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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, 2000 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)
TWO WORLD TRADE CENTER, 84TH FLOOR, NEW YORK, NY 10048
- ------------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 748-7000
--------------
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. _X_
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (assuming directors, executive officers and 5% stockholders are
affiliates), based on the Nasdaq Stock Market(R) last sales price of $2.00 on
March 23, 2001, was approximately $11,067,000.
As of March 23, 2001, there were 7,621,893 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Those portions of registrant's Proxy
Statement for its 2001 Annual Meeting of Stockholders (which registrant intends
to file pursuant to Regulation 14A on or before April 30, 2001) that contain
information required to be included in Part III of this Form 10-K are
incorporated by reference into Part III hereof solely to the extent provided
therein.
MAXCOR FINANCIAL GROUP INC.
INDEX
PAGE
PART I
Item 1. Business ........................................................ 3
Item 2. Properties ...................................................... 17
Item 3. Legal Proceedings ............................................... 18
Item 4. Submission of Matters to a Vote of Security-Holders ............. 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................. 18
Item 6. Selected Financial Data ......................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...... 35
Item 8. Financial Statements and Supplementary Data ..................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................ 38
PART III
Item 10. Directors and Executive Officers of the
Registrant ...................................................... 38
Item 11. Executive Compensation .......................................... 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management .................................................. 38
Item 13. Certain Relationships and Related Transactions .................. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ..................................................... 39
Signatures ................................................................ 40
Consolidated Financial Statements and Notes................................ F-1
Index to Consolidated Financial Statements ................................ F-2
Exhibit Index ............................................................. X-1
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[LOGO] MAXF
NASDAQ
LISTED
PART I
ITEM 1. BUSINESS
OVERVIEW
Maxcor Financial Group Inc. (the "Company" or "Maxcor") is a publicly-held
financial services holding company, incorporated in Delaware in August 1994. The
Company maintains a web page at www.maxf.com and its Common Stock is traded on
The Nasdaq Stock Market(R) under the symbol "MAXF."
In a 1996 merger transaction (the "Merger"), the Company acquired Euro
Brokers Investment Corporation ("EBIC"), a privately held domestic and
international inter-dealer broker for a broad range of financial instruments,
having operational roots dating back to 1970. In 2000, EBIC acquired all of the
outstanding capital stock of Tradesoft Technologies, Inc. ("Tradesoft"), a
privately held developer of e-commerce technology.
Through the Euro Brokers division of its Maxcor Financial Inc. subsidiary,
a U.S. registered broker-dealer, and other EBIC subsidiaries and affiliates,
including Euro Brokers Inc., the Company conducts its core business as a leading
domestic and international inter-dealer brokerage firm, specializing in (i) cash
deposits and other money market instruments, (ii) interest rate and currency
derivatives, (iii) emerging market debt and related products, (iv) various fixed
income securities, including municipal securities, corporate and yankee bonds,
zero coupon Treasuries, convertible bonds and, since February 2001, U.S.
government agency bonds, (v) U.S. Treasury and government agency repurchase
agreements and (vi) products and derivatives relating to emission allowances,
coal and bandwidth,
Tradesoft is a leading-edge technology provider of electronic trading
systems and matching engines that enable customers to deal electronically
through the automation of order entry, price distribution, order matching and
straight through processing.
The Company also maintains certain specialty subsidiaries. Maxcor Financial
Asset Management Inc., an investment adviser registered with the Securities and
Exchange Commission ("SEC"), is engaged in securities lending through its Euro
Brokers Securities Lending division. Maxcor Information Inc. is charged with
packaging and exploiting the data and other information generated by the
Company's inter-dealer brokerage businesses and offers such data online at
www.maxcorinfo.com.
The Company has in excess of 500 employees worldwide and conducts its
businesses through principal offices in New York, London and Tokyo, other
offices in Stamford (CT), York (PA), Vancouver (WA), Geneva and Mexico City, and
correspondent relationships with other brokers throughout the world. Except as
described below, the Company operates in each
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financial center through wholly-owned subsidiaries. In London, the Company, as
of January 1, 1999, formed Euro Brokers Finacor Ltd. ("EBFL"), a 50/50 equity
venture with the European broker, Finacor, that combined their respective
London-based capital market operations, as well as Finacor's Paris-based capital
markets operations. The Company's other London operations, primarily comprised
of securities businesses, are wholly owned. In Tokyo, the Company has
historically had a 50% interest with Yagi Euro Nittan Corporation ("Yagi Euro"),
formerly known as Yagi Euro Corporation, in a partnership (the "Tokyo
Partnership") conducting yen derivative businesses, as well as a 15% minority
interest in Yagi Euro itself. As of January 1, 2000, the Company sold a 10%
interest in the Tokyo Partnership to Nittan Exco Limited ("Nittan"), a
subsidiary of Nihon Tanshi Co., Limited, thereby reducing its direct interest in
the Tokyo Partnership to 40%.
In its inter-dealer brokerage businesses, the Company functions primarily
as an intermediary, matching up the trading needs of its institutional client
base, which is primarily comprised of well-capitalized banks, investment banks
and other financial institutions, securities dealers and other broker-dealers
and large corporations. The Company assists its clients in executing trades by
identifying counterparties with reciprocal interests. The Company provides its
services through an international network of brokers who service direct phone
lines to most of the Company's clients and through proprietary screen systems
and other delivery systems that provide clients with historical data and
real-time bids, offers and pricing information in the Company's various
products. Clients use the Company's services for several reasons. First, a
client can benefit from the broader access and liquidity provided by the
Company's 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, the Company provides clients with anonymity,
thereby enhancing their flexibility and ability to act without signaling their
intentions to the marketplace. Third, because of its network, the Company can
provide high-quality pricing and market information, as well as sophisticated
analytics and trading and arbitrage opportunities.
The Company's inter-dealer brokerage transactions are principally of two
types: (i) "name give-up" transactions, whereby the Company acts only as an
introducing broker, and (ii) transactions whereby the Company acts as a "matched
riskless principal." Primarily in transactions 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 the
Company acts solely as an introducing broker who brings the two counterparties
together, and not as a counterparty itself. Consummation of the transaction may
then remain subject to the actual counterparties who have been matched by the
Company accepting the credit of each other. In the second type of transaction,
primarily securities transactions, the Company acts 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
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which the Company has contractual arrangements, and who will have previously
reviewed and approved the credit of the participating counterparties.
PRODUCTS
The Company's 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, banker's acceptances and short-term
commercial paper. U.S. dollars continue to be the most actively traded offshore
currency deposit. Other actively traded offshore currency deposits are
denominated in Japanese yen, British pounds sterling, Swiss francs, Canadian
dollars and the euro. Examples of onshore deposits include term and overnight
U.S. federal funds. The Company brokers money market products predominantly to
multinational banks.
DERIVATIVE PRODUCTS
A derivative products transaction generally is an agreement entered into by
two parties, in which each commits to a series of payments based upon the price
performance of an underlying financial instrument or commodity for a specified
period of time. This category includes a broad range of sophisticated financial
instruments employed by multinational banks, financial institutions, securities
dealers and corporations. Some of the types of derivatives most frequently
brokered by the Company 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.
In an interest rate swap, 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 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.
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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.
The Company brokers most of its derivative products predominantly to
multinational banks and investment banks.
The Company also brokers derivatives related to emission allowances, coal
and bandwidth, generally in the form of options on such products for future
physical deliveries. These products are often traded by utilities,
telecommunication companies and large energy marketing and trading companies.
SECURITIES PRODUCTS
Products brokered by the Company in this category primarily consist of a
variety of debt obligations issued by governments, government agencies, banks
and corporations. The Company brokers transactions in emerging market debt,
municipal securities, U.S. Treasury and government agency repurchase agreements,
high grade and high yield corporate bonds, yankee bonds, U.S. Treasury zero
coupon bonds, U.S. domestic convertible bonds, floating rate notes, other
corporate securities and, since February 2001, U.S. government agency bonds.
Emerging market debt, including Brady bonds, global bonds, Eurobonds, local
issues and loans, as well as options on the foregoing, continues to constitute
the largest area within the securities products category, and is brokered by
specialized teams located in New York, London and Mexico City and through a
correspondent broker in Buenos Aires. The market coverage of the teams from
these locations is worldwide. The Company's brokerage of emerging market debt
utilizes direct communication phone lines and provides historical data and
real-time pricing through proprietary, computerized screen systems located in
clients' offices or through direct digital feeds. In addition, beginning in
mid-2000, the Company deployed to certain of its clients Tradesoft's fully
interactive, electronic execution and processing system (the "Tradesoft System")
for Brady bonds and global bonds. In most emerging markets transactions, the
Company acts as matched riskless principal and settles trades through a clearing
firm, although some transactions are brokered 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
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a buyer) at an agreed upon future date and price. The Company acts as an
intermediary primarily 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, mortgaged-backed and U.S. government agency
repurchase agreements. As is the case with emerging markets, the Company
disseminates repurchase agreement market information via its proprietary,
computerized screens and digital data feeds. Most of the repurchase agreements
that the Company executes for dealers are cleared through the Government
Securities Clearing Corporation, in which the Company's broker-dealer
subsidiary, Maxcor Financial Inc., is a member, although some transactions are
brokered on a name give-up basis.
The Company's brokerage of U.S. government agency debt is also generally
conducted on a riskless principal basis and with the same client base that
participates in U.S. Treasury and government agency repurchase agreements.
Dissemination of U.S. government agency debt market information to clients also
relies on the Company's proprietary screen system and digital data feeds.
The Company brokers municipal securities on a matched riskless principal
basis, and also uses an allocation of the firm's capital to support limited
inventory positions. Corporate and yankee bonds are generally brokered on a
matched riskless principal basis. U.S. convertible bonds are generally brokered
on a name give-up basis.
The Company brokers securities products predominantly to banks, investment
banks and other financial institutions.
COMMUNICATIONS NETWORK AND INFORMATION AND RELATED SYSTEMS
The Company has a global communications network through which it conducts
its inter-dealer brokerage businesses and sophisticated computerized information
systems over which it receives and transmits current market information. The
Company's 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. The Tradesoft System, deployed in 2000,
displays to all Tradesoft subscribers real-time bid, offer and transaction
information for certain emerging market debt products, and enables subscribers
to initiate bids, offers and trades directly through a dedicated keypad at the
subscribers' workstations, with or without contacting a voice broker at the
Company. The Tradesoft System is also used to provide a sophisticated and highly
automated broker station for the Company's U.S. government agency desk,
enhancing brokers' ability to monitor trading activity and relevant market
information efficiently and communicate analysis to their clients.
The Company's proprietary middle-office trade processing system (the "MEB
System"), which incorporates an electronic touchpad blotter system for
post-trade data input, is integrated with and captures transactions effected
through either the proprietary screen system or the Tradesoft System, and
thereafter hands through those transactions for back
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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 the Company's 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.
To ensure rapid and timely access to the most current market bids and
offers, the majority of the Company's clients are connected to the Company via
dedicated point to point telephone and data lines around the world. For products
that are screen-brokered, such as emerging market debt, U.S. government agency
bonds, repurchase agreements, options on emerging market debt, banker's
acceptances and commercial paper, the Company maintains an extensive private
network to connect the Company's 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. The Company has also developed and
deployed an Internet real-time distribution capability for both its emerging
markets and repurchase agreement screen information, which has allowed access to
clients in more remote or unproven brokerage locations without incurring the
infrastructure costs associated with expanding its private network.
The Company's teams of computer and communications specialists provide
technological support to the network. The Company is continually upgrading its
technological facilities in order to access and collate market information and
redistribute it virtually instantaneously throughout its network. Through the
continued development and use of proprietary software, computerized screen
displays, digital networks and interactive capabilities, the Company strives to
keep its communication, technology and information systems as current as
possible.
Most of the markets in which the Company operates 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 the Company's 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 its clients.
For this reason, the Company continually needs to expend significant resources
on the maintenance, expansion and enhancement of its communication and
information system networks. After payroll, such costs have historically
represented the Company's second largest item of expenditure.
The Company continues to explore whether more of its inter-dealer brokerage
businesses should become screen-based and whether the Tradesoft System or other
interactive trading systems can be developed and deployed successfully in whole
or in part for other products brokered by the Company. The Company believes that
its clients' diverse needs in each of the products it brokers require the
Company to remain flexible in its approaches. The
8
Company currently believes that a hybrid approach to servicing its clients, by
providing both quality voice brokering and advanced screen system and other
technology, will best enable it to build liquidity and retain client loyalty.
OTHER BUSINESSES
Through the Euro Brokers Securities Lending division of its SEC-registered
investment adviser, Maxcor Financial Asset Management Inc., the Company conducts
a securities lending business. In securities lending, the Company arranges for
the lending of securities held in its clients' portfolios to securities dealers
and other market participants who need them to manage their own positions. In
exchange for such loaned securities, which are primarily U.S. government and
agency securities and U.S. corporate bonds (but also non-dollar government
securities and corporate bonds), the Company arranges for its clients or their
custodians to receive either (i) cash collateral, for which the Company then
directs 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.
The Company's information and data subsidiary, Maxcor Information Inc., is
charged with licensing data to third party vendors, and in 1999 executed a
three-year, non-exclusive agreement with Telerate, Inc. for the sale to Telerate
subscribers of an indicative feed based on information sourced from the Euro
Brokers emerging market debt inter-dealer brokerage business, as well as an
array of optional "add-on" services. Maxcor Information also maintains a
subscription-based web page (www.maxEMG.com) for the sale of both basic and
premium emerging market debt information packages.
CAPITAL STRUCTURE HISTORY
In its December 1994 initial public offering, the Company issued a total of
3,583,333 units, each comprised of one share of common stock, $.001 par value
("Common Stock"), and two redeemable common stock purchase warrants ("Series A
Warrants"), and raised net proceeds of approximately $20 million.
In its August 1996 Merger acquisition of EBIC, the Company issued aggregate
consideration consisting of approximately $22 million in cash, 4,505,666 shares
of Common Stock and 7,566,625 Series B redeemable common stock purchase warrants
("Series B Warrants" and, together with the Series A Warrants, the "Warrants"),
economically identical in their terms to the Series A Warrants.
In November 1997, the Company consummated an exchange offer, on the basis
of 0.1667 of a share of Common Stock for each Warrant (the "Exchange Offer"),
pursuant to which it issued an aggregate of 2,380,975 shares of Common Stock in
exchange for 14,283,296 (or approximately 95.1%) of the then-outstanding
Warrants. As a result of the Exchange Offer, the Warrants (and any remaining,
related units) were delisted from trading on
9
The Nasdaq Stock Market(R) and deregistered under the Securities Exchange Act of
1934, as amended.
Although delisted and deregistered, each Warrant remaining outstanding
continues to entitle the holder thereof to purchase from the Company one share
of Common Stock at an exercise price of $5.00 per share, to expire on November
30, 2001, and to be redeemable at a price of $.01 if the last sales price of the
Common Stock has been at least $8.50 per share for 20 consecutive trading days.
In October 1998, the Company issued 2,000 shares of a newly created Series
B Cumulative Redeemable Preferred Stock ("Preferred Stock") to its 15% equity
affiliate, Yagi Euro, for an aggregate purchase price of $2 million. The
Preferred Stock pays a quarterly cumulative dividend, in arrears, at an annual
rate of 2%, and is subject to optional redemption by the Company at any time,
and to mandatory redemption on the tenth anniversary of its issue. The Preferred
Stock does not have conversion rights or, unless there is a payment default,
voting rights.
In June 1999, the Company repurchased 2,986,345 shares of Common Stock from
various partnerships of the venture capital firm, Welsh, Carson, Anderson &
Stowe. The aggregate purchase price was approximately $5.23 million, or $1.75
per share. The shares repurchased represented approximately 26.4% of the shares
of Common Stock then outstanding.
In May 2000, the Company's Board of Directors authorized a repurchase
program for up to 10% of its then outstanding Common Stock, or 833,744 shares,
with purchases to be made from time to time, as market and business conditions
warranted, in open market, negotiated or block transactions. As of December 31,
2000, the Company had repurchased 591,602 shares of Common Stock under this
program for an aggregate purchase price of $894,494.
On August 11, 2000, the Company issued 375,000 unregistered shares of
Common Stock from treasury in connection with the acquisition of Tradesoft.
At December 31, 2000, the Company had outstanding 8,120,835 shares of
Common Stock, 734,980 Warrants and 2,000 shares of Preferred Stock.
In January 2001, the Company completed the repurchase of the full 833,744
shares of Common Stock originally authorized to be repurchased under the May
2000 program. The aggregate purchase price for such shares was $1,187,650, or an
average of $1.42 per share. In addition, the Board of Directors authorized an
extension of the repurchase program for up to an additional 787,869 shares, or
10% of the Common Stock then outstanding.
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At March 23, 2001, the Company had repurchased an additional 256,800 shares
pursuant to this extension of the program and had 7,621,893 shares of Common
Stock outstanding.
PERSONNEL
As of February 28, 2001, the Company employed 391 brokers, plus an
additional administrative staff, including officers and senior managers, of 146
persons, for a total employee headcount of 537. Of the brokers, 191 were located
in the U.S., 132 were located in Europe, and 50 were located in Japan, with the
balance distributed among the Company's other office locations. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with employees to be good and regards
compensation and employee benefits to be competitive with those offered by other
inter-dealer brokerage firms.
SEGMENT AND GEOGRAPHIC DATA
Note 23 to the Consolidated Financial Statements contains summary financial
information, for each year of the three-year period ended December 31, 2000,
with respect to each of the Company's 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 of and extent of client networks developed by the firm
and its personnel;
o the range of products and value-added services offered;
o commission rates;
o the quality, speed and reliability of service;
o proficiency in and ability to implement current technology, including
electronic execution and matching platforms;
o salaries and other cost structures; and
o capital resources and perceived creditworthiness.
While there are not many large international inter-dealer brokers and entry
into the industry is costly, the Company encounters intense competition in all
aspects of its businesses from a number of companies which have significantly
greater resources than the Company. Recent consolidations in the industry have
narrowed the field of competition somewhat, but have also produced combined
entities with even greater resources. Moreover, with the recent advent of
electronic brokerage in non-equity markets, new potential competitors have
emerged that do not have traditional inter-dealer brokerage roots, such as the
BrokerTec Global consortium recently formed by a number of the leading
investment banks. In addition,
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dealer firms within a consortium could elect to conduct a disproportional or
increased share of their business between other member firms, thus reducing
liquidity in the traditional inter-dealer markets.
In addition, all brokerage firms are subject to the pressures of offering
their services at a lower price. The recent pace of consolidation in the banking
and financial services community continues to reduce the number of clients in
the marketplace and, accordingly, has further increased the competition among
inter-dealer brokers and the downward pressure on already low commission rates.
The use of volume discounting has also become more widespread in recent years.
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. In late 1999, one competitor, Cantor Fitzgerald,
developed and spun off an electronic brokerage subsidiary, eSpeed, whose system
has to date successfully garnered considerable liquidity in the U.S. Treasury
markets, and has already been deployed across additional products. Other
competitors have also deployed, or announced plans to deploy, their own systems
in various markets. In practice, these systems so far have proved most viable in
markets involving very standardized products, such as spot foreign exchange,
Treasuries and U.S. equities. The Company believes 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, the number and
penetration of such automated trading platforms is increasing, and one
competitor, Garban Intercapital, recently invested in Blackbird, an electronic
trading system for over-the-counter derivatives such as swap contracts.
The further development and successful deployment of such electronic
systems in advance of, or more successfully than, the Company's efforts to do so
itself or to promote hybrid systems combining voice brokering with advanced
technology, could erode the Company's market shares and ultimately have material
adverse effects on the Company's businesses. Although the Company is devoting
substantial financial and other resources to ensure the success of its own
electronic brokerage and technology initiatives (described above under
"Communications Network and Information and Related Systems"), its ability to
execute successfully thereon is subject to a number of uncertainties, not all of
which are within the Company's control. These include, but are not necessarily
limited to, the speed, capacity and interfaces of systems performing acceptably
under both normal and stress conditions, the availability of sufficient funds to
develop, refine and promote further the systems, the retention of sufficient
training and maintenance resources, the desire for and acceptance of the systems
by clients, both at the trader and the information technology department levels,
the internal broker support for the systems, the timing and success of
deployment of competitive systems, and market conditions at the time of
deployment.
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The Company is inherently reliant on relationships with clients that
develop over time, and certain of the Company's brokers have established
long-term associations with clients. The Company's success depends to a
significant extent on these relationships and on the performance and experience
of a number of key management and brokerage personnel. The loss of one or more
of these key employees, who are often the target of aggressive recruitment
efforts by competitors within the industry, could have a material adverse effect
on the Company. Moreover, the highly competitive hiring environment by itself
creates upward pressures on broker compensation that can reduce profit margins.
While the Company has entered into employment agreements with, granted stock
options to, and implemented deferred compensation arrangements for, many of its
key employees, there can be no assurance that such employment agreements or
stock-based or deferred compensation will be effective in retaining such
persons' services or that other key personnel will remain with the Company
indefinitely. Nor can there be any guarantee that the Company 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.
The Company also faces intense competition from other inter-dealer brokers
to achieve revenues from, and the widest dissemination and acceptance of, the
data generated and collected from its brokerage businesses.
REGULATION
The Company and its subsidiaries, in the ordinary course of their business,
are subject to extensive regulation at international, federal and state levels
by various regulatory bodies which are charged with safeguarding the integrity
of the securities and other financial markets and protecting the interests of
clients participating in those markets.
Maxcor Financial Inc. ("MFI"), formerly known as Euro Brokers Maxcor Inc.,
is registered as a broker-dealer with the SEC, all applicable states, and is a
member of the National Association of Securities Dealers, Inc. ("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 Regulation, Inc.
("NASDR") 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.
MFI is also a member of the Government Securities Clearing Corporation
("GSCC") for the purpose of clearing certain U.S. Treasury and government agency
repurchase agreements and other U.S. Treasury securities, as well as U.S.
government agency securities.
13
Such membership requires MFI to maintain minimum net capital of $10,000,000,
including a minimum deposit with the GSCC of $5,000,000.
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.
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.
The Company's businesses are also subject to extensive regulation by
various non-U.S. governments and regulatory bodies, including: (i) in the United
Kingdom, the Financial Services Authority and the Securities and Futures
Authority (the "SFA"); (ii) in Japan, the Bank of Japan and the Japanese
Ministry of Finance, and (iii) in Mexico, the Banking and Securities National
Commission. The compliance requirements of these different overseer bodies may
include, but are not limited to, net capital or stockholders' equity
requirements.
The Company is 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 phases in 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 the Company's brokerage businesses are subject to Regulation ATS and
its requirements.
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 the manner
of operation and profitability of the Company. In addition, any expansion of the
Company's activities into new areas may subject the Company to additional
regulatory requirements that could similarly affect such operation and
profitability.
14
CAUTIONARY STATEMENTS
As provided under the Private Securities Reform Act of 1995, the Company
desires to caution investors that the following factors, among others (including
the factors discussed above under the "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 the
Company's results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this report and
elsewhere by or on behalf of the Company.
ECONOMIC AND MARKET CONDITIONS
The Company's brokerage businesses and their profitability are affected by
many factors, including the volatility of securities markets, the volume, size
and timing of securities transactions, the level and volatility of interest
rates, legislation affecting the business and financial communities, and the
economy in general. Low trading volume may reduce revenues, which would
generally negatively impact profitability because a portion of the Company's
costs is fixed.
LIABILITY FOR UNSETTLED TRADES
The Company through its subsidiaries and relationships with correspondent
brokers functions as an intermediary, matching the trading needs of financial
institutions 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 completed
directly by both counterparties. Other transactions are completed with the
subsidiary acting as a matched riskless principal in which the respective
parties to the transaction know the subsidiary as the counterparty. The
transactions are then settled through a clearing institution. In the process of
executing brokerage transactions, from time to time in the fast moving markets
in which such subsidiaries and brokers operate, miscommunications or other
errors can arise whereby transactions are completed with only one counterparty
("out trades"), thereby creating a potential liability for such subsidiaries. If
the out trade is promptly discovered, thereby allowing prompt disposition of the
unmatched position, the risk to the subsidiary is usually limited. If discovery
is delayed, the risk is heightened by the increased possibility of intervening
market movements prior to such disposition. Although out trades usually become
known at the time of or later on the day of the trade, on occasion they are not
discovered until later in the settlement process. When out trades occur and are
discovered, the Company's policy is to have the unmatched position 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 the financial condition or
results of operations of the Company.
15
SYSTEMS AND TECHNOLOGY
In addition to the Company's continuing need to expend significant
resources on the maintenance, expansion and enhancement of its communication
network, information systems and other technology, it also faces the risk that
the systems it currently has or in the future implements, or the software
underlying such systems, will fail in some fashion or be inadequate to the task.
During the Asian and Latin American debt crisis that occurred in late October
1997, the Company's then-existing trade processing system for emerging market
debt was unable to handle smoothly the extraordinary spike in trading volume
that occurred for a sustained five-day trading period. As a result, the Company
experienced significant delays and backlogs in the processing and settlement of
such trades and a higher than usual incidence of disputed trades, all of which
negatively impacted 1997 fourth quarter earnings. Although the Company believes
that the MEB System, with its electronic blotter and upgraded trade processing
features, together with periodic stress-testing and monitoring, will mitigate
against any such recurrence, there can be no assurance that there will not be
other, unanticipated system or technology failures that could negatively impact
the Company's operations or business.
CLEARING ARRANGEMENTS
In addition to the GSCC, Wexford Clearing Services ("Wexford") and the
Pershing division of Donaldson, Lufkin & Jenrette Securities Corporation
("Pershing") act as the primary clearing agents, on a fully-disclosed basis, for
MFI. Under the terms of these agreements, Wexford clears as principal a
significant portion of MFI's transactions in emerging market debt and Pershing
clears as principal many of MFI's municipal securities and other domestic
fixed-income securities transactions. Among other services, both firms prepare
and mail confirmations and monthly statements to clients. Each of the Wexford
and Pershing agreements is terminable by either party upon 90 days' prior
notice. If either clearing agreement were to be terminated, the Company believes
that it would be able to establish in timely fashion a new clearing arrangement
with another clearing correspondent on terms acceptable to MFI. However, there
can be no assurance that it would be able to do so, and a failure in this regard
could have a material adverse effect on the Company's results of operations and
financial condition.
BUSINESS PARTNERS
Many of the Company's overseas brokerage operations are conducted in
conjunction with independent business partners, such as Finacor in London, Yagi
Euro and Nittan in Tokyo and a correspondent broker in Buenos Aires, over whom
the Company does not have control and whose business interests may not always
coincide with those of the Company. Although such operations are generally
subject to detailed governing documents, any event which negatively affects the
financial condition or management of such partners, or their willingness
otherwise to conduct such operations in conjunction with the Company (or vice
versa), may also have a negative impact on the operations themselves.
16
For example, the ownership of Finacor changed hands at the end of 2000 as the
result of a sales process that took almost the full year, and the Company
believes that the distractions of that process harmed the operating performance
of EBFL and its Paris branch during the period. In addition, the new owner of
Finacor is a competitor of the Company across a number of products, and there
have been some disputes with them since the change in control, the outcome or
effect of which on EBFL are not currently possible to predict.
LITIGATION AND ARBITRATION
Many aspects of the Company's businesses involve varying risks of
liability. Over the years participants in the inter-dealer brokerage industry
have been parties to or otherwise involved in numerous litigations,
arbitrations, claims and investigations, including employee claims alleging
discrimination or defamation in connection with terminations, client claims
alleging the occurrence of out trades or other errors in the handling of trade
orders, 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. A settlement or judgment related to these or similar types of claims
or activities could have a material adverse effect on the Company's financial
condition or results of operations.
LACK OF DIVERSIFICATION
From a revenue perspective, the Company's inter-dealer brokerage businesses
account for substantially all of Maxcor's consolidated revenues. Accordingly,
the prospects for the Company's performance and the market prices for the Common
Stock are currently highly dependent upon the performance of the inter-dealer
brokerage businesses. Although the Company is continuously seeking to strengthen
and improve the inter-dealer brokerage businesses, it is also constantly
exploring various options for diversifying the Company's businesses and sources
of revenue (its acquisition of Tradesoft and its limited proprietary trading of
municipal securities are two such efforts) and for strengthening its capital
base. There can be no assurances, however, that the Company will be successful
in achieving these goals or others related to diversification or, if achieved,
whether they will positively or negatively affect the Company's financial
condition or results of operations.
ITEM 2. PROPERTIES
The Company has offices in each of the following locations: New York, New
York; London, England; Tokyo, Japan; Stamford, Connecticut; Geneva, Switzerland;
Vancouver, Washington; York, Pennsylvania; and Mexico City, Mexico. The Company
leases all of its office space and has material lease obligations with respect
to its New York and London premises. The Company occupies an aggregate of
approximately 49,000 square feet of space
17
in 2 World Trade Center in downtown New York under leases expiring on various
dates from 2004 through 2007 (with a lease break provision in 2002). The Company
occupies approximately 36,000 square feet of space in the City of London under a
lease expiring in 2018 (with a lease break provision in 2003). In September
1998, the Company subleased approximately one-third of its London premises to a
co-tenant in the building, for a term expiring at the end of 2002.
The Company believes that its facilities are suitable and adequate for its
present and anticipated purposes. See Note 17 to the Consolidated Financial
Statements for further information regarding future minimum rental commitments
under the Company's existing leases.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or its subsidiaries are subject to various legal
proceedings, arbitrations and claims that generally arise in the ordinary course
of their businesses. Although the results of such matters cannot be predicted
with certainty, based on information currently available and established
reserves, management believes that resolving any currently known matters will
not have a material adverse impact on the Company's consolidated financial
condition or results of operations. See Note 18 to the Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of its fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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
the Common Stock, as reported by The Nasdaq Stock Market(R), for the Company's
last two fiscal years.
18
COMMON STOCK: HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2000
First Quarter .......................... $3.000 $2.000
Second Quarter ......................... 2.500 1.469
Third Quarter .......................... 2.375 1.250
Fourth Quarter ......................... 2.000 0.813
YEAR ENDED DECEMBER 31, 1999
First Quarter .......................... $4.000 $1.031
Second Quarter ......................... 3.000 1.250
Third Quarter .......................... 3.563 2.156
Fourth Quarter ......................... 3.250 1.688
As of March 23, 2001 there were 57 holders of record of the Common Stock.
The Company is aware that certain holders of record hold a substantial number of
shares of Common Stock as nominees for a significant number of beneficial
owners. Based on a broker-dealer inquiry made by the Company's transfer agent in
April 2000, the Company believes there are approximately 700 beneficial owners
of the Common Stock.
The Company has never declared any cash dividends on the Common Stock, nor
does the Company currently anticipate declaring any cash dividends in the
foreseeable future. However, as described above in Item 1 of this report, under
the caption "Capital Structure History," the Company has over the past two years
repurchased significant amounts of its Common Stock, both in
privately-negotiated transactions and through an open market repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each included elsewhere in this report. Statement of Operations
data presented below includes reclassifications of certain revenue and expense
items which are not directly associated with operations. Such reclassifications
include interest income, interest expense, amortization of intangible assets,
amortization of goodwill, foreign exchange effects and other non-operating
items. Because the Merger was accounted for as a recapitalization of EBIC, with
the issuance of shares by EBIC in August 1996 for the net assets of Maxcor,
financial and other information of the Company presented below for 1996
represents financial and other information of EBIC (and its subsidiaries and
affiliates) as if all shares issued in the Merger had been issued as of January
1, 1996 and were outstanding for the merged and recapitalized entity since that
date.
19
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS
Revenue:
Commission income $ 144,057,920 $ 153,151,341 $ 149,293,022 $ 163,467,438 $ 178,109,899
Other income 3,497,043 2,618,822 973,908 740,683 360,967
------------- ------------- ------------- ------------- -------------
147,554,963 155,770,163 150,266,930 164,208,121 178,470,866
------------- ------------- ------------- ------------- -------------
Operating costs:
Compensation and related costs 106,904,658 108,470,659 100,527,090 107,375,812 116,296,606
Communication costs 13,430,339 15,083,928 14,726,069 16,010,272 18,288,441
Travel and entertainment 8,313,068 8,706,358 9,098,311 10,386,202 11,355,183
Occupancy costs 4,743,986 5,400,888 6,065,132 6,053,469 6,539,150
Depreciation and amortization 3,501,373 3,955,500 4,594,622 4,908,979 4,324,097
Clearing fees 3,307,802 3,005,785 4,588,170 6,165,264 4,411,515
General and administrative 5,111,212 5,802,572 5,639,524 7,667,597 7,495,441
------------- ------------- ------------- ------------- -------------
145,312,438 150,425,690 145,238,918 158,567,595 168,710,433
------------- ------------- ------------- ------------- -------------
Operating profit 2,242,525 5,344,473 5,028,012 5,640,526 9,760,433
------------- ------------- ------------- ------------- -------------
Other non-operating (expenses) income:
Interest expense (594,957) (833,935) (1,079,147) (840,584) (693,132)
Amortization of intangible assets (507,564) (410,004) (410,004) (410,004) (410,004)
Other non-operating expenses (477,000) (1,141,356) (632,247)
Other non-operating income 2,235,511 527,018 450,000
Restructuring costs (541,961) (1,028,893)
Income (loss) from equity affiliates 135,890 (1,576,644) (19,925) 191,771 229,992
Interest income 1,823,285 1,879,500 1,737,403 1,718,099 1,801,442
Foreign exchange (loss) gain (21,579) (319,547) (184,518) 137,449 (8,229)
------------- ------------- ------------- ------------- -------------
2,051,625 (1,762,505) (1,097,547) 1,246,731 287,822
------------- ------------- ------------- ------------- -------------
Income before provision for income taxes
and minority interest
4,294,150 3,581,968 3,930,465 6,887,257 10,048,255
Provision for income taxes 3,543,220 1,116,131 3,950,645 5,757,897 6,650,606
------------- ------------- ------------- ------------- -------------
Income (loss) before minority interest 750,930 2,465,837 (20,180) 1,129,360 3,397,649
Minority interest 1,251,169 66,375 (1,254,970) (1,398,352) 307,311
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 2,002,099 $ 2,532,212 ($ 1,275,150) ($ 268,992) $ 3,704,960
============= ============= ============= ============= =============
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Total assets $ 71,799,793 $ 72,467,958 $ 75,269,665 $ 86,531,513 $ 97,172,715
Obligations under capitalized leases 335,635 493,367 751,747 974,186 1,428,764
Notes payable 1,723,169 1,799,870 3,824,842 6,261,839 7,379,762
Loan payable 674,282
Total liabilities 38,151,244 38,162,466 43,476,151 54,928,268 64,721,841
Minority interest 3,407,628 4,885,896
Redeemable preferred stock 2,000,000 2,000,000 2,000,000
Stockholders' equity 28,240,921 27,419,596 29,793,514 31,603,245 32,450,874
PER SHARE INFORMATION
Net income (loss) - basic $ .23 $ .26 ($ .11) ($ .03) $ .41
Net income (loss) - diluted .23 .25 (.11) (.03) .41
Book value 3.48 3.29 2.63 2.79 3.63
Weighted average common shares
outstanding - basic 8,374,166 9,711,974 11,327,741 9,243,201 8,949,656
Weighted average common shares
outstanding - diluted 8,374,166 9,846,257 11,327,741 9,243,201 8,949,656
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues currently are derived primarily from commissions
related to its inter-dealer brokerage businesses. Generally, the Company
receives a commission from both counterparties in a trade, although in trades of
certain products only one party pays a commission. The dollar amount of the
average transaction generating a commission varies significantly by the type of
product and the duration of the transaction. Similarly, the applicable
commission will vary according to product and services required and may also
reflect discounts for high transaction volumes or other client rebates.
Other sources of revenues include interest income, derived primarily from
cash and cash equivalents, deposits with clearing organizations and interest
associated with municipal securities positions, gains and losses on securities
transactions (currently primarily in connection with the Company's municipal
securities business), income from the sale of data and financial information
generated from the Company's brokerage businesses, and foreign exchange gains
and losses.
The largest single component of the Company's expenses is compensation paid
to its brokers. Attracting and retaining qualified brokerage personnel with
strong client relationships is a prerequisite in the Company's business and in
the brokerage business in general. Brokers are generally compensated by a
combination of fixed salary and incentive payments based on commissions
generated by them or on the 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 bonuses 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, the Company includes performance-based salary adjustment provisions in
substantially all of its broker contracts and closely tracks revenues and
compensation expenses (as well as other direct costs) by department (which may
involve one or more products) and by broker, at each location.
Direct client contact, including entertainment, is also an integral part of
the Company's marketing program and represents another significant component of
its expenses. The Company has made it a priority to manage these expenditures in
a more focused and coordinated fashion, and has had reasonable success in
reducing their gross levels over each of the last three years.
The costs of maintaining sophisticated trading room environments and a
worldwide data and communications network comprise another significant portion
of the Company's expenses, and, with the usage of electronic execution and
matching systems, the need to invest
21
in new technology and Internet deployment strategies has also increased. The
Company's ability to compete effectively is significantly dependent on its
ability to maintain a high level of client service, through its proprietary
software, computerized screen displays and digital networks, the Tradesoft
System, the MEB System and the Company's provision of whatever additional
systems are demanded by clients at any given time. It is this infrastructure and
technological commitment that enables the Company to support its 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
the Company maintains sizeable management information services and
communications departments, the Company will also license technology or
outsource infrastructure or technology projects, where practical and consistent
with its business goals, in order to manage its fixed costs in these areas.
To grow revenues and stay competitive, the Company constantly needs 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 brokers to specialize in a single product or group
of related products, rather than function as market generalists. Product
expansion, and the effort to grow market share, also typically results in
increased entertainment expenses and the increased infrastructure and
communication costs associated with configuring a new desk and delivering its
product to the necessary client base.
YEAR ENDED DECEMBER 31, 2000
The year ended December 31, 2000 was an uneven one for the Company, with
operating performances during the first three quarters that were not fully up to
the Company's expectations, mitigated in part by the Company's ability to
recognize a significant first quarter gain on the strategic restructuring of its
Tokyo operations, followed by improvements in fourth quarter performance that
have carried over into initial results for the first quarter of 2001.
Net income for the full year 2000 was approximately $2.0 million, or $.23
per share, on total revenues of $151.6 million. Based on results to date, the
Company anticipates earning in excess of $2.0 million (on an operating and net
income basis), or more than $.25 per share, solely in the first quarter of 2001.
Management undertook and implemented a number of initiatives during 2000
that the Company believes helped both to address weaknesses in operating
performance during the year and position the Company for its strong start in
2001. These included the launching of a number of technology initiatives
designed to enhance the Company's services to clients, including the acquisition
of an electronic trading platform developer, the refinement and further
deployment of a proprietary middle office trade processing system, and the
licensing of a third-party secure e-mail trade confirmation system. They also
included the further expansion of the Company's brokerage products to include
U.S. government agency bonds, the closure of two marginal and under performing
foreign offices, the exit of the Company
22
from brokering certain energy derivatives where the Company's market share
penetration was inadequate to maintain profitability, the completion of the
Company's strategic restructuring of its Tokyo operations, the continued
reduction of the Company's outstanding debt borrowings, and the initiation of an
open market repurchase program for the Company's Common Stock, all as more fully
described below.
The year started with the Company completing the merger of the Tokyo
Partnership, the Tokyo-based derivatives brokering venture in which the Company
had been a 50/50 economic partner with its 15% equity affiliate, Yagi Euro, with
the off-balance sheet brokerage operations of Nittan. The combination saw the
Company retaining a 40% direct interest in the expanded Tokyo Partnership, with
Yagi Euro retaining a 30% interest and Nittan acquiring the remaining 30%. As a
result of the transaction, which closed effective January 1, 2000, the Company
recognized a one-time, after-tax gain in the first quarter of 2000 of
approximately $1.5 million.
The Company throughout the year continued its strategy of focusing on its
three core financial centers of New York, London and Tokyo. This focus resulted
in the closure of the Company's Toronto-based operations, effective June 30,
2000, at an approximate cost of $205,000, and the taking of a charge of
approximately $337,000 during the fourth quarter for the decision taken to close
the Paris branch operations of the Company's venture with Finacor, EBFL, in
early January 2001. Both the Toronto and Paris operations were relatively small,
but had been losing money for some time and were no longer considered viable as
self-sustaining offices.
The Company continued its efforts to grow revenues and improve
profitability by expanding into new products when it found reasonable business
opportunities to do so. Near the end of 2000, the Company began taking steps
that enabled it to hire a core of experienced brokers from several competing
firms and establish a brokerage service in U.S. government agency debt. The
Company is optimistic about the prospects for the new department, which began
formal operations in February 2001. With the reduction in issuances of the
30-year Treasury bond, U.S. government agency bonds are evolving into an
increasingly used benchmark and hedging tool. The product also compliments
several of the Company's other departments, such as interest rate derivatives,
repurchase agreements and overnight federal funds.
On the other hand, the Company did not hesitate to exit businesses in 2000
where its market share penetration was proving inadequate to achieve
profitability. In this regard, the Company's energy derivatives businesses,
which had already been streamlined in 1999, were further cut back, with the
Company halting its brokerage of weather derivatives in the second quarter and
its brokerage of electricity-related products and derivatives in the third
quarter. The Company countered these trends somewhat by establishing a bandwidth
brokerage operation in the latter half of 2000, and continues to maintain
energy-related businesses in the brokerage of emission credits and coal.
23
The Company's business has always been sensitive to prevailing economic and
market conditions, and, in particular, trading levels in the fixed income and
derivatives markets in which it is active, and in this respect 2000 saw wide
fluctuations. The year began with significant uncertainty surrounding the
potential effects of Y2K, which negatively affected trading levels, particularly
in emerging markets, and quickly moved to a state of euphoric market expectation
in, and focus on, equities. By the end of the year, however, the equity markets
were battered by a steep market correction and worldwide economic slowdown, and
financial market participants were realigning their risk profiles. Combined with
a declining interest rate environment, the market saw increased levels of
activity both in fixed income and interest rate derivative products, which
helped the Company's brokerage levels in the fourth quarter.
On the technology front, the Company continued its efforts to deliver its
clients the most advanced brokerage services possible, while also exploring the
expansion of its business model into the provision of financial services-related
technology and systems. The most significant step in this direction was the
Company's third quarter acquisition of the privately-held Tradesoft
Technologies, Inc. ("Tradesoft"), a developer and licensor of electronic trading
platforms, for a combination of $2.1 million in cash and 375,000 shares of
Common Stock. In the third quarter of 1999, the Company had entered into a
licensing agreement with Tradesoft for the development of an electronic matching
system to broker Brady bonds and global bonds. The completed application, which
was deployed to some of the Company's largest clients in emerging markets during
the first half of 2000, received significant accolades for its functionality and
ease-of-use. As a result of the acquisition of Tradesoft, the Company now owns
instead of licenses the Tradesoft System and its related software, and can
manage and direct its further development and modification for other products
and uses, as well as directly benefit from any revenues generated by third-party
licensing arrangements.
More recently, the Company utilized Tradesoft's know-how and software to
automate the broker interface on its new U.S. government agencies desk.
Deployment of the interactive trade execution element on the client end is
expected ultimately to follow, but only as an adjunct to voice brokerage
operations for those clients who desire it, and not as a substitute. The Company
believes that this hybrid approach, which marries quality voice brokering and
advanced screen system technology, offers a better opportunity to expand its
inter-dealer brokerage business and grow revenues than the model that looks to
achieving total electronic execution and automation. Moreover, because the
approach is geared to developing and maintaining genuine internal broker support
for the Tradesoft System and its related technology, the expectation is that it
will build on existing voice brokerage liquidity, rather than cannibalize it to
move a small portion of that liquidity to a fully electronic platform. The
Company accordingly is also exploring whether and how to modify its prior
deployment of the Tradesoft System in emerging markets, where neither its fully
electronic execution application nor those of competitors have been successful
to date in garnering meaningful liquidity.
24
The Company in 2000 also continued to modify and fine tune the MEB System,
its proprietary middle-office trade processing system that also incorporates an
electronic touchpad blotter application for capturing trade information. These
efforts included deploying the MEB System across the Company's repurchase
agreement operations and its new U.S. government agencies desk, as well as
developing an interface to feed data directly from the Tradesoft System front
end into the MEB System. Although to date the MEB System has only been deployed
internally, the Company believes that there may be an untapped revenue potential
in licensing the MEB System and its unique technology and risk-management
features to third parties.
The third quarter of 2000 also saw the Company's licensing of a secure
e-mail trade confirmation system from PostX Corporation, with anticipated
deployment of the system in mid-2001. The system represents an additional
element in the Company's strategy of using advanced technology to provide the
best possible client service. Upon its anticipated deployment within the
Company's derivatives department, the system is expected to enable the Company
to offer its client base the advantage of secure, encrypted trade confirmations
delivered by e-mail promptly after execution, and the ability to respond
immediately with secure e-mail verifications or queries.
After repurchasing 2,986,345 shares of Common Stock in mid-1999 in a
single, negotiated transaction at a price of $1.75 per share, the Company's
Board of Directors in May 2000 authorized an open market repurchase program for
up to 10% of the outstanding Common Stock, or 833,744 shares. By mid-January
2001, the Company had completed the repurchase of the full 833,744 shares
authorized under the program, at an average price of $1.42 per share. The Board
of Directors then increased the authorization under the program to allow the
repurchase of up to an additional 787,869 shares, or 10% of the Common Stock
outstanding at that time. As of March 23, 2001, the Company had repurchased an
additional 256,800 shares pursuant to this extension of the program, at an
average price of $1.66 per share. Management recommended and implemented the
repurchase program in the belief that the Common Stock at the market valuations
then prevailing represented an attractive long-term investment for the Company
and would increase value for the Company's remaining stockholders.
The year 2000 also saw the Company continue the process of paring down its
already low level of debt, ending the year with notes and loans payable at a
historically low level of $1.7 million, down from $2.5 million at 1999 year end
and $3.8 million at 1998 year end.
These management initiatives were implemented in a business and marketplace
environment that continues to be extremely competitive and challenging. The
Company's primary client base continues to undergo consolidations, resulting in
surviving financial institutions that are increasingly large and have greater
purchasing power, as well as fewer market participants. In addition, the
inter-dealer brokerage business continues to see new entrants in the form of
electronic marketplaces, often with significant capital markets backing. Several
have been established by existing money and securities brokers, others by
consortia of
25
banks and institutional market participants, and some with a combination of
both. The Company believes its own technology initiatives and assortment of
product offerings have to date positioned it to meet these competitive threats,
but the landscape is constantly evolving and the Company continuously needs to
adapt its business methods and strategies.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Commission income for 2000 decreased $9,093,421 to $144,057,920, compared
to $153,151,341 for 1999. The decrease resulted primarily from the combined
effect of decreased brokerage in London and Geneva of approximately $10.1
million, offset in part by the combined effect of increased brokerage in New
York and Mexico City of approximately $1.5 million. The reduction in London
primarily resulted from decreased brokerage on interest rate derivative products
and the currency effects of translating weakened British pound sterling amounts
to U.S. dollars, offset in part by increased brokerage on emerging market debt
securities. The decline in Geneva was primarily the result of a reduction in
brokerage staff and the transfer of some customer relationships to the London
office. In New York, the increase reflected the net effects of an increase in
brokerage of U.S. Treasury repurchase agreements as a result of the hiring of a
new brokerage team during the fourth quarter of 1999, an increase in brokerage
of interest rate derivative products, reflecting both improved market activity
and market share, a decrease in brokerage relating to the discontinuance of
certain operations in late 1999 and 2000, including parts of the Company's
energy-related derivatives operations, and a decrease in brokerage of emerging
market debt securities reflecting reduced market activity. The increase in
Mexico City primarily resulted from improved market conditions for local market
debt.
Interest income for 2000 decreased $56,215 to $1,823,285, compared to
$1,879,500 for 1999, primarily reflecting a reduction in the average inventory
of municipal securities held.
Other income for 2000 increased $3,411,700 to $5,710,975, compared to
$2,299,275 for 1999, primarily due to a one-time gain on a partial sale of the
Company's interest in the Tokyo Partnership, net of related transaction costs,
of approximately $2.2 million (approximately $1.5 million on an after-tax
basis), a full period of income derived from the Company's licensing agreement
with Telerate for a variety of pricing and other data on emerging market bonds,
and an increase in trading gains on municipal securities transactions.
Compensation and related costs for 2000 decreased $1,566,001 to
$106,904,658, compared to $108,470,659 for 1999. The decrease was primarily the
result of decreased employment costs in London and Geneva of approximately $4.4
million, reflecting decreased commission income and the currency effects of
translating weakened British pound sterling amounts to U.S. dollars. This
decrease was partially offset by increased employment costs in New York and
Mexico City of approximately $3.3 million, reflecting increased operating
revenues (commission income, trading gains and information sales revenue) and
improved profitability in certain areas. As a percentage of operating revenues,
compensation and related costs increased to
26
72% for 2000 as compared to 70% for 1999, primarily reflecting fixed salary
costs in certain derivatives brokerage groups in London that experienced reduced
brokerage.
Communication costs for 2000 decreased $1,653,589 to $13,430,339, compared
to $15,083,928 for 1999, primarily as a result of cost reduction efforts in New
York throughout 1999 and into 2000.
Travel and entertainment costs for 2000 decreased $393,290 to $8,313,068,
compared to $8,706,358 for 1999. As a percentage of operating revenues, travel
and entertainment costs were consistent for 2000 and 1999 at 5.6%, reflective of
continued efforts to control and correlate these costs to revenue levels.
Occupancy costs represent expenses incurred in connection with various
operating leases for the Company's office premises and include base rent and
related escalations, maintenance, electricity and real estate taxes. In 2000,
these costs decreased $129,884 to $4,743,986, compared to $4,873,870 for 1999,
primarily reflecting the combined effect of a reduction in leased space in
Stamford, Connecticut as a result of the closing of certain departments within
the energy-related derivatives group, and a reduction in rent tax rates in
London, offset in part by the effect of a reduction in certain occupancy-related
accruals in 1999 of approximately $527,000.
Depreciation and amortization expense consists principally of depreciation
of communication and computer equipment and leased automobiles and amortization
of leasehold improvements, software, goodwill and other intangible assets. In
2000, these costs decreased $356,567 to $4,008,937, compared to $4,365,504 for
1999, primarily as a result of a reduction in depreciable equipment, offset in
part by an increase in amortizable software, goodwill and other intangible
assets. The decrease in depreciable equipment reflected in part the Company's
increased use of operating leases to finance the upgrading of communication and
information systems during 1999 and 2000, while the increase in amortizable
software, goodwill and other intangible assets primarily reflected the effects
of the Tradesoft acquisition.
Clearing fees are fees for transaction settlements and credit enhancements,
which generally are charged by the Company's clearing firms in transactions
where the Company acts as a riskless principal on a fully matched basis. In
2000, these expenses increased $302,017 to $3,307,802, compared to $3,005,785
for 1999, primarily due to an increase in the number of cleared U.S. Treasury
repurchase agreements transactions, offset in part by a net decrease in the
number of cleared emerging market debt transactions.
Interest expense for 2000 decreased $238,978 to $594,957, compared to
$833,935 for 1999, primarily as a result of the combined effect of a lower
average aggregate amount of debt (loan, notes and capitalized lease obligations
payable) outstanding and a decrease in average margin borrowings to finance
municipal securities positions.
27
Restructuring costs of $541,961 were incurred during 2000, as compared to
$1,028,893 in 1999. In 2000, these costs related to the ceasing of operations by
the Company's Toronto-based subsidiary in June 2000 and the notice given in
December 2000 to close EBFL's Paris branch in January 2001. A portion of the
business previously conducted in Toronto has been relocated to New York. The
restructuring costs in 1999 were incurred in connection with the anticipated
admission of Nittan to the Tokyo Partnership and the closing of certain
departments within the energy-related derivatives group. Included in these costs
for 2000 and 1999 were employee severance, the disposal/write-off of fixed
assets and occupancy-related costs.
General, administrative and other expenses include such expenses as
corporate insurance, office supplies and expenses, legal fees, audit and tax
fees, consulting fees, food costs and dues to various industry associations. In
2000, these expenses decreased $214,360 to $5,588,212, as compared to $5,802,572
for 1999, primarily as a result of a reduction in consumption taxes in Europe
and reductions in various other general and administrative expenses due to
continued efforts to reduce these costs, offset in part by an increase in
professional fees and a one-time charge of $477,000 attributable to Tradesoft's
in-process research and development initiatives ongoing at the date of
acquisition.
For 2000, the Company had income from its 15% equity interest in Yagi Euro
of $135,890, as opposed to a loss of $1,576,644 for 1999. Yagi Euro experienced
significant restructuring activities in late 1999 and early 2000 relating to
Nittan's admission to the Tokyo Partnership and the combining of Yagi Euro's
money market and forward foreign exchange businesses with those of Nittan in a
separate joint venture. In 2000, the Company's share of a gain realized by Yagi
Euro on its restructuring activities was approximately $86,000. In 1999, the
Company's share of expenses incurred by Yagi Euro on its restructuring
activities approximated $1,031,000.
Provision for income taxes for 2000 increased $2,427,089 to $3,543,220,
compared to $1,116,131 for 1999. This increase was primarily reflective of a
$1,200,000 adjustment during the prior period to reduce income tax reserves as a
result of obtaining a favorable resolution to certain contingencies and a
reduction of approximately $972,000 during the prior period to the deferred tax
asset valuation allowance due to tax planning strategies derived from the Nittan
transaction and improved profitability in certain subsidiaries. Exclusive of
these adjustments, the Company's effective tax rate was lower for 2000, as
compared to 1999, primarily reflecting the impact of the significant loss
incurred by the Company's foreign equity affiliate (Yagi Euro) in 1999.
For the year ended December 31, 2000, minority interest in consolidated
subsidiaries resulted in a reduction of net losses from such subsidiaries of
$1,251,169, as compared to a reduction of net losses from such subsidiaries of
$66,375 for 1999, primarily as a result of reduced brokerage activity in EBFL.
28
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Commission income for 1999 increased $3,858,319 to $153,151,341, compared
to $149,293,022 for 1998. The increase resulted primarily from increased
brokerage in London and Geneva, aggregating approximately $14.1 million, offset
in part by decreased brokerage in New York and Mexico City, aggregating
approximately $7.0 million, and decreased brokerage in the Tokyo Partnership of
approximately $2.9 million. The increased brokerage in London and Geneva
primarily reflected the expansion, as of January 1, 1999, of the London
operations through the EBFL venture and the impact of the Geneva operations,
which commenced in July 1998. Brokerage in New York and Mexico City declined
primarily as a result of reduced market activity in both centers in emerging
market debt securities and, in New York, reduced brokerage in energy-related
derivatives, offset in part by increased brokerage in cash deposits and interest
rate derivatives. The decreased brokerage in the Tokyo Partnership primarily
reflected the impact of increased competitive pressures and reduced market
activity.
Interest income for 1999 increased by $142,097 to $1,879,500, compared to
$1,737,403 for 1998. This increase resulted primarily from an increase in the
average inventory of municipal securities held by the Company.
Other income for 1999 increased $1,509,885 to $2,299,275, compared to
$789,390 for 1998, primarily due to income derived from the Company's May 1999
licensing agreement with Telerate for a variety of pricing and other data on
emerging market bonds and an increase in trading gains on municipal securities
transactions.
Compensation and related costs for 1999 increased $7,943,569 to
$108,470,659, compared to $100,527,090 for 1998. The increase was primarily the
result of increased employment costs in London and Geneva, aggregating
approximately $9.2 million, reflecting an increase in brokerage staff and
commission income in conjunction with the expansion of the London operations in
EBFL and the new Geneva operations, and increased employment costs in the Tokyo
Partnership, approximating $2.3 million, reflecting increased competitive
pressures and an increase in brokerage staff. These increases were partially
offset by reduced employment costs in New York and Mexico City, aggregating
approximately $3.3 million, primarily reflecting reduced commission income and
implemented cost reductions in the emerging market debt and energy-related
derivatives areas. As a percentage of operating revenues, compensation and
related costs increased to approximately 70% for 1999, as compared to
approximately 67% for 1998, primarily resulting from certain fixed salary costs
in areas which sustained reduced revenues.
Communication costs were comparable for 1999 and 1998, at $15,083,928 and
$14,726,069, respectively, reflecting the net effects of an increase in London
associated with the expanded operations of EBFL, additional costs from the
Geneva operations and a decrease in New York associated with overall cost
reductions in certain areas.
29
Travel and entertainment costs for 1999 decreased $391,953 to $8,706,358,
compared to $9,098,311 for 1998, primarily as a result of management's continued
focus on reducing these costs, while at the same time increasing revenues. As a
percentage of operating revenues, travel and entertainment costs decreased to
approximately 5.6% for 1999, as compared to 6.1% for 1998.
Occupancy costs for 1999 decreased $1,191,262 to $4,873,870, compared to
$6,065,132 for 1998, primarily reflecting the combined effect of a reduction in
rent and related costs derived from subletting a portion of the Company's leased
space in London (which commenced in September 1998), an overall rent tax rate
reduction in London and an approximately $527,000 reduction in certain
occupancy-related accruals.
Depreciation and amortization expense for 1999 decreased $639,122 to
$4,365,504, compared to $5,004,626 for 1998, primarily due to a reduction in
depreciable fixed assets in London.
Clearing fees decreased $1,582,385 to $3,005,785 for 1999, compared to
$4,588,170 for 1998, due primarily to a decrease in the number of cleared
transactions, primarily in emerging market debt securities.
Interest expense for 1999 decreased $245,212 to $833,935, compared to
$1,079,147 for 1998. This decrease was primarily the result of a lower average
aggregate amount of debt outstanding during the current period.
Restructuring costs of $1,028,893 were incurred during 1999, in connection
with the anticipated admission of Nittan to the Tokyo Partnership and the
closing of certain departments within the energy-related derivatives group.
These costs included, among others, employee severance, the write-off of
leasehold improvements and occupancy-related costs.
General, administrative and other expenses decreased $978,308 to
$5,802,572, for 1999, as compared to $6,780,880 for 1998, primarily as a result
of a decrease in professional fees, which were higher in 1998 due to the Finacor
transaction in London, the opening of the Geneva office and other corporate
matters. In connection with management's continued efforts to reduce costs,
there were also reductions in various other general and administrative expenses
during 1999 in comparison to 1998, notwithstanding the fact that the 1998 costs
were themselves reduced by reductions to various accruals approximating
$462,000.
Loss from equity affiliates for the year ended December 31, 1999 consisted
of the Company's equity interest in the loss incurred by Yagi Euro.
Approximately $1.0 million of this loss represented the Company's share of
employee severance costs and fixed asset disposals incurred in anticipation of
the 50-50 joint venture in conventional products formed by Yagi Euro and Nittan,
effective January 1, 2000. In 1998, the loss resulted from a write-off of the
Company's equity interest in a small derivatives broker of $118,000, offset in
part by the Company's share of Yagi Euro's profits for 1998.
30
Provision for income taxes for 1999 decreased $2,834,514 to $1,116,131,
compared to $3,950,645 for 1998. This decrease was primarily reflective of a
$1,200,000 adjustment during the current period to reduce income tax reserves as
a result of obtaining a favorable resolution to certain contingencies, as well
as a reduction to the deferred tax asset valuation allowance of approximately
$972,000 due to tax planning strategies derived from the Nittan transaction and
improved profitability in certain subsidiaries. Even exclusive of these
adjustments, the Company's effective tax rate was lower for 1999, as compared to
1998, reflecting a lower tax rate on income generated by the Tokyo Partnership
as a result of certain initiatives undertaken effective as of January 1, 1999,
and management's success in reducing the Company's overall level of
non-deductible entertainment expenses.
For 1999, minority interest in consolidated subsidiaries resulted in a
reduction of net losses from such subsidiaries of $66,375, as compared to a
reduction of net income from such subsidiaries of $1,254,970 for 1998, primarily
due to the competitive pressures encountered by the Tokyo Partnership.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
A substantial portion of the Company's assets, similar to other brokerage
firms, is liquid, consisting of cash, cash equivalents and assets readily
convertible into cash, such as receivables from broker-dealers and customers,
and securities owned.
Securities owned principally reflect municipal security positions taken in
connection with the Company's brokerage of municipal securities business.
Positions are generally held for short periods of time and for the purpose of
facilitating anticipated client needs and are currently financed by margin
borrowings from a broker-dealer that clears these transactions on the Company's
behalf on a fully-disclosed basis. At year-end 2000, as reflected on the
Consolidated Statements of Financial Condition, the Company had net assets
relating to securities transactions of approximately $3.6 million, reflecting
securities owned of approximately $10.7 million, financed by a payable to the
clearing broker of approximately $7.1 million.
MFI is a member of the GSCC for the purpose of clearing U.S. Treasury and
government agency repurchase agreements and other U.S. Treasury securities, as
well as U.S. government agency securities. Pursuant to such membership, MFI is
required to maintain excess regulatory net capital of $10,000,000, including a
pledge of $5,000,000 in U.S. Treasury securities, which has been reflected as
deposits with clearing organizations on the Consolidated Statements of Financial
Condition.
31
Net cash provided by operations for 2000 was approximately $6.7 million.
This increase in cash was the result of net income of approximately $2.0 million
adjusted to reflect the net effect of approximately $2.4 million of non-cash
items, primarily consisting of depreciation and amortization, the gain on the
partial sale of the Company's interest in the Tokyo Partnership, minority
interest in the loss of consolidated subsidiaries and the decrease to net
deferred income tax assets, and the net positive effects of other working
capital items, principally increased accrued compensation and decreased prepaid
expenses and other assets.
Net cash provided by operations for 1999 was approximately $9.8 million.
This increase in cash was the combined result of net income of approximately
$2.5 million adjusted to reflect the net effect of approximately $5.8 million of
non-cash items, primarily consisting of depreciation and amortization,
undistributed losses of unconsolidated subsidiaries and an increase to deferred
income taxes, and the net positive effects of other working capital items,
principally reduced receivable balances.
Net cash provided by operations for 1998 was approximately $1.1 million.
This increase in cash was the result of a net loss of approximately $1.3 million
adjusted to reflect approximately $6.8 million of non-cash items, principally
for depreciation and amortization and deferred income taxes, and the net
negative effects of other working capital items, principally reduced payable
balances.
The Company and its subsidiaries, in the ordinary course of their business,
are subject to extensive regulation at international, federal and state levels
by various regulatory bodies which are charged with safeguarding the integrity
of the securities and other financial markets and protecting the interest of
customers. The compliance requirements of these different regulatory bodies may
include, but are not limited to, net capital or stockholders' equity
requirements. The Company has historically met regulatory net capital and
stockholders' equity requirements and expects to be able to continue to do so in
the future.
In London, the Company's wholly-owned securities subsidiary, Euro Brokers
Financial Services Limited ("EBFSL"), has been notified by its regulator, the
SFA, of an interpretative change by the SFA under its rules in the
categorization of EBFSL's business activities, such that increased regulatory
capital requirements would apply. Rather than tie up extra capital in EBFSL's
business, the Company has decided to transfer the business of EBFSL into a new
London branch office of the Company's U.S. broker-dealer subsidiary, MFI (which
already conducts the same emerging markets debt business as EBFSL), and has
received initial approvals to do so from both the SFA and the NASDR. The
transfer is expected to be effected during 2001.
32
INVESTING ACTIVITIES
Investing activities for 2000, 1999 and 1998 reflect net cash used of
approximately $2.0 million, $1.0 million and $3.6 million, respectively,
primarily for purchases of fixed assets. The decrease in fixed asset purchases
during 1999 reflected, in part, the Company's increased use of operating leases
to finance much of the upgrading of communication and information systems
necessary to sustain the Company's commitment to maintaining current technology.
Investing activities for 2000 also included approximately $267,000 received,
relating to the net effect of proceeds received on the partial sale of the
Company's interest in the Tokyo Partnership and the cash portion paid out in the
Tradesoft acquisition.
FINANCING ACTIVITIES
At December 31, 2000, the Company did not have a loan outstanding under its
revolving credit facility with General Electric Capital Corporation ("GECC").
The facility provides for borrowings of up to $5 million. It expires on June 17,
2004 and is secured by substantially all the assets of Euro Brokers Inc.
("EBI"), a U.S. subsidiary. The borrowing availability under the facility (which
approximated $3.1 million at December 31, 2000) is determined based upon the
level and condition of the billed accounts receivable of EBI. The agreement with
GECC contains certain covenants, which require EBI, and the Company as a whole,
to maintain certain financial ratios and conditions.
Notes payable at December 31, 2000 of approximately $1.7 million reflects
the remaining principal installments of approximately $827,000 due on a fixed
rate note payable to GECC issued in December 1997, which is secured by all owned
equipment of EBI and is payable in monthly installments through December 2002,
and subordinated notes issued by EBFL to Monecor (London) Limited ("Monecor"), a
subsidiary of Finacor and the minority shareholder of EBFL, in the aggregate
amount of (pound)600,000 (approximately $896,000 at December 31, 2000), due
March 31, 2001 (subject to three months' notice and regulatory approval).
Net cash used in financing activities for 2000 was approximately $2.6
million, primarily reflective of cash of approximately $894,000 used to acquire
treasury stock, the repayment of notes payable and obligations under capitalized
leases aggregating approximately $1,196,000, and the net repayment of borrowings
under the revolving credit facility of approximately $674,000.
Net cash used in financing activities for 1999 was approximately $4.0
million, primarily reflective of the net effects of cash of approximately $4.2
million used to acquire treasury stock, the repayment of notes payable and
obligations under capitalized leases aggregating approximately $3.4 million, the
cash contribution from minority interest, net of dividends paid to minority
interest, of approximately $3.1 million, and net borrowings under the revolving
credit facility of approximately $674,000.
33
Net cash used in financing activities for 1998 was approximately $780,000,
primarily reflective of the net effects of the repayment of notes payable and
obligations under capital leases aggregating approximately $2.7 million, and the
issuance of the Preferred Stock to Yagi Euro for $2.0 million.
EFFECTS OF INFLATION
Because the Company's assets are to a large extent liquid in nature, the
Company believes it is less susceptible to the negative effects of inflation
than companies with high levels of inventories or fixed assets exposed to
increasing replacement costs. Moreover, to the extent the earning power of the
Company's liquid assets diminishes in an inflationary environment, the effects
tend to be offset by the salutary consequences of inflation on the true cost of
paying the Company's current liabilities. However, increases in certain Company
expenses due to inflation, such as employee compensation, travel and
entertainment and occupancy and communication costs may not be readily
recoverable in the price of its services. In addition, to the extent inflation
increases or decreases volatility in the securities markets, the Company's
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 the Company to the public,
contain and incorporate by reference forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Wherever possible, the Company has identified these
forward-looking statements by words such as "believes," "anticipates," "expects"
and similar phrases. Such forward-looking statements, which describe the
Company's current beliefs concerning future business conditions and the outlook
for the Company, are subject to significant uncertainties, many of which are
beyond the control of the Company. Actual results or performance could differ
materially from that expected by the Company. Uncertainties include factors such
as market and economic conditions, the success of technology development and
deployment, the status of relationships with employees, clients, business
partners and clearing firms, possible third-party litigations or other
unanticipated contingencies, the actions of competitors, and government
regulatory changes. For a fuller description of these and additional
uncertainties, reference is made to the "Competition," "Regulation" 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 the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management of the Company is actively involved in the evaluation of risks
associated with certain financial instruments and will from time to time reduce
other risks inherent in its businesses through the use of financial instruments.
The Company reduces market risk related to its municipal securities
positions by limiting both the size of its overall positions and the number of
days positions are held. In addition, the Company from time to time sells
interest rate sensitive financial futures contracts as a means of managing
market risk on its municipal securities positions. Management closely monitors
the Company's municipal securities positions on a daily basis through its review
of daily activity and position reports prepared by operations staff. These
reports detail all executed transactions, the resulting trading gains and sales
commissions and, using independently verified market prices, the closing
positions. At December 31, 2000, the Company held municipal securities positions
with an aggregate market value of approximately $10.7 million.
In the process of executing brokerage transactions, the Company sometimes
experiences "out trades" or other errors in which the Company may have liability
for the resulting unmatched position. The occurrence of out trades generally
rises with increases in the volatility of the market. If an out trade is
promptly discovered, thereby allowing prompt disposition of the unmatched
position, the risk to the Company is usually limited. If discovery (or
disposition) is delayed, the risk is heightened by the increased possibility of
intervening market movements prior to such disposition. The Company believes
that the MEB System, including its electronic blotter application, because of
its ability to identify unbalanced trade conditions as they occur, serves to
help limit the market risk exposure when out trades or other errors occur. To
limit its exposure further in such situations, the Company's policy is to
dispose of any resulting unmatched positions promptly after their discovery.
The Company has various foreign exchange rate exposures, including
commission income earned in a currency other than the functional currency and
foreign income streams which are eventually distributed. Management's strategies
to reduce these risks include the use of foreign currency forward contracts. As
a result of the early adoption of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, changes in the deemed highly effective portion of the fair value of
foreign currency forward contracts used to hedge commission income earned in a
currency other than the functional currency are deferred from recognition into
earnings until the forecasted revenue streams are realized. As of year-end 2000
and 1999, the Company has postponed its hedging practice with respect to
anticipated dividends from the Tokyo Partnership, awaiting a time when it can
better predict the income streams therefrom. If and when foreign currency
forward contracts are again used to hedge these anticipated dividends, the gains
and losses thereon will be included in current operations even though the
offsetting gains and losses on the income streams are not recognized until
realized.
35
The Company's note payable to GECC and Preferred Stock have interest and
dividend rates that are fixed. Although the Company has theoretical interest
rate exposure with these instruments should market interest rates decline or
rise, management's judgment is that the aggregate future required payments under
these instruments are satisfactory as a business matter, and do not require
application of hedging strategies. In addition, the Company's exposure to fixed
interest rates has declined during 2000 as a result of the maturing of certain
notes payable.
The subordinated notes payable to Monecor and any borrowings under the
facility with GECC bear interest at variable rates. Management will continue to
monitor the level of borrowings under the GECC 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, 2000 and
December 31, 1999, about the Company's financial instruments used for other than
trading purposes that are sensitive to either changes in interest rates or
changes in foreign exchange rates. Except as noted above, the Company's market
risk analysis at December 31, 2000 did not materially change from the market
risk analysis at December 31, 1999. For loan and notes payable and Preferred
Stock the table presents principal and redemption cash flows with expected
maturity dates. For foreign currency forward contracts, the table presents
notional amounts with expected maturity dates.
36
AS OF DECEMBER 31, 2000:
AFTER FAIR
2001 2002 2005 TOTAL VALUE
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity:
Loan payable $ $ $ $ $
7.9% note secured by
certain equipment 511,312 316,057 827,369 827,369
Subordinated notes issued
to minority shareholder 895,800 895,800 895,800
2% Redeemable
Preferred Stock 2,000,000 2,000,000 2,000,000
Exchange rate sensitivity:
Foreign currency forward
contracts:
Sell U.S. dollars/buy
British pounds
sterling 9,600,000 9,600,000 46,177
AS OF DECEMBER 31, 1999:
AFTER FAIR
2000 2001 2002 2004 TOTAL VALUE
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