 2002 Charity Day was contributed entirely to the Euro Brokers Relief Fund, Inc. NOTE 5 - REPURCHASE AND REVERSE REPURCHASE AGREEMENTS: ----------------------------------------------------- Transactions involving the purchase of U.S. Treasury and U.S. federal agency securities under agreements to resell (reverse repurchase agreements) and the sale of U.S. Treasury and U.S. federal agency securities under agreements to repurchase (repurchase agreements) are treated as collateralized financings and are recorded at contracted amounts, plus accrued interest. These amounts are presented on a net-by-counterparty basis when the requirements of Financial Accounting Standards Board (FASB) Interpretation No. 41 are satisfied. Income and expense on these agreements are recognized as interest over the life of the transaction. The Company monitors the fair value of the securities purchased and sold under these agreements daily and obtains additional collateral or returns excess collateral when appropriate. Securities received as collateral for reverse repurchase agreements are used to secure repurchase agreements. As of December 31, 2004, the fair value of securities pledged as collateral under reverse repurchase agreements of $286.8 million was repledged under repurchase agreements. NOTE 6 - EARNINGS PER SHARE: --------------------------- The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002 -------------- -------------- -------------- Numerator (basic and diluted calculation): Net income $ 4,535,816 $ 16,314,792 $ 12,546,624 Denominator: Weighted average common shares outstanding - basic calculation 7,051,720 6,987,415 7,304,284 Dilutive effect of stock options and warrants 746,943 1,241,184 906,354 Weighted average common shares outstanding - diluted calculation 7,798,663 8,228,599 8,210,638 Basic earnings per share: Income before extraordinary item $ .64 $ 1.91 $ 1.72 Extraordinary gain on purchase of minority interest .42 -------------- -------------- -------------- Net income $ .64 $ 2.33 $ 1.72 ============== ============== ============== Diluted earnings per share: Income before extraordinary item $ .58 $ 1.62 $ 1.53 Extraordinary gain on purchase of minority interest .36 -------------- -------------- -------------- Net income $ .58 $ 1.98 $ 1.53 ============== ============== ============== Antidilutive common stock equivalents Options 270,000 190,000 270,000
F-13 NOTE 7 - DEPOSITS WITH CLEARING ORGANIZATIONS: --------------------------------------------- The following is a summary of deposits with clearing organizations at December 31, 2004 and 2003: December 31, 2004 December 31, 2003 ----------------- ----------------- Cash $ 811,135 $ 810,803 U.S. Treasury obligations 7,504,172 8,037,926 ----------------- ----------------- $ 8,315,307 $ 8,848,729 ================= ================= Pursuant to its membership in the Government Securities Division of the Fixed Income Clearing Corporation ("GSD-FICC"), MFI is required to maintain a clearing deposit with GSD-FICC based upon its level of trading activity (with a minimum deposit of $5,000,000). At December 31, 2004 and 2003, MFI's clearing deposit with GSD-FICC approximated $7,000,000 and $7,520,000, respectively. The remaining collateral deposits reflect requirements from MFI's clearing brokers. NOTE 8 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS, CUSTOMERS AND CLEARING ------------------------------------------------------------------------------ ORGANIZATIONS: ------------- The following is a summary of receivable from and payable to broker-dealers, customers and clearing organizations at December 31, 2004 and 2003:
December 31, 2004 December 31, 2003 --------------------------- ----------------- Receivable Payable Receivable ------------ ------------ ----------------- Commissions receivable $ 22,640,010 $ $ 21,487,492 Receivable from clearing firms 1,334,408 836,614 Receivable from clearing organization 50,480 Payable to clearing firm 11,578,831 ------------ ------------ ----------------- $ 24,024,898 $ 11,578,831 $ 22,324,106 ============ ============ =================
The Company clears its matched riskless principal brokerage transactions and its securities sales and trading transactions through other broker-dealers on a fully-disclosed basis pursuant to clearing agreements. The receivable from clearing firms primarily represents commissions due on matched riskless principal brokerage transactions, net of transaction fees, while the payable to clearing firm at December 31, 2004 represents the net amount owed for financing the Company's securities positions. This clearing firm provides a range of borrowing availability on securities positions from 0% for certain corporate bonds to 93% for municipal securities. Commissions receivable represent amounts billed on the Company's name give-up brokerage transactions, net of allowances for doubtful accounts of approximately $613,000 and $483,000 at December 31, 2004 and 2003, respectively. NOTE 9 - SECURITIES OWNED, HELD AT CLEARING FIRM AND SECURITIES SOLD, NOT YET ----------------------------------------------------------------------------- PURCHASED: --------- The following is a summary of securities owned, held at clearing firm and securities sold, not yet purchased at December 31, 2004 and 2003:
December 31, 2004 December 31, 2003 ----------------------------- ----------------------------- Owned, Held at Sold, Not Yet Owned, Held at Sold, Not Yet Clearing Firm Purchased Clearing Firm Purchased ------------- ------------- ------------- ------------- Municipal obligations $ 10,772,112 $ $ 6,028,680 $ Foreign sovereign debt 551,850 Corporate bonds 11,096,725 Corporate stocks 360,165 36,255 106,594 22,428 ------------- ------------- ------------- ------------- $ 22,229,002 $ 36,255 $ 6,687,124 $ 22,428 ============= ============= ============= =============
Securities positions held by the Company's clearing firms may be rehypothecated by them. F-14 NOTE 10 -MINORITY INTEREST: -------------------------- Euro Brokers Finacor Limited: ---------------------------- On January 1, 1999, Euro Brokers International Limited ("EBIL"), a U.K. subsidiary, completed a Sale and Purchase Agreement with Monecor (London) Limited ("Monecor"), issuing 50% of its share capital to Monecor in exchange for net assets approximating $5.4 million, consisting of all the shares of Monecor's subsidiary, Finacor Limited, and the assets and undertaking of its Finacor Peter branch in Paris. This transaction combined the existing interest rate options, U.S. dollar deposit and the euro, British pound sterling and Japanese yen swaps operations of EBIL with the euro and Scandanavian swaps businesses of Finacor Limited and the euro swaps business of Finacor Peter. Simultaneously, EBIL changed its name to Euro Brokers Finacor Limited ("EBFL"). The Company was deemed to have management control of EBFL because of the Company's mandated 3 to 2 majority on EBFL's Board of Directors and the fact that the day-to-day operations of EBFL were principally run by the Chief Executive Officer of Euro Brokers Holdings Ltd. ("EBHL"), the Company's U.K. based holding company. Accordingly, the assets and liabilities and results of operations of EBFL were consolidated in the Company's consolidated financial statements, with Monecor's interest presented as minority interest. In May 2002, EBHL obtained a judgment of the London High Court of Justice entitling EBHL to purchase Monecor's 50% shareholding in EBFL at a 30% discount to the book value attributable to this shareholding as of December 2000. The Company had sought this judgment under the terms of the EBFL shareholders agreement as a result of Monecor's failure to provide certain requested funding to EBFL in late 2000. In February 2003, the London Court of Appeals dismissed Monecor's appeal of the May 2002 judgment, enabling EBHL to proceed with the acquisition of Monecor's shareholding at the discounted price. Upon completion of the purchase in February 2003, EBFL was renamed as Euro Brokers Limited ("EBL"), and the Company recorded a one-time extraordinary gain of $2,957,547, representing the excess of the $5,570,703 amount recorded for Monecor's interest in EBFL over the purchase price of $2,613,156. NOTE 11 - TOKYO-BASED VENTURE: ----------------------------- Since 1994, the Company has held an interest in a Tokyo-based derivatives brokering venture (the "Tokyo Venture") structured under Japanese law as a Tokumei Kumiai ("TK"). A TK is a contractual arrangement in which an investor invests in a business of a TK operator by making a capital contribution to the TK operator and, in return, becomes entitled to a specified percentage of the profits of the business while also becoming obligated to fund a specified percentage of the losses of the business. The Company has a 57.25% interest in the Tokyo Venture, with Nittan Capital Group Limited ("Nittan"), the TK operator, holding a 42.75% interest. Although the operations of the Tokyo Venture have always been run and managed by persons appointed by the Company, it does not operate in a legal entity separately distinguishable from Nittan, which has other substantial operations, and, accordingly, the Company accounts for its share of the results of operations of the Tokyo Venture in other income as non-equity income or loss from contractual arrangement. Summarized operating results of the Tokyo Venture for the years ended December 31, 2004, 2003 and 2002, along with the Company's share of those results, are presented below: 2004 2003 2002 ------------ ------------ ------------ Revenues $ 4,399,108 $ 4,891,281 $ 10,405,376 Expenses 7,112,062 7,616,662 12,473,906 ------------ ------------ ------------ Loss ($ 2,712,954) ($ 2,725,381) ($ 2,068,530) ============ ============ ============ Company's share ($ 1,553,166) ($ 1,560,281) ($ 1,184,233) ============ ============ ============ F-15 NOTE 12 - FIXED ASSETS: ---------------------- Fixed assets at December 31, 2004 and 2003 are summarized below:
December 31, 2004 December 31, 2003 ----------------- ----------------- Furniture and telephone equipment $ 12,207,583 $ 11,000,473 Leasehold improvements 13,372,118 12,834,635 Computer and related equipment 7,438,965 6,380,616 Software 9,318,625 8,541,527 Automobiles 1,135,137 1,393,961 ----------------- ----------------- 43,472,428 40,151,212 Less - Accumulated depreciation and amortization ( 31,300,206) ( 27,140,349) ----------------- ----------------- $ 12,172,222 $ 13,010,863 ================= =================
NOTE 13 - OBLIGATIONS UNDER CAPITALIZED LEASES: ---------------------------------------------- The Company, primarily in the U.K., has purchased automobiles under capitalized leases. The lease terms generally do not exceed three years. The following is a schedule of future minimum lease payments under capitalized leases together with the present value of the net minimum lease payments as of December 31, 2004: For the Year Ending December 31, 2005 $ 231,578 Less - Amount representing interest ( 20,942) ----------- Present value of total minimum lease payments $ 210,636 =========== The gross amounts of assets under capitalized leases are approximately $409,000 and $1,046,000 at December 31, 2004 and 2003, respectively. Such amounts are included in fixed assets in the consolidated statements of financial condition. The charges to income resulting from the amortization of assets recorded under capitalized leases were approximately $20,000, $375,000 and $219,000 for the years ended December 31, 2004, 2003 and 2002, respectively. NOTE 14 - REVOLVING CREDIT FACILITY: ----------------------------------- In March 2003, Euro Brokers Inc. ("EBI"), a U.S. subsidiary, entered into a Credit Agreement with The Bank of New York for a three-year revolving credit facility of up to $15 million. This facility is secured by EBI's receivables and the stock issued by EBI to its direct parent and initially had mandatory reductions to availability of $5 million on each of the eighteenth and thirtieth months following the closing date. In November 2003, this facility was amended to expand the permitted use of borrowings and to establish a fixed availability of $10 million through maturity. This agreement contains certain covenants which require EBI separately, and the Company as a whole, to maintain certain financial ratios and conditions. Borrowings under this facility bear interest at a variable rate based upon two types of borrowing options, (1) an "alternate base rate" option which incurs interest at the prime rate plus a margin or (2) a Eurodollar option which incurs interest at rates quoted in the London interbank market plus a margin. Commitment fees of .35% per annum are charged on the unused portion of this new facility. MFGI has executed an agreement to guarantee the payment of amounts due under this facility. At December 31, 2004 and 2003, the Company had borrowings outstanding under this facility of $5,000,000 and $7,500,000, respectively. NOTE 15 - EMPLOYEE BENEFIT PLAN: -------------------------------- The Company maintains a 401(k) defined contribution plan for the Company's U.S. operations covering substantially all salaried employees. The Company's contributions to the 401(k) plan are, subject to a maximum limit, based upon a percentage of employee contributions. Total 401(k) plan expense approximated $247,000, $235,000 and $213,000 for the years ended December 31, 2004, 2003 and 2002, respectively. F-16 NOTE 16 - INCOME TAXES: ---------------------- Income before provision for income tax, minority interest and extraordinary item is subject to tax under the following jurisdictions: For the Year Ended ----------------------------------------------------------- December 31, 2004 December 31, 2003 December 31, 2002 ----------------- ----------------- ----------------- Domestic $ 5,549,849 $ 16,742,077 $ 22,801,450 Foreign 2,881,548 6,540,435 2,857,723 ----------------- ----------------- ----------------- Total $ 8,431,397 $ 23,282,512 $ 25,659,173 ================= ================= ================= The components of the provision for income taxes are as follows:
For the Year Ended ----------------------------------------------------------- December 31, 2004 December 31, 2003 December 31, 2002 ----------------- ----------------- ----------------- Current Federal $ 3,037,564 $ 1,759,517 $ 7,980,966 State and local 867,025 345,553 2,291,478 Foreign 1,403,140 3,340,276 1,880,831 ----------------- ----------------- ----------------- 5,307,729 5,445,346 12,153,275 ----------------- ----------------- ----------------- Deferred Federal ( 245,388) 2,760,376 ( 746,432) State and local ( 1,072,923) 1,913,063 906,825 Foreign ( 93,837) ( 369,503) ( 182,910) ----------------- ----------------- ----------------- ( 1,412,148) 4,303,936 ( 22,517) ----------------- ----------------- ----------------- Total $ 3,895,581 $ 9,749,282 $ 12,130,758 ================= ================= =================
Deferred tax assets (liabilities) are comprised of the following:
December 31, 2004 December 31, 2003 ----------------- ----------------- Assets Bad debt reserve $ 180,046 $ 171,529 Occupancy reserves 88,158 70,926 Fixed assets 558,492 620,188 Net operating losses ("NOLs") 483,689 383,733 Foreign tax credits 183,529 103,520 Capital loss carryforwards 322,049 387,609 Unrealized losses 250,148 Other 347,258 298,851 Deferred tax asset valuation allowance ( 989,267) ( 857,555) ----------------- ----------------- Gross deferred tax asset, after valuation allowance 1,424,102 1,178,801 Jurisdictional deferred taxes payable offset ( 598,082) ( 444,393) ----------------- ----------------- Deferred tax asset $ 826,020 $ 734,408 ================= ================= Liabilities Unrealized gains $ ($ 648,835) Fixed assets ( 4,051,315) ( 4,565,128) Other ( 197,181) ( 274,188) ----------------- ----------------- Gross deferred tax liability ( 4,248,496) ( 5,488,151) Jurisdictional deferred tax asset offset 598,082 444,393 ----------------- ----------------- Deferred tax liability ($ 3,650,414) ($ 5,043,758) ================= =================
The valuation allowance for deferred tax assets has been established for assets arising from various foreign timing differences to reduce the amounts to only that portion that is judged more likely than not to be realized. Foreign tax credit carryforwards of approximately $73,000, $24,000, $2,000 and $85,000 expire in 2005, 2007, 2008 and 2009, respectively. Foreign NOLs approximating $710,000, $228,000, $1,505,000, $665,000 and $117,000 expire in 2007, 2008, 2009, 2010 and 2011, respectively. F-17 NOTE 16 - INCOME TAXES (Continued): ---------------------------------- The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from continuing operations as a result of the following differences:
For the Year Ended ------------------------------------------------ December 31, December 31, December 31, 2004 2003 2002 ------------ ------------ ------------ Tax at U.S. statutory rate $ 2,866,675 $ 7,916,054 $ 8,724,119 Increase (decrease) in tax resulting from: Higher effective rates on earnings of foreign operations and tax benefit of foreign losses not recognized, net 292,213 508,896 610,115 Nondeductible meals and entertainment 1,276,561 1,087,118 955,536 Reduction of income tax reserves ( 391,922) ( 500,000) Non-taxable interest income ( 102,809) ( 540,607) ( 336,974) Decrease to deferred tax asset valuation allowance ( 82,110) ( 290,210) State and local taxes, net 354,940 1,820,720 2,110,880 Other ( 317,967) ( 252,689) 67,082 ------------ ------------ ------------ $ 3,895,581 $ 9,749,282 $ 12,130,758 ============ ============ ============
NOTE 17 - STOCKHOLDERS' EQUITY: ------------------------------ Dividends: ---------- During 2003, the Company declared and paid its first two quarterly common stock dividends, each at the rate of $.0625 per share ($.25 per share on an annualized basis), for aggregate payments of $877,988. During 2004, the Company declared and paid four quarterly common stock dividends, each at the rate of $.0625, for aggregate payments of $1,760,612. Preferred stock: --------------- Pursuant to the Company's adoption of a shareholder rights plan (the "Plan") in December 1996, the Company authorized the creation of Series A Junior Participating Preferred Stock, par value $.001 per share ("Series A Preferred Stock"), and reserved 300,000 shares thereof for issuance upon exercise of the preferred stock purchase rights (each, a "Right") that, pursuant to the Plan, were at the time dividended to holders of common stock on the basis of one Right, expiring December 6, 2006, for each share of common stock. Each Right will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock for $22.50, subject to adjustment. The Rights, however, generally do not become exercisable until ten days after a person or group acquires (or commences a tender or exchange offer to acquire) 15% or more beneficial ownership of the common stock. Upon occurrence of such event (subject to certain conditions and exceptions more fully described in the Plan), and subject to the Rights no longer being redeemable, each Right would entitle the holder thereof (other than the person or group triggering such exercisability) to buy (with certain limited exceptions) common stock of the Company (or, if the Company is acquired, common shares of the surviving entity) having a market value equal to twice the exercise price of the Right. The Rights may be redeemed by the Company, generally at any time prior to the triggering events described above, at a price of $.01 per Right. At December 31, 2004 and 2003, there were no shares of preferred stock outstanding. F-18 NOTE 17 - STOCKHOLDERS' EQUITY (Continued): ------------------------------------------ Common stock and warrants: ------------------------- At December 31, 2001, the Company had outstanding 7,026,229 shares of common stock and held 4,586,540 shares of common stock in treasury. The Company also had outstanding 685,948 redeemable purchase warrants issued in connection with the Company's 1994 initial public offering (the "IPO Warrants") and 49,032 Series B redeemable common stock purchase warrants issued in connection with the acquisition of EBIC (the "Acquisition Warrants"). Both series of warrants entitled the holder to purchase from the Company one share of common stock at an exercise price of $5.00 per share. In April 2002, the Company issued 492,795 shares of common stock upon the exercise of an aggregate like number of IPO Warrants and Acquisition Warrants and received total proceeds of $2,463,975. The remaining IPO Warrants and Acquisition Warrants expired on April 12, 2002. During the year ended December 31, 2002, the Company purchased 375,507 shares under its repurchase program at an aggregate purchase price of $2,120,161. This program was authorized by the Board of Directors in July 2001 for 709,082 shares, representing 10% of the then-outstanding common stock, and was expanded by 490,918 shares, to 1,200,000 shares, by the Board of Directors in late September 2001 (214,000 shares had been purchased under this authorization in 2001 at an aggregate purchase price of $810,725). The Company also issued 127,000 shares in 2002 pursuant to options exercised under the Company's 1996 Stock Option Plan. In connection with certain exercises, the Company received 15,357 shares into treasury as consideration for exercise prices aggregating $96,525. During the year ended December 31, 2003, the Company's Board of Directors increased the July 2001 repurchase program authorization by an additional 700,000 shares, to an authorization of 1,900,000 shares, and purchased an additional 616,300 shares under this expanded authorization at an aggregate purchase price of $4,736,301. The Company also issued an aggregate of 562,062 shares in 2003 pursuant to options exercised under the Company's 1996 Stock Option Plan and the Company's 2002 Stock Option Plan (collectively, the "Option Plans"). In connection with certain exercises, the Company received 62,199 shares into treasury as consideration for exercise prices and income tax withholding payments aggregating $826,303. During the year ended December 31, 2004, the Company's Board of Directors again increased the July 2001 repurchase program authorization by an additional 500,000 shares to a total authorization of 2,400,000 shares, and purchased 361,963 shares under this expanded authorization at an aggregate purchase price of $3,650,837. The Company also issued an aggregate of 90,750 shares in 2004 under the Option Plans. In connection with certain exercises, the Company received 906 shares into treasury as consideration for exercise prices and income tax withholding payments aggregating $8,063. As a result of the foregoing activity, at December 31, 2004 and 2003, the Company had outstanding 6,866,604 and 7,138,723 shares of common stock, respectively, and held 6,018,772 and 5,655,903 shares of common stock in treasury, respectively. At December 31, 2004, the Company had 2,299,688 shares of common stock reserved for issuance upon exercise of options pursuant to the Option Plans. NOTE 18 - STOCK OPTION AND WARRANT PLANS: ---------------------------------------- Stock Options: -------------- The Company's 1996 Stock Option Plan, as amended, provides for the granting of stock options to directors, executive officers and key employees of the Company and its subsidiaries, generally as determined by the compensation committee of the Company's Board of Directors. Options to purchase a maximum of 1,800,000 shares of common stock are available under the 1996 Stock Option Plan. The Company's 2002 Stock Option Plan provides for incentive awards to directors, officers, employees and consultants of the Company and its subsidiaries, F-19 NOTE 18 - STOCK OPTION AND WARRANT PLANS (Continued): ---------------------------------------------------- including the granting of stock options, stock appreciation rights, restricted stock and stock bonus awards as determined by the compensation committee of the Company's Board of Directors. A total of 1,500,000 shares were authorized for awards under the 2002 Stock Option Plan. Options under the Option Plans may be in the form of incentive stock options ("ISOs") and non-qualified stock options. In the case of ISOs, the duration of the option may not exceed 10 years (five years for a 10% or more stockholder) and the exercise price must be at least equal to the fair market value of a share of common stock on the date of grant (110% of the fair market value for a 10% or more stockholder). Employee options granted to date vest and become exercisable in equal installments on each anniversary of the date of grant for periods of four or five years. Non-employee director grants granted to date vest in equal 50% installments on the dates that are six and twelve months following the date of grant. Upon a change in control of the Company, as defined in the Option Plans, all unvested options automatically vest. Under the Option Plans, unless otherwise determined by the compensation committee, options may only be exercised during the period of employment or service with the Company or the 30-day period thereafter (or, in the case of death, disability or retirement, the one-year period thereafter). A summary of the Company's stock option activity follows:
December 31, 2004 December 31, 2003 December 31, 2002 ------------------------ ------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 1,547,938 $ 5.22 1,700,000 $ 3.14 1,470,750 $ 2.29 Granted 240,000 10.43 485,000 9.68 426,250 5.79 Exercised ( 90,750) 3.61 ( 562,062) 2.52 ( 127,000) 2.12 Canceled ( 105,000) 9.70 ( 75,000) 6.95 ( 70,000) 3.23 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at end of year 1,592,188 $ 5.80 1,547,938 $ 5.22 1,700,000 $ 3.14 ========== ========== ========== ========== ========== ========== Exercisable at end of year 972,813 $ 4.06 735,750 $ 2.74 1,030,625 $ 2.20 ========== ========== ========== ========== ========== ========== Weighted average fair value of options granted during the year $ 5.51 $ 6.26 $ 4.47 ========== ========== ==========
At December 31, 2004 there were 741,250 options outstanding with exercise prices ranging from $2.00 to $3.00, 245,938 options outstanding with exercise prices ranging from $5.14 to $6.00 and 605,000 options outstanding with exercise prices ranging from $8.95 to $12.67. The weighted-average remaining contractual life of all options outstanding approximates 6.5 years. During 2002, the Company issued 500,000 common stock purchase warrants to employees under a newly established warrant program to provide inducements and incentives in connection with the formation of a new leveraged finance department (the "Leveraged Finance Warrants"). The Leveraged Finance Warrants were issued at an exercise price of $5.875 with vesting at the rate of 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries. This warrant program also included the granting of up to an additional 500,000 common stock purchase warrants upon the achievement of specific performance goals, with the same vesting schedule and with exercise prices equal to the higher of book value per share or the fair market value per share of the Company's common stock at the time of grant. During 2003, 75,000 of the Leveraged Finance Warrants were cancelled and the remaining 425,000 were cancelled in 2004. The Company has elected to continue to follow APB 25 in accounting for the Option Plans and the Leveraged Finance Warrants. Accordingly, the Company has not recognized any compensation cost associated with the F-20 NOTE 18 - STOCK OPTION AND WARRANT PLANS (Continued): ---------------------------------------------------- Option Plans and the Leveraged Finance Warrants since the market prices of the underlying stock on the option and warrant grant dates were not greater than the exercise prices. As required by SFAS 123, however, the Company has disclosed below its estimated pro forma net income and earnings per share if compensation costs under the Option Plans and the Leveraged Finance Warrants had been recognized using the fair value method of SFAS 123. Because stock options under the Option Plans and the Leveraged Finance Warrants have characteristics significantly different from those of traded options and warrants and because changes in subjective assumptions can materially affect the fair value estimated, the Company used the Black-Scholes pricing model for grants in 2004, 2003 and 2002 with the following weighted average assumptions: expected volatility of 73%, 98% and 101%, respectively; risk free interest rate of 3.5%, 3.1% and 4.5%, respectively; expected annual dividends of $.25, $.23 and $0; and an expected option life of five years. The pro forma expense for stock-based compensation during 2004 includes the impact of reversing the aggregate pro forma expense of $444,153 previously determined for prior periods for the 425,000 Leveraged Finance Warrants cancelled in 2004.
For the Year Ended ------------------------------------------------ December 31, December 31, December 31, 2004 2003 2002 -------------- -------------- -------------- Net income As reported $ 4,535,816 $ 16,314,792 $ 12,546,624 Pro forma 4,145,486 15,358,744 11,733,262 Basic earnings per share As reported .64 2.33 1.72 Pro forma .59 2.20 1.61 Diluted earnings per share As reported .58 1.98 1.53 Pro forma .53 1.87 1.43
NOTE 19 - COMMITMENTS: --------------------- The Company is obligated under certain non-cancelable leases for office space and equipment and under telecommunication services contracts. Operating leases for office space contain escalation clauses for base rent, maintenance and real estate tax increases. Future minimum rental commitments for operating leases that have initial or remaining terms in excess of one year approximate the following: Year ---- 2005 $ 13,231,573 2006 8,432,691 2007 5,758,998 2008 5,630,021 2009 5,570,791 Thereafter (through 2018) 37,938,350 -------------- $ 76,562,424 ============== Rental expense amounted to approximately $6,027,000, $5,539,000 and $3,642,000 in 2004, 2003 and 2002, respectively. F-21 NOTE 20 - CONTINGENCIES: ----------------------- Counterparty Risk and Guarantees: --------------------------------- The Company clears certain of its securities transactions with its institutional counterparties through clearing firms on a fully disclosed basis. Pursuant to the terms of the agreements between the Company and the clearing firms, the clearing firms may have the right to charge the Company for losses that result from a counterparty's failure to fulfill its contractual obligations. At December 31, 2004 and 2003, the Company has recorded no liabilities with respect to this risk. During 2004 and 2003, the Company made no payments to its clearing firms related to these rights. The Company has the right to pursue collection or performance from counterparties who do not perform under their contractual obligations. The Company and its clearing firms have a policy of reviewing, on an ongoing basis, the credit standing of the Company's counterparties. NTL When-issued Equity Trades: ------------------------------ On January 10, 2003, NTL Inc. ("NTL") emerged from Chapter 11 bankruptcy under an amended plan of reorganization providing for the issuance of 50 million shares of common stock. MFI and other participants in the when-issued trading market for NTL shares, which began in September 2002 after confirmation of NTL's prior plan of reorganization that contemplated the issuance of 200 million shares, expected the settlement of their when-issued trades would be adjusted to reflect the equivalent of a one-for-four reverse stock split. A number of buyers of NTL when-issued shares, seizing upon a Nasdaq advisory issued on January 14, 2003 that Nasdaq would neither cancel nor adjust such trades, either have retained the full, unadjusted number of shares delivered to them as a result of certain automated settlement processes or are demanding compensation for the remaining unadjusted number of shares not delivered to them if settlement was made on an adjusted basis. In February 2003, MFI filed a suit in the New York State Supreme Court (the "Court"), naming all of its counterparties to its NTL when-issued trades, in order to seek a uniform, adjusted settlement of these trades. Similar proceedings, some seeking settlement on an adjusted basis, others on an unadjusted basis, also were commenced by other parties to NTL when-issued trades against their counterparties, including MFI, both in the Court and before NASD. During 2003 MFI recorded a net loss of $5.1 million on the settlement of its NTL when-issued trades. This loss included the estimated damages payable if the above proceedings were to conclude that all of MFI's NTL when-issued trades, other than permanently adjusted settlements by mutual agreement, should have settled on an unadjusted basis, and was net of a partially offsetting $800,000 principal transaction gain recorded on NTL shares subsequently determined no longer to constitute a hedge against such an outcome. In March 2004, the Court granted a summary judgment motion made by MFI and issued a decision stating that all NTL when-issued trades among the parties before the Court should be settled on an adjusted and uniform basis. In July 2004, based upon this decision, MFI obtained a judgment from the Court entitling MFI to collect a total of $3.6 million (inclusive of interest) from those counterparties that received and retained unadjusted deliveries of NTL shares from MFI. The judgment remains subject to collection, however, as both it and the underlying decision have been appealed by a number of MFI's counterparties. Following the Court's favorable decision, MFI has been able to reach permanent, negotiated resolutions of its NTL when-issued trades with certain of its counterparties during 2004. These resolutions resulted in the dismissal of the sole proceeding before NASD (leaving the remaining disputes centralized in one forum - the Court) and the reversal of $3.3 million of estimated damages payable recorded in 2003. This $3.3 million net loss reversal in 2004 is reflected on the statement of operations as gains on principal transactions. F-22 NOTE 20 - CONTINGENCIES (Continued): ----------------------------------- Because of the pending appeals and their associated uncertainties, MFI only intends to record gains related to the $3.6 million judgment if and when permanent resolutions, whether by negotiation, completion of the appeals process or otherwise, are reached with counterparties. General, administrative and other expenses include legal fees related to this matter during 2004 and 2003 of $290,000 and $700,000, respectively. U.K. National Insurance: ----------------------- The Company has unsettled demands from the Inland Revenue in the United Kingdom for the employer portion of National Insurance Contributions ("NIC") related to certain employee bonuses paid during the period from August 1995 to February 2001 in the amount of approximately (pound)1.7 million (approximately $3.2 million at December 31, 2004), plus interest estimated at approximately (pound)642,000 through December 31, 2004 (approximately $1.2 million). The Company has formally challenged these demands as it believes the respective bonus payment methods used did not require NIC payments under existing legislation. At December 31, 2004, the Company had reserved approximately (pound)1.5 million (approximately $2.9 million) against these demands from the Inland Revenue for NIC related to employee bonuses paid. Based upon this level of reserves, management does not anticipate the ultimate outcome of this will have a material adverse effect on its consolidated financial condition or results of operations. NOTE 21 - NET CAPITAL REQUIREMENTS: ---------------------------------- MFI, as a U.S. broker-dealer, is subject to the Uniform Net Capital Rule (rule 15c3-1) of the Securities and Exchange Commission ("SEC"), which requires the maintenance of minimum regulatory net capital. MFI has elected to use the alternative method, as permitted by the rule, which requires that MFI maintain minimum regulatory net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined; or 4% of the funds required to be segregated pursuant to the Commodity Exchange Act and regulations thereunder. MFI's membership in the Government Securities Division of the Fixed Income Clearing Corporation ("GSD-FICC") requires it to maintain minimum excess regulatory net capital of $10,000,000 and minimum net worth of $25 million. At December 31, 2004, MFI had regulatory net capital of $40.1 million, a regulatory net capital requirement of $250,000 and net worth of $56.0 million. Euro Brokers Ltd. ("EBL"), a U.K. brokerage subsidiary of the Company, is a Type D registered firm of the Financial Services Authority ("FSA"), required to maintain a financial resources requirement generally equal to six weeks' average expenditures plus the amount of less liquid assets on hand. At December 31, 2004, EBL had financial resources in accordance with FSA's rules of (pound)4.6 million ($8.9 million) and a financial resources requirement of (pound)3.5 million ($6.7 million). F-23 NOTE 22 - SEGMENT REPORTING: --------------------------- In accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), the Company is reporting certain information relating to its operating segments. For the purpose of this disclosure, operating revenues include commission income, principal transactions and information sales revenue. The Company has defined its operating segments based upon geographic location as such units are managed separately to reflect their unique market, employment and regulatory environments. The reportable segments, as defined by SFAS 131, consist of the United States, United Kingdom, Japan and Switzerland. United States amounts are principally derived from the Company's New York office, but include all U.S.-based operations. In the U.S. segment in 2003, net income reflects the $11.1 million pre-tax insurance gain on property destroyed in the September 11th attacks, and operating revenues and net income reflect the net loss of $5.1 million pre-tax recorded on the NTL when-issued trades (see Note 20). For 2004 operating revenues and net income reflect a partial reversal of the 2003 NTL pre-tax loss of $3.3 million. In the U.K. segment 2003 net income reflects the $3.0 million extraordinary gain realized on the February 2003 purchase of the minority interest in EBL and includes the results for EBL, for periods prior to the purchase, net of such minority interest (see Note 10). Japan amounts primarily reflect the non-equity earnings (loss) from contractual arrangement (Tokyo Venture). See Note 11 for additional disclosure of the revenues and expenses of the Tokyo Venture. Other geographic segments that do not meet the SFAS 131 materiality thresholds for reportable segments have been included in "All Other". The accounting policies of the segments are the same as those described in Note 2.
United United All States Kingdom Japan Switzerland Other Total --------------- -------------- ------------- -------------- -------------- --------------- 2004 ---- Operating revenues $ 106,607,925 $ 75,638,952 $ $ 4,278,841 $ 4,298,787 $ 190,824,505 Interest income 14,564,129 697,039 2,429 360 15,263,957 Interest expense on securities indebtedness 13,752,951 13,752,951 Other interest expense 541,459 50,959 592,418 Depreciation and amortization 2,256,217 738,921 23,568 63,733 3,082,439 Provision for income taxes 2,586,279 979,840 48,661 280,801 3,895,581 Non-equity loss from contractual arrangement ( 1,553,166) ( 1,553,166) Net income (loss) 2,963,571 1,299,360 ( 1,553,166) 1,416,534 409,517 4,535,816 Assets 268,711,769 31,458,442 185,013 5,697,366 2,302,533 308,355,123 Capital expenditures 1,414,049 741,398 77,888 146,694 2,380,029 2003 ---- Operating revenues $ 106,290,191 $ 70,358,981 $ $ 2,269,812 $ 3,992,674 $ 182,911,658 Interest income 5,895,773 555,351 833 346 6,452,303 Interest expense on securities indebtedness 4,117,319 4,117,319 Other interest expense 438,327 140,053 578,380 Depreciation and amortization 1,998,890 1,139,711 11,724 70,252 3,220,577 Provision for income taxes 6,778,509 2,728,526 17,071 225,176 9,749,282 Non-equity loss from contractual arrangement ( 1,560,281) ( 1,560,281) Net income (loss) 9,963,568 6,898,667 ( 1,517,882) 706,826 263,613 16,314,792 Assets 1,649,597,122 33,182,725 179,899 3,370,315 1,771,417 1,688,101,478 Capital expenditures 8,816,779 843,213 26,819 55,433 9,742,244
F-24 NOTE 22 - SEGMENT REPORTING (Continued): ----------------------------------------
United United All States Kingdom Japan Switzerland Other Total --------------- -------------- ------------- -------------- -------------- --------------- 2002 ---- Operating revenues $ 101,096,048 $ 52,717,957 $ $ 1,076,945 $ 3,519,537 $ 158,410,487 Interest income 1,781,994 411,917 18 1,446 391 2,195,766 Interest expense on securities indebtedness 147,865 147,865 Other interest expense 144,372 55,334 199,706 Depreciation and amortization 1,413,595 905,006 8,635 78,598 2,405,834 Provision for income taxes 10,432,832 1,549,168 13,553 135,205 12,130,758 Non-equity loss from contractual arrangement ( 1,184,233) ( 1,184,233) Net income (loss) 12,368,617 1,064,250 ( 1,287,064) 226,240 174,581 12,546,624 Assets 111,571,666 28,297,516 196,825 1,417,682 1,363,614 142,847,303 Capital expenditures 6,839,528 664,444 8,897 98,647 7,611,516
Included below are reconciliations of reportable segment items to the Company's consolidated totals as reported in the consolidated financial statements.
2004 2003 2002 --------------- --------------- --------------- Interest income: Total for reportable segments $ 15,263,597 $ 6,451,124 $ 2,193,929 Other interest 360 1,179 1,837 Elimination of intersegment interest income ( 411,197) ( 171,608) ( 48,492) --------------- --------------- --------------- Consolidated total $ 14,852,760 $ 6,280,695 $ 2,147,274 =============== =============== =============== Other interest expense: Total for reportable segments $ 592,418 $ 578,380 $ 199,706 Elimination of intersegment interest expense ( 411,197) ( 171,608) ( 48,492) --------------- --------------- --------------- Consolidated total $ 181,221 $ 406,772 $ 151,214 =============== =============== =============== Assets: Total for reportable segments $ 306,052,590 $ 1,686,330,061 $ 141,483,689 Other assets 2,302,533 1,771,417 1,363,614 Elimination of intersegment receivables ( 13,840,061) ( 11,878,858) ( 6,273,360) Elimination of investments in other segments ( 13,095,984) ( 13,095,984) ( 13,095,984) --------------- --------------- --------------- Consolidated total $ 281,419,078 $ 1,663,126,636 $ 123,477,959 =============== =============== ===============
F-25 NOTE 23 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited): ------------------------------------------------------- The following table reflects the unaudited quarterly results of operations of the Company for 2004 and 2003.
For the Three Months Ended ---------------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 2004 ---- Net revenues $ 51,406,884 $ 48,477,378 $ 45,476,213 $ 45,016,755 Costs and expenses 46,474,882 46,668,518 44,272,623 44,529,810 Income before provision for income taxes 4,932,002 1,808,860 1,203,590 486,945 Net income 2,605,440 1,006,316 523,082 400,978 Weighted average common shares outstanding-basic 7,153,981 7,113,784 6,993,230 6,947,668 Weighted average common shares outstanding-diluted 8,082,514 7,876,356 7,660,510 7,586,803 Basic earnings per share $ .36 $ .14 $ .07 $ .07 Diluted earnings per share .32 .13 .07 .06 2003 ---- Net revenues $ 37,342,741 $ 52,214,646 $ 57,535,450 $ 47,656,352 Costs and expenses 39,422,765 44,489,548 42,942,881 44,611,483 (Loss) income before provision for income taxes, minority interest and extraordinary item ( 2,080,024) 7,725,098 14,592,569 3,044,869 (Loss) income before extraordinary item ( 1,176,090) 4,544,074 8,448,306 1,540,955 Extraordinary gain on purchase of minority interest 2,957,547 Net income 1,781,457 4,544,074 8,448,306 1,540,955 Weighted average common shares outstanding-basic 7,130,991 6,875,169 6,889,677 7,055,723 Weighted average common shares outstanding-diluted 7,130,991 8,046,794 8,154,004 8,214,608 Basic (loss) earnings per share: (Loss) income before extraordinary item ($ .16) $ .66 $ 1.23 $ .22 Extraordinary gain on purchase of minority interest .41 Net income .25 .66 1.23 .22 Diluted (loss) earnings per share: (Loss) income before extraordinary item ( .16) .56 1.04 .19 Extraordinary gain on purchase of minority interest .41 Net income .25 .56 1.04 .19
F-26 NOTE 24 - SUBSEQUENT EVENT -------------------------- On March 4, 2005, the Company announced that it was holding preliminary business combination discussions with a potential acquirer. As of March 30, 2005, the parties had made substantial progress towards a transaction. However, there are still issues remaining to be resolved and, accordingly, there can be no assurance as to whether the Company will be successful in reaching agreement on or completing a transaction. F-27 EXHIBIT INDEX Exhibit No. Description --------------- ---------------- 2.1 Agreement and Plan of Merger, dated as of March 8, 1996, as amended, by and among the Registrant, EBIC Acquisition Corp. and Euro Brokers Investment Corporation, without exhibits and schedules (incorporated herein by reference to Exhibit 2.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996) 2.2 Stock Purchase Agreement, dated as of August 11, 2000, by and between the registrant and the stockholders of Tradesoft Technologies, Inc., without exhibits and schedules (incorporated herein by reference to Exhibit 2.6 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000) 3.1 Restated Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 Form 10-K")) 3.2 Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K")) 4.1 Form of Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 of Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (No. 33-85346), dated November 23, 1994) 4.2 Warrant Agreement, dated as of April 19, 2002, by and between the Registrant and certain employees (incorporated herein by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K, dated April 23, 2002) 4.3 Rights Agreement, dated as of December 6, 1996, between the Registrant and Continental Stock Transfer & Trust Company, as rights agent (the "Rights Agreement") (incorporated herein by reference to Exhibit 1 of the Registrant's Registration Statement on Form 8-A, dated December 6, 1996) 4.4 Amendment No. 1, dated July 26, 2001, to the Rights Agreement (incorporated herein by reference to Exhibit 4.6a of the Registrant's Current Report on Form 8-K, dated July 27, 2001) 4.5 Agreement on Removal of Rights Agent and Appointment of Successor Rights Agent, dated as of September 9, 2003, by and among the Registrant, Continental Stock Transfer & Trust Company and The Bank of New York (incorporated herein by reference to Exhibit 4.5 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (the "2003 Form 10-K") 10.2 Subordination, Recognition and Attornment Agreement, dated as of August 16, 2002, by and among Resnick Seaport, LLC, as landlord, Prudential Securities Incorporated, as sublandlord, and Euro Brokers Inc., as subtenant (incorporated herein by reference to Exhibit 10.2 of the September 2002 Form 10-Q) 10.3 Underlease of Premises, dated 28 May 1993, between Chestermount Properties Limited and Euro Brokers Holdings Limited (the "London Underlease") (incorporated herein by reference to Exhibit 10.4 of the 1996 Form 10-K) X-1 10.4 Supplemental Deed to the London Underlease, dated 28 May 1993 (incorporated herein by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998) 10.5+ Maxcor Financial Group Inc. 1996 Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.6 of the 1999 Form 10-K) 10.6+ Maxcor Financial Group Inc. 2002 Stock Option Plan (incorporated herein by reference to Appendix A of the Registrant's Definitive Proxy Statement on Schedule 14A, dated April 30, 2002 (the "2002 Proxy Statement")) 10.7+ Maxcor Financial Group Inc. Key Executive Incentive Bonus Plan (incorporated herein by reference to Appendix B of the 2002 Proxy Statement) 10.8+ Amended and Restated Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Gilbert Scharf (incorporated herein by reference to Exhibit 10.8 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "2002 Form 10-K")) 10.9+ Amended and Restated Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Keith Reihl (incorporated herein by reference to Exhibit 10.9 of the 2002 Form 10-K) 10.10+ Amended and Restated Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Roger Schwed (incorporated herein by reference to Exhibit 10.10 of the 2002 Form 10-K) 10.11+ Employment Agreement, dated as of October 1, 2002, by and between the Registrant and Steven Vigliotti (incorporated herein by reference to Exhibit 10.11 of the 2002 Form 10-K) 10.12+ Employment Agreement, dated 1 October 2000, by and between Euro Brokers Finacor Limited and Robin Adrian Clark (the "Clark Employment Agreement") (incorporated herein by reference to Exhibit 10.10 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000) 10.13+ Amendment, dated 1 October 2002, to the Clark Employment Agreement (incorporated herein by reference to Exhibit 10.13 of the 2002 Form 10-K) 10.14+ Change in Control Severance Agreement, dated as of October 1, 2002, by and between the Registrant and Robin Adrian Clark (incorporated herein by reference to Exhibit 10.14 of the 2002 Form 10-K) 10.15 Agreement for Securities Clearance Services, dated as of March 20, 2000, by and between Wexford Clearance Services Corporation and Maxcor Financial Inc. (incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000)(1) 10.16 Securities Clearance Agreement, dated as of August 15, 2002, between Maxcor Financial Inc. and The Bank of New York (incorporated herein by reference to Exhibit 10.3 to the September 2002 Form 10-Q) (1) 10.17 Credit Agreement, dated March 27, 2003, between Euro Brokers Inc. and The Bank of New York (the "Credit Agreement") (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003)(1) X-2 10.18 Amendments No. 1, 2 and 3, dated June 26, 2003, September 29, 2003 and November 14, 2003, respectively, to the Credit Agreement (incorporate herein by reference to Exhibit 10.18 to the 2003 Form 10-K) 10.19 Agreement for Securities Clearance Services, dated as of April 1, 2004, by and between Refco Securities, LLC and Maxcor Financial Inc. (incorporated herein by reference to Exhibit 10.1.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004) (1) 10.20+ Form of Section 16(a) Officer Nonqualified Stock Option Agreement under the Registrant's 2002 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (the "September 2004 Form 10-Q")) 10.21+ Form of Non-Employee Director Nonqualified Stock Option Agreement under the Registrant's 2002 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the September 2004 Form 10-Q) 10.22+ Form of Section 16(a) Officer Nonqualified Stock Option Agreement under the Registrant's 1996 Stock Option Plan (incorporated herein by reference to Exhibit 10.3 to the September 2004 Form 10-Q) 10.23+ Form of Non-Employee Director Nonqualified Stock Option Agreement under the Registrant's 1996 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the September 2004 Form 10-Q) 21 Subsidiaries of the Registrant* 23 Consent of PricewaterhouseCoopers LLP* 31.1 Rule 13a-14(a) Certification of Principal Executive Officer* 31.2 Rule 13a-14(a) Certification of Principal Financial Officer* 32 18 U.S.C. Section 1350 Certifications of Principal Executive and Financial Officers* -------------------------- * Filed herewith + Connotes a management contract or compensatory plan or arrangement in which a director or executive officer of the Registrant participates. (1) Portions of this exhibit have been redacted and confidential treatment granted or requested pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. X-3