<PAGE>
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, 1997 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to____________
Commission File Number 0-25056
-------
MAXCOR FINANCIAL GROUP INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-3262958
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two World Trade Center, 84th Floor, New York, NY 10048
- ------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 748-7000
--------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of class)
Preferred Stock Purchase Rights
-------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (assuming directors, executive officers and 5% stockholders
are affiliates), based on the Nasdaq National Market closing sales price of
$2.00 on March 27, 1998, was approximately $11,454,300.
As of March 27, 1998, 11,330,631 shares of Common Stock were
outstanding.
Documents Incorporated by Reference: Those portions of registrant's
Proxy Statement for Annual Meeting of Stockholders (which registrant intends
to file pursuant to Regulation 14A on or before April 30, 1998) that contain
information required to be included in Part III of this Form 10-K are
incorporated by reference into Part III hereof as provided therein.
<PAGE>
MAXCOR FINANCIAL GROUP INC.
INDEX
-----
Page
----
PART I
Item 1. Business.................................................. 3
Item 2. Properties................................................ 15
Item 3. Legal Proceedings......................................... 15
Item 4. Submission of Matters to a Vote of Security-Holders...... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Financial Data................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data............... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant........ 29
Item 11. Executive Compensation.................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 29
Item 13. Certain Relationships and Related Transactions............ 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 30
Signatures.......................................................... 31
Consolidated Financial Statements and Notes......................... F-1
Index to Consolidated Financial Statements.......................... F-2
Exhibit Index....................................................... X-1
2
<PAGE>
PART I
ITEM 1. BUSINESS
History
Maxcor Financial Group Inc. (the "Company" or "Maxcor") was
incorporated under the name of "Financial Services Acquisition Corporation" in
Delaware in August 1994 with the objective of acquiring or merging with an
operating business in the financial services industry. To this end, the
Company consummated an initial public offering in December 1994 (the "IPO"),
pursuant to which it issued 3,583,333 units, each comprised of one share of
common stock, $.001 par value ("Common Stock"), and two redeemable common
stock purchase warrants ("Series A Warrants"), and raised net proceeds of
approximately $20 million.
On March 8, 1996, the Company entered into a merger agreement to
acquire Euro Brokers Investment Corporation ("EBIC"), since 1986 a privately
held domestic and international inter-dealer broker for a broad range of
financial instruments. Pursuant to the merger agreement, a newly-formed,
wholly-owned subsidiary of the Company merged (the "Merger") with and into
EBIC on August 16, 1996, with EBIC thereby becoming a wholly-owned subsidiary
of the Company. In the Merger, former holders of EBIC common stock received
consideration consisting, in the aggregate, of approximately $22 million in
cash, 4,505,666 shares of Common Stock and 7,566,625 Series B redeemable
common stock purchase warrants ("Series B Warrants" and, together with the
Series A Warrants, the "Warrants") of the Company (economically identical in
their terms to the Series A Warrants).
In connection with the Merger, the Company also acquired, in exchange
for 225,000 shares of Common Stock, all of the unit purchase options that had
been issued in the IPO (representing the right, in the aggregate, to acquire
333,333 units) and redeemed, for cash, 136,000 shares of Common Stock for
which certain Merger-related conversion rights had been exercised.
In June 1997, in connection with its Annual Meeting of Stockholders,
the Company changed its name to Maxcor Financial Group Inc.
In November 1997, the Company consummated an exchange offer, on the
basis of 0.1667 of a share of Common Stock for each Warrant (the "Exchange
Offer"), pursuant to which it issued an aggregate of 2,380,975 shares of
Common Stock in exchange for 14,283,296 (or approximately 95.1%) of the
then-outstanding Warrants. As a result of the Exchange Offer, the Warrants
were delisted from trading on the Nasdaq National Market and deregistered
under the Securities Exchange Act of 1934, as amended.
3
<PAGE>
At December 31, 1997, the Company had outstanding 11,330,631 shares
of Common Stock and 734,980 Warrants. The Common Stock is traded on the Nasdaq
National Market under the symbol "MAXF".
The Merger was accounted for as a recapitalization of EBIC, with the
issuance of shares by EBIC for the net assets of Maxcor. Accordingly,
financial and other information of the Company presented herein for dates and
periods prior to the Merger, unless otherwise indicated, represent financial
and other information of EBIC (and its subsidiaries and affiliates) for such
dates and periods.
Overview
The Company is a financial services holding company. Through the Euro
Brokers division of its Maxcor Financial Inc. subsidiary, a U.S. registered
broker-dealer, and other EBIC subsidiaries and affiliates, the Company conducts
its principal business as a leading domestic and international inter-dealer
brokerage firm, specializing in emerging market debt and related products, cash
deposits and other money market instruments, interest rate and currency
derivatives, natural gas, electricity and other energy-related products,
repurchase agreements and other fixed income securities. In 1998, Maxcor
Financial Inc. also started an investment banking business. In addition, the
Company's Maxcor Financial Asset Management Inc. subsidiary, a registered
investment advisor, is engaged in securities lending through its Euro Brokers
Securities Lending division, as well as other asset management activities.
The Company, which has approximately 650 employees worldwide,
conducts its businesses through principal offices in New York, Stamford,
London, Tokyo, Toronto and Mexico City and by means of correspondent
relationships with other brokers throughout the world. The Company operates in
each of these six financial centers (other than Tokyo) through wholly-owned
subsidiaries. In Tokyo, the Company has a 50% interest in a partnership (the
"Tokyo Partnership") with Yagi Euro Corporation ("Yagi Euro") and a 15%
minority interest in Yagi Euro itself.
In its inter-dealer brokerage business, the Company functions
primarily as an intermediary, matching up the trading needs of its customers,
who are primarily well-capitalized banks, investment banks and broker-dealers.
The Company assists its customers in executing trades by identifying
counterparties with reciprocal interests. The Company provides its services
through an international network of brokers who service direct phone lines to
most of the Company's approximately 2000 clients and through proprietary
screen systems and other delivery systems that provide customers with
historical data and real-time pricing information in the Company's various
products. Customers use the Company's services for several reasons. First, a
customer can benefit from the broader access and liquidity provided by the
Company's worldwide broker and telecommunications network, which communicates
with and services most of the largest banks and securities firms. The result
is typically better pricing and faster execution than the customer could
achieve acting
4
<PAGE>
unilaterally. Second, the Company provides customers with anonymity, thereby
enhancing their flexibility and ability to act without signaling their
intentions to the marketplace. Third, because of its network, the Company can
provide high-quality pricing and market information, as well as sophisticated
analytics and trading and arbitrage opportunities.
The Company's inter-dealer brokerage transactions are principally of
two types, (i) "name give-up" transactions, whereby the Company acts only as a
matching broker, and (ii) transactions whereby the Company acts as a "matched
riskless principal." Primarily in transactions involving money market
instruments, derivative products and certain repurchase agreements, the trades
are arranged while preserving the customers' anonymity, but executed at the
last instant on a name give-up basis and settled directly between the
counterparties. In these transactions the Company acts solely as the matching
broker and not as a counterparty itself. Consummation of the transaction may
then remain subject to the counterparties who have been matched by the Company
accepting the credit of each other. In the second type of transaction,
primarily securities transactions, the Company acts as a matched riskless
principal, connecting the buyer and seller for the transaction on a fully
anonymous basis by acting as the counterparty for each in matching, reciprocal
back-to-back trades. This type of transaction is then settled through one of
various clearing institutions with which the Company has contractual
arrangements, and who will have previously reviewed and approved the credit of
the participating counterparties.
Products
The Company's inter-dealer brokerage business generally falls 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 Eurodollar deposits, term and overnight Federal
Funds and Interbank deposits, Eurocurrency deposits, certificates of deposit,
banker's acceptances and short-term commercial paper. The most traditional
product in this category is the Eurodollar deposit, which are U.S. dollar
deposits placed with financial institutions domiciled outside the United
States (including foreign branches of U.S. banks). Eurocurrency deposits are
non-dollar deposits placed outside the country of denomination, such as Euro
Swiss Francs, Euro Deutsche Marks and Euro Yen. The Company brokers money
market products predominantly to multinational banks.
Derivative Products
A derivative products transaction generally is an agreement entered
into by two parties, in which each commits to a series of payments based upon
the price performance of
5
<PAGE>
an underlying financial instrument or commodity for a specified period of
time. This category includes a broad range of sophisticated financial
instruments employed by multinational banks, financial institutions,
securities dealers and corporations. Some of the types of derivatives most
frequently brokered by the Company are interest rate swaps, interest rate
options, and forward rate agreements, in each case conducted in a multitude of
different currencies and localized primarily by office. The Company also
brokers cross-currency swaps and a broad variety of energy-related
derivatives.
In an interest rate swap, two parties agree to exchange interest rate
payment obligations on a notional principal amount over the term of the swap.
No principal is exchanged, and market risk for the parties is limited to
differences in the interest payments. The usual format for swaps involves the
exchange of fixed rate payments based on the term of the swap for floating
rate payments based on a shorter-term rate. Interest rate options, which may
also be structured as "cap," "floor" or "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 similar to interest rate futures, designed to give the
counterparties protection against a shift in the future in interest rates for
time deposits. The buyer, or borrower, of a FRA agrees to pay the seller, or
lender, at some specified future settlement date, an amount of interest based
on a notional principal at a fixed rate for a specified period of time. The
seller agrees to pay the buyer, on the same future settlement date, an amount
of interest based on the same amount of notional principal and the same period
of time, but based on the then-prevailing market rate for the time period. No
actual principal is exchanged. On the settlement date, the buyer and the
seller calculate the present value of the net interest owed, and one party
pays the other accordingly.
The Company also brokers trades in cross-currency swaps, in which
interest rate flows denominated in different currencies are exchanged, based
on predetermined notional amounts, in order to convert exposure in one
currency to another.
Energy-related derivatives brokered by the Company primarily consist
of options and physical contracts based on natural gas, electricity, emissions
and coal, and generally are transactions in which payments based on fixed and
floating commodities indices are exchanged. The Company has recently begun
brokering weather-related derivatives, which may be based, among other measures,
upon the average temperature or rainfall of a given city during a stated
period of time.
The Company brokers most of its derivative products predominantly to
multinational banks and investment banks. Energy-related derivative products,
however, are often traded by large energy marketing and trading companies.
6
<PAGE>
Securities Products
Products brokered by the Company in this category primarily consist
of a variety of debt obligations issued by governments, banks and
corporations. The Company brokers transactions in emerging market debt,
municipal securities, U.S. Treasury zero coupon bonds, U.S. domestic
convertible bonds, floating rate notes and other corporate securities. This
category also includes repurchase agreements.
Emerging market debt, including Brady bonds, global bonds, Eurobonds,
local issues and loans, as well as options and repurchase agreements on the
foregoing, continues to constitute the largest area within the securities
products category, and is brokered by specialized teams located in New York,
London and Mexico City and through a joint venture in Buenos Aires. The market
coverage of the teams from these locations is worldwide. The Company's
brokerage of emerging market debt utilizes direct communication phone lines
and provides pricing and other data through proprietary, computerized screen
systems located directly in customers' offices. In most emerging markets
transactions, Euro Brokers acts as matched riskless principal and settles
trades through its clearing firms.
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. The Company acts as an intermediary primarily for the U.S.
Primary Government Dealer community (banks and dealers licensed to participate
in auctions of U.S. Treasury securities), as well as for a number of U.S.
regional banks and dealers, in the negotiation and execution of U.S. Treasury
and mortgaged-backed repurchase agreements. As is the case with emerging
markets, the Company disseminates repurchase agreement market information via
its proprietary, computerized screens. Most of the repurchase agreements that
the Company executes for dealers are cleared through the Government Securities
Clearing Corporation, in which Maxcor Financial Inc. is a member, although
some are brokered on a name give-up basis.
Since mid-1996, the Company has also brokered municipal securities
out of its Connecticut office; generally acting as a matched riskless
principal, but also using a small allocation of the firm's capital to support
limited inventory positions. In October 1996, the Company also established a
U.S. convertible bond desk, generally brokering such instruments on a name
give-up basis.
In its securities lending business, the Company arranges for the
lending of securities held in its clients' portfolios to securities dealers
and other market participants who need them to manage their own positions. In
exchange for such loaned securities, which are primarily U.S. government and
agency securities and U.S. corporate bonds (but also non-dollar government
securities and corporate bonds), the Company receives either (i) cash
collateral, which it then reinvests to earn a spread over the rebate rate it
is required to pay in connection with the underlying loan, or (ii) non-cash
collateral plus fee income from the borrower.
7
<PAGE>
The Company brokers securities products predominantly to banks,
investment banks and other financial institutions.
Communications Network and Information and Related Systems
The Company has a global communications network through which it
conducts its business and a sophisticated computerized information system over
which it receives and transmits current market information. Its teams of
computer and communications specialists provide technological support to the
network. The Company is continually upgrading its technological facilities in
order to access and collate market information and redistribute it virtually
instantaneously throughout its network. Through the continued development and
use of proprietary software, computerized screen displays, digital networks
and interactive capabilities, the Company strives to keep its communication,
technology and information systems as current as possible.
To ensure rapid and timely access to the most current market bids and
offers, the majority of the Company's customers are connected to the Company
via dedicated point to point telephone and data lines around the world. For
products that are screen-brokered, such as emerging market debt, repurchase
agreements, options on emerging market debt, banker's acceptances and
commercial paper, the Company maintains an extensive private network to
connect the Company's offices and the specific customers who trade in these
products. In this way, all such customers have the simultaneous ability to view
and act upon market bids and offers. The Company has also developed and
deployed in 1997 an Internet real-time distribution capability for its
emerging markets screen information, which is expected to allow access to
customers in more remote or unproven brokerage locations without incurring the
infrastructure costs associated with expanding its private network.
Most of the markets in which the Company operates are highly
efficient, offering participants immediate access and enormous liquidity. Some
markets are subject to a high degree of volatility. Even the slightest
variation in price can make the difference between missing or executing a
transaction. Consequently, the Company's business depends heavily on the use
of advanced telephone equipment, computer systems and pricing software. Direct
line voice communication, real-time computerized screen systems and rapid
trade execution for its clients are all imperative for the Company's continued
success in the inter-dealer brokerage business. For this reason, the Company
continually needs to expend significant resources on the maintenance,
expansion and enhancement of its communication and information system
networks. After payroll, such costs have historically represented the
Company's second largest item of expenditure.
In 1998, in connection with its emerging market debt business, the
Company is testing and implementing an electronic blotter system as part of an
upgraded front and middle-office trade processing system. The new system,
which will replace paper blotters and certain existing software, is expected
to introduce numerous efficiencies, including the ability to handle trading
volumes far in excess of current capabilities, identify almost immediately
8
<PAGE>
unbalanced trade conditions as they occur and provide customers with more
certain and rapid check-outs of their transactions.
Personnel
As of February 28, 1998, the Company employed 486 brokers, plus an
additional administrative staff, including officers and senior managers, of
166 persons, for a total employee headcount of 652. Of the brokers, 273 were
located in the U.S. and 150 were located in Europe, with the balance
distributed among the Company's other office locations. None of the Company's
employees are covered by a collective bargaining agreement. The Company
considers its relations with employees to be good and regards compensation and
employee benefits to be competitive with those offered by other inter-dealer
brokerage firms.
Geographic Data
Note 24 of the Notes to the Consolidated Financial Statements
contains summary financial information, for each year of the three-year period
ended December 31, 1997, with respect to each of the Company's principal
geographic locations.
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
o salaries and other cost structures
o capital resources and perceived creditworthiness.
While there are not many large international inter-dealer brokers and
entry into the industry is costly, the Company encounters intense competition
in all aspects of its business from several companies which are divisions of
much larger financial services conglomerates and which have significantly
greater resources than the Company. Moreover, all brokerage firms are subject
to the pressures of offering their services at a lower price. The recent pace
of consolidation in the banking and financial services community continues to
reduce the number of customers in the marketplace and, accordingly, has
further increased the competition among inter-dealer brokers and the downward
pressure on already low commission rates. The use of volume discounting has
also become more widespread in recent years. As a result, increases in market
volumes do not necessarily result in proportionate increases in brokerage
commissions and revenues.
9
<PAGE>
As global communication advances and new technologies are developed,
the inter-dealer brokerage industry also is becoming more susceptible to the
possibility of losing customers to electronic trading systems that provide for
fully automated trade matching. In practice, these systems so far have proved
most viable in markets involving very standardized products, such as spot
foreign exchange and U.S. equities. The Company believes that more complex
financial vehicles, in particular derivatives, are less amenable to fully
electronic matching. However, the number and penetration of such automated
trading platforms is increasing. For example, Bloomberg, primarily known as a
data and analytical service provider, has increasingly used its network of
terminals to facilitate on-line screen-based trading between authorized
parties. The further development and successful deployment of such systems
could ultimately have significant adverse effects on the Company's business.
The Company is inherently reliant on relationships with clients that
develop over time, and certain of the Company's brokers have established
long-term associations with customers. The Company's success depends to a
significant extent on these relationships and on the performance and
experience of a number of key management and brokerage personnel. The loss of
one or more of these key employees, who are often the target of aggressive
recruitment efforts by competitors within the industry, could have a material
adverse effect on the Company. Moreover, the highly competitive hiring
environment by itself creates upward pressures on broker compensation that can
reduce profit margins. While the Company has entered into employment
agreements with and granted stock options to many of its 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 the Company indefinitely. Nor can there
be any guarantee that the Company will be able to attract and retain
qualified, experienced individuals, whether to replace current personnel or as
a result of expansion, because competition in the brokerage industry for such
individuals is intense.
The Company also faces intense competition from other inter-dealer
brokers to achieve revenues from, and the widest dissemination and acceptance
of, the data generated and collected from its brokerage business. Although the
Company currently is seeking to enhance such revenues (see Item 7 below),
there can be no assurances that the Company will be successful in its efforts.
Regulation
The Company and its subsidiaries, in the ordinary course of their
business, are subject to extensive regulation at international, federal and
state levels by various regulatory bodies which are charged with safeguarding
the integrity of the securities and other financial markets and protecting the
interests of customers participating in those markets.
Maxcor Financial Inc. ("MFI"), a wholly owned subsidiary of the
Company formerly known as Euro Brokers Maxcor Inc., is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC"), all
applicable states, and is a member of the National
10
<PAGE>
Association of Securities Dealers, Inc. ("NASD"). Broker-dealers are subject
to regulations that cover all aspects of the securities business, including
initial licensing requirements, sales and trading practices, safekeeping of
customers' funds and securities, capital structure, record-keeping and the
conduct of directors, officers and employees. The SEC, other governmental
regulatory authorities, including state securities commissions and
self-regulatory organizations, such as NASD Regulation, Inc. ("NASDR") in the
case of MFI, may institute administrative proceedings, which may result in
censure, fine, the issuance of cease-and-desist orders, the suspension or
expulsion of a broker-dealer, its officers or employees or other similar
consequences.
As a futures commission merchant, MFI is also registered with the
Commodity Futures Trading Commission and is a member of the National Futures
Association and, as such, its activities in the futures and options-on-futures
markets are subject to regulation by these bodies.
MFI is also a member of the Government Securities Clearing
Corporation ("GSCC") for the purpose of clearing certain U.S. Treasury
repurchase agreements and other U.S. Treasury securities. Such membership
requires MFI to maintain a minimum net capital of $10,000,000, including a
minimum deposit with GSCC of $5,000,000.
Maxcor Financial Asset Management Inc. ("MFAM"), a subsidiary of the
Company, is an investment advisor, registered with the SEC, pursuant to its
securities lending activities. As a result, MFAM's investment advisory
business is subject to various federal and state laws and regulations that
generally grant supervisory agencies and bodies broad administrative powers,
including the power to limit or restrict MFAM from carrying on its investment
advisory business in the event that it fails to comply with such laws and
regulations and/or to impose other censures and fines.
The Company's business is also subject to extensive regulation by
various non-U.S. governments and regulatory bodies, including the Bank of
England, the Securities and Futures Authority (the "SFA") and the Director
General of Fair Trading in the United Kingdom, the Ontario Securities
Commission in Canada, the Bank of Japan and the Japanese Ministry of Finance
in Japan, and 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.
Additional legislation and regulations, changes in rules promulgated
by the SEC or other U.S. federal and state governmental regulatory
authorities, self-regulatory organizations or clearing organizations, as well
as non-U.S. governments or governmental regulatory agencies, or changes in the
interpretation or enforcement of laws and rules, may directly affect the
manner of operation and profitability of the Company. In addition, any
expansion of the Company's activities into new areas may subject the Company
to additional regulatory requirements that could similarly affect such
operation and profitability.
11
<PAGE>
Cautionary Statements
As provided under the Private Securities Reform Act of 1995, the
Company desires to caution investors that the following factors, among others
(including the factors discussed under the "Competition" and "Regulation"
headings above), could affect the Company's results of operations and cause
such results to differ materially from those anticipated in forward-looking
statements made in this report and elsewhere by or on behalf of the Company.
Economic and Market Conditions
The Company's brokerage business and its profitability are affected
by many factors, including the volatility of securities markets, the volume,
size and timing of securities transactions, the level and volatility of
interest rates, legislation affecting the business and financial communities
and the economy in general. Low trading volume may reduce revenues, which
would generally negatively impact profitability because a portion of the
Company's costs is fixed.
Liability for Unsettled Trades
The Company through its subsidiaries functions as an intermediary,
matching the trading needs of financial institutions by providing specialized
services. Some of these transactions are executed on a name give-up basis,
that is, once the specific economic terms of a proposed transaction are
agreed, the names of the individual counterparties are disclosed and, subject
to acceptance of the credit, the transaction is completed directly by both
counterparties. Other transactions are completed with the subsidiary acting as
a matched riskless principal in which the respective parties to the
transaction know the subsidiary as the counterparty. The transactions are then
settled through a clearing institution. In the process of executing brokerage
transactions, from time to time in the fast moving markets in which such
subsidiaries operate, miscommunications or other errors can arise whereby
transactions are completed with only one counterparty ("out trades"), thereby
creating a potential liability for such subsidiaries. If the out trade is
promptly discovered, thereby allowing prompt disposition of the unmatched
position, the risk to the subsidiary is usually limited. If discovery is
delayed, the risk is heightened by the increased possibility of intervening
market movements prior to such disposition. Although out trades usually become
known at the time of or later on the day of the trade, on occasion they are
not discovered until later in the settlement process. When out trades occur
and are discovered, the Company's policy is to have the unmatched position
disposed of promptly. Out trades generally increase with increases in the
volatility of the market and, depending on their number and amount, have the
potential to have a material adverse effect on the financial condition or
results of operations of the Company.
12
<PAGE>
Systems and Technology
In addition to the Company's continuing need to expend significant
resources on the maintenance, expansion and enhancement of its communication
network, information systems and other technology, it also faces the risk that
the systems it currently has or in the future implements, or the software
underlying such systems, will fail in some fashion or be inadequate to the
task. During the Asian and Latin American debt crisis that occurred in late
October 1997, the Company's trade processing system for emerging market debt
was unable to handle smoothly the extraordinary spike in trading volume that
occurred for a sustained five-day trading period. As a result, the Company
experienced significant delays and backlogs in the processing and settlement
of such trades and a higher than usual incidence of disputed trades, all of
which negatively impacted fourth quarter earnings. Although the Company
believes that the electronic blotter and upgraded trade processing system that
is being implemented in 1998 (see Item 7 below) will mitigate against any such
recurrence, there can be no assurance that the Company will be successful in
such implementation, that the system will function as anticipated, or that
there will not be other, unanticipated system or technology failures that
could negatively impact the Company's operations or business. In addition,
although the Company currently anticipates that the "Year 2000" issue will not
materially disrupt its operations as the result of any failure by the
Company's systems to be Year 2000 compliant (see Item 7 below), the
possibility remains that the compliance status of its customers, or currently
unforeseen compliance issues faced by the Company, could have such a negative
impact.
Clearing Arrangements
Daiwa Securities America Inc. ("Daiwa") and Morgan Stanley & Co.
Incorporated ("Morgan Stanley") act as the primary clearing agents, on a
fully-disclosed basis, for MFI. Under the terms of these agreements, Daiwa and
Morgan Stanley clear as principals a significant portion of MFI's transactions
in emerging market debt and other securities and, among other services,
prepare and mail confirmations and monthly statements to customers. The Daiwa
agreement is terminable by either party upon 30 days' prior notice and the
Morgan Stanley agreement is terminable by either party upon 120 days' prior
notice. Because of the short notice period and because Daiwa handles the
majority of emerging market debt trades for MFI, a termination of its
agreement with MFI, in particular, could have a material adverse effect on the
Company's results of operation and financial condition if a new clearing
arrangement were not established in a timely fashion with another clearing
correspondent on terms acceptable to MFI. The anticipated April 1998
commencement of operations of the Emerging Markets Clearing Corporation (an
industry-owned matching and netting system for certain emerging market debt)
could mitigate to some extent any negative effects arising from such a
termination, but it is not expected to be fully phased-in and implemented
until 1999.
13
<PAGE>
European Market Unification
The "European Monetary Union" is scheduled to commence on January 1,
1999 when the European Currency Unit will be replaced by the "Euro," and those
national currencies which are to participate in the European Monetary Union
will ultimately cease to exist as separate currencies by virtue of being
replaced by the Euro. The introduction of a single currency for the European
Community ("EC") could eliminate the European cross-currency market and have
an adverse impact on the Company's business. Moreover, deregulation within the
EC will allow brokers from any EC country to conduct business in any other EC
country without the necessity of complying with the specific local
regulations, and could increase the competitive challenges faced by the
Company. Finally, to the extent that the Company or its customers fail to make
and complete in timely fashion any necessary modifications of their computer
software applications and systems to handle the new currency conversions
required by the Euro, there could be a negative impact on the Company's
business.
Litigation and Arbitration
Many aspects of the Company's business involve varying risks of
liability. In recent years, there has been an increasing incidence of
litigation and arbitration involving participants in the inter-dealer
brokerage industry, including employee claims alleging discrimination or
defamation in connection with terminations and competitor claims alleging
theft of trade secrets, unfair competition or tortious interference in
connection with new employee or new desk hires. A settlement or judgment
related to these or similar types of claims or activities could have a
material adverse effect on the Company's financial condition or results of
operations.
Lack of Diversification
EBIC and its subsidiaries and affiliates currently comprise
substantially all of Maxcor's business and assets. Accordingly, the prospects
for the Company's performance and the market prices for the Common Stock are
highly dependent upon the performance of EBIC's inter-dealer brokerage
business. Although the Company is continuously seeking to strengthen and
improve EBIC's inter-dealer brokerage business, it is also currently exploring
various options for diversifying the Company's businesses and sources of
income and strengthening its capital base. There can be no assurances,
however, that the Company will be successful in achieving these goals or
others related to diversification or, if achieved, whether they will
positively affect the Company's financial condition or results of operations.
14
<PAGE>
ITEM 2. PROPERTIES
The Company has principal offices in each of the following locations:
New York, New York; London, England; Tokyo, Japan; Toronto, Canada; Stamford,
Connecticut (beginning in April 1998); and Mexico City, Mexico. The Company
leases all of its office space and has material lease obligations with respect
to its New York and London premises. The Company occupies an aggregate of
approximately 49,000 square feet of space in 2 World Trade Center in downtown
New York under leases expiring on various dates from 2004 through 2007 (with a
lease break provision in 2002). The Company occupies approximately 36,000
square feet of space in downtown London under a lease expiring in 2018 (with a
lease break provision in 2003).
The Company believes that its facilities are suitable and adequate for
its present and anticipated purposes. See Note 20 of Notes to the Consolidated
Financial Statements for further information regarding future minimum rental
commitments under the Company's existing leases.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or its subsidiaries are subject to various legal
proceedings, arbitrations and claims that arise in the ordinary course of
their businesses. Although the results of legal proceedings and arbitrations
cannot be predicted with certainty, based on information currently available
and established reserves, management believes that resolving any currently
known matters will not have a material adverse impact on the Company's
consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of its fiscal year ended December 31, 1997.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently trades on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol "MAXF". Prior to
November 12, 1996, the Common Stock was quoted on the OTC Bulletin Board; an
NASD sponsored and operated inter-dealer automated quotation system for equity
securities not listed on The Nasdaq Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail markups, markdowns or
commissions and may not necessarily represent actual transactions.
The following table sets forth (i) the range of high and low sales
prices for the Common Stock, as reported by The Nasdaq Stock Market, for the
period beginning on November 12, 1996 when the Common Stock began trading on
the Nasdaq National Market and (ii) for all other periods, the range of high
and low closing bid prices for the Common Stock on the OTC Bulletin Board, as
reported by the NASD.
Common Stock: High Low
---- ---
Year Ended December 31, 1996
----------------------------
First Quarter................................. $4.875 $4.625
Second Quarter................................ 5.063 4.875
Third Quarter................................. 5.375 4.813
Fourth Quarter (through November 11).......... 5.25 3.50
Fourth Quarter (from November 12)............. 4.00 2.625
Year Ended December 31, 1997
----------------------------
First Quarter................................. $4.50 $2.875
Second Quarter................................ 3.375 2.375
Third Quarter................................. 4.25 2.813
Fourth Quarter................................ 4.563 1.688
As of March 26, 1998 there were 80 holders of record of the Common
Stock. The Company is aware that certain holders of record hold a substantial
number of shares of Common Stock as nominees for a significant number of
beneficial owners. Based on a broker-dealer inquiry made by the Company's
transfer agent in March 1998, the Company believes there are approximately 736
beneficial owners of the Common Stock.
The Company has never declared any cash dividends on the Common
Stock. It is the present intention of the Company's Board of Directors to
retain all earnings, if any, for use in the Company's business operations and,
accordingly, the Company does not anticipate declaring any cash dividends on
the Common Stock in the foreseeable future.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations," each included elsewhere in this report. Statement of
Operations data presented below includes reclassifications of certain revenue
and expense items which are not directly associated with operations. Such
reclassifications include interest income, interest expenses, foreign exchange
effects and other non-operating items.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations
Revenue:
Commission income $ 135,577,625 $ 144,586,661 $ 171,576,327 $ 178,109,899 $ 163,467,438
Other income 722,838 207,522 518,052 590,959 968,536
------------- ------------- ------------- ------------- -------------
136,300,463 144,794,183 172,094,379 178,700,858 164,435,974
-------------- ------------- ------------- ------------- -------------
Operating costs:
Payroll and related costs 86,763,854 96,207,365 110,915,257 115,536,731 106,477,319
Communication costs 12,987,800 15,633,010 17,187,573 18,288,441 16,010,272
Travel and entertainment 8,681,483 10,493,903 10,224,384 11,355,183 10,386,202
Occupancy costs 4,452,232 5,640,070 5,854,525 6,539,150 6,053,469
Depreciation and
amortization 4,192,404 4,248,181 4,568,164 4,734,101 5,318,983
Clearing fees 863,445 3,647,556 3,777,710 4,411,515 6,165,264
General and administrative 7,148,335 6,817,988 7,550,059 8,255,316 8,967,302
Write-off of goodwill 12,643,948
------------- ------------- ------------- ------------- -------------
137,733,501 142,688,073 160,077,672 169,120,437 159,378,811
------------- ------------- ------------- ------------- -------------
Operating profit (loss) ( 1,433,038) 2,106,110 12,016,707 9,580,421 5,057,163
------------- ------------- ------------- ------------- -------------
Other non-operating income
(expenses):
Interest expense ( 2,702,759) ( 1,635,547) ( 775,077) ( 693,132) ( 840,584)
Other non-operating
expenses ( 2,086,718) ( 520,607) ( 295,344) ( 632,247)
Other non-operating
income 1,487,918 490,000 815,130
Interest income 1,203,082 1,090,789 1,462,744 1,801,442 1,718,099
Foreign exchange gain
(loss) 64,003 ( 17,139) 214,295 ( 8,229) 137,449
------------- ------------- ------------- ------------- -------------
( 2,034,474) ( 592,504) 606,618 467,834 1,830,094
------------- ------------- ------------- ------------- -------------
Income (loss) before provision
for income taxes and
minority interest ( 3,467,512) 1,513,606 12,623,325 10,048,255 6,887,257
Provision for income taxes 4,858,901 3,333,989 7,393,196 6,650,606 5,757,897
------------- ------------- ------------- ------------- -------------
Income (loss) before
minority interest ( 8,326,413) ( 1,820,383) 5,230,129 3,397,649 1,129,360
Minority interest ( 442,673) ( 250,480) ( 1,767,854) 307,311 ( 1,398,352)
------------- ------------- ------------- ------------- -------------
Net income (loss) ($ 8,769,086) ($ 2,070,863) $ 3,462,275 $ 3,704,960 ($ 268,992)
============= ============= ============= ============= =============
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 76,631,544 $ 71,914,532 $ 82,078,742 $97,172,715 $88,051,513
Obligations under capitalized
leases 2,766,961 2,804,836 2,284,806 1,428,764 974,186
Notes payable 27,080,598 9,830,284 7,880,032 7,379,762 6,261,839
Total liabilities 65,695,698 43,360,381 50,185,747 64,881,249 56,778,293
Minority interest 548,179 492,154 501,731 ( 159,408) ( 330,025)
Stockholders' equity 10,387,667 28,061,997 31,391,264 32,450,874 31,603,245
Per Share Information (a)
Net income $ 0.39 $ 0.41 ($ 0.03)
Book value $ 3.51 $ 3.63 $ 3.42
Weighted average common shares
outstanding 8,949,656 8,949,656 9,243,201
</TABLE>
(a) The Merger acquisition of EBIC by Maxcor in August 1996 has been
accounted for as a recapitalization of EBIC. Per share information has
been presented as if all shares issued in the Merger had been issued as
of January 1, 1995 and all such shares were outstanding for the merged
and recapitalized entity since that date. See Notes 1 and 18 of Notes
to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's revenues currently are derived primarily from
commissions. Generally, the Company receives a commission from both
counterparties in a trade, although in trades of certain products only
one party pays a commission. The dollar amount of the average transaction
generating a commission varies significantly by the type of product and
the duration of the transaction. Similarly, the applicable commission
will vary according to product and may also reflect discounts for high
transaction volumes or other customer rebates.
Other sources of revenues include interest income, derived primarily
from deposits with clearing organizations and interest associated with
municipal securities positions, gains and losses on securities
transactions (currently primarily in connection with the Company's
municipal securities business), earnings from the Company's equity
affiliate, Yagi Euro, and foreign exchange gains and losses.
The largest single component of the Company's expenses is
compensation paid to its brokers. Attracting and retaining qualified
brokerage personnel with strong customer relationships is a prerequisite
in the Company's business and in the brokerage business in general.
Brokers are generally compensated by a combination of fixed salary and
incentive payments based on commissions generated by them or on the net
profitability of their
18
<PAGE>
particular products. For this purpose, revenue and direct expenses are
regularly tracked by desk (which may involve one or more products) and
often by broker, at each location. Direct client contact, including
entertainment, is also an integral part of the Company's marketing
program and represents another significant component of its expenses.
The costs of maintaining sophisticated trading room environments and
a worldwide data and communications network comprise another significant
portion of the Company's expenses. The Company's ability to compete
effectively is significantly dependent on its ability to maintain a high
level of client service through its proprietary software, computerized
screen displays and digital networks. It is this infrastructure and
technological commitment that enables the Company to support its existing
client base and product lines, as well as provides a base for offering
brokerage or other services in additional or newly developing financial
instruments. Product expansion, when undertaken, also generally leads to
an increase in the number of brokerage personnel since the markets
usually require brokers to specialize in a single product or group of
related products, rather than to function as market generalists.
Reference is made to Item 6 above, "Selected Financial Data," for a
summary table comparison of changes in the major categories of revenues
and expenses over the Company's five most recent fiscal years.
Year Ended December 31, 1997
The year ended December 31,1997 proved to be a difficult and
challenging year for the Company and, management believes, for other
inter-dealer brokers. Mergers and acquisitions in the banking community,
including, with the relaxation of regulatory barriers, between commercial
banks and investment banks, have reduced the number of customers in the
marketplace. This consolidation has increased the competition among
inter-dealer brokers and placed additional downward pressure on already
low commission rates. As a result, the Company believes there is a need
more than ever to focus on brokering products where it can be among the
top two or three brokers in the markets served.
In view of the highly competitive market environment, management
decided in 1997 to refocus its attention on the Company's core business
units located in New York (and Connecticut), London and Tokyo.
Accordingly, during the first half of the year management reviewed each
of the Company's operations to identify the strategic business units for
each office and exit certain areas that were either marginal to
operations or unprofitable. In Australia, the Company liquidated its
joint venture that had been established to broker Australian dollar
derivative products. The joint venture was not successful in gaining a
sufficient market share to cover operating costs, and the Company was
unable to agree with its joint venture partner on a recapitalization
plan. In South Africa, significant delays in receiving necessary
regulatory approvals led to the Company forgoing its effort to establish
an emerging markets screen system with counterparties located there. In
Canada, the Company discontinued its Canadian Automated Brokerage Service
implemented for brokering Canadian
19
<PAGE>
repurchase agreements and Canadian government securities on a fully
automated basis. Notwithstanding a considerable marketing effort and a
technically and operationally sound automated system, the Company was not
able to garner sufficient market share to justify allocation of
additional capital resources to this project. The Company subsequently
decided to exit the Canadian repurchase agreement market completely and,
accordingly, reduced the broker headcount in its Toronto office by over
50%.
In London, the Company closed several desks that suffered from poor
market positions or limited growth potentials in the London market,
including its European currency and Sterling deposits desks. Mainly as a
result, the broker headcount in London during 1997 was reduced by
approximately 25%.
The Company's largest trading department in fiscal year 1997 (as was
the case in fiscal 1996) was emerging markets, where the Company
continued to maintain a leading market position in the brokerage of
emerging market products, which include Brady bonds, global bonds,
Eurobonds, local issues and loans, as well as options and repurchase
agreements on the foregoing. During the first quarter, as part of the
Company's continued expansion in this area, the Company opened an office
in Mexico to broker local market securities (i.e. Cetes, Pagares, Bondes
and Udibonos) and, through the further distribution of its proprietary
screen system, to service Mexican-based counterparties. As a result, the
Company has established a strong market presence in Mexico, although many
of its competitors are now opening offices there to compete.
The Company in 1997 also continued to expand its presence in the
energy derivatives market, where deregulation of the energy industry has
led to a fast growing market in which the Company has carved a strong
market presence. In addition to its standard brokerage products,
primarily consisting of options and physical contracts based on natural
gas, electricity and emissions, the Company in 1997 added the brokerage
of coal and weather-related derivatives. The Company will shortly move its
energy derivatives business to new office premises in Stamford,
Connecticut to provide additional space for its growth.
The Company's interest rate derivatives business in Tokyo and its
interest rate options business in London also maintained strong market
positions in 1997. A current main focus of the Company is to build on
these strengths and improve the balance of its interest rate derivatives
businesses in both New York and London. The Company believes that with a
combination of greater focus and the addition of several experienced
brokers, the interest rate derivative markets can provide good
opportunities for profitable brokerage operations.
The Company also simplified its capital structure in 1997 by
completing the Exchange Offer. Pursuant thereto, 2,380,975 shares of
Common Stock were issued in exchange for 14,283,296 (or approximately
95.1%) of the Company's then-outstanding Warrants.
20
<PAGE>
The fourth quarter of 1997 was adversely impacted by the
extraordinary trading volume and price volatility that occurred in
emerging market debt securities in late October 1997. During a five-day
trading period in late October, the Company's emerging market debt
securities business experienced an almost five-fold increase in its
normal trading volume and unprecedented price volatility in such
securities. Unfortunately, the Company's front and back office systems
were not fully able to handle this increased volume, resulting in the
Company incurring significant delays and backlogs in processing and
settling its trades and a higher than usual incidence of disputed trades.
Although the increased trading volume generated increased commission
revenue, the delays, backlogs and disputes resulted in additional costs
of approximately $6,000,000, principally consisting of payments related
to settlement of disputes, interest claims by customers and financing
charges from clearing firms. These payments have been reflected as a
reduction of commission income in the consolidated statement of
operations included in the Consolidated Financial Statements.
A secondary effect of this temporary spike in activity was
subsequent reduced trading volume in emerging market debt securities for
the balance of the fourth quarter, as customers focused on settling
outstanding transactions and, more generally, appeared to be adjusting to
the after-effects of the market turbulence. During this period, the
Company's management and emerging markets brokers allocated significant
time and resources to restoring and preserving the Company's inter-dealer
brokerage market position in emerging market debt securities, and the
Company believes they have been largely successful in that effort.
The Company is currently implementing an electronic blotter and
upgraded processing system that is being tested to handle extraordinary
emerging markets activity in the future, including trading volume well
beyond that which was experienced during October 1997. The Company
believes this system, which was in the first stages of being implemented
even before the events of late October, would have substantially avoided
or mitigated the problems the Company experienced if it had been fully
implemented at that time. The Company has also prepared and submitted a
report about the high-volume trading period to its regulator, the NASDR,
and continues to cooperate with the NASDR in its ongoing review of the
events and effects of the period.
In late 1997, the Company took steps to establish, and recently
received regulatory approval to commence, an investment banking business
in private placements and financial advisory work, to be conducted out of
the Company's MFI broker-dealer subsidiary. The Company also continued to
explore ways to exploit the pricing information and other data generated
by its inter-dealer brokerage businesses, including by recently
establishing a separate information subsidiary, Maxcor Information Inc.,
and, through such subsidiary, undertaking the development of an Internet
web site to market and sell certain such information. Although management
believes both ventures represent important diversifications of the
Company's business, it is too soon to tell whether either venture will be
profitable or contribute materially to revenues in 1998.
21
<PAGE>
Certain statements contained in this Item 7 and elsewhere in this
report are forward-looking statements. These are based on management's
current knowledge of factors affecting the Company's business. Actual
results could differ materially from those currently anticipated.
Investors are cautioned that such forward-looking statements involve risk
and uncertainty, including, but not limited to, the factors outlined
under the "Competition," "Regulation" and "Cautionary Statements"
captions of Item 1 of this report.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Commission income for the year ended December 31, 1997 decreased
$14,642,461 to $163,467,438, compared to $178,109,899 for the year ended
December 31, 1996. The net decrease was primarily attributable to the
disposition of the Company's joint venture in Hong Kong as of January 1,
1997, which accounted for approximately $8,085,000 of the decrease, and
the closure of several departments in London, primarily deposit-based
businesses, which accounted for an additional approximately $8,000,000.
Offsetting this decrease was a net increase attributable to increased
revenues in emerging market products, commodity derivatives and
convertible bonds, offset by revenue decreases in repurchase agreements
and interest rate derivatives in New York and London.
Interest income for 1997 decreased $83,343 to $1,718,099, compared
to $1,801,442 for 1996, principally due to a decrease in average cash
balances throughout the year.
Other income for 1997 increased by $523,256 to $1,105,985, from
$582,729 in 1996. The increase was principally due to increased foreign
exchange gains of approximately $146,000 and increased gains on
securities transactions of $357,000.
Payroll and related costs for 1997 decreased $9,059,412 to
$106,477,319, compared to $115,536,731 for 1996. The decrease was
primarily due to the disposition of the Company's Hong Kong joint
venture, accounting for approximately $6,000,000, and the closure of
certain departments in London as noted above.
Communication costs for 1997 decreased $2,278,169 to $16,010,272,
compared to $18,288,441 for 1996. The decrease was primarily due to the
disposition of the Company's Hong Kong joint venture and the London
department closures.
Travel and entertainment costs for 1997 decreased $968,981 to
$10,386,202, as compared to $11,355,183 for 1996. Such costs represented
approximately 6.4% of commission income for 1997, as was the case for
1996. The absolute decrease is principally due to the department closures
in London and the disposition of the Company's Hong Kong joint venture.
Management continually reviews the level of expenditures by department,
with the goal of balancing the benefits of such expenditures while
controlling the costs.
22
<PAGE>
Occupancy costs represent expenses incurred in connection with
various operating leases in respect of the Company's office premises and
include base rent and related escalations, maintenance, electricity and
real estate taxes. These costs decreased $485,681 to $6,053,469 for 1997,
compared to $6,539,150 for 1996. The net decrease is principally
attributable to the disposition of the Company's Hong Kong joint venture,
which resulted in a decrease of approximately $800,000, offset in part by
rent and operating expense escalations elsewhere.
In 1997, depreciation and amortization expense, which consists
principally of depreciation of communication and computer equipment,
automobile leases and amortization of leasehold improvements, increased
$584,882 to $5,318,983, compared to $4,734,101 for 1996, reflective of
continued expansion of the Company's proprietary screen system and other
front office technology expenditures, principally in emerging market debt
related business. These expenditures include the expansion of the
Company's screen system into Mexico and Russia and the design and initial
implementation of the electronic blotter system for use in the brokering
of emerging market debt products.
Clearing fees are fees for transaction settlements and credit
enhancement, which are charged by clearing institutions where the Company
acts as riskless principal on a fully matched basis. These expenses
increased $1,753,749 to $6,165,264 for 1997, compared to $4,411,515 for
1996, due principally to the growth in the volume of transactions in
emerging market debt products and an increase in the per transaction cost
which was effective January 1997.
Interest expense increased $147,452 to $840,584 in 1997, compared to
$693,132 in 1996. The net increase is attributable to the effects of an
increase in interest expense associated with financing municipal
securities positions, reduced by a decrease in interest expense
associated with a repayment of principal on the Company's indebtedness
incurred in connection with the acquisition of certain EBIC predecessor
companies.
General, administrative and other expenses include such operating
expenses as corporate insurance, office supplies and expenses, legal
fees, audit and tax fees, consulting fees, food costs and dues to various
industry associations. These expenses decreased $735,390 to $8,152,172 in
1997, compared to $8,887,562 in 1996, principally due to the reversal of
excess litigation reserves in the U.K. of approximately $815,000 and the
absence in 1997 of one-time expenses incurred in 1996 of $427,000
relating to the disposition of the Hong Kong joint venture and the
establishment of reserves for the Australian joint venture and of
$635,000 relating to non-recurring legal fees. These decreases were
offset in part by the accrual of a reserve of approximately $506,000 for
the disposal of equipment and an aggregate increase of approximately
$600,000 in various miscellaneous expenses.
Provision for income taxes decreased $892,709 to $5,757,897 for
1997, compared to $6,650,606 for 1996, primarily due to a decrease in
income before tax. The Company has
23
<PAGE>
historically incurred a high effective tax rate due to the
non-deductibility of certain expenses, principally entertainment
expenses. The increased effective tax rate for 1997 reflects the
heightened effect of the non-deductibility of these expenses on lower
pre-tax accounting income. The effective tax rate is also impacted by the
distribution of pre-tax accounting income among the different tax
jurisdictions in which the Company operates, and the statutory tax rates
in those jurisdictions.
Minority interest in income of consolidated subsidiaries of
$1,398,352 for 1997 represents the net income allocable to the Company's
non-controlling shareholder in the Tokyo Partnership. Minority interest
in losses of consolidated subsidiaries of $307,311 for 1996 relates
primarily to the non-controlling shareholder's share of earnings of the
Tokyo Partnership, offset by losses incurred by the Australia operations,
which have been closed.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Commission income for the year ended December 31, 1996 increased
$6,533,572 to $178,109,899, compared to $171,576,327 for the year ended
December 31, 1995. Commission income for 1996 is primarily reflective of
increased business in emerging market debt, commodity derivatives and
repurchase agreements. Part of the increase is also attributable to new
business in 1996, principally municipal securities and securities
lending.
Interest income for 1996 increased $338,698 to $1,801,442, compared
to $1,462,744 for 1995, due to a slight increase in interest bearing
assets, principally deposits with clearing organizations, as well as
approximately $147,000 in interest associated with municipal securities
positions held during 1996.
Other income for 1996 decreased by $149,618 to $582,729, from
$732,347 in 1995. The decrease was principally due to the net effect for
1996 of reduced foreign exchange gains of approximately $220,000, reduced
earnings from the Company's equity affiliate, Yagi Euro, of approximately
$210,000 and an increase in income from gains on securities transactions
of $333,000.
Payroll and related costs for 1996 increased $4,621,474 to
$115,536,731, compared to $110,915,257 for 1995. These costs increased
slightly to 64.9% of commission income for 1996, as compared to 64.6% of
commission income for 1995. The increase was primarily due to the
inclusion of a provision for severance and related costs of $2,787,000
which was accrued to fully provide for the costs associated with certain
desk closures and management changes. Absent the provision for severance
costs, payroll costs as a percentage of commission income decreased due
to management's efforts to reduce compensation costs by more closely
correlating compensation to commission income.
24
<PAGE>
Communication costs for 1996 increased $1,100,868 to $18,288,441,
compared to $17,187,573 for 1995. The increase was primarily the result
of expansion of business, principally in emerging market debt.
Travel and entertainment costs for 1996 increased $1,130,799 to
$11,355,183, or 6.4% of commission income, compared to $10,224,384 or
6.0% of commission income for 1995. The overall increase is reflective of
efforts to expand business as well as gain market share in existing
businesses where quiet markets prevailed.
Occupancy costs increased $684,625 to $6,539,150 for 1996, compared
to $5,854,525 for 1995. The increase is principally attributable to the
increase in rent of $284,000 for premises of the Company's Hong Kong
joint venture, the absence of a rent credit received in 1995 for the U.K.
premises aggregating $250,000, and the costs of other small offices
opened in Connecticut, Pennsylvania and Mexico pursuant to expansion of
business.
In 1996, depreciation and amortization expense increased $165,937 to
$4,734,101, compared to $4,568,164 for 1995, reflective of continued
expansion of the Company's proprietary screen system principally in
emerging market debt related business.
Clearing fees increased $633,805 to $4,411,515 for 1996, compared to
$3,777,710 for 1995, due principally to the growth in the volume of
transactions in emerging market debt products.
Interest expense decreased $81,945 to $693,132 in 1996, compared to
$775,077 in 1995. The net decrease is attributable to the effects of
reduced interest expense associated with a repayment of principal on the
Company's indebtedness incurred in connection with the acquisition of
certain EBIC predecessor companies, partially offset by an increase in
interest associated with financing municipal securities positions.
General, administrative and other expenses increased $1,042,159 to
$8,887,562 in 1996, compared to $7,845,403 in 1995. The increase is
principally attributable to costs of approximately $427,000 that were
accrued in 1996 relating to the disposition of the Hong Kong joint
venture and the establishment of reserves for losses at the Australia
joint venture, and non-recurring legal and accounting fees of
approximately $632,000.
Provision for income taxes decreased $742,590 to $6,650,606 for
1996, compared to $7,393,196 for 1995, primarily due to a decrease in
income before tax. The increased effective tax rate reflects the effect
of losses in certain foreign taxing jurisdictions for which no tax
benefits have been recorded. The increased effective tax rate for 1996
also reflects the heightened effect of the non-deductibility of certain
expenses, principally entertainment expenses, on lower pre-tax accounting
income.
25
<PAGE>
Minority interest in loss of consolidated subsidiaries of $307,311
for 1996 represents the combined interests of the Company's joint venture
partners in the aggregate losses incurred by the Hong Kong and Australia
operations of approximately $1,404,000, reduced by the Company's
non-controlling shareholder's interest in the Tokyo Partnership of
approximately $1,096,000. Minority interest in income of consolidated
subsidiaries of $1,767,854 for 1995 relates primarily to the Company's
non-controlling shareholder's share of earnings of the Tokyo Partnership.
Liquidity and Capital Resources
Operating Activities
A substantial portion of the Company's assets, similar to other
brokerage firms, is liquid, consisting of cash, cash equivalents and
assets readily convertible into cash, such as commissions receivable,
receivables from broker-dealers, customers and clearing firms and
securities owned.
Securities owned principally reflect municipal security positions
taken in connection with the Company's brokerage of municipal securities
business. Positions are generally held for short periods of time and for
the purpose of facilitating anticipated customer needs and are generally
financed by a combination of cash margin and short-term borrowings from
the Company's clearing bank. At year-end 1997, as reflected on the
consolidated statement of financial condition, the Company had net assets
relating to securities transactions of approximately $4.6 million,
reflecting securities owned of approximately $10.5 million, securities
sold, not yet purchased of approximately $0.8 million and a receivable
from broker-dealers and customers of approximately $1.7 million, financed
by short-term borrowings of approximately $6.2 million and a payable to
broker-dealers and customers of approximately $0.6 million.
In 1996, the Company's U.S. broker-dealer subsidiary, MFI, became a
member of GSCC for the purpose of clearing U.S. Treasury repurchase
agreements. Such membership requires a minimum net regulatory capital of
$10,000,000, and a pledge of $5,000,000 in U.S. Treasury securities,
which has been reflected as deposits with clearing organizations on the
consolidated statement of financial condition.
Net cash provided by operations for 1997 was approximately $4.6
million. The increase in cash is the combined result of a net loss of
approximately $300,000 adjusted to reflect approximately $5.3 million of
non-cash expenses, principally for depreciation and amortization, and the
net negative effects of other working capital items.
Net cash used in operations for 1996 was approximately $1.8 million.
The net use of cash is the result of net income of approximately $3.7
million adjusted to reflect approximately $4.7 of non-cash expenses,
principally for depreciation and amortization. These
26
<PAGE>
positive cash effects were offset by decreases in cash attributable to
increased deposits with clearing organizations of $5.1 million (in
connection with the Company's GSCC membership described above) and an
increase in net assets associated with securities transactions of
approximately $4.5 million.
Operating activities in 1995 provided approximately $10.4 million in
cash, resulting from approximately $3.5 million in net income plus
approximately $4.6 million in non-cash items, principally depreciation
and amortization, and the net positive effects of other working capital
items.
The Company and its subsidiaries, in the ordinary course of their
business, are subject to extensive regulation at international, federal
and state levels by various regulatory bodies which are charged with
safeguarding the integrity of the securities and other financial markets
and protecting the interest of customers. The compliance requirements of
these different regulatory bodies may include, but are not limited to,
net capital or stockholders' equity requirements. The Company has
historically met regulatory net capital or stockholders' equity
requirements and believes it will be able to continue to do so in the
future.
Investing Activities
Investing activities for 1997, 1996 and 1995 reflect cash used of
approximately $2.5 million, $3.9 million and $2.2 million, respectively,
primarily for purchases of fixed assets. These purchases are reflective
of the Company's continuing commitment, as well as its competitive need,
to upgrade communication and information system technology.
Financing Activities
Notes payable at December 31, 1997 of approximately $6.3 million
reflects the remaining two annual installments of principal due on
November 30 of each of 1998 and 1999 on notes issued by the Company in
connection with the acquisition of EBIC's predecessor business in
December 1986, which aggregate $4.2 million, and approximately $2.1
million which relates to secured financing obtained by the Company in
December 1997 in the form of a fixed rate note payable to GE Capital
Corporation. In each of 1995, 1996 and 1997 the Company repaid
approximately $2 million of the acquisition notes. The principal and
interest payments of these notes are expected to be paid in timely
fashion from the Company's resources.
Net cash used in financing activities for 1997 was approximately
$2.5 million and is reflective of a net repayment of notes payable of
approximately $1.1 million, $0.4 million decreased obligations under
capitalized leases, acquisition costs for treasury stock of approximately
$0.2 million and expenses relating to the issuance of common stock
pursuant to the Exchange Offer (described above) of approximately $0.3
million.
27
<PAGE>
Net cash used in financing activities for 1996 was approximately
$3.5 million and is reflective of a net effect of approximately $2.2
million of net cash used in connection with the deemed recapitalization
of EBIC pursuant to the Merger (as reflected in the consolidated
statement of cash flows included in the Consolidated Financial
Statements), net repayment of notes payable of approximately $1.0 million
and decreased obligations under expired capitalized leases of
approximately $1.0 million.
Cash used in financing activities for 1995 was approximately $2.5
million and is primarily attributable to repayment of notes payable of
approximately $2.0 million and decreased obligations under capitalized
leases of approximately $500,000.
Effects of Inflation
Because the Company's assets are to a large extent liquid in nature,
they are not significantly affected by inflation. However, increases in
certain Company expenses due to inflation, such as employee compensation,
travel and entertainment and occupancy and communication costs may not be
readily recoverable in the price of its services. In addition, to the
extent inflation increases or decreases volatility in the securities
markets, the Company's brokerage business is likely to be affected by
corresponding increases or decreases in brokerage transaction volumes.
Year 2000 Compliance
The Company is in the process of modifying and upgrading its
computer software applications and systems in a manner that the Company
expects will incorporate the "Year 2000" dating changes necessary to
permit correct recording of year dates for 2000 and later years. The
Company does not currently expect the cost of this process to be material
to its business, operations or financial condition. The Company believes
that it will be able to achieve substantial or complete internal
compliance by the end of 1998, and does not currently anticipate any
material disruption to its operations as the result of any failure by the
Company to be in compliance. The Company is currently in the process of
surveying the compliance status of its suppliers and customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item 7A is not currently applicable
to the Company.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of
this Form 10-K. See Item 14 and the F-pages that follow.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by Item 9 is incorporated herein by
reference to the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders (the "Proxy Statement"). The Company intends to
file the Proxy Statement with the SEC on or prior to April 30, 1998. The
Company has previously reported such information, which relates to its
decision of December 2, 1996 to change independent accountants from BDO
Seidman, LLP to Price Waterhouse LLP, in Amendment No. 1 to its Current
Report on Form 8-K/A, filed with the SEC on December 13, 1996, and in its
Schedule 14A relating to its 1997 Annual Meeting of Stockholders, filed
with the SEC on April 29, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by
reference to the Proxy Statement. The Company intends to file the Proxy
Statement with the SEC on or prior to April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference to the Proxy Statement, except that such incorporation by
reference shall not be deemed to specifically incorporate by reference
the information referred to in Item 402(a)(9) of Regulation S-K. The
Company intends to file the Proxy Statement with the SEC on or prior to
April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by
reference to the Proxy Statement. The Company intends to file the Proxy
Statement with the SEC on or prior to April 30, 1998.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the Proxy Statement. The Company intends to file the Proxy
Statement with the SEC on or prior to April 30, 1998.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Listed on page F-2 of the Consolidated Financial Statements
included in this Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial
Statements.
(a)(3) Exhibits
Listed in the Exhibit Index appearing at page X-1 of this Form
10-K.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during
the fourth quarter of its fiscal year ended December 31, 1997.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MAXCOR FINANCIAL GROUP INC.
By: /s/ Gilbert D. Scharf
--------------------------------------
Gilbert D. Scharf,
Chairman of the Board, President and
Chief Executive Officer
Dated: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Gilbert D. Scharf Chairman of the Board, President March 30, 1998
- --------------------- and Chief Executive Officer
Gilbert D. Scharf
/s/ Keith E. Reihl Chief Financial and Principal March 30, 1998
- ------------------ Accounting Officer, Treasurer and
Keith E. Reihl Director
/s/ Larry S. Kopp Director March 30, 1998
- -----------------
Larry S. Kopp
/s/ Michael J. Scharf Director March 30, 1998
- ---------------------
Michael J. Scharf
/s/ James W. Stevens Director March 30, 1998
- --------------------
James W. Stevens
/s/ Frederick B. Whittemore Director March 30, 1998
- ---------------------------
Frederick B. Whittemore
/s/ William B. Wigton Director March 30, 1998
- ---------------------
William B. Wigton
</TABLE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 1995, 1996 AND 1997
--------------------------------
F-1
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DECEMBER 31, 1995, 1996 AND 1997
--------------------------------
Contents Page
- --------------------------------------------------------------------------------
Report of Independent Accountants F-3
Consolidated Financial Statements:
Consolidated Statement of Financial Condition F-4
Consolidated Statement of Operations F-6
Consolidated Statement of Changes in Stockholders' Equity F-7
Consolidated Statement of Cash Flows F-8
Notes to the Consolidated Financial Statements F-10
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
and Stockholders of
Maxcor Financial Group Inc.
In our opinion, the accompanying consolidated statement of financial
condition and the related consolidated statements of operations,
changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Maxcor Financial Group
Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
New York, New York
March 17, 1998
F-3
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
---------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 18,231,926 $ 18,041,631
Commissions receivable 18,558,643 16,177,429
Deposits with clearing organizations 7,181,992 9,048,922
Receivable from clearing firms 2,200,062 2,585,762
Receivable from broker-dealers and customers 9,042,613 1,723,000
Securities owned 8,751,276 10,497,465
Prepaid expenses and other assets 8,145,969 7,972,400
Deferred tax asset 6,662,193 6,331,637
Equity in affiliated companies 2,756,741 2,606,987
Furniture, equipment and leasehold improvements 13,624,500 11,459,523
Intangible assets 2,016,800 1,606,757
-------------- --------------
Total assets $ 97,172,715 $ 88,051,513
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
---------------------------------------------
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
- ------------------------------------ ------------- ------------
<S> <C> <C>
Liabilities:
Short-term bank loans $ 9,688,983 $ 6,225,928
Accounts payable and accrued liabilities 17,336,032 18,820,536
Accrued compensation payable 22,973,060 18,202,561
Payable to broker-dealers and customers 1,826,250 569,458
Income taxes payable 1,804,543 4,286,269
Securities sold, not yet purchased 1,724,531 780,849
Deferred taxes payable 719,324 656,667
Obligations under capitalized leases 1,428,764 974,186
Notes payable 7,379,762 6,261,839
------------- -------------
64,881,249 56,778,293
------------- -------------
Minority interest in consolidated subsidiaries ( 159,408) ( 330,025)
------------- -------------
Commitments and contingencies (Notes 20 and 21)
Stockholders' equity:
Preferred stock, at December 31, 1996 and 1997,
$.001 par value, 1,000,000 shares authorized;
none outstanding
Common stock, at December 31, 1996 and 1997,
$.001 par value, 30,000,000 shares authorized;
8,949,656 shares and 11,330,631 shares outstanding
at December 31, 1996 and 1997, respectively 8,950 11,331
Additional paid-in capital 33,533,867 33,187,476
Treasury stock at cost; 61,638 shares of common stock
held at December 31, 1997 ( 209,451)
Accumulated deficit ( 3,546,081) ( 3,815,073)
Foreign translation adjustment 2,454,138 2,428,962
------------- -------------
Total stockholders' equity 32,450,874 31,603,245
------------- -------------
Total liabilities and stockholders' equity $ 97,172,715 $ 88,051,513
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
December 31, December 31, December 31,
1995 1996 1997
<S> <C> <C> <C>
Revenue:
Commission income $ 171,576,327 $ 178,109,899 $ 163,467,438
Interest income 1,462,744 1,801,442 1,718,099
Other income 732,347 582,729 1,105,985
-------------- -------------- --------------
173,771,418 180,494,070 166,291,522
-------------- -------------- --------------
Costs and expenses:
Payroll and related costs 110,915,257 115,536,731 106,477,319
Communication costs 17,187,573 18,288,441 16,010,272
Travel and entertainment 10,224,384 11,355,183 10,386,202
Occupancy costs 5,854,525 6,539,150 6,053,469
Depreciation and amortization 4,568,164 4,734,101 5,318,983
Clearing fees 3,777,710 4,411,515 6,165,264
Interest expense 775,077 693,132 840,584
General, administrative and other expenses 7,845,403 8,887,562 8,152,172
-------------- -------------- --------------
161,148,093 170,445,815 159,404,265
-------------- -------------- --------------
Income before provision for income taxes and
minority interest 12,623,325 10,048,255 6,887,257
Provision for income taxes 7,393,196 6,650,606 5,757,897
-------------- -------------- --------------
Income before minority interest 5,230,129 3,397,649 1,129,360
Minority interest in (income) loss of
consolidated subsidiaries ( 1,767,854) 307,311 ( 1,398,352)
-------------- -------------- --------------
Net income (loss) $ 3,462,275 $ 3,704,960 ($ 268,992)
============== ============== ==============
Weighted average common shares outstanding 8,949,656 8,949,656 9,243,201
Basic and diluted earnings per share $.39 $.41 ($.03)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
----------------------------------------------------
<TABLE>
<CAPTION>
Notes
Additional receivable Foreign
Common paid-in Treasury Accumulated from translation
stock capital stock deficit Stockholders adjustment Total
----- ------- ----- ------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 $ 4,258 $ 48,200,186 ($10,177,107) ($10,713,316) ($2,283,886) $ 3,031,862 $ 28,061,997
Net income 3,462,275 3,462,275
Expenses relating
to acquisition
of common stock ( 7,146) ( 7,146)
Repayment of
stockholder notes 40,177 40,177
Foreign translation ( 166,039) ( 166,039)
adjustment -------- ------------ ----------- ----------- ----------- ----------- ------------
Balance at
December 31, 1995 4,258 48,193,040 ( 10,177,107) ( 7,251,041) ( 2,243,709) 2,865,823 31,391,264
Retirement of
treasury stock ( 2,587) ( 10,174,520) 10,177,107
Net income 3,704,960 3,704,960
Foreign
translation ( 411,685) ( 411,685)
adjustment
Recapitalization in
connection with
the Merger:
Retirement of EBIC
stock ( 1,671) 1,671
Issuance of
shares to
EBIC shareholders 8,950 18,234,300 18,243,250
Cash consideration
paid to EBIC
shareholders ( 21,955,012) ( 21,955,012)
Repayment of
stockholder 2,243,709 2,243,709
notes
EBIC expenses
incurred in
connection
with Merger ( 765,612) ( 765,612)
------- ------------ ------------ ---------- ----------- ----------- ------------
Balance at
December 31, 1996 8,950 33,533,867 ( 3,546,081) 2,454,138 32,450,874
Issuance of shares
in Exchange Offer 2,381 ( 2,381)
Net loss ( 268,992) ( 268,992)
Foreign translation
adjustment ( 25,176) ( 25,176)
Acquisition of
treasury stock ( 209,451) ( 209,451)
Expenses incurred in
connection with
Exchange Offer ( 344,010) ( 344,010)
------- ------------ ------------ ---------- ----------- ----------- ------------
Balance at
December 31, 1997 $11,331 $ 33,187,476 ($ 209,451) ($3,815,073) $ $ 2,428,962 $ 31,603,245
======= ============ ============ ========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
December 31, December 31, December 31,
1995 1996 1997
----------- ------------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,462,275 $ 3,704,960 ($ 268,992)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,568,164 4,734,101 5,318,983
Provision for doubtful accounts ( 48,956) ( 45,361) 96,203
Gain on sale of exchange memberships ( 14,000) ( 8,000)
Undistributed earnings of unconsolidated subsidiaries ( 537,571) ( 636,148) ( 63,472)
Minority interest in consolidated subsidiaries 9,249 ( 1,403,631) ( 342,308)
Imputed interest expense 129,358 106,287 83,959
Amortization of deferred expenses 5,269 1,457 1,457
Deferred income taxes ( 4,522,662) ( 1,055,635) 222,733
Change in assets and liabilities:
(Increase) decrease in commissions receivable ( 1,654,378) 644,622 1,998,671
Increase in deposits with clearing organizations ( 1,877,041) ( 5,092,794) ( 1,872,061)
Decrease (increase) in receivable from clearing firms 852,110 ( 607,412) ( 385,700)
(Increase) decrease in receivable from broker-dealers and
customers ( 9,042,613) 7,319,613
Decrease (increase) in securities owned 967,500 ( 8,751,276) ( 1,746,189)
(Increase) decrease in prepaid expenses and other
assets ( 478,684) 1,184,235 364,383
Increase (decrease) in short-term bank loans 9,688,983 ( 3,463,055)
(Decrease) increase in accounts payable and accrued
liabilities ( 243,403) 569,448 1,544,633
Increase (decrease) in accrued compensation payable 5,552,106 6,231,912 ( 4,436,546)
Increase (decrease) in payable to broker-dealers and
customers 1,825,650 ( 1,256,792)
Increase (decrease) in income taxes payable 5,494,722 ( 5,555,680) 2,480,599
(Decrease) increase in securities sold, not yet
purchased ( 1,280,000) 1,724,531 ( 943,682)
----------- ------------- -------------
Net cash provided by (used in) operating activities 10,384,058 ( 1,774,364) 4,644,437
----------- ------------ -------------
Cash flows from investing activities:
Net purchase of fixed assets ( 2,059,449) ( 4,030,004) ( 3,050,373)
Investment in equity affiliates ( 93,745) 113,070 58,520
Net (purchase) sale of exchange memberships ( 25,000) 148,000
Proceeds from the sale of subsidiary 322,622
----------- ------------ -------------
Net cash used in investing activities ( 2,178,194) ( 3,916,934) ( 2,521,231)
----------- ------------ -------------
</TABLE>
F-8
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Continued)
<TABLE>
<CAPTION>
For the Year Ended
December 31, December 31, December 31,
1995 1996 1997
----------- ------------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of notes payable ( 2,037,502) ( 1,027,396) ( 3,203,573)
Issuance of note payable 2,140,000
Decrease in obligations under capitalized leases ( 507,946) ( 1,001,529) ( 397,717)
Increase (decrease) in payable to minority
shareholders 743,000 ( 455,262)
Issuance of common stock, net of expenses ( 7,146)
Expenses incurred in connection with
Exchange Offer ( 344,010)
Acquisition of treasury stock ( 209,451)
Issuance of shares in connection with Merger 18,243,250
EBIC expenses incurred in connection with Merger ( 765,612)
Cash merger consideration paid to EBIC ( 21,955,012)
shareholders
Repayments of notes receivable from stockholders 40,177 2,243,709
----------- ------------ -------------
Net cash used in financing activities ( 2,512,417) ( 3,519,590) ( 2,470,013)
----------- ------------ -------------
Effect of exchange rate changes on cash ( 35,370) 429,464 156,512
----------- ------------ -------------
Net increase (decrease) in cash and
cash equivalents 5,658,077 ( 8,781,424) ( 190,295)
Cash and cash equivalents at beginning of year 21,355,273 27,013,350 18,231,926
----------- ------------ -------------
Cash and cash equivalents at end of year $ 27,013,350 $ 18,231,926 $ 18,041,631
=========== ============ =============
Supplemental disclosures of cash flow information:
Interest paid $ 650,007 $ 616,750 $ 768,270
Income taxes paid 881,875 12,070,364 2,124,722
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-9
<PAGE>
MAXCOR FINANCIAL GROUP INC.
---------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
DECEMBER 31, 1995, 1996 AND 1997
--------------------------------
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
- ------------------------------------------------
Maxcor Financial Group Inc. (the "Company"), formerly Financial Services
Acquisition Corporation, was incorporated in Delaware on August 18, 1994 with
the objective of acquiring or merging with an operating business in the
financial services industry. To this end, the Company consummated an initial
public offering in December 1994 (the "IPO"), pursuant to which it issued
3,583,333 units, each comprised of one share of common stock, $.001 par value
("Common Stock"), and two redeemable common stock purchase warrants, and
raised net proceeds of approximately $20 million.
On March 8, 1996, the Company entered into a merger agreement to acquire Euro
Brokers Investment Corporation ("EBIC"), which since 1986 was a privately held
international and domestic inter-dealer broker for a broad range of financial
instruments. Pursuant to the merger agreement, a newly-formed, wholly-owned
subsidiary of the Company merged with and into EBIC on August 16, 1996 (the
"Merger"), with EBIC thereby becoming a wholly-owned subsidiary of the
Company. In the Merger, former holders of EBIC common stock received
consideration consisting, in the aggregate, of approximately $22 million in
cash, 4,505,666 shares of Common Stock and 7,566,625 Series B redeemable
common stock purchase warrants.
In connection with the Merger, the Company also acquired, in exchange for
225,000 shares of Common Stock, all of the unit purchase options that had been
issued in the IPO (representing the right, in the aggregate, to acquire
333,333 units) and redeemed, for cash, 136,000 shares of Common Stock for
which certain Merger-related conversion rights had been exercised.
In November 1997, the Company consummated an exchange offer, on the basis of
0.1667 of a share of Common Stock for each warrant (the "Exchange Offer"),
pursuant to which it issued an aggregate of 2,380,975 shares of Common Stock
in exchange for 14,283,296 (or approximately 95.1%) of its then-outstanding
warrants.
The Merger has been accounted for as a recapitalization of EBIC, with the
issuance of shares by EBIC for the net assets of the Company. The historical
assets and liabilities of the Company and EBIC have been combined and
reflected in the consolidated statement of financial condition at their
respective book values. The consolidated results of operations and financial
position of the Company for periods and dates prior to the Merger are the
consolidated historical results of operations and financial position of EBIC
and its subsidiaries and affiliates for such periods and dates. The number of
shares outstanding and related earnings per share information have been
presented as if all shares issued in the Merger had been issued as of January
1, 1995 and all such shares were outstanding for the merged and recapitalized
entity since that date.
For the years ended December 31, 1995 and December 31, 1996, the number of
shares outstanding (8,949,656) reflects a restatement of the number of shares
reported outstanding (9,011,295) in the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. The restatement reflects the actual number of shares issued
in the Merger, as opposed to the anticipated number.
F-10
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
- -----------------------------------------
Basis of presentation:
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries and other entities over which it exercises
control. All significant intercompany balances and transactions have been
eliminated. Investments in unconsolidated affiliates where the Company may
exercise significant influence over operating and financial policies have been
accounted for using the equity method. Earnings from investments accounted for
under the equity method have been reflected as other income in the
consolidated statement of operations.
Revenue recognition:
Commission income is recognized on a trade date basis.
Securities transactions:
Securities transactions are recorded on a trade date basis.
Securities owned and securities sold, not yet purchased are carried at market
value with unrealized gains and losses reflected in income.
Gains on securities transactions of approximately $333,000 and $690,505 for
the years ended December 31, 1996 and 1997, respectively, have been included
in other income in the consolidated statement of operations.
Furniture, equipment and leasehold improvements:
Depreciation of furniture and equipment is computed on a straight-line basis
using estimated useful lives of 3 to 5 years. Leasehold improvements are
amortized over the lesser of the terms of the related leases or the estimated
useful lives of the improvements.
Exchange memberships:
The Company carried its exchange memberships at cost. At December 31, 1996,
the market value of these memberships approximated cost. At December 31, 1996,
the cost of such memberships aggregated $140,000 and had been included in
prepaid expenses and other assets. During 1997, the Company sold its exchange
memberships for $148,000, realizing a gain of $8,000.
Intangible assets:
Intangible assets principally include the values assigned to customer lists
and are being amortized on a straight-line basis over their estimated useful
lives, which approximate 15 years. Accumulated amortization of intangible
assets aggregated $7,166,596 and $7,576,599 at December 31, 1996 and 1997,
respectively.
The Company has a policy of reviewing the carrying value of intangible assets
to consider whether events or changes in circumstances have occurred - such as
the loss of significant customers, a significant change in the revenues
received from customers or a significant change in the nature of the brokerage
business - which would indicate that the carrying amount of such assets may
not be
F-11
<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
- -----------------------------------------------------
recoverable, in which case the Company would evaluate the estimated future
cash flows expected to result from the asset. Should the expected future cash
flows be less than the carrying amount of the asset, an impairment loss would
be recognized to the extent that the carrying value exceeds the fair value of
the assets. There have been no impairment losses with respect to intangible
assets.
Foreign currency translation:
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars using exchange rates at the end of the year; revenues and
expenses are translated at average rates for the year.
Gains and losses on foreign currency translation of the financial statements
of operations whose functional currency is other than the U.S. dollar,
together with related hedges and tax effects, are reflected in the foreign
translation adjustment account in stockholders' equity. Foreign currency
exchange gains and losses from transactions and balances denominated in a
currency other than the related operating subsidiary's functional currency are
recorded in income.
Fair value of financial instruments:
The Company's securities owned and securities sold, not yet purchased are
carried at market value. Additionally, off-balance sheet financial instruments
are valued at market with unrealized gains and losses recorded in the
consolidated financial statements.
Management estimates that the fair values of other financial instruments
recognized on the consolidated statement of financial condition approximate
their carrying value, as such financial instruments are short-term in nature
or bear interest at rates approximating current market rates.
Income taxes:
The Company and its subsidiaries account for certain income and expense items
in a period different from that reported for tax purposes. The tax effects of
transactions are generally recognized in the consolidated financial statements
in the same period as the related items of income and expense, regardless of
when they are recognized for tax purposes.
Use of estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Earnings per share:
The Company computes earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share", which
requires the presentation of basic and diluted EPS. Options and warrants to
purchase Common Stock outstanding at December 31, 1996 and 1997 were not
included in the computation of EPS because they were anti-dilutive for the
periods presented.
F-12
<PAGE>
NOTE 3 - INCREASED TRADING VOLUME:
- ----------------------------------
During the five trading-day period of October 23, 1997 through October 29, 1997,
the Company experienced up to an approximately five-fold increase in the typical
daily trading volume of the emerging market debt securities it brokers, together
with unprecedented price volatility in such securities. As a result, the Company
and its clearing firms experienced significant delays and backlogs in the
processing and settlement of such trades and a higher than usual incidence of
disputed trades. Although the temporary increase in volume generated additional
commission income, the delays, backlogs and disputes resulted in additional
costs for the Company, aggregating to approximately $6,000,000, principally
consisting of payments related to settlement of disputes, interest claims by
customers and financing charges from clearing firms. Such payments have been
reflected as a reduction of commission income in the consolidated statement of
operations.
NOTE 4 - ACQUISITION AND SALE OF BUSINESS:
- ------------------------------------------
During 1996, the Company's 51% owned Hong Kong subsidiary, Yagi Euro (Hong
Kong) Limited ("YEHK"), entered into a joint venture with Martin Brokers (Hong
Kong) Limited ("Martins") whereby YEHK contributed its business and
substantially all of its net assets to the joint venture in exchange for 57.5%
of the common stock of the joint venture and a note. Martins also contributed
its business and net assets in exchange for 42.5% of the common stock and
notes. The Company's consolidated financial statements include the accounts of
the joint venture on a consolidated basis and, at December 31, 1996, included
notes payable aggregating approximately $1,100,000 that were issued to
minority shareholders in connection with the transaction.
On February 5, 1997 the Company's YEHK subsidiary completed the sale of its
57.5% interest in the joint venture to the minority shareholders for $323,000,
realizing a loss of $277,000 that was fully reserved for at December 31, 1996.
Commission income, expenses and net loss before minority interest for the
joint venture which have been reflected in the consolidated statement of
operations for the year ended December 31, 1996 were $8,085,000, $9,885,000
and $1,800,000, respectively.
NOTE 5 - CASH AND CASH EQUIVALENTS:
- -----------------------------------
The Company considers all short-term investments with an initial maturity of
three months or less to be cash equivalents.
NOTE 6 - COMMISSIONS RECEIVABLE:
- --------------------------------
Commissions receivable are reflected in the consolidated statement of
financial condition net of allowances for doubtful accounts of $434,400 and
$554,200 at December 31, 1996 and 1997, respectively.
NOTE 7 - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CUSTOMERS:
- ---------------------------------------------------------------------
Receivable from and payable to broker-dealers and customers primarily
represents amounts due to and payable by the Company for securities
transactions which have not yet settled.
F-13
<PAGE>
NOTE 8 - DEPOSITS WITH CLEARING ORGANIZATIONS:
- ----------------------------------------------
Deposits with clearing organizations are comprised of cash of approximately
$675,000 and $767,000 and U.S. Treasury obligations of approximately
$6,507,000 and $8,282,000 at December 31, 1996 and 1997, respectively.
Pursuant to its membership in Government Securities Clearing Corporation, the
Company's U.S. broker-dealer subsidiary is required to maintain a minimum
deposit with GSCC of $5,000,000 and maintain minimum excess net capital of
$10,000,000. The balance of the deposits is required pursuant to the Company's
clearing firm relationships.
NOTE 9 - SECURITIES OWNED:
- --------------------------
Securities owned at December 31, 1996 and 1997 primarily reflect municipal
securities positions taken in connection with the Company's municipal
securities business.
NOTE 10 - SHORT-TERM BANK LOANS:
- --------------------------------
Short-term bank loans at December 31, 1996 and 1997 principally represent
financings of municipal securities positions. The loans, which bear interest
at a variable rate based on the federal funds rate plus 1%, are fully
collateralized by securities, valued at approximately $13,500,000 and
$10,809,000, respectively, at December 31, 1996 and 1997, which amounts
principally represent municipal securities inventory on a settlement date
basis.
NOTE 11 - RELATED PARTY TRANSACTIONS:
- -------------------------------------
Prepaid expenses and other assets include loans to employees aggregating
$1,526,000 and $1,176,300 at December 31, 1996 and 1997, respectively. Such
loans generally bear interest at the prime rate and are short term in nature.
NOTE 12 - EQUITY IN AFFILIATED COMPANIES:
- -----------------------------------------
The Company's equity in affiliated companies principally consists of a 15%
equity interest in Yagi Euro Corporation ("Yagi Euro"), which operates the
business of a broker of money market, foreign exchange and derivative products
in Tokyo and is 85% owned by Yagi Tanshi Company, Limited.
In addition, in 1994 the Company entered into a partnership arrangement with
Yagi Euro to broker certain derivative products in Tokyo. The results of such
business are consolidated in the Company's financial statements and Yagi
Euro's approximately 50% interest in the related profit or loss is presented
as minority interest.
The Company's investments in equity affiliates are as follows:
December 31, December 31,
1996 1997
------------- --------------
Yagi Euro $ 2,604,439 $ 2,488,957
Other 152,302 118,030
-------------- ---------------
$ 2,756,741 $ 2,606,987
============== ==============
F-14
<PAGE>
NOTE 12 - EQUITY IN AFFILIATED COMPANIES (Continued):
- -----------------------------------------------------
Summarized financial information for Yagi Euro is as follows:
December 31, December 31,
1996 1997
------------- ---------------
Total assets $ 20,729,326 $ 20,162,750
Total liabilities 3,366,396 3,569,702
Revenues 10,169,693 7,770,628
Net income 1,296,149 1,430,121
NOTE 13 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
- ----------------------------------------------------------
Furniture, equipment and leasehold improvements are summarized below:
December 31, December 31,
1996 1997
-------------- ---------------
Furniture and telephone equipment $ 13,579,847 $ 13,509,465
Leasehold improvements 6,865,342 6,813,323
Computer and related equipment 10,193,793 12,197,628
Automobiles 2,156,887 1,311,298
-------------- --------------
32,795,869 33,831,714
Less - Accumulated depreciation
and amortization ( 19,171,369) ( 22,372,191)
-------------- --------------
$ 13,624,500 $ 11,459,523
============== ==============
NOTE 14 - OBLIGATIONS UNDER CAPITALIZED LEASES:
- -----------------------------------------------
The Company has purchased automobiles and telecommunications equipment under
capitalized leases. The lease terms generally do not exceed three years. The
following is a schedule of future minimum lease payments under capitalized
leases together with the present value of the net minimum lease payments as of
December 31, 1997:
For the Year Ending December 31,
1998 $ 674,726
1999 242,759
2000 190,785
--------------
Total net minimum lease payments 1,108,270
Less: amount representing interest 134,084
--------------
Present value of net minimum lease payments
$ 974,186
==============
The gross amounts of assets under capitalized leases are $2,435,700 and
$1,489,000 at December 31, 1996 and 1997, respectively. Such amounts are
principally automobiles and are included in furniture, equipment and leasehold
improvements in the consolidated statement of financial condition.
F-15
<PAGE>
NOTE 14 - OBLIGATIONS UNDER CAPITALIZED LEASES (Continued):
- -----------------------------------------------------------
The charges to income resulting from the amortization of assets recorded under
capitalized leases were approximately $644,700, $520,200 and $297,400 for the
years ended December 31, 1995, 1996 and 1997, respectively.
NOTE 15 - NOTES PAYABLE:
- ------------------------
Notes payable at December 31, 1996 and 1997 primarily represent the remaining
installments of convertible purchase price notes which were issued in December
1986 in connection with the acquisition of the predecessor businesses of EBIC
and bear interest at a stated rate of 6-1/8% per annum. The conversion feature
expired on November 30, 1993. The notes have been payable in equal annual
installments of approximately $2.1 million each November 30 from 1995 through
1999. The notes have been adjusted for financial reporting purposes to reflect
imputed interest at fair market rates at the time of issuance of 7.71%. The
notes are subordinated to the claims of financial institutions to a maximum
aggregate amount of $10,000,000. Approximately 57% and 56% of the reported
balance of the purchase price notes was denominated in British pounds sterling
at December 31, 1996 and 1997, respectively.
During 1997, the Company entered into a secured financing agreement with GE
Capital Corporation, borrowing $2,140,000 at a fixed annual interest rate of
7.9%. The note is payable in monthly installments of $46,545 through December
2001 and $27,482 thereafter through December 2002.
Notes payable at December 31, 1996 also included notes issued by the Company's
Hong Kong joint venture to minority shareholders in connection with the
formation of the joint venture. In February 1997 the Company sold its interest
in the joint venture (See Note 4) and, accordingly, the notes payable are no
longer a liability of the Company.
The change in notes payable is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
----------- ----------
<S> <C> <C>
Balance at beginning of year $ 7,880,032 $ 7,379,762
Issuance of note payable to GE Capital 2,140,000
Repayment of principal ( 2,128,469) ( 2,103,711)
Exchange rate difference 420,839 ( 137,098)
Imputed interest 106,287 83,959
Issuance and repayment of note to Martin Brokers
(Hong Kong) Limited 1,101,073 ( 1,101,073)
-------------- ------------
Balance at end of year $ 7,379,762 $ 6,261,839
============== ============
</TABLE>
NOTE 16 - EMPLOYEE BENEFIT PLAN:
- --------------------------------
The Company maintains a 401(k) defined contribution plan for the Company's
U.S. operations covering substantially all salaried employees. The Company's
contributions to the 401(k) plan are, subject to a maximum limit, based upon a
percentage of employee contributions. Total 401(k) plan expense approximated
$222,000, $308,000 and $361,000 for the years ended December 31, 1995, 1996
and 1997, respectively.
F-16
<PAGE>
NOTE 17 - INCOME TAXES:
- -----------------------
Income (loss) before provision for income tax and minority interest was taxed
under the following jurisdictions:
<TABLE>
<CAPTION>
For the Year Ended
December 31, December 31, December 31,
1995 1996 1997
-------------- ------------------ -----------------
<S> <C> <C> <C>
Domestic $ 2,645,217 $ 11,570,041 $ 625,936
Foreign 9,978,108 ( 1,521,786) 6,261,321
------------ ------------- --------------
Total $ 12,623,325 $ 10,048,255 $ 6,887,257
============= ============= ==============
<CAPTION>
The components of the provision for income taxes are as follows:
For the Year Ended
December 31, December 31, December 31,
1995 1996 1997
------------- ------------------ ---------------
<S> <C> <C> <C>
Current
Federal $ 2,745,733 $ 3,965,812 $ 1,623,627
State and local 931,547 1,968,578 ( 672,374)
Foreign 8,510,075 2,488,923 4,614,209
------------ ------------- --------------
12,187,355 8,423,313 5,565,462
------------ ------------- --------------
<CAPTION>
For the Year Ended
December 31, December 31, December 31,
1995 1996 1997
------------- ------------------- ------------
<S> <C> <C> <C>
Deferred
Federal ( 1,946,254) ( 506,338) ( 114,331)
State and local ( 164,502) ( 390,189) 31,265
Foreign ( 2,683,403) ( 876,180) 275,501
------------ -------------- -------------
( 4,794,159) ( 1,772,707) 192,435
------------ -------------- -------------
Total $ 7,393,196 $ 6,650,606 $ 5,757,897
============ ============== ==============
</TABLE>
F-17
<PAGE>
NOTE 17 - INCOME TAXES (Continued):
- -----------------------------------
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
----------- -----------
<S> <C> <C>
Assets
Bad debt reserve $ 149,500 $ 190,800
Amortization of leasehold
improvements 294,161 410,085
Rent reserve 254,535 309,120
Deferred compensation 5,583,442 4,336,216
Miscellaneous reserves 380,555 800,635
Depreciation 284,781
Foreign tax credits 1,990,000 2,926,135
Deferred tax asset valuation
allowance ( 1,990,000) ( 2,926,135)
-------------- -------------
Gross deferred tax assets, after
valuation allowance $ 6,662,193 $ 6,331,637
============== ==============
Liabilities
Depreciation ($ 54,164) $
Unrealized foreign exchange
gain ( 665,160) ( 304,365)
Other ( 352,302)
Gross deferred tax ------------- -------------
liabilities ($ 719,324) ($ 656,667)
============= ==============
</TABLE>
The valuation allowance for deferred tax assets for the year ended December
31, 1996 and 1997 was established for foreign tax credit carryforward benefits
generated during 1995, due to the uncertainty regarding their realizability.
Foreign tax credit carryforwards of $1,990,000 and $936,135 expire in the
years ended December 31, 2000 and 2002, respectively.
Not reflected above are the tax effects of foreign currency translation
adjustments related to the hedging of foreign net investments. These tax
effects are recorded directly in stockholders' equity. Such amounts recorded
in stockholders' equity are tax benefit (expense) of $20,600, ($272,000) and
$111,000 in the years ended December 31, 1995, 1996 and 1997, respectively.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income from continuing operations as a result of the following
differences:
F-18
<PAGE>
NOTE 17 - INCOME TAXES (Continued):
- -----------------------------------
<TABLE>
<CAPTION>
For the Year Ended
December 31, December 31, December 31,
1995 1996 1997
------------- ------------------ ---------------
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 4,291,930 $ 3,516,889 $ 2,341,667
Increase (decrease) in tax resulting from:
Higher effective rates on earnings of
foreign operations and tax benefit of
foreign losses not recognized 1,847,061 1,413,660 2,308,543
Nondeductible meals and
entertainment 868,507 1,018,345 1,319,521
State and local taxes, net 506,259 1,025,952 ( 423,060)
Other ( 120,561) ( 324,240) 211,226
-------------- -------------- --------------
$ 7,393,196 $ 6,650,606 $ 5,757,897
============= ============= =============
</TABLE>
NOTE 18 - STOCKHOLDERS' EQUITY:
- -------------------------------
Preferred stock:
The Company is authorized to issue 1,000,000 shares of preferred stock with
such designations, voting and other rights and preferences as may be
determined from time to time by its Board of Directors. At December 31, 1996
and December 31, 1997, no shares of preferred stock were issued or
outstanding.
Pursuant to the Company's adoption of a shareholder rights plan (the "Plan")
in December 1996, the Company authorized the creation of Series A junior
participating preferred stock and reserved 300,000 shares thereof for issuance
upon exercise of the rights that, pursuant to the Plan, were at the time
dividended to holders of Common Stock.
Common stock and warrants:
The Company is authorized to issue 30,000,000 shares of Common Stock. At
December 31, 1996 (giving effect to the exchange in the Merger of all
certificates formerly representing EBIC common stock), the Company had
outstanding 8,949,656 shares of Common Stock, 7,566,666 redeemable common
stock purchase warrants (issued in connection with the IPO) and 7,566,625
Series B redeemable common stock purchase warrants (issued in connection with
the Merger and economically identical in their terms to the IPO warrants).
Each of the Company's outstanding warrants (both series) currently entitles
the holder thereof to purchase from the Company one share of Common Stock at
an exercise price of $5.00 per share. The warrants expire on November 30, 2001
and are redeemable at a price of $.01 per warrant upon 30 day's notice at any
time, but only if the last sale price of the Common Stock has been at least
$8.50 per share for 20 consecutive trading days ending on the third day prior
to the date on which notice of redemption is given.
On November 17, 1997, the Company consummated the Exchange Offer, pursuant to
which it issued an aggregate of 2,380,975 shares of Common Stock in exchange
for 14,283,296, or approximately 95.1%, of the then-outstanding warrants
(6,880,718 of the IPO series warrants and 7,402,578 of the Series B
F-19
<PAGE>
NOTE 18 - STOCKHOLDERS' EQUITY (Continued):
- -------------------------------------------
warrants). As a result, at December 31, 1997, the Company had outstanding
11,330,631 shares of Common Stock, 685,948 IPO series warrants and 49,032
Series B warrants.
At December 31, 1997, the Company had 734,980 shares of Common Stock reserved
for issuance upon exercise of all warrants and an additional 1,800,000 shares
reserved for issuance upon exercise of options that have been and may be
granted pursuant to the Company's 1996 Stock Option Plan (see Note 19).
In May 1997 the Company acquired treasury stock consisting of 61,638 shares of
Common Stock and 115,015 Series B warrants. At December 31, 1997, the Company
continued to hold the 61,638 shares of Common Stock in treasury. During the
fourth quarter of 1997, the 115,015 Series B warrants held in treasury were
canceled and returned to authorized but unissued status.
Notes receivable from stockholders:
Notes receivable from stockholders of $2,243,709 at December 31, 1995,
represent amounts due to the Company for the purchase of common stock of EBIC
by certain of its employees. The notes all matured and were payable on demand.
The notes bore interest at 5% per annum, and were collateralized by the EBIC
stock purchased therewith. The notes have been reflected as a decrease to
stockholders' equity.
In connection with the Merger described in Note 1, such notes have been repaid
through the application of the cash Merger consideration otherwise payable to
such stockholders.
NOTE 19 - STOCK OPTION PLAN:
- ----------------------------
The Company's 1996 Stock Option Plan, as amended (the "Plan"), provides for
the granting of stock options, in the form of incentive stock options ("ISOs")
and non-qualified stock options, to directors, executive officers and key
employees of the Company and its subsidiaries, as determined by the
compensation committee of the Company's Board of Directors. Options to
purchase a maximum of 1,800,000 shares of Common Stock are available under the
Plan. In the case of ISOs, the duration of the option may not exceed ten years
and the exercise price must be at least equal to the fair market value of a
share of Common Stock on the date of grant. Employee options granted to date
generally are ISOs and vest and become exercisable in equal 20% installments
on each of the first five anniversaries of the date of the grant. Non-employee
director options granted to date are non-qualified stock options and vest in
equal 50% installments on the dates that are respectively six and twelve
months following the date of grant. Under the Plan, unless otherwise
determined by the compensation committee, options may only be exercised during
the period of employment or service with the Company or the 30-day period
thereafter (or, in the case of death, disability or retirement, the one-year
period thereafter).
A summary of the Company's stock option activity follows:
Weighted average
Shares Exercise price
----------- ----------------
Outstanding at January 1, 1997 1,260,000 $ 5.07
Granted 45,000 4.90
Forfeited ( 60,000) 5.00
-----------
Outstanding at December 31, 1997 1,245,000
============
F-20
<PAGE>
NOTE 19 - STOCK OPTION PLAN (Continued):
- ----------------------------------------
Exercise prices for options outstanding at December 31, 1997 ranged from $4.81
to $5.50. The weighted average fair value of options granted during the year
was $1.20 per share based on the value of the Common Stock at the date of
grant.
Because stock options under the Plan have characteristics significantly
different from those of traded options and because changes in subjective
assumptions can materially affect the fair value estimated, the Company used
the Black-Scholes pricing model with the following weighted average
assumptions for options granted during 1997: expected volatility of 35%; risk
free interest rate of 6.16% and an expected option life of five years.
The Company applies APB Opinion 25 in accounting for the Plan and,
accordingly, does not recognize any compensation cost associated with the Plan
in the consolidated financial statements. Had compensation costs for the Plan
been determined based on the fair value at the grant dates for the options
under SFAS No. 123, net income (loss) and earnings per share would
approximate the pro forma amounts indicated below:
For the Year Ended
December 31, December 31,
1996 1997
----------- --------------
Net income (loss) As reported $ 3,704,960 ($ 268,992)
Pro forma $ 3,527,612 ($ 745,211)
Earnings per share As reported $ .41 ($ .03)
Pro forma $ .39 ($ .08)
NOTE 20 - COMMITMENTS:
- ----------------------
The Company is obligated under certain non-cancelable leases for office space
and telecommunication services.
The Company has executed various operating leases in respect of premises,
which contain escalation clauses for base rent, maintenance, electricity and
real estate tax increases.
At December 31, 1997, the Company had the following commitments under
long-term non-cancelable operating leases:
For the Year Ending December 31, 1998 $ 7,984,309
1999 4,495,678
2000 4,250,864
2001 4,242,267
2002 4,780,149
Thereafter 7,323,141
------------
Total minimum lease payments $ 33,076,408
============
At December 31, 1996 and 1997 the Company has pledged $1,968,851 and
$1,893,033, respectively, in cash with a bank in respect of a guarantee of its
London premises lease. This amount has been reflected in prepaid and other
assets in the consolidated statement of financial condition.
F-21
<PAGE>
NOTE 21 - CONTINGENCIES:
- ------------------------
The Company and/or its subsidiaries are subject to various legal proceedings,
arbitrations and claims that arise in the ordinary course of their businesses.
Although the results of legal proceedings and arbitrations cannot be predicted
with certainty, based on information currently available and established
reserves, management believes that resolving any currently known matters will
not have a material adverse impact on the Company's consolidated financial
condition or results of operations.
NOTE 22 - OFF-BALANCE SHEET AND COUNTERPARTY RISK:
- --------------------------------------------------
In the normal course of business, certain securities transactions brokered by
the Company are introduced to and settled by the Company's clearing firms. In
the event of non-performance by a counterparty to such transactions, the
Company may be responsible to meet obligations incurred by such
non-performance. The Company and its clearing firms have a policy of
reviewing, on an ongoing basis, the credit standing of the Company's
customers, which are primarily major financial institutions.
Financial instruments subject to credit risk are primarily commissions
receivable, which are unsecured and short-term in nature. Receivable from
clearing firms represents a concentration of credit risk, and is related to
securities transactions cleared primarily through two correspondent brokers.
NOTE 23 - NET CAPITAL REQUIREMENTS:
- -----------------------------------
The Company's U.S. broker-dealer subsidiary, Maxcor Financial Inc. ("MFI"), is
subject to the Securities and Exchange Commission's Uniform Net Capital Rule
(rule 15c3-1) which requires the maintenance of minimum net capital. MFI has
elected to use the alternative method, as permitted by the rule, which
requires that MFI maintain minimum net capital, as defined, equal to the
greater of $250,000 or 2% of aggregate debit items arising from customer
transactions, as defined; or 4% of the funds required to be segregated
pursuant to the Commodity Exchange Act and regulations thereunder. At December
31, 1997, MFI's net capital was $11,329,822 and exceeded the minimum
requirement of $250,000 by $11,079,822. MFI's memberships in certain clearing
corporations and its agreements with certain clearing organizations also
require it to maintain certain minimum levels of net capital. In addition, a
number of the Company's other subsidiaries operating in various countries are
subject to capital rules and regulations issued by the designated regulatory
authorities to which they are subject.
NOTE 24 - GEOGRAPHIC DATA:
- --------------------------
The following tables set forth, for each year in the three-year period ended
December 31, 1997, summary financial information for each of the Company's
principal geographic locations. United States amounts are principally derived
from the Company's New York office, but include the results of operations of
all of its U.S. based operations and its Mexico City based operations. Tokyo
amounts include the consolidation of the results of operations of the Tokyo
Partnership, and Hong Kong amounts include the consolidation of the results of
operations of the Company's Hong Kong joint venture (a 51% interest prior to
June 1996 and a controlling, approximately 30% beneficial interest, during the
balance of 1996). The Company's stake in the Hong Kong joint venture was
subsequently sold in February 1997 as described in Note 4. Results of
operations from the Company's Australia joint venture are consolidated into
the results of operations for the United Kingdom. Income (loss) from
operations excludes non-operating expenses, primarily interest income and
expense.
F-22
<PAGE>
NOTE 24 - GEOGRAPHIC DATA (Continued):
- --------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1995 1996 1997
---------------- ---------------- --------------
<S> <C> <C> <C>
Commission income:
United States $ 69,081,547 $ 82,178,265 $ 86,322,405
United Kingdom 65,715,235 64,399,407 51,478,803
Canada 3,452,205 3,375,172 2,800,872
Japan 24,601,532 20,071,821 22,865,358
Hong Kong 8,725,808 8,085,234
--------------- -------------- -------------
$ 171,576,327 $ 178,109,899 $ 163,467,438
=============== ============== =============
Income (loss) from operations:
United States $ 3,021,226 $ 5,045,727 ($ 542,710)
United Kingdom 2,901,237 1,452,943 ( 1,089,354)
Canada ( 874,440) ( 452,261) ( 1,048,896)
Japan 6,985,361 4,919,490 7,738,123
Hong Kong ( 16,677) ( 1,385,478)
---------------- ----------------- ---------------
$ 12,016,707 $ 9,580,421 $ 5,057,163
================ ================= ===============
Identifiable assets:
United States $ 38,962,574 $ 59,489,742 $ 57,143,069
United Kingdom 31,767,594 26,434,750 21,831,862
Canada 1,789,815 1,927,895 1,352,458
Japan 7,656,963 6,704,895 7,570,840
Hong Kong 1,901,796 2,615,433 153,284
-------------- ---------------- -------------
$ 82,078,742 $ 97,172,715 $ 88,051,513
============== ================ =============
</TABLE>
F-23
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ---------- -----------
2.1 Agreement and Plan of Merger, dated as of March 8, 1996, as amended,
by and among the Registrant, EBIC Acquisition Corp. and Euro Brokers
Investment Corporation ("EBIC"), without exhibits and schedules
(incorporated herein by reference to Exhibit 2.1 of the Registrant's
Quarterly Report on Form 10-Q, dated May 15, 1996 (the "Form 10-Q"))
2.2 Registration Rights Agreement, dated as of August 16, 1996, by and
among the Registrant and the persons listed in Annexes I, II and III
thereto (incorporated by reference to Exhibit 2.5 of the Registrant's
Current Report on Form 8-K, dated August 16, 1996)
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3 of the Registrant's
Registration Statement on Form 8-A, dated October 28, 1996)
3.2 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant (incorporated herein by reference to
Exhibit 3.1 of the Registrant's Current Report on Form 8-K, dated
June 18, 1997)
3.3 Amended and Restated Bylaws of the Registrant (incorporated herein by
reference to Exhibit 3.2 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 ("1996 Form 10-K"))
4.1 Form of Common Stock Certificate (incorporated herein by reference to
Exhibit 4.1 of Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (No. 33-85346), dated November 23, 1994
("Amendment No. 1"))
4.2 Form of Redeemable Common Stock Purchase Warrant (incorporated herein
by reference to Exhibit 4.2 of Amendment No. 1)
4.3 Warrant Agreement, dated as of November 30, 1994, by and between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated herein by reference to Exhibit 4.4 of Amendment No.1)
4.4 Form of Series B Redeemable Common Stock Purchase Warrant
(incorporated herein by reference to Exhibit 4.5 of the Registrant's
Registration Statement on Form S-4 (No. 333-06753) dated June 25,
1996) (the "Form S-4"))
4.5 Warrant Agreement, dated as of June 5, 1996, by and between the
Registrant and Continental Stock Transfer & Trust Company
(incorporated herein by reference to Exhibit 4.3 of the Form S-4)
X-1
<PAGE>
4.6 Rights Agreement, dated as of December 6, 1996, between the
Registrant and Continental Stock Transfer & Trust Company, as rights
agent (incorporated herein by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-A, dated December 6,
1996)
4.7 Agreement to furnish Debt Instruments*
10.1 Agreement of Lease, dated September 10, 1992, by and between Euro
Brokers Inc. and The Port Authority of New York and New Jersey (the
"NY Lease") (incorporated herein by reference to Exhibit 10.1 of the
1996 Form 10-K)
10.2 Supplement No. 1 to the NY Lease, dated March 21, 1993 (incorporated
herein by reference to Exhibit 10.2 of the 1996 Form 10-K)
10.3 Supplement No. 2 to the NY Lease, dated July 1, 1994 (incorporated
herein by reference to Exhibit 10.3 of the 1996 Form 10-K)
10.4 Underlease of Premises, dated 28 May 1993, between Chestermount
Properties Limited and Euro Brokers Holdings Limited (incorporated
herein by reference to Exhibit 10.4 of the 1996 Form 10-K)
10.5+ The Registrant's 1996 Stock Option Plan, as amended and restated
(incorporated herein by reference to Exhibit 10.7 of the 1996 Form
10-K)
10.6+ Employment Agreement, dated March 8, 1996, by and between the
Registrant and Gilbert Scharf (incorporated herein by reference to
Exhibit 10.8 of the Form 10-Q)
10.7+ Employment Agreement, dated March 8, 1996, by and between EBIC and
Keith Reihl (incorporated herein by reference to Exhibit 10.7 to the
Form S-4)
10.8+ Employment Agreement, dated as of September 11, 1996, by and between
the Registrant and Roger Schwed (incorporated herein by reference to
Exhibit 10.10 of the 1996 Form 10-K)
10.9+ Employment Agreement, dated 23 May 1994, by and between Euro Brokers
Limited and Michael Morrison (incorporated herein by reference to
Exhibit 10.11 of the 1996 Form 10-K)
10.10+ Employment Agreement, dated as of September 1, 1996, by and between
Euro Brokers Inc. and Walter E. Dulski (incorporated herein by
reference to Exhibit 10.12 of the 1996 Form 10-K)
10.11+ Agreement, dated as of November 19, 1996, by and among the
Registrant, EBIC and Donald R.A. Marshall (incorporated herein by
reference to Exhibit 10.13 of the 1996 Form 10-K)
X-2
<PAGE>
10.12 Agreement for Securities Clearance Services, dated June 7, 1993, as
amended, by and between Daiwa Securities America Inc. and Maxcor
Financial Inc. (formerly, Euro Brokers Maxcor Inc.) (incorporated
herein by reference to Exhibit 10.14 of the 1996 Form 10-K) (1)
10.13 Fully Disclosed Clearing Agreement, dated July 21, 1997, by and
between Morgan Stanley & Co. Incorporated and Maxcor Financial Inc.
(formerly, Euro Brokers Maxcor Inc.) (incorporated herein by
reference to Exhibit 10.15 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (No. 333-34485) dated October 7,
1997) (2)
21 Subsidiaries of the Registrant*
27 Financial Data Schedule (filed in electronic form only)
- --------------------------
* Filed herewith
+ Connotes a management contract or compensatory plan or arrangement in
which a director or executive officer of the Registrant participates.
(1) Portions of this exhibit have been redacted and confidential treatment
granted pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended.
(2) Portions of this exhibit have been redacted and confidential treatment
granted pursuant to Rule 406 under the Securities Act of 1933, as
amended.
X-3
<PAGE>
Exhibit 4.7
-----------
MAXCOR FINANCIAL GROUP INC.
Roger E. Schwed March 31, 1998
Vice President and General Counsel
Direct Dial: (212) 748-8860
Direct Fax: (212) 748-7979
E-Mail: [email protected]
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C. 20549
Dear Sirs or Madams:
This will confirm that Maxcor Financial Group Inc. (the "Company")
will furnish to the Securities and Exchange Commission upon request copies of
the following Notes:
(i) Convertible Note dated 1st December, 1988 issued by Euro
Brokers Holdings, Inc. and Euro Brokers Limited to MAG
Investments Limited;
(ii) Convertible Note dated December 1, 1986 issued by Euro
Brokers Holdings, Inc., First Euro Brokers, Inc., and Euro
Brokers (USA) Inc., to EBH Holding, Inc.; and
(iii) Secured Promissory Note, dated December 10, 1997 issued by
Euro Brokers Inc. to General Electric Capital Corporation.
The amount of each of the foregoing Notes does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.
Very truly yours,
/s/ Roger E. Schwed
Two World Trade Center, 84th floor, New York, New York 10048 o Tel.
212-748-7000 o Fax. 212-748-7329
<PAGE>
Exhibit 21
----------
MAXCOR FINANCIAL GROUP INC.
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION
SUBSIDIARY OF INCORPORATION
- ------------------------------------------ ---------------------
EURO BROKERS INVESTMENT CORPORATION DELAWARE
EURO BROKERS HOLDINGS INC. NEW YORK
EURO BROKERS INC. NEW YORK
MAXCOR FINANCIAL INC. NEW YORK
MAXCOR FINANCIAL ASSET MANAGEMENT INC. DELAWARE
MAXCOR FINANCIAL SERVICES INC. DELAWARE
MAXCOR INFORMATION INC. DELAWARE
E-B FUNDING CORPORATION DELAWARE
EURO BROKERS HOLDINGS LTD. ENGLAND
EURO BROKERS INTERNATIONAL LTD. ENGLAND
EURO BROKERS FINANCIAL SERVICES LTD. ENGLAND
EURO BROKERS SERVICES LTD. ENGLAND
EURO BROKERS TOKYO INC. DELAWARE
YAGI EURO CORPORATION JAPAN
EURO BROKERS CANADA LTD. CANADA
EURO BROKERS MEXICO, S.A. de C.V. MEXICO
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Maxcor Financial Group Inc. at and as of
December 31, 1997 and is qualified in its entirety by reference to such
Consolidated Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,041,631
<RECEIVABLES> 1,723,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 10,497,465
<PP&E> 11,459,523
<TOTAL-ASSETS> 88,051,513
<SHORT-TERM> 6,225,928
<PAYABLES> 569,458
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 780,849
<LONG-TERM> 6,261,839
0
0
<COMMON> 11,331
<OTHER-SE> 31,591,914
<TOTAL-LIABILITY-AND-EQUITY> 88,051,513
<TRADING-REVENUE> 690,505
<INTEREST-DIVIDENDS> 1,718,099
<COMMISSIONS> 163,467,438
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 840,584
<COMPENSATION> 106,477,319
<INCOME-PRETAX> 6,887,257
<INCOME-PRE-EXTRAORDINARY> 6,887,257
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (268,992)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
