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, 2003 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.
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(Exact name of registrant as specified in its charter)
Delaware 59-3262958
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Seaport Plaza, 19th Floor, New York, NY 10038
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (646) 346-7000
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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
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(Title of class)
Preferred Stock Purchase Rights
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (assuming directors, executive officers and 10% stockholders
are affiliates), based on the Nasdaq Stock Market(R) last sales price of $10.10
on June 30, 2003 (the last business day of the registrant's most recently
completed second fiscal quarter), was approximately $47 million.
As of March 29, 2004, there were 7,166,973 shares of Common Stock
outstanding.
Documents Incorporated by Reference: Those portions of registrant's
Proxy Statement for its 2004 Annual Meeting of Stockholders (which registrant
intends to file pursuant to Regulation 14A on or before April 29, 2004) 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.
[GRAPHIC OMITTED]
MAXCOR FINANCIAL GROUP INC.
INDEX
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PAGE
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PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 21
Item 3. Legal Proceedings............................................ 21
Item 4. Submission of Matters to a Vote
of Security-Holders.......................................... 21
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................. 22
Item 6. Selected Financial Data...................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 24
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk............................................ 40
Item 8. Financial Statements and Supplementary Data.................. 42
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure........... 42
Item 9A. Controls and Procedures...................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant........... 42
Item 11. Executive Compensation....................................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............. 43
Item 13. Certain Relationships and Related Transactions............... 43
Item 14. Principal Accountant Fees and Services....................... 43
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...................................... 43
Signatures................................................................ 45
Consolidated Financial Statements and Notes............................... F-1
Index to Consolidated Financial Statements................................ F-2
Exhibit Index............................................................. X-1
[GRAPHIC OMITTED]
This report includes certain statements that are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Any statement in this report that is not a statement of historical fact
may be deemed to be a forward-looking statement. Because these forward-looking
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by these forward-looking statements. Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those discussed elsewhere in this report in the section entitled
"Cautionary Statements." For additional information about forward-looking
statements, see page 39.
References in this report to "we," "us," and "our" mean Maxcor
Financial Group Inc. and its subsidiaries and other businesses, unless the
context requires otherwise.
PART I
ITEM 1. BUSINESS
OVERVIEW
Maxcor Financial Group Inc. is a publicly-held financial services
holding company, incorporated in Delaware in August 1994. We maintain a web page
at www.maxf.com and our common stock is traded on The Nasdaq Stock Market(R)
under the symbol "MAXF." At our web page you can access free-of-charge our
filings with the Securities and Exchange Commission (the "SEC"), which are
posted there as soon as reasonably practicable after they are made.
In August 1996, we acquired Euro Brokers Investment Corporation, a
privately held domestic and international inter-dealer broker for a broad range
of financial instruments, having operational roots dating back to 1970.
Through our various Euro Brokers businesses, we conduct our core
business as a domestic and international inter-dealer brokerage firm,
specializing in (i) cash deposits and other money market instruments, (ii)
interest rate and credit derivatives, (iii) emerging market debt and related
products, (iv) various other fixed income securities, including convertible
bonds, U.S. Treasury securities and federal agency bonds, and (v) U.S. Treasury,
federal agency and mortgage-backed repurchase agreements. Maxcor Financial Inc.,
our U.S. registered broker-dealer subsidiary, also conducts institutional sales
and trading operations in municipal bonds, corporate bonds, convertible
securities and equities, as well as institutional securities financing
operations.
We also maintain certain specialty subsidiaries. Tradesoft
Technologies, Inc. ("Tradesoft"), acquired by us in August 2000, is a software
developer and technology provider that specializes in designing trading systems
and broker platforms for automating or enhancing order entry and tracking, price
and information distribution, order matching, trade capture and straight through
processing. Maxcor Financial Asset Management Inc., an investment adviser
registered with the SEC, is engaged in securities lending through its Euro
Brokers Securities Lending division. Maxcor Information Inc. is charged with
packaging and exploiting the data and other information generated by our
inter-dealer brokerage businesses.
We have approximately 500 employees worldwide and conduct our
businesses through principal offices in New York, London and Tokyo, other
offices in Stamford (CT), Nyon (Switzerland) and Mexico City, and correspondent
relationships with other brokers throughout the world.
In each financial center other than Tokyo, we currently operate through
wholly-owned subsidiaries. With respect to our London capital markets
operations, housed in Euro Brokers Limited, this 100% ownership has been the
case since February 2003, when we purchased, at a discounted purchase price
pursuant to a favorable litigation result, the 50% interest that had been held
by Monecor (London) Limited ("Monecor") in those operations since January 1,
1999 (see Note 10 to the Consolidated Financial Statements). In Tokyo, since
July 1, 2001 we have had a controlling 57.25% financial interest in a brokerage
venture conducting yen and dollar denominated derivative businesses (the "Tokyo
Venture"), with Nittan Capital Group ("Nittan") holding the other 42.75%.
Previously, from January 1, 2000, we and Nittan respectively held 40% and 30%
interests in the Tokyo Venture, with Yagi Euro Nittan ("Yagi Euro"), in which we
also held a 15% minority interest, holding the other 30% interest (see Note 11
to the Consolidated Financial Statements).
INTER-DEALER BROKERAGE BUSINESSES
In our Euro Brokers inter-dealer brokerage businesses, we function
primarily as an intermediary, matching up the trading needs of our institutional
client base, which is primarily comprised of well-capitalized banks, investment
banks, broker-dealers and other financial institutions. We assist our clients in
executing trades by identifying counterparties with reciprocal interests. We
provide our services through an international network of brokers who service
direct phone lines to most of our clients and through proprietary screen systems
and other delivery systems that provide clients with real-time bids, offers and
pricing information in our various products.
Clients use our services for several reasons. First, a client can
benefit from the broader access and liquidity provided by our worldwide broker
and telecommunications network, which communicates with and services most of the
largest banks and securities firms. The result is typically better pricing and
faster execution than the client could achieve acting unilaterally. Second, we
provide clients with anonymity, both as to their identity and, depending on the
product, the size of their proposed trade, thereby enhancing their flexibility
and ability to act without signaling their intentions to the marketplace. Third,
because of our network, we can provide high-quality pricing and market
information, as well as sophisticated analytics and trading and arbitrage
opportunities.
Our inter-dealer brokerage transactions are principally of two types:
(i) "name give-up" transactions, in which we act only as an introducing broker,
and (ii) transactions in which we act as a "matched riskless principal." In the
first type of transaction, primarily involving money market instruments and
derivative products, the trades are arranged while preserving the clients'
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anonymity, but executed at the last instant on a name give-up basis and settled
directly between the counterparties. In these transactions we act solely as an
introducing broker who brings the two counterparties together, and not as a
counterparty ourselves. Consummation of the transaction may then remain subject
to the actual counterparties who have been matched by us accepting the credit of
each other. In the second type of transaction, primarily securities
transactions, we act as a matched riskless principal, connecting the buyer and
seller for the transaction on a fully anonymous basis by acting as the
counterparty for each in matching, reciprocal back-to-back trades. This type of
transaction is then settled through one of various clearing institutions with
which we have contractual arrangements, and who will have previously reviewed
and approved the credit of the participating counterparties.
PRODUCTS
Our inter-dealer brokerage businesses generally fall into the brokerage
of three broad groups of products: (i) money market products, (ii) derivative
products and (iii) securities products.
Money Market Products
In general, money market products take the form of cash deposits or
other negotiable instruments placed by one financial institution with another,
at an agreed-upon rate of interest, for a fixed period of time. Money market
products primarily include offshore deposits (i.e., deposits placed outside the
country of denomination), onshore deposits (i.e., deposits placed within the
country of denomination), certificates of deposit and short-term commercial
paper. U.S. dollars continue to be the most actively traded offshore currency
deposit. Other offshore currency deposits may be denominated in Japanese yen,
British pounds sterling, Swiss francs, Canadian dollars or the euro. Examples of
onshore deposits include term and overnight U.S. federal funds.
We broker money market products primarily out of our New York and
London centers, to a client base consisting predominantly of multinational
banks.
Derivative Products
A derivative products transaction generally is an agreement entered
into by two parties, in which each commits to a series of payments based upon
the price performance of an underlying financial instrument or commodity for a
specified period of time. This category includes a broad range of sophisticated
financial instruments employed by multinational banks, financial institutions,
securities dealers and corporations. Some of the types of derivatives we most
frequently broker are interest rate swaps, interest rate options and forward
rate agreements, in each case conducted in a multitude of different currencies
and localized primarily by office. We also broker credit derivatives in the form
of default swaps.
In an interest rate swap transaction, two parties agree to exchange
interest rate payment obligations on a notional principal amount over the term
of the swap. No principal is exchanged, and market risk for the parties is
limited to differences in the interest payments. The usual format for swaps
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involves the exchange of fixed rate payments based on the term of the swap for a
series of floating rate payments based on a shorter-term rate.
Interest rate options, which include "cap," "floor" and "swaption"
transactions, are transactions in which one party grants the other the right
(but not the obligation) to receive a payment equal to the amount by which an
interest rate either exceeds (for call options) or is less than (for put
options) a specified strike rate.
Forward rate agreements ("FRAs") are over-the-counter, off-balance
sheet instruments designed to give the counterparties protection against a
future shift in interest rates for time deposits. The buyer, or borrower, of a
FRA agrees to pay the seller, or lender, at some specified future settlement
date, an amount of interest based on a notional principal at a fixed rate for a
specified period of time. The seller agrees to pay the buyer, on the same future
settlement date, an amount of interest based on the same amount of notional
principal and the same period of time, but based on the then-prevailing market
rate for the time period. No actual principal is exchanged. On the settlement
date, the buyer and the seller calculate the present value of the net interest
owed, and one party pays the other accordingly.
In a default swap transaction, a counterparty who is seeking to buy
credit protection pays a periodic fee or premium to the other counterparty (or
seller of protection) in order to transfer or hedge credit risk with respect to
a particular issuer or security. If the reference issuer suffers a specified
credit event within the term of the swap, such as an event of default under its
loan agreements or indentures, then the seller of protection pays the loss on
the reference security to the buyer, generally either by buying bonds or loans
of the issuer from the buyer at par or making a cash payment to the buyer based
on the difference between such par amount and the market value of the reference
security at the time of default.
We broker derivative products out of all of our financial centers. Our
client base for most of these products is predominantly multinational banks and
investment banks.
Securities Products
Products that we broker in this category consist primarily of a variety
of debt obligations issued by governments, government agencies, banks and
corporations. We broker transactions in emerging market debt, U.S. Treasury and
federal agency securities and repurchase agreements, U.S. domestic convertible
bonds, floating rate notes and other corporate securities.
Emerging market debt, including Brady bonds, global bonds, Eurobonds,
local issues and loans, as well as options on the foregoing, is brokered by
specialized teams located in New York, London and Mexico City and through a
correspondent broker relationship in Buenos Aires. The market coverage of the
teams from these locations is worldwide. Our brokerage of emerging market debt
utilizes direct communication phone lines and provides real-time pricing through
proprietary, computerized screen systems located in clients' offices or through
direct digital feeds. In most emerging markets transactions, we act as matched
riskless principal and settle trades through a clearing firm, although we broker
some transactions on a name give-up basis.
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Repurchase agreements are contractual obligations entered into by two
counterparties, first to sell securities and then to repurchase those same
securities (or the reverse in the case of a buyer) at an agreed upon future date
and price. We act as an intermediary mainly for the U.S. primary government
dealer community (banks and dealers licensed to participate in auctions of U.S.
Treasury securities), as well as for a number of U.S. regional banks and
dealers, in the negotiation and execution of U.S. Treasury, federal agency and
mortgaged-backed repurchase agreements. As is the case with emerging markets, we
disseminate repurchase agreement market information via our proprietary,
computerized screens and digital data feeds. Most of the repurchase agreements
that we execute for dealers are cleared through the Government Securities
Division of the Fixed Income Clearing Corporation ("GSD-FICC") in which our
broker-dealer subsidiary, Maxcor Financial Inc., is a member, although some
transactions are brokered on a name give-up basis.
Our brokerage of U.S. Treasury and federal agency securities is also
generally conducted on a riskless principal basis and with the same client base
that participates in U.S. Treasury and federal agency repurchase agreements. The
clearance of these transactions also occurs at GSD-FICC. Dissemination of market
information to clients for these securities similarly relies on our proprietary
screen system and digital data feeds. We also use a proprietary front-end broker
interface developed by Tradesoft to monitor and manage trading activity and
market information, which has the capability of providing fully-automated client
execution capability if and when client demand for it grows.
We broker securities products to a broad institutional client base, but
mostly to banks, investment banks, broker-dealers and other financial
institutions.
INSTITUTIONAL SALES AND TRADING BUSINESSES
In our Maxcor institutional sales and trading businesses, we provide
research and execution to the institutional money management community, as well
as to corporations with publicly-traded securities and other institutional
clients. In these businesses, we specialize in municipal securities, corporate
bonds (including high grade and high yield), convertible securities and
equities. Our research analysts provide valuable trading ideas and market
insights to our client base. We make this research available by permissioning
clients to access our research web links at www.maxf.com and through other
distribution methods. In addition, through the communication and coordination
among our sales and trading groups, we allow clients to take advantage of
trading strategies across multiple asset classes. Our execution services are
designed to provide our clients with discreet placement of client orders with
minimal market impact.
We allocate a portion of our capital to support trading and inventory
positions in these businesses, often for the purpose of facilitating anticipated
client needs. We manage the risks associated with these positions by placing
trading guidelines on their size, rating and number of days held and with
certain hedging requirements. They are marked-to-market and monitored on a real
time basis. We also utilize a portion of our capital for investment positions in
municipal and other securities.
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INSTITUTIONAL SECURITIES FINANCING
In our Maxcor institutional securities financing business, we operate a
matched-book of offsetting securities purchased under agreements to resell
("reverse repurchase agreements") and securities sold under agreements to
repurchase ("repurchase agreements"). In this business, we enable institutional
customers to finance U.S. Treasury, federal agency and mortgage-backed
securities in their portfolios and to borrow such securities to make deliveries
on short sales. We also enable institutions with available cash to earn interest
through an investment in a secured financing arrangement. In reverse repurchase
agreements, we receive collateral in the form of securities and lend cash on
which we earn interest. The securities received as collateral are then used as
collateral to secure repurchase agreements whereby we borrow funds from another
institution and incur interest. A significant portion of our interest revenues
and our interest expense from securities indebtedness results from this
activity. We monitor the fair value of the securities received and delivered
under these agreements and obtain additional collateral or return excess
collateral when appropriate.
OTHER BUSINESSES
Through the Euro Brokers Securities Lending division of our
SEC-registered investment adviser, Maxcor Financial Asset Management Inc., we
conduct a securities lending business. In securities lending, we arrange for the
lending of securities held in our clients' portfolios to securities dealers and
other market participants who need them to manage their own positions. In
exchange for such loaned securities, which include U.S. Treasury and federal
agency securities, U.S. corporate bonds (but also non-dollar government
securities and corporate bonds) and equities, we arrange for our clients or
their custodians to receive either (i) cash collateral, for which we then direct
the reinvestment to earn a spread over the rebate rate the client is required to
pay in connection with the underlying loan, or (ii) non-cash collateral plus fee
income from the borrower. Our securities lending activities are executed solely
on an agency basis, so that collateral and cash funds of clients are never
received or held by us.
Maxcor Financial Services Inc. is a non-regulated subsidiary through
which we from time to time develop and initially conduct various new business
efforts unrelated to inter-dealer brokerage. It is also charged with managing
our firm's investment account.
Our information and data subsidiary, Maxcor Information Inc., is
charged with exploiting the data generated by our inter-dealer brokerage
businesses, including licensing such data to third party vendors.
COMMUNICATIONS NETWORK AND INFORMATION AND RELATED SYSTEMS
We conduct our inter-dealer brokerage businesses through a global
communications network and sophisticated computerized information systems over
which we receive and transmit current market information. Our proprietary screen
system and digital data feeds display to all screen-based clients real-time bid,
offer and transaction information for various products offered on the system.
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To ensure rapid and timely access to the most current market bids and
offers, the majority of our clients are connected to our brokers and information
feeds via dedicated, "always on," point to point telephone and data lines around
the world. For products that are screen-brokered, such as emerging market debt
and related options, U.S. Treasury and federal agency securities, repurchase
agreements and floating rate notes, we maintain an extensive private network to
connect our offices and the specific clients who trade in these products. In
this way, all such clients have the simultaneous ability to view and act upon
market bids and offers. We also have developed and deployed a real-time
distribution capability for our data feeds through both the Internet and
Bloomberg terminals, which permits us to customize data delivery in accordance
with our clients' desires and which also has allowed us to access a broader
range of clients without incurring the infrastructure costs associated with
expanding our private network.
We maintain teams of computer and communications specialists to provide
technological support to our network. We are continually upgrading our
technological facilities in order to access and collate market information and
redistribute it virtually instantaneously throughout our network or these
alternative delivery systems. Through the continued development and use of
proprietary software, computerized screen displays, vendor relationships,
digital networks and interactive capabilities, we strive to keep our
communication, technology and information systems as current as possible.
On many of our brokerage desks, the Tradesoft(R) system is used to
provide a sophisticated and automated broker station, enhancing brokers' ability
to monitor trading activity and relevant market information efficiently and
communicate analysis and transaction details to their clients. The system now
also incorporates a paperless ticket and confirmation process, which captures
relevant trade details and then generates automatic e-mail or fax confirmations
to clients. If and when client demand for it in our products grows, the
Tradesoft(R) system also retains the ability to be deployed to display real-time
bid, offer and transaction information to clients so that they can initiate
bids, offers and trades directly through a dedicated keypad at their
workstations, with or without contacting one of our voice brokers, using the
system's proprietary matching engine.
Our proprietary middle-office trade processing system (the "MEB
System"), which incorporates an electronic blotter system for post-trade data
input, is integrated with and captures transactions effected through either our
proprietary screen system or the Tradesoft(R) system, and thereafter transmits
those transactions for back office processing. The MEB System has effectively
replaced paper blotters on most securities desks and, by automating a number of
manually-intensive processes, has introduced numerous efficiencies to our trade
processing and handling, including the ability to handle significantly increased
trading volumes, identify unbalanced trade conditions as they occur, impose
tighter security and provide clients with more certain and rapid check-outs of
their transactions.
Most recently we have developed and begun to deploy an integrated
straight through processing system (the "STP System") that uses Tradesoft(R)
technology to capture data from the MEB System and enables clients to
electronically access transaction details for paperless updating of front-office
position-keeping (risk management) and back-office settlement systems.
Consistent with our vision of and commitment to a hybrid approach to servicing
our clients, the STP System is intended to enable us to provide the same trade
processing services as an electronic trading platform, but without foregoing the
front-end execution services of a voice broker. We believe that this is an
important service and efficiency desired by our largest and most active clients
and provides the enhanced functionality now required in ever-increasing
electronic communications.
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Although we continue to explore whether more of our inter-dealer
brokerage businesses should become screen-based or incorporate a higher degree
of automation, we believe that our clients' diverse needs in each of our
products require us to remain flexible in our approaches. As mentioned above, we
currently believe that a hybrid approach, in which we provide both quality voice
brokering and advanced screen system and other technology, including the front
end Tradesoft(R) broker station, paperless confirmations and the STP System,
will best enable us to build liquidity, maintain a satisfied employee base and
provide current technology solutions to meet the requirements of our most active
clients.
REVENUES AND EXPENSES
Our revenues currently are derived primarily from commissions related
to our inter-dealer brokerage businesses. Generally, we receive a commission
from both counterparties in a trade, although in trades of certain products only
one party pays a commission. The dollar amount of the average transaction
generating a commission varies significantly by the type of product and the
duration of the transaction. Similarly, the applicable commission will vary
according to product and services required and may also reflect discounts for
high transaction volumes or other client rebates. We also generate commissions
on sales and trading transactions executed on an agency or matched riskless
principal basis.
Other sources of revenues include (1) the net principal gains or losses
from transactions in our sales and trading businesses involving the assumption
of market risk for a period of time and from investment positions, (2) profits
or losses from the Tokyo Venture, (3) interest income, derived primarily from
reverse repurchase agreements, securities positions, cash and cash equivalents
and deposits with clearing organizations, (4) income from the sale of data and
financial information generated from our brokerage businesses, and (5) foreign
exchange gains and losses.
Interest expense on securities indebtedness, primarily on repurchase
agreements and margin borrowings, is deducted from gross revenues to arrive at
net revenues.
The largest single component of our expenses is compensation paid to
our brokerage personnel (which includes traders and sales persons in our
institutional sales and trading businesses). Attracting and retaining qualified
brokerage personnel with strong client relationships is a prerequisite in our
business and in the brokerage business in general. Brokerage personnel are
generally compensated by a combination of fixed salary and incentive payments
based on commissions or credits generated by them or on the net profitability of
their respective departments. For this reason, compensation expense frequently
will increase or decrease in rough proportion to revenues, although the fixed
salary component can skew the correlation in businesses with declining revenues
by causing decreases in compensation to lag behind decreases in revenues, and
starting salaries for new hires in businesses for which revenue growth is sought
can increase compensation expenses in advance of realizing the anticipated
revenue growth. To manage this area, we include performance-based salary
adjustment provisions in substantially all of our broker contracts and closely
track revenues and compensation expenses (as well as other direct costs) by
department (which may involve one or more products) and by individual, at each
location.
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Most of the markets in which we operate are highly efficient, offering
participants immediate access and enormous liquidity. Some markets are subject
to a high degree of volatility. Even the slightest variation in price can make
the difference between missing or executing a transaction. Consequently, many of
our businesses depend heavily on the use of direct line voice communications,
advanced telephone equipment, real-time computerized screen systems and digital
feeds and proprietary pricing software in order to ensure rapid trade executions
and timely analyses for our clients. For this reason, we continually need to
expend significant resources on the maintenance, expansion and enhancement of
our communication and information system networks. After compensation, such
costs have historically represented our second largest item of expenditure.
The costs of maintaining sophisticated trading room environments and a
worldwide data and communications network comprise another significant portion
of our expenses, and, with the advent of electronic execution and matching
systems, the need to invest in new technology has also increased. Our ability to
compete effectively is significantly dependent on our ability to maintain a high
level of client service, through our proprietary software, computerized screen
displays and digital networks, the Tradesoft(R) systems, the MEB System, the STP
System and our provision of whatever additional systems are demanded by clients
at any given time. It is this infrastructure and technological commitment that
enables us to support our existing client base and product lines, as well as
provide a platform for offering brokerage or other services in additional or
newly developing financial instruments. Although we maintain sizeable management
information services and communications departments, we will also license
technology from others, or outsource infrastructure or technology projects,
where practical and consistent with our business goals, in order to manage our
fixed costs in these areas.
Direct client contact, including entertainment, is also an integral
part of our marketing program and represents another significant component of
our expenses. We continuously monitor and make it a priority to manage these
expenditures in a focused and coordinated fashion.
To grow revenues and stay competitive, we constantly need to analyze
and pursue growth opportunities in both new and existing product lines. Product
expansion, when undertaken, however, generally leads to an increase in the
number of brokerage personnel, and therefore in compensation expense, since the
markets usually require brokerage personnel to specialize in a single product or
group of related products, rather than function as market generalists. Product
expansion, and the effort to grow market share, also typically results in
increased entertainment expenses and the increased infrastructure and
communication costs associated with configuring a new desk and delivering its
product to the necessary client base.
CAPITAL STRUCTURE HISTORY
Our initial public offering occurred in December 1994, and we issued a
total of 3,583,333 units, each comprised of one share of common stock, $.001 par
value, and two redeemable common stock purchase warrants. The offering raised
net proceeds of approximately $20 million.
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In our August 1996 acquisition of Euro Brokers Investment Corporation,
we issued aggregate consideration consisting of approximately $22 million in
cash, 4,505,666 shares of common stock and 7,566,625 Series B redeemable common
stock purchase warrants, economically identical in their terms to the initial
public offering warrants.
In November 1997, we consummated an exchange offer, on the basis of
0.1667 of a share of common stock for each warrant of either series (the
"Exchange Offer"), pursuant to which we issued an aggregate of 2,380,975 shares
of common stock in exchange for 14,283,296 (or approximately 95.1%) of the
then-outstanding warrants. As a result of the Exchange Offer, the warrants (and
any remaining, related units) were delisted from trading on The Nasdaq Stock
Market(R) and deregistered under the Securities Exchange Act of 1934, as
amended.
Although delisted and deregistered, each warrant entitled the holder
thereof to purchase from us one share of Common Stock at an exercise price of
$5.00 per share. Each warrant was also redeemable by us at a price of $.01 if
the last sales price of the common stock has been at least $8.50 per share for
20 consecutive trading days. During April 2002, 492,795 shares of common stock
were issued upon the exercise of a like number of warrants, for total proceeds
of $2,463,975. The remaining warrants expired on April 12, 2002.
In October 1998, we issued 2,000 shares of a newly created Series B
cumulative redeemable preferred stock to our 15% equity affiliate, Yagi Euro,
for an aggregate purchase price of $2 million. The preferred stock paid a
quarterly cumulative dividend, in arrears, at an annual rate of 2%, and was
subject to optional redemption by us at any time, and to mandatory redemption on
the tenth anniversary of its issue. The preferred stock did not have conversion
rights or, unless there was a payment default, voting rights. In June 2001, upon
the sale of our investment in Yagi Euro, we redeemed the preferred stock at its
stated value, together with accrued and unpaid dividends thereon.
In June 1999, we repurchased 2,986,345 shares of common stock from
various partnerships of the venture capital firm, Welsh, Carson, Anderson &
Stowe. The aggregate purchase price was approximately $5.23 million, or $1.75
per share. The shares repurchased represented approximately 26.4% of the shares
of common stock then outstanding.
In May 2000, our Board of Directors authorized a repurchase program for
up to 10% of our then outstanding common stock, or 833,744 shares, with
purchases to be made from time to time as market and business conditions
warranted, in open market, negotiated or block transactions. In January 2001, we
completed this repurchase program for an aggregate purchase price of $1,187,650,
or $1.42 per share, and our Board authorized an additional repurchase of up to
787,869 shares, or 10% of the then outstanding common stock. In July 2001, this
repurchase program was completed for an aggregate purchase price of $1,907,660,
or $2.42 per share, and our Board authorized an additional repurchase of up to
709,082 shares, or 10% of the then outstanding common stock. In the week after
the September 11th terrorist attacks, this authorization was expanded by 490,918
shares, to a total of 1,200,000 shares, followed by a further expansion in 2003
of 700,000 shares, to a total of 1,900,000 shares. Through December 31, 2003, we
had purchased 1,205,807 shares under this expanded repurchase program at an
aggregate purchase price of $7,667,187, or $6.36 per share.
10
In August 2000, we issued from treasury 375,000 shares of common stock
as part of the consideration for our acquisition of Tradesoft. In August 2001,
we received 22,528 of these shares back into treasury as part of a post-closing
adjustment valued at approximately $82,000.
Through December 31, 2003, 909,562 shares of common stock were issued
pursuant to options exercised under our 1996 Stock Option Plan and our 2002
Stock Option Plan. The 1996 Stock Option Plan provides for options to purchase a
maximum of 1,800,000 shares. The 2002 Stock Option Plan provides for incentive
awards in the form of stock options, stock appreciation rights, restricted stock
and bonus awards. A total of 1,500,000 shares were authorized for awards under
the 2002 Stock Option Plan. In connection with certain of these option
exercises, we received 126,123 shares into treasury as consideration for
exercise prices aggregating $1,142,828.
In April 2002, we issued 500,000 common stock purchase warrants to
employees under a newly established warrant program to provide inducements and
incentives in connection with the formation of a new leveraged finance
department (the "Leveraged Finance Warrants"). The Leveraged Finance Warrants
issued had an exercise price of $5.875 with vesting at the rate of 50% on the
second anniversary of the grant date and 25% on each of the third and fourth
anniversaries. In March 2003, 75,000 of the Leveraged Finance Warrants were
cancelled, and the remaining 425,000 were cancelled in January 2004.
During 2003, we declared and paid our first two quarterly common stock
dividends, each at the rate of $.0625 per share ($.25 per share on an annualized
basis).
At December 31, 2003, we had outstanding 7,138,723 shares of common
stock, 1,547,938 stock options and 425,000 Leveraged Finance Warrants.
PERSONNEL
As of February 29, 2004, we and our businesses employed 387 brokerage
personnel (including trainees), plus an additional administrative staff,
including officers and senior managers, of 117 persons, for a total employee
headcount of 504. Of the brokerage personnel, 230 were located in the U.S., 135
were located in Europe, and 22 were located in Japan, with the balance
distributed among our other office locations. None of our employees are covered
by a collective bargaining agreement. We consider our relations with employees
to be good and regard compensation and employee benefits to be competitive with
those offered by other inter-dealer brokerage firms.
SEGMENT AND GEOGRAPHIC DATA
Note 22 to the Consolidated Financial Statements contains summary
financial information, for each year of the three-year period ended December 31,
2003, with respect to each of our reportable operating segments, which are based
upon the countries in which they operate.
11
COMPETITION
The inter-dealer brokerage industry is highly competitive, with the
success of a company within the industry dependent on a variety of key factors.
These factors include:
o the experience of and extent of client networks developed by the
firm and its personnel;
o the range of products and value-added services offered;
o commission rates;
o the quality, speed and reliability of service;
o proficiency in and ability to implement current technology,
including electronic execution and straight through processing;
o salaries and other cost structures; and
o capital resources and perceived creditworthiness.
While there are not many large international inter-dealer brokerage
firms and entry into the industry is costly, we encounter intense competition in
all aspects of our businesses from a number of companies that have significantly
greater resources than us. Recent consolidations in the industry have narrowed
the field of competition somewhat, but have also produced combined entities with
even greater resources. Moreover, with the recent advent of electronic brokerage
in non-equity markets, new potential competitors have emerged that do not have
traditional inter-dealer brokerage roots. In addition, dealer firms within a
consortium platform could elect to conduct a disproportionate or increased share
of their business between other member firms, or even to deal directly with each
other, thus reducing liquidity in the traditional inter-dealer markets and
potentially eroding our market shares.
The recent pace of consolidation in the banking and financial services
community continues to reduce the number of clients in the marketplace and,
accordingly, has further increased the competition among inter-dealer brokerage
firms and potentially the downward pressure on already low commission rates. As
a result, increases in market volumes do not necessarily result in proportionate
increases in brokerage commissions and revenues.
During the last several years, the industry has seen an acceleration of
the development of electronic execution systems that claim to provide fully
automated trade matching. The electronic system first deployed by eSpeed, Inc.
in late 1999 successfully garnered liquidity in the U.S. Treasury markets, and
continues to do so even after the horrendous losses that firm suffered as a
result of the September 11th attacks. Another well-financed competitor, ICAP
plc, has acquired BrokerTec, an inter-dealer electronic brokerage exchange
formerly owned by a consortium formed by the leading investment banks. In
practice, these systems so far have proved most viable in markets involving very
standardized products, such as U.S. Treasuries, spot foreign exchange,
commodities and U.S. equities. We believe that more complex financial vehicles,
in particular derivatives, are less amenable to fully electronic matching, and
that clients in these markets are not inclined to forego talking to voice
brokers for information and execution. However, various competitors continue to
pursue electronic execution platforms for a variety of derivative products, and
it can be expected that significant efforts and resources will continue to
12
be devoted by these competitors and others to trying to increase the number and
penetration of such automated trading platforms across all profitable brokerage
markets.
The further development and successful deployment of such electronic
systems could negatively affect our market shares and ultimately have material
adverse effects on our businesses. Although we are devoting substantial
financial and other resources to ensure the success of our electronic brokerage
and technology initiatives (described above under "Communications Network and
Information and Related Systems"), our ability to execute successfully thereon
is subject to a number of uncertainties, not all of which are within our
control. These include, but are not necessarily limited to, the speed, capacity
and interfaces of systems performing acceptably under both normal and stress
conditions, the availability of sufficient funds to develop, refine and promote
further the systems, the retention of sufficient training and maintenance
resources, the desire for and acceptance of the systems by clients, both at the
trader and the information technology department levels, the internal brokerage
personnel support for the systems, the timing and success of deployment of
competitive systems, and market conditions at the time of deployment.
We are inherently reliant on relationships with clients that develop
over time, and certain of our brokerage personnel have established long-term
associations with clients. Our success depends to a significant extent on these
relationships and the service we provide our clients. The loss of one or more of
our key employees, who are often the target of aggressive recruitment efforts by
competitors within the industry, could have a material adverse effect on us.
Moreover, the highly competitive hiring environment by itself creates upward
pressures on compensation that can reduce profit margins. While we have entered
into employment agreements with, and granted stock options to, many of our key
employees, there can be no assurance that such employment agreements or
stock-based compensation will be effective in retaining such persons' services
or that other key personnel will remain with us indefinitely. Nor can there be
any guarantee that we will be able to attract and retain qualified, experienced
individuals, whether to replace current personnel or as a result of expansion,
because competition in the brokerage industry for such individuals is intense.
REGULATION
Our businesses are subject to extensive regulation at international,
federal and state levels by various regulatory bodies which are charged with
safeguarding the integrity of the securities and other financial markets and
protecting the interests of clients participating in those markets.
Our broker-dealer subsidiary, Maxcor Financial Inc. ("MFI"), is
registered with the SEC, all applicable states, and is a member of NASD.
Broker-dealers are subject to regulations that cover all aspects of the
securities business, including initial licensing requirements, sales and trading
practices, safekeeping of clients' funds and securities, capital structure,
record-keeping and the conduct of directors, officers and employees. The SEC,
other governmental regulatory authorities, including state securities
commissions and self-regulatory organizations, such as NASD in the case of MFI,
have broad oversight powers, including the ability to institute administrative
proceedings that can result in censure, fine, the issuance of cease-and-desist
13
orders, the suspension or expulsion of a broker-dealer, its officers or
employees or other similar consequences.
At the end of 2001, MFI established a new London branch office in order
to conduct certain securities businesses that were previously being conducted in
a separate, London-based subsidiary. As a result, these operations of MFI,
although primarily overseen by NASD, are also subject to oversight by the
London-based regulatory body, the Financial Services Authority.
MFI is also a member of the GSD-FICC for the purpose of clearing
transactions in U.S. Treasury and federal agency securities and repurchase
agreements collateralized by such instruments. Such membership requires MFI to
maintain minimum net capital of $10,000,000, including a minimum deposit with
GSD-FICC of $5,000,000. In addition, as a result of the upgrading of MFI's
GSD-FICC membership to dealer status in 2003, MFI is required to maintain a
minimum net worth (including subordinated borrowing) of $25 million.
MFI is also registered with the Commodity Futures Trading Commission as
a futures commission merchant and is a member of the National Futures
Association. As such, any business activities by MFI in the futures and
options-on-futures markets would be subject to regulation by these bodies.
Our subsidiary, Maxcor Financial Asset Management Inc. ("MFAM"), is a
SEC-registered investment adviser, pursuant to its securities lending
activities. As a result, MFAM's investment advisory business is subject to
various federal and state laws and regulations that generally grant supervisory
agencies and bodies broad administrative powers, including the power to limit or
restrict MFAM from carrying on its investment advisory business in the event
that it fails to comply with such laws and regulations and/or to impose other
censures and fines.
Our London capital markets subsidiary, Euro Brokers Limited ("EBL"), is
a Type D registered firm with the Financial Services Authority in the U.K.,
required to maintain a financial resources requirement generally equal to six
weeks average expenditures plus the amount of less liquid assets on hand (a $5.7
million requirement at December 31, 2003).
Our other foreign businesses are also subject to regulation by the
governments and regulatory bodies in their countries, including: (i) the Bank of
Japan and the Japanese Ministry of Finance in Japan and (ii) the Banking and
Securities National Commission in Mexico. The compliance requirements of these
different overseer bodies may include, but are not limited to, net capital or
stockholders' equity requirements.
We are also subject to SEC rules regarding the regulation of
alternative trading systems ("Regulation ATS"). Regulation ATS imposes
significant reporting and recordkeeping requirements on so-called "alternative
trading systems" and imposes certain substantive requirements, primarily
depending upon the scope of coverage and market share of the alternative trading
system. Such requirements may include maintaining transparency of certain
pricing information, providing fair and equal access to the system, and taking
necessary steps to ensure the capacity, integrity and security of the system. A
number of our brokerage businesses are subject to Regulation ATS and its
requirements.
14
The passage by Congress of the Sarbanes-Oxley Act of 2002 has imposed,
and required the promulgation by the SEC of, numerous rules and regulations
directly impacting the operation of public companies such as ourselves. These
include mandates for: the composition and member qualification of boards of
directors and audit committees, the enhanced independence of accounting firms
and the manner and content of their communications with audit committees,
rigorous certification procedures for financial statements and SEC filings, the
establishment and review of and the making of disclosures with respect to
internal controls and procedures, the use and reconciliation to generally
accepted accounting principles in the United States ("GAAP") of non-GAAP
financial information, internal and outside counsel reporting requirements
relating to evidence of material violations, disclosures with respect to the
adoption of or waivers under codes of ethics, and, generally, significantly
expanded, accelerated and more frequent public reporting and disclosure
requirements in SEC filings. The Nasdaq Stock Market(R), in the wake of the
Sarbanes-Oxley Act of 2002 and these SEC actions, also has promulgated
significant revisions to its listing standards to encompass many additional
requirements related to corporate governance and other matters.
The foregoing requirements, and additional legislation and regulations,
changes in rules promulgated by the SEC or other U.S. federal and state
governmental regulatory authorities, self-regulatory organizations or clearing
organizations, as well as non-U.S. governments or governmental regulatory
agencies, or changes in the interpretation or enforcement of laws and rules, may
directly affect our manner of operation and profitability, including as a result
of the costs and management time required for compliance. In addition, any
expansion of our activities into new areas may subject us to additional
regulatory requirements that could similarly affect our manner of operation and
profitability.
CAUTIONARY STATEMENTS
As provided under the Private Securities Litigation Reform Act of 1995,
we wish to caution investors that the following factors, among others (including
the factors discussed above under the "Revenues and Expenses," "Competition" and
"Regulation" headings, and the factors discussed below under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 7A, "Quantitative and Qualitative Disclosures about Market
Risk"), could affect our results of operations and cause such results to differ
materially from those anticipated in forward-looking statements made in this
report and elsewhere by us or on our behalf to the public. Please also refer to
"Forward-Looking Statements" below, at page 39.
15
Adverse changes in economic and market conditions could negatively impact our
business.
Our brokerage businesses and profitability are directly affected by
economic and market conditions, including the volatility of the securities
markets, the volume, size and timing of securities transactions, the level and
volatility of interest rates, and the economy in general. Our businesses
generally benefit if these factors cause trading volumes in the instruments we
broker to increase and, conversely, can suffer if they cause such trading levels
to decrease. Lower trading volumes are likely to reduce our revenues, which
would generally negatively impact our profitability because a portion of our
costs is fixed.
Market and economic uncertainties are heightened in the current geopolitical
environment.
In the current geopolitical environment following the September 11th
terrorist attacks, there is an increased uncertainty in the performance of the
financial markets and the economy as a whole, as well as specifically in the New
York financial community. Any additional terrorist acts, or the prospect
thereof, and governments' military and economic responses to them, may
significantly affect the financial markets and the economy, as well as resulting
trading volumes.
Unanticipated system or technology failures internally or externally could
negatively impact our business or financial results.
To remain competitive in our industry, we continuously need to expend
significant resources on the maintenance, expansion and enhancement of our
communication networks, information systems and other technology, and our
business is highly reliant on these systems. Many of these systems are internal,
but others are provided by third-party suppliers over whom we have no control,
such as telephone companies, online data vendors and software and hardware
vendors. It is an ongoing risk that the systems we currently have or in the
future implement, or the software underlying these systems, will fail in some
fashion or be inadequate to the task. Although we believe that ongoing upgrades
to our trade processing systems, together with periodic stress-testing and
monitoring, reduces the likelihood of a material failure of our internal
systems, there can be no assurance that there will not be unanticipated system
or technology failures, internally or externally, that could negatively impact
our business or financial results. Moreover, to the extent we deploy
technologies, such as straight through processing, that are relied upon by our
clients and incorporated into their internal systems, the business reputation
and other risks to us of a technology failure may be exacerbated.
An increase in the occurrence of "out trades" could have a material adverse
effect on our financial condition or results.
Our core inter-dealer brokerage business primarily involves one or more
of our subsidiaries acting as an intermediary, matching the trading needs of our
predominantly institutional client base by providing specialized services. Some
of these transactions are executed on a name give-up basis, that is, once the
specific economic terms of a proposed transaction are agreed, the names of the
individual counterparties are disclosed and, subject to acceptance of the
credit, the transaction is confirmed to and completed directly by both
counterparties. Other transactions are completed with our broker-dealer
16
subsidiary acting as a matched riskless principal, with the respective parties
to the transaction knowing the subsidiary as the counterparty. The transactions
are then settled through one of the clearing firms or organizations with which
the subsidiary has a contractual relationship. In the process of executing
brokerage transactions, from time to time in the fast moving markets in which
our subsidiaries and brokers operate, miscommunications or other errors can
arise, such as parties knowing different trade details or transactions being
completed with only one counterparty ("out trades"), thereby creating a
potential liability for us. If the out trade is promptly discovered, thereby
allowing prompt correction or disposition of the unmatched position at or around
the same price, the risk to us is usually limited. If discovery is delayed, the
risk is heightened by the increased possibility of intervening market price
movements prior to such correction or disposition. Although out trades usually
become known at the time of or later on the day of the trade, on occasion they
are not discovered until later in the settlement process. When out trades occur
and are discovered, our policy is to have the resultant position corrected or
disposed of promptly. Accordingly, the cost of individual out trades can vary
widely, although on an aggregate basis in each of our last three fiscal years
they have approximated only 1% of total commission income. The occurrence of out
trades generally rises with increases in the volatility of the market and,
depending on their number and amount, have the potential to have a material
adverse effect on our financial condition or results of operations.
If any of our clearing agents terminate our contracts with them, our business
could suffer.
Our broker-dealer subsidiary, Maxcor Financial Inc., has contractual
arrangements with a variety of clearing firms and organizations for purposes of
clearing and settling the various securities transactions it brokers. Each
clearing firm or organization typically handles only certain types of securities
for MFI. Thus, one firm clears its emerging market debt transactions, another
clears its municipal securities, corporate bond and equity transactions and
another two collectively clear different aspects of its transactions in U.S.
Treasury and federal agency securities and repurchase agreements collateralized
by such instruments. Without the capital resources and services of these firms
and organizations which generally step in and act as principal in substitution
for MFI, MFI's business, and our financial results, could be materially
adversely impacted. Although most of the clearing contractual arrangements have
existed for some time, they are generally terminable by the clearing firm upon
reasonably short notice. We believe that in each category of securities there
are alternative clearing firms or arrangements that could be put into place, but
not necessarily with immediate effect or upon as favorable terms. Accordingly,
if any of our existing clearing agreements were to be terminated, and we were
unable to establish in timely fashion a new clearing arrangement with another
clearing firm or organization on financial and other terms acceptable to MFI, we
might suffer an interruption in or not be able to continue brokering the
particular product that was the subject of the terminated clearing arrangement,
and we could suffer a material adverse effect on our results of operations and
financial condition.
The securities settlement process exposes MFI to credit and other risks that can
negatively impact our business and profitability.
The securities settlement process for principal trades brokered by MFI
and for its institutional securities financing operations exposes MFI to various
risks that individually or in combination could have a negative impact on its
17
business, profitability and results of operations. Credit risk exists because
there is always the possibility that a counterparty that was solvent or believed
to be solvent on trade date has become insolvent and incapable of performing by
the time of settlement. This risk is mitigated in part, but not fully, by short
settlement cycles, the predominantly institutional nature of MFI's client base,
and the fact that some (but not all) of MFI's clearing agreements provide for
the relevant clearing firm or organization to assume all counterparty risk,
including credit risk, once the parties to and the terms of the trade have been
confirmed on trade date by the clearing firm or matched through its related
settlement facilities. Financing risk exists because if the trade does not
settle timely, either because it is not matched immediately or, even if matched,
one party fails to deliver the cash or securities it is obligated to, the
resulting unbalanced position may need to be financed, either directly by MFI or
through one of its clearing firms at MFI's expense. These charges may be
recoverable by claiming interest from the failing counterparty, but sometimes
are not. Finally, in instances where the unmatched position or failure to
deliver is prolonged, there may also be regulatory capital charges required to
be taken by MFI, which depending on their size and duration, can limit MFI's
business flexibility or even force the curtailment of those portions of MFI's
business requiring higher levels of capital.
Events that negatively impact our overseas business partners may negatively
affect our operations.
Many of our overseas brokerage operations are conducted in conjunction
with independent business partners, such as Nittan Capital Group in Tokyo, and
correspondent brokers, such as Delsur S.A. in Buenos Aires and Codebel S.A. in
Nyon. Some of these entities may compete with us in other products, and their
business interests may not always coincide with ours. Although such brokerage
operations are generally subject to detailed governing arrangements, any event
which negatively affects the financial condition or management of any of our
partners or correspondent brokers, or their willingness otherwise to conduct
such brokerage operations in conjunction with us (or vice versa), may have a
negative impact on our operations.
We may be subject to litigation and arbitration, which could limit our
profitability.
Many aspects of our businesses involve varying risks of liability. Over
the years, participants in the inter-dealer and institutional brokerage industry
have been parties to or otherwise involved in numerous litigations,
arbitrations, claims and investigations, including employee claims alleging
discrimination or defamation in connection with terminations, client claims
alleging the occurrence of out trades or other errors in the handling of trade
orders, clearing firm claims for financing charges or other liabilities
associated with out trades or settlement problems, and competitor claims
alleging theft of trade secrets, unfair competition or tortious interference in
connection with new employee or desk hires or intellectual property infringement
in connection with new product launches. To the extent we become subject to any
such claims or actions that are significant, a settlement or judgment related
thereto could have a material adverse effect on our financial condition or
results of operations.
18
Employee misconduct or errors can hurt our business.
Although we have significant procedures and other checks and balances
in place designed to prevent and/or detect employee misconduct, including many
that are mandated by regulators, it is not always possible to deter employee
misconduct and our precautions may not always be effective. Misconduct by
employees could include hiding unauthorized activities, improper or unauthorized
activities on behalf of a client, or improper use of proprietary or confidential
information. Any of the foregoing types of misconduct could subject us to
financial losses, regulatory sanctions and/or harm our reputation, and thereby
hurt our results of operations and business. Similarly, employee errors,
including mistakes recording or executing transactions for clients, may cause us
to record transactions that clients later disavow and refuse to settle, exposing
us to risk of material loss until the errors in question are detected and
resolved. As with out trades, adverse movements in the prices of the instrument
involved in an error transaction before it is detected and unwound, reversed or
otherwise corrected can increase this risk.
We have market risk exposure from trading and inventory positions held and on
our matched book of reverse repurchase agreements and repurchase agreements.
We allocate a portion of our available capital to our institutional
sales and trading operations to support trading and inventory positions. The
positions are generally intended to be held short term, often for the purpose of
facilitating anticipated client needs. Where available, they are financed by
margin loans provided by our clearing firms. As a result, we have market risk
exposure on these securities, varying based on the size of the overall
positions, the terms of the securities themselves, and the number of days the
positions are held. The aggregate market value of such positions is included in
the "securities held at clearing firm and trading contracts" line of our
Consolidated Statements of Financial Condition. Although such positions are
marked to market and carefully monitored on a real-time basis, resulting
principal gains and losses from such positions can on occasion have a
disproportionate effect, positive or negative, on our results of operations for
any particular reporting period. For example, see Note 20 to the Consolidated
Financial Statements, describing a 2003 loss recorded associated with MFI's
trading in when-issued contracts for NTL, Inc. common stock. In addition, from
time to time we hold small amounts of municipal and other securities in the
firm's investment account, which can create similar risk exposures and effects.
We also have market risk exposure in our institutional securities financing
business during the period in which a reverse repurchase agreement matures prior
to or after the maturity of an offsetting repurchase agreement if we have failed
to match these maturity dates precisely.
The lack of diversification in our business could negatively affect our
financial condition or results of operations; conversely, managing our growth
effectively can be difficult.
From a revenue perspective, our inter-dealer brokerage businesses
account for substantially all of our revenues denoted as "commission income" in
our Consolidated Statements of Operations. Accordingly, the prospects for our
performance and the market prices for our common stock are highly dependent upon
the performance of the inter-dealer brokerage businesses. This lack of
diversification could negatively affect our financial condition or results of
operations. As a result, we have spent considerable time, resources and efforts
in attempting to grow and diversify our business operations over the last few
19
years, including by building our institutional sales and trading businesses and
our institutional securities financing business. However, these efforts place,
and are expected to continue to place, strains on our management and other
personnel and resources and require timely and continued investment in
facilities, personnel and financial and management systems and controls.
Accordingly, there can be no assurances that our growth and diversification
efforts will be successful or, if achieved, whether they will positively or
negatively affect our financial condition or results of operations.
20
ITEM 2. PROPERTIES
We and our businesses maintain offices in each of the following
locations: New York, New York; London, England; Tokyo, Japan; Stamford,
Connecticut; Nyon, Switzerland (with a registered office in Geneva); and Mexico
City, Mexico. Our subsidiaries lease all of their office space, and we have
material lease obligations with respect to our New York and London premises. In
New York, we occupy an aggregate of approximately 62,000 square feet on the 18th
and 19th floors at One Seaport Plaza in lower Manhattan under a lease expiring
in 2014. In London, we occupy approximately 36,000 square feet of space in
London's financial center, The City, under a lease expiring in 2018.
We believe that all of our other facilities are suitable and adequate
for their present and anticipated purposes. See Note 19 to the Consolidated
Financial Statements for further information regarding future minimum rental
commitments under our existing leases.
ITEM 3. LEGAL PROCEEDINGS
Our businesses are subject to various legal proceedings, arbitrations
and claims that generally arise in the ordinary course. Although the results of
such matters cannot be predicted with certainty, based on available information
and advice of counsel, management believes that resolving any currently known
matters, after taking into account reserves already established, will not have a
material adverse impact on our consolidated financial condition (although they
may be material to our results of operations for any particular period). For
additional discussion of certain pending matters and reserve levels, see Note 20
to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2003.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock currently trades on The Nasdaq Stock Market(R) under
the symbol "MAXF." The following table sets forth the range of high and low
sales prices for our common stock, as reported by The Nasdaq Stock Market(R),
for our last two fiscal years.
COMMON STOCK: High Low
---- ---
YEAR ENDED DECEMBER 31, 2003
----------------------------
First Quarter................................ $ 8.090 $ 6.000
Second Quarter............................... 10.660 6.680
Third Quarter................................ 14.500 9.120
Fourth Quarter............................... 16.350 11.930
YEAR ENDED DECEMBER 31, 2002
----------------------------
First Quarter................................ $ 6.510 $ 5.000
Second Quarter............................... 7.920 5.250
Third Quarter................................ 6.300 3.850
Fourth Quarter............................... 6.700 5.050
As of March 29, 2004, there were 35 holders of record of our common
stock. We are aware that certain holders of record hold a substantial number of
shares of common stock as nominees for a significant number of beneficial
owners. Based on a March 2004 inquiry made by ADP, we believe there currently
are approximately 1450 beneficial owners of our common stock.
In 2003, we declared and paid our first two quarterly dividends, each
at a rate of $.0625 per share ($.25 per share on an annualized basis). It is our
current intention to continue this dividend policy in 2004. In addition, we have
over the past several years repurchased significant amounts of our common stock,
both in privately-negotiated transactions and through an open market repurchase
program.
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.
22
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS
Revenue:
Commission income $ 176,497,549 $ 149,428,132 $ 138,003,085 $ 122,613,654 $ 132,892,282
Insurance recoveries 11,106,063 11,098,135 4,498,144
Interest income 6,280,695 2,147,274 2,306,044 1,823,285 1,879,500
Principal transactions 6,122,442 8,720,422 8,932,861 2,627,169 1,215,233
Other income ( 1,140,241) ( 843,142) 1,083,431 4,741,415 1,318,454
------------- ------------- ------------- ------------- -------------
Gross revenue 198,866,508 170,550,821 154,823,565 131,805,523 137,305,469
Interest expense on securities indebtedness 4,117,319 147,865 444,174 329,919 497,773
------------- ------------- ------------- ------------- -------------
Net revenue 194,749,189 170,402,956 154,379,391 131,475,604 136,807,696
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Compensation and related costs 126,323,608 107,024,194 106,619,297 92,061,672 93,392,948
Communication costs 12,989,853 10,597,126 9,870,217 11,007,091 13,193,446
Travel and entertainment 9,833,755 7,406,116 6,493,462 6,620,974 6,797,740
Occupancy and equipment rental 6,623,731 4,490,356 3,967,255 5,127,875 4,963,755
Clearing and execution fees 3,865,514 3,311,759 3,511,712 3,307,802 3,005,785
Depreciation and amortization 3,220,577 2,405,834 3,598,580 4,008,937 4,365,504
Charity Day contributions 982,300 1,219,233
Other interest expense 406,772 151,214 222,213 265,038 336,162
Costs related to World Trade Center
attacks 3,204,468 1,590,060
Restructuring costs 541,961 321,000
General, administrative and other expenses 7,220,567 4,933,483 6,619,527 5,161,550 5,507,156
------------- ------------- ------------- ------------- -------------
171,466,677 144,743,783 142,492,323 128,102,900 131,883,496
------------- ------------- ------------- ------------- -------------
Income before provision for income taxes,
minority interest, income from equity
affiliate and extraordinary item 23,282,512 25,659,173 11,887,068 3,372,704 4,924,200
Provision for income taxes 9,749,282 12,130,758 2,174,673 2,710,482 545,216
------------- ------------- ------------- ------------- -------------
Income before minority interest, income
from equity affiliate and extraordinary
item 13,533,230 13,528,415 9,712,395 662,222 4,378,984
Minority interest ( 175,985) ( 981,791) ( 683,985) 1,203,987 ( 270,128)
Income (loss) from equity affiliate 9,992 135,890 ( 1,576,644)
------------- ------------- ------------- ------------- -------------
Income before extraordinary item 13,357,245 12,546,624 9,038,402 2,002,099 2,532,212
Extraordinary item 2,957,547
------------- ------------- ------------- ------------- -------------
Net income $ 16,314,792 $ 12,546,624 $ 9,038,402 $ 2,002,099 $ 2,532,212
============= ============= ============= ============= =============
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Total assets $1,663,126,636 $ 123,477,959 $ 279,317,292 $ 70,906,347 $ 72,467,958
Obligations under capitalized leases 703,944 842,399 204,252 335,635 493,367
Notes payable 447,978 1,723,169 1,799,870
Revolving credit facility 7,500,000 674,282
Total liabilities 1,603,082,134 70,477,645 241,021,098 37,257,798 38,162,466
Minority interest 5,407,228 3,979,291 3,407,628 4,885,896
Redeemable preferred stock 2,000,000 2,000,000
Stockholders' equity 60,044,502 47,593,086 34,316,903 28,240,921 27,419,596
PER SHARE INFORMATION
Income before extraordinary item -- basic $ 1.91 $ 1.72 $ 1.23 $ .23 $ .26
Extraordinary item -- basic .42
Net income -- basic 2.33 1.72 1.23 .23 .26
Income before extraordinary item -- diluted 1.62 1.53 1.16 .23 .25
Extraordinary item -- diluted .36
Net income -- diluted 1.98 1.53 1.16 .23 .25
Book value 8.41 6.56 4.88 3.48 3.29
Weighted average common shares
outstanding -- basic 6,987,415 7,304,284 7,357,017 8,374,166 9,711,974
Weighted average common shares
outstanding -- diluted 8,228,599 8,210,638 7,764,667 8,374,166 9,846,257
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
We are proud to report that 2003 was another year of record financial
performance for us, on the heels of a 2002 that, until this year, had been our
best performing year ever.
Our basic measures of financial performance were up across the board in
2003 over 2002. On a GAAP basis, net income increased by 30%, to $16.3 million,
or $1.98 per share, from $12.5 million, or $1.53 per share. Net revenues
increased by 14%, to $195 million from $170 million in 2002. Overall
stockholders' equity surged 26%, to $60.0 million (a per share book value of
$8.41) from $47.6 million (a per share book value of $6.56).
Because we settled our September 11th-related property damage insurance
claim in 2003 and our September 11th-related business interruption insurance
claim in 2002, both years' results included significant one-time benefits
related to these settlements. For 2003, this after-tax benefit (net of September
11th-related expenses) was $6.0 million, or $.72 per share, principally recorded
during our third quarter. For 2002, this net after-tax benefit was $3.8 million,
or $.46 per share, principally recorded during our fourth quarter.
Reflecting the overall strength of our 2003 financial performance, as
well as the change in the tax treatment of corporate dividends, we declared and
paid our first ever quarterly dividends in the third and fourth quarters of 2003
- - at a rate of $.0625 per share - for an anticipated annual dividend of $.25 per
share.
Our goal as a company is to maintain and build on our track record over
the last three years of consistent profitability, quarter in and quarter out,
and build up stockholders' equity, while at the same time providing our
stockholders with a meaningful, tax-efficient current return through our
dividend policy. We also recognize that the nature of the markets in which we
participate is likely to cause significant fluctuations up or down in our
financial results for any given quarter. Thus, although every quarter in 2003
was profitable - extending a run of thirteen consecutive quarters of
profitability - our financial performance was strongest during our first three
quarters and flattened out somewhat during our fourth quarter.
Historically, because of fewer trading days and often quieter markets,
the fourth quarter is usually our biggest challenge. The performance of our core
Euro Brokers inter-dealer brokerage businesses is highly dependent on the
volumes of trading activity in the various products that we broker. For example,
volatility in interest rates, and a steeper yield curve, are usually positives
for generating more trading activity, regardless of whether the interest rate
trend is up or down.
Continuing the pattern of recent years, most of 2003 saw reasonably
strong levels of trading activity in the fixed income and derivatives markets in
which we are active. Through an emphasis on retaining our key employees with the
strongest client relationships, we generally were able to maintain or build our
24
market share in key products, with one or two exceptions. As a result, our Euro
Brokers businesses, overall, continued to perform well. In New York, our largest
departments - cash deposits, interest rate derivatives and repurchase agreements
- - all produced solid returns, and our new effort in the brokerage of U.S.
Treasuries, started in late 2002, continued to grow and improve in performance.
London was a particular bright spot. There, we were able to increase
revenues on nearly all of our inter-dealer brokerage desks, as well as improve
our market position in several as well. We also benefited from owning 100% of
those operations from late-February 2003 forward, the result of winning a
lawsuit against our former partner there that permitted us to buy their 50%
shareholdings at a significant discount to book value. Overall, revenues in
London increased by more than 30% (inclusive of the impact of exchange rates),
and net income (not including the extraordinary gain from this discounted
acquisition) almost quadrupled.
Our Tokyo operations, on the other hand, continued to struggle, as a
restructuring that attempted to switch our brokers there to higher incentive
payouts and lower base salaries failed to gain traction, even as derivatives
market activity in Japan began to pick up. In late 2003, we assigned a new
full-time manager to the operations and moved the overall supervision to our
London center, where the time zone is more closely aligned to Tokyo's. We also
recently upgraded the office's infrastructure, including the installation of new
telephone equipment. Although these operations have not yet returned to
profitability, we saw their losses narrow by more than 50% during our fourth
quarter, and that improvement is continuing so far into early 2004.
In addition to tending to and continuously seeking to improve our Euro
Brokers inter-dealer brokerage businesses, we focused strongly in 2003 on
building and expanding our Maxcor institutional sales and trading businesses. In
our equity group, we added our first research analysts in order to complement a
sales and trading operation that was consistently top-ranked in 2003 for
execution quality. Our municipal securities group, which has been operating
successfully since 1997, maintained its strong performance by focusing on
special situations and providing top-quality research, particularly in the
hospital and healthcare arena. Our institutional convertible securities
operation, started at the very end of 2002, settled in and performed steadily,
although it still needs to gain critical mass. We also added an institutional
securities financing operation in mid-2003, pursuant to which we operate a
matched book of repurchase agreements. This business not only provides an
opportunity to generate net spread revenue, but also provides us with the
capability to reduce the costs of processing and financing securities positions
from our other sales and trading businesses.
Our most uneven performer among the Maxcor businesses was our leveraged
finance group, which specialized in high-yield and distressed debt. While
showing pockets of strength, this group suffered the whole year under the cloud
of taking more than $5 million in first quarter losses on its when-issued
trading contracts in the equity of NTL, Inc. ("NTL"), at the time a Chapter 11
debtor. As described more fully in Note 20 to the Consolidated Financial
Statements, in January 2003 NTL emerged from bankruptcy under a plan of
reorganization providing for the issuance of one-fourth the number of shares
that had previously been contemplated during the when-issued trading period. Our
traders, and other participants in the when-issued trading market, expected the
settlement of their NTL trades would be adjusted to reflect what NTL had
intended to be a neutral transaction, with the same effects as a 1-for-4 reverse
25
stock split. However, a number of buyers of NTL when-issued shares either
retained delivery of the full, unadjusted number of shares or, alternatively,
demanded compensation for the remaining unadjusted number of shares not
delivered to them.
In February 2003, we initiated litigation in New York State Supreme
Court, naming all of our NTL trading counterparties as defendants, in order to
try to force an adjusted and uniform settlement of our NTL when-issued trades
that would be permanent (we had previously obtained temporary relief, on an
emergency application, from the Bankruptcy Court administering NTL's
reorganization). Following our lead, two parallel NTL-related suits were also
filed in this Court, bringing to almost fifty the number of counterparties
before the Court seeking a resolution of this dispute. We then moved for summary
judgment in our case, with many of the parties in our suit and the two related
suits joining in our motion.
Very recently, on March 15, 2004, the Court granted our summary
judgment motion in this matter, holding that all NTL trades should settle as we
believed to be correct, that is, on an adjusted and uniform basis. That
decision, however, remains subject to the entry of a final order implementing
its terms and possible appeal. Accordingly, we do not intend to reverse any of
the losses previously taken except to the extent that we achieve a final
resolution, whether by mutual consent, appeal or otherwise, with any of the
counterparties with whom we traded. Since the Court's decision, one such final
resolution has already been achieved, and will result in our recording a
$625,000 pre-tax benefit in the first quarter of 2004.
Below-expected performance, combined with the tensions generated by the
NTL matter, contributed to the departure of the key members of our leveraged
finance group in early January 2004. As a result, the remaining Leveraged
Finance Warrants were cancelled. We took the opportunity to restructure the
group entirely, and brought in a new manager. Going forward, our focus will be
more on corporate bond sales and trading, with a high-grade bond effort added to
our previous high-yield presence. To date in 2004, we have rapidly ramped up
this area, hiring more than a dozen new traders and salespersons. We intend to
keep growing this area aggressively, with the expectation that it will begin
covering its costs and making a positive contribution to profit by the second
half of 2004.
Although we are now incurring initial higher costs associated with its
growth, we believe that the Maxcor institutional sales and trading businesses
provide some important diversity to our overall mix of operations. In
particular, we are looking to these businesses both to create positive
contributions to revenues and earnings and to expand our client base beyond that
of our Euro Brokers businesses.
We continued in 2003 to allocate portions of our capital to support
principal transactions in which we assume market risk for a period of time. This
trading occurred primarily in our Maxcor municipal securities and leveraged
finance groups, but also in our firm investment account. In 2004, it will also
occur in our restructured corporate bond businesses, and generally will include
hedging the corporate bond positions with Treasuries or other bonds to minimize
our risk exposure.
To support our Maxcor sales and trading operations in 2003, we
contributed an additional $20 million in capital to our broker-dealer - thereby
raising its total capital to in excess of $50 million. This strengthening
26
enabled us to upgrade to dealer membership status with GSD-FICC and facilitated
our ability to deploy risk capital selectively as opportunities arose.
The additional capital was primarily financed by a new $15 million,
secured reducing credit facility obtained from The Bank of New York ("BONY") in
March 2003, which replaced an existing $5 million line with General Electric
Capital Corporation ("GECC"). In November 2003, the BONY facility was converted
at our request into a fixed $10 million credit facility (see Note 14 to the
Consolidated Financial Statements). We also increased our available cash and
capital earlier in the year by financing with GECC, through various sale and
leaseback arrangements that are treated as operating leases, approximately $5
million in various phone and computer equipment purchased to outfit our new
headquarters in New York.
Our move in February 2003 to those new headquarters, on two floors at
One Seaport Plaza in lower Manhattan, was a huge step forward for our business
and our employees. After more than 16 months in temporary headquarters following
the September 11th terrorist attacks, we once again had a permanent home.
Moreover, the move and rebuilding of our office space provided us with an
opportunity to deploy state-of-the-art infrastructure and equipment, while also
building in ample room for expansion. For example, the offices contain the
latest in telecommunications and networking equipment, making it easy and
cost-effective to add new, or expand existing, brokerage and trading desks. We
believe this is a clear competitive advantage in recruiting new employees and
business groups.
Our build-out at our new premises was substantially funded by our
property insurance coverage, underwritten by Kemper Insurance Companies
("Kemper"), which ultimately paid us the policy's full aggregate limit of
approximately $14 million. Our claim under that coverage was fully settled in
late 2003, resulting in a one-time after-tax net gain, as mentioned above, of
approximately $6.0 million.
After experiencing September 11th and its aftermath, we as a firm are
firmly convinced that "doing good," while doing well, is an essential part of
who we are, as well as an important motivational force for our employees.
Accordingly, in May 2003 we established the Maxcor Foundation, to serve as our
broader charitable giving arm, in supplementation of our Euro Brokers Relief
Fund, whose charter was limited to providing aid to our families who lost loved
ones in the terrorist attacks. On May 12, 2003, we held our second annual
Charity Day, in which all of our brokerage revenues are donated to these two
entities. With the full support of our customers and our employees, who waived
any entitlement to commissions from the revenues generated that day, we were
able to raise almost $1 million. We are very proud of these results and will be
holding our third annual Charity Day this year on April 19th. Organizations that
will be funded by the Maxcor Foundation this year include the Marine Corps-Law
Enforcement Foundation, Columbia University's College of Physicians and
Surgeons, Duke University's Fuqua/Coach K Center for Leadership and Ethics, and
The Royal Marsden Hospital in London.
The year 2003 also saw the continuation of our common stock repurchase
program, which, in addition to the initiation of our dividend policy, is a key
component of our overall effort to increase value to stockholders and
intelligently manage our capital structure. In total, we repurchased 616,300
shares in 2003, at an aggregate cost of $4.7 million. These repurchases more
27
than offset dilution from stock option exercises during the year, which, net of
shares delivered in connection with such exercises, resulted in the issuance of
499,863 shares (See Note 17 to the Consolidated Financial Statements).
CRITICAL ACCOUNTING POLICIES
Note 2 to the Consolidated Financial Statements details the significant
accounting policies used in the preparation of those statements. There are
certain of these policies that are considered to be of particular importance
because they require difficult, complex or subjective judgments on matters that
are often inherently uncertain. The following is a discussion of these policies.
Securities and trading contracts are carried at fair values generally
based on quoted market prices. From time to time quoted market prices are not
available for certain municipal or other securities positions. For such
securities, we, with the assistance of independent pricing services, determine
fair values by analyzing securities with similar characteristics that have
quoted market prices. Consideration is given to the size of our individual
positions relative to the overall market activity in such positions when
determining the impact our sale would have on fair values. Since uncertainties
may exist as to the settlement of when-issued equity trading contracts, we defer
any gains resulting from adjusting the costs of these contracts to fair values
until uncertainties relating to settlement are resolved. The assumptions used in
valuing our securities and trading contracts may be incorrect and the actual
value realized upon disposition could be different from the current carrying
value.
Included in accounts payable and accrued liabilities are reserves for
certain contingencies to which we may have exposure, such as the employer
portion of National Insurance Contributions in the U.K., interest and claims on
securities settlement disputes, such as the NTL matter, and reserves for certain
income tax contingencies. The determination of the amounts of these reserves
requires significant judgment on our part. We consider many factors in
determining the amount of these reserves, such as legal precedent and case law
and historic experience. The assumptions used in determining the estimates of
reserves may be incorrect and the actual costs of resolution of these items
could be greater or less than the reserve amount.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued. The
adoption of FIN 45 did not have a material impact on our Consolidated Financial
Statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148
amends Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
28
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 effective December
31, 2002, and continue to follow the intrinsic value method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for
the purpose of recognizing compensation cost.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 149 is effective for derivative contracts entered into after June 30, 2003.
The adoption of SFAS 149 did not have a material impact on our Consolidated
Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
imposes certain additional disclosure requirements. The provisions of SFAS 150
are effective for financial instruments entered into or modified after May 31,
2003 and must be applied to all financial instruments at the beginning of the
third quarter of 2003. The adoption of SFAS 150 did not affect our Consolidated
Financial Statements.
In December 2003, the FASB issued FASB Interpretation No. 46(R),
"Consolidation of Variable Interest Entities" ("FIN 46(R)"). FIN 46(R) addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through a means other than voting rights and accordingly
should consolidate the entity. FIN 46(R) replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which was issued in January 2003.
Prior to FIN 46, variable interest entities were commonly referred to as special
purpose entities. The adoption of FIN 46(R) will not affect our Consolidated
Financial Statements.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Commission income represents revenue generated on our brokerage
transactions conducted on an agency (including name give-up) or matched riskless
principal basis. For 2003, these revenues increased $27,069,417 to $176,497,549,
compared to $149,428,132 for 2002, primarily reflecting increased brokerage in
New York and London. The increase in New York was attributable to increased
commissions generated by the institutional sales and trading operations started
during 2002 (leveraged finance - high-yield and distressed debt, convertible
securities and equities) and increased commissions generated by our inter-dealer
brokerage operations. In London, the increase was attributable to increased
revenues from our inter-dealer brokerage operations, commissions generated by
our newly-started sales and trading operations and the currency effects of
translating strengthened British pound sterling amounts to U.S. dollars.
29
During 2003, we recognized a net gain of $11,106,063 on the settlement
of our property insurance claim against Kemper for losses incurred for destroyed
property as a result of the September 11, 2001 terrorist attacks on the World
Trade Center, where we were formerly headquartered. This net gain reflected the
gross insurance proceeds received since the attacks of $13,868,210, less
$2,762,147, representing the aggregate of the net book value of owned property
destroyed in the attacks, termination costs associated with operating leases of
equipment destroyed in the attacks and claim-related expenses. During 2002, we
recorded insurance recoveries of $11,098,135, representing the portions of the
settlements of claims under our U.S. business interruption insurance policy with
Kemper ($10.3 million) and our U.K. business interruption insurance policy with
Norwich Union ($831,000) for losses incurred in New York and London following
the September 11th attacks attributable to lost revenues (net of saved
expenses).
Interest income for 2003 increased $4,133,421 to $6,280,695, compared
to $2,147,274 for 2002, primarily reflecting financing income earned on reverse
repurchase agreements in connection with our newly-started institutional
securities financing operations and an increase in the average inventory of
securities held.
Principal transactions represent the net gains or losses generated from
securities transactions involving the assumption of market risk for a period of
time. For 2003, these activities resulted in a gain of $6,122,442, compared to a
gain of $8,720,422 for 2002. This change primarily reflected a net loss of $5.1
million recorded by MFI during 2003 on the disputed settlement of its NTL
when-issued equity trades. As discussed in Note 20 to the Consolidated Financial
Statements, the recording of this $5.1 million net loss includes the estimated
damages payable if the NTL-related legal proceedings conclude that all of MFI's
NTL when-issued trades, other than permanently adjusted settlements by mutual
agreement, should have settled on an unadjusted basis. However, the final net
loss could be materially higher or lower based on the ultimate outcome of such
proceedings. This net loss in principal transactions was partially offset by
improved results in our firm investment account and by an increase in gains on
municipal securities.
Other items for 2003 resulted in a loss of $1,140,241, as compared to a
loss of $843,142 for 2002. The increase in this loss resulted from the loss of
$1,560,281 on our interest in the Tokyo Venture for 2003, as compared to a loss
of $1,184,233 for 2002, offset in part by income of $292,000 during 2003 from
the licensing of financial information derived from our inter-dealer brokerage
business, as compared to $262,000 during 2002, and an increase in foreign
exchange gains during 2003.
For 2003, interest expense on securities indebtedness increased
$3,969,454 to $4,117,319, compared to $147,865 for 2002, primarily as a result
of interest expense incurred on repurchase agreements in connection with our
newly-started institutional securities financing operations discussed above. The
other type of interest expense included in this classification, interest expense
incurred on margin borrowings to finance securities positions, decreased
slightly.
30
Compensation and related costs for 2003 increased $19,299,414 to
$126,323,608, compared to $107,024,194 for 2002, primarily as a result of
increased brokerage personnel in connection with the expansion of products in
New York, the overall increase in operating revenues (commission income,
principal transactions and information sales revenue), which results in higher
commission-based payouts, and the currency effects of translating strengthened
British pound sterling amounts to U.S. dollars. As a percentage of operating
revenues, compensation and related costs increased slightly to 69% for 2003, as
compared to 68% for 2002 (but decreased slightly, to 67% for 2003, if operating
revenues are adjusted to add back in the $5.1 million NTL loss recorded in
2003).
Communication costs for 2003 increased $2,392,727 to $12,989,853,
compared to $10,597,126 for 2002, primarily as a result of the expansion of
products and customers in New York and London and the currency effects of
translating strengthened British pound sterling amounts to U.S. dollars.
Travel and entertainment costs for 2003 increased $2,427,639 to
$9,833,755, compared to $7,406,116 for 2002, reflective in part of the expansion
efforts in New York and London and the overall increase in operating revenues.
As a percentage of operating revenues, travel and entertainment costs increased
to 5.4% for 2003 (or 5.2% if operating revenues are adjusted for the NTL loss),
compared to 4.7% for 2002.
Occupancy and equipment rental represents expenses incurred in
connection with our office premises, including base rent and related
escalations, maintenance, electricity and real estate taxes, as well as rental
costs for equipment under operating leases. For 2003, these costs increased
$2,133,375 to $6,623,731, compared to $4,490,356 for 2002, primarily due to
increased costs for office space associated with our new headquarters at One
Seaport Plaza in lower Manhattan, increased costs for office space in London and
rental costs on new equipment in New York leased from GECC.
Clearing and execution fees are fees paid to clearing organizations for
transaction settlements and credit enhancements and to other broker-dealers
(including ECNs) for providing access to various markets and exchanges for
executing transactions. For 2003, these costs increased $553,755 to $3,865,514,
compared to $3,311,759 for 2002, primarily as a result of the increase in
transaction volumes from our institutional equities desk and other areas
commenced in 2002.
Depreciation and amortization expense consists principally of
depreciation of communication and computer equipment and automobiles under
capitalized leases and amortization of leasehold improvements and software. For
2003, depreciation and amortization increased $814,743 to $3,220,577, compared
to $2,405,834 for 2002, principally as a result of the depreciation and
amortization in New York of furniture and leasehold improvements purchased
primarily with insurance proceeds for our new headquarters.
All the revenues generated on our Charity Days by our New York,
Stamford, Mexico, London and Switzerland offices are donated to designated
charities. All participating brokerage personnel waive any entitlement from such
revenues. The proceeds of $982,300 raised on our May 12, 2003 Charity Day were
designated for The Euro Brokers Relief Fund, Inc., which provides charitable aid
31
to the families and other financial dependents of our 61 employees and staff
members killed as a result of the September 11th attacks, and our Maxcor
Foundation, Inc. The Maxcor Foundation, Inc. in turn designated three principal
recipients: Marine Corps-Law Enforcement Foundation, Inc., Columbia University
College of Physicians & Surgeons and The Great Ormond Street Hospital for
Children in London. Our March 11, 2002 Charity Day resulted in a contribution of
$1,219,233 entirely to The Euro Brokers Relief Fund, Inc.
Other interest expense represents interest costs incurred on
non-securities related indebtedness, such as revolving credit facilities and
capital lease obligations. For 2003, these costs increased $255,558 to $406,772,
compared to $151,214 for 2002, primarily as a result of increased costs
associated with larger balances outstanding under our new revolving credit
facility with BONY.
General, administrative and other expenses include such expenses as
corporate insurance, office supplies and expenses, professional fees, food costs
and dues to various industry associations. For 2003, these expenses increased
$2,287,084 to $7,220,567, compared to $4,933,483 for 2002, primarily as a result
of professional fees of $700,000 incurred in connection with the NTL when-issued
equity trade disputes previously discussed, an increase to the reserve for the
employer portion of National Insurance Contributions in the U.K. of $465,000,
increased costs for corporate insurance coverage and increase in other general,
administrative and other expenses.
Provision for income taxes for 2003 decreased $2,381,476 to $9,749,282,
compared to $12,130,758 for 2002, notwithstanding higher net income in 2003 than
2002, primarily as a result of a decrease in income before provision for income
taxes, minority interest, income from equity affiliate and extraordinary item,
and a reduction of $500,000 to income tax reserves as the result of the
favorable resolution to certain contingencies.
For 2003, minority interest in consolidated subsidiaries resulted in a
reduction of the net income from such subsidiaries of $175,985, as compared to a
reduction of $981,791 for 2002. The decrease is the result of our February 2003
purchase of the minority interest in EBL (formerly Euro Brokers Finacor Limited
("EBFL")).
During 2003 we recorded an extraordinary gain of $2,957,547 on the
purchase of the 50% shareholding held by Monecor in EBFL. This purchase resulted
from a ruling by the London Court of Appeals in February 2003 that dismissed
Monecor's appeal of the May 2002 judgment of the London High Court of Justice.
That judgment permitted Euro Brokers Holdings Limited ("EBHL"), our top U.K.
holding company, to purchase Monecor's interest at a 30% discount to the book
value attributable to this shareholding as of December 2000. EBHL obtained the
May 2002 judgment under the terms of the EBFL shareholders agreement as a result
of Monecor's failure to provide certain requested funding to EBFL in late 2000.
This discounted purchase price resulted in a gain of $2,957,547, equal to the
excess of the amount recorded for Monecor's interest in EBFL of $5,570,703 over
the purchase price of $2,613,156.
32
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Commission income for 2002 increased $11,425,047 to $149,428,132,
compared to $138,003,085 for 2001, due to increased brokerage in New York and
London. In New York, the increase principally reflected increased revenues from
our inter-dealer brokerage operations (including the commencement of a U.S.
Treasury bond department) and from newly started institutional sales and trading
operations (leveraged finance, convertible securities and equities). Reduced
commissions in 2001 from the disruption to operations following the September
11th terrorist attacks also contributed to the year-over-year increase.
Partially offsetting this increase was the permanent discontinuance in 2002 of
certain inter-dealer brokerage operations suspended after the September 11th
attacks. The increase in London principally reflected increased revenues from
our inter-dealer brokerage operations (including the commencement of a credit
derivatives department) and the currency effect of translating strengthened
British pound sterling amounts to U.S. dollars.
Insurance recoveries for 2002 represent the portions of the settlements
of claims under U.S. and U.K. business interruption insurance policies for
losses incurred in New York and London following the September 11th attacks
attributable to lost revenues (net of saved expenses). The balance of these
settlements is included as an offset to costs related to World Trade Center
attacks (see below). During 2002 we recorded $10.3 million in insurance
recoveries relating to the settlement of our U.S. claim against Kemper,
representing the $14.8 million portion of the $18.9 million total settlement
allocated to lost revenues (net of saved expenses), less the $4,498,144 amount
recorded in 2001. Also during 2002 we recorded an insurance recovery of $831,000
pursuant to the U.K. settlement of $1.2 million with Norwich Union, representing
the portion of that settlement allocated to lost revenues (net of saved
expenses). The $4,498,144 amount recorded in 2001 reflected the portion of lost
revenues (net of saved expenses) through September 30, 2001 under our U.S.
policy with Kemper for which we believed there were no contingencies that would
have a material impact.
Interest income for 2002 decreased $158,770 to $2,147,274, compared to
$2,306,044 in 2001, reflecting the net effects of a lower interest rate
environment for our deposits and cash equivalents and an increase in the average
inventory of municipal securities held.
Principal transactions for 2002 decreased $212,439 to $8,720,422,
compared to $8,932,861 for 2001, primarily due to reduced gains on municipal
securities and in our investment account, offset in part by gains from our then
newly-started leveraged finance group.
Other items for 2002 resulted in a loss of $843,142, as compared to
income of $1,083,431 for 2001. This change resulted prima