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| MAXF > SEC Filings for MAXF > Form 10-Q on 17-May-2004 | All Recent SEC Filings |
17-May-2004
Quarterly Report
Critical Accounting PoliciesThe following is a discussion of certain of our significant accounting policies(see Note 2 to the Consolidated Financial Statements for the fiscal year endedDecember 31, 2003 in the 2003 Form 10-K) that we consider to be of particularimportance because they require difficult, complex or subjective judgments onmatters that are often inherently uncertain.
Securities positions are carried at fair values generally based on quoted marketprices. From time to time quoted market prices are not available for certainmunicipal or other securities positions. For such securities, we, with theassistance of independent pricing services, determine fair values by analyzingsecurities with similar characteristics that have quoted market prices.Consideration is given to the size of our individual positions relative to theoverall market activity in such positions when determining the impact our salewould have on fair values. The assumptions used in valuing our securitiespositions may be incorrect and the actual value realized upon disposition couldbe different from the current carrying value.
Included in accounts payable and accrued liabilities are reserves for certaincontingencies to which we may have exposure, such as the employer portion ofNational Insurance Contributions in the U.K., interest and claims on securitiessettlement disputes, such as the NTL matter, and reserves for certain income taxcontingencies. The determination of the amounts of these reserves requiressignificant judgment on our part. We consider many factors in determining theamount of these reserves, such as legal precedent and case law and historicexperience. The assumptions used in determining the estimates of reserves may beincorrect and the actual costs of resolution of these items could be greater orless than the reserve amounts.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003Commission income represents revenues generated on brokerage transactionsconducted on an agency (including name give-up) or matched riskless principalbasis. For the three months ended March 31, 2004, these revenues increased$6,900,948 to $48,050,301, compared to $41,149,353 for the comparable period in2003, reflecting increases in London and New York. In London, the increaseprimarily reflected increased commissions generated by our inter-dealerbrokerage operations, which included improved brokerage of derivatives productsand the expansion during 2003 of our securities brokerage operations, and thecurrency effects of translating strengthened British pound sterling amounts toU.S. dollars. The increase in New York was primarily attributable to increasedcommissions generated by our inter-dealer brokerage operations, which includedimproved brokerage of money market products.
Page 16 of 59 PagesPrincipal transactions represent the net gains or losses generated fromsecurities transactions involving the assumption of market risk for a period oftime. For the three months ended March 31, 2004, these activities resulted in again of $3,500,510, compared to a loss of $4,081,752 for the three months endedMarch 31, 2003. This change primarily reflected the $5.9 million loss recordedby MFI during the three months ended March 31, 2003 on the settlement of its NTLwhen-issued equity trades and, during the three months ended March 31, 2004, thereversal of $625,000 of this loss, as well as a $1.5 million gain resulting fromthe resolution of contingencies associated with the settlement of certainprincipal transactions in the aftermath of the September 11th attacks.
As discussed in Note 5 to the Consolidated Financial Statements included in thisreport, the recording of this $5.9 million loss during the first quarter of 2003(which was partially offset by a gain of $800,000 recorded during the secondquarter of 2003) reflected the contingency that all of MFI's NTL when-issuedtrades, other than permanently adjusted settlements by mutual agreement, shouldhave settled on an unadjusted basis. In March 2004, the New York State SupremeCourt granted a summary judgment motion made by MFI and issued a decisionstating that all NTL when-issued trades among the parties before the Courtshould be settled on an adjusted and uniform basis. Following this decision, MFIin March 2004 reached a permanent settlement of this dispute with its one NTLcounterparty who had brought a claim before NASD, resulting in the reversal of$625,000 of the $5.1 million net loss recorded by MFI during 2003. As a resultof this settlement, MFI's dispute with its remaining NTL counterparties is nowfully centralized in only one forum (New York State Supreme Court). However,because the Court's summary judgment decision remains subject to the entry of afinal order implementing its terms and possible appeal, MFI only intends toreverse additional portions of the 2003 net loss to the extent it achievesadditional permanent resolutions, whether by mutual consent, completion of theappeals process or otherwise, with any of its remaining counterparties.
Interest income for the three months ended March 31, 2004 increased $1,287,252to $1,926,968, compared to $639,716 for the three months ended March 31, 2003,primarily reflecting financing income earned on reverse repurchase agreements inconnection with the institutional securities financing operations we started in2003 and coupon and financing income associated with securities positions takenby our restructured institutional corporate bond sales and trading operations.
Other items for the three months ended March 31, 2004 resulted in a loss of$375,616, as compared to a loss of $319,478 for the three months ended March 31,2003. This increased loss resulted from the expiration of an informationlicensing agreement in the second half of 2003, which generated $125,000 oflicensing income during the three months ended March 31, 2003, and foreignexchange losses during the first quarter of 2004, as compared to foreignexchange gains during the first quarter of 2003. Offsetting these decreases wasa narrowing of the losses incurred by the Tokyo Venture. For the three monthsended March 31, 2004, we recorded a loss of $318,561 on our 57.25% interest inthis venture, as compared to a loss of $529,348 for the three months ended March31, 2003.
Page 17 of 59 PagesFor the three months ended March 31, 2004, interest expense on securitiesindebtedness increased $1,650,181 to $1,695,279, compared to $45,098 for thethree months ended March 31, 2003, primarily as a result of interest expenseincurred on repurchase agreements in connection with our institutionalsecurities financing operations and coupon and financing expense on securitiespositions taken by our institutional corporate bond sales and tradingoperations.
Compensation and related costs for the three months ended March 31, 2004increased $4,167,855 to $33,975,005, compared to $29,807,150 for the threemonths ended March 31, 2003, primarily as a result of increased brokerage staffin connection with the expansion of products in London and New York, the overallincrease in net revenues (resulting in higher incentive-based compensation), andthe currency effects of translating strengthened British pound sterling amountsto U.S. dollars.
Communication costs for the three months ended March 31, 2004 increased $166,081to $3,406,872, compared to $3,240,791 for the three months ended March 31, 2003,primarily as a result of the currency effects of translating strengthenedBritish pound sterling amounts to U.S. dollars.
Travel and entertainment costs for the three months ended March 31, 2004increased $863,086 to $2,774,983, compared to $1,911,897 for the three monthsended March 31, 2003, reflective in part of expansion efforts in New York andLondon and the overall increase in net revenues.
Occupancy and equipment rental represent expenses incurred in connection withour office premises, including base rent and related escalations, maintenance,electricity and real estate taxes, as well as rental costs for equipment underoperating leases. For the three months ended March 31, 2004, these costsincreased $1,429,952 to $2,538,472, compared to $1,108,520 for the three monthsended March 31, 2003, primarily due to an increase of $673,000 to an accrual inLondon for excess office space (arising from a terminated sublet) designated forsublease. This adjustment was based upon a reassessment of the length of time itwill take to generate sublease income on this space. Also contributing to theincrease in these costs were increased costs for office space in London andrental costs on new equipment in New York leased from General Electric CapitalCorporation.
Clearing and execution fees are fees paid to clearing organizations fortransaction settlements and credit enhancements and to other broker-dealers(including ECNs) for providing access to various markets and exchanges forexecuting transactions. For the three months ended March 31, 2004, these costsincreased $142,883 to $1,012,354, compared to $869,471 for the three monthsended March 31, 2003, primarily as a result of the increase in transactionvolumes from our institutional sales and trading businesses and our emergingmarket debt brokerage business.
Depreciation and amortization expense consists principally of depreciation ofcommunication and computer equipment and automobiles under capitalized leasesand amortization of leasehold improvements and software. For the three monthsended March 31, 2004, depreciation and amortization increased $43,408 to$809,143, compared to $765,735 for the three months ended March 31, 2003,primarily as a result of the depreciation and amortization in New York offurniture and leasehold improvements purchased for our new headquarters.
Page 18 of 59 PagesOther interest expense represents interest costs incurred on non-securitiesrelated indebtedness, such as revolving credit facilities and capital leaseobligations. For the three months ended March 31, 2004 and the three monthsended March 31, 2003, these costs were $53,249 and $36,477, respectively.
General, administrative and other expenses include such expenses as corporateinsurance, office supplies and expenses, professional fees, food costs and duesto various industry associations. For the three months ended March 31, 2004,these expenses increased $222,080 to $1,904,804, as compared to $1,682,724 forthe three months ended March 31, 2003, primarily as a result of increases invarious general and administrative costs such as corporate insurance, securitieslicensing fees and office expenses. These costs also included professional feesincurred during the three months ended March 31, 2004 and the three months endedMarch 31, 2003 in connection with the NTL when-issued trade disputes of $118,000and $200,000, respectively.
During the three months ended March 31, 2004, the Company recorded a provisionfor income taxes of $2,326,562, as compared to a benefit for income taxes duringthe three months ended March 31, 2003 of $1,079,919. The benefit reflected theCompany's pre-tax loss, before extraordinary item, during the first quarter of2003, incurred primarily as a result of the $5.9 million loss recorded for theNTL when-issued trade disputes.
For the three months ended March 31, 2003, minority interest in consolidatedsubsidiary resulted in a reduction of the net income from EBL of $175,985. Thelack of minority interest in the current period is the result of the Company'spurchase of the minority interest of EBL in February 2003.
During the three months ended March 31, 2003, we recorded an extraordinary gainof $2,957,547 as the result of our February 2003 discounted purchase of the 50%minority shareholding held in EBL. We purchased this interest, pursuant to theterms of an EBL shareholders agreement that we enforced in a U.K. courtproceeding, as a result of the failure of the minority shareholder to providecertain requested funding to EBL in late 2000. The discounted purchase price,calculated under the agreement as 70% of the book value attributable to thisshareholding as of December 2000, resulted in an extraordinary gain of$2,957,547. The gain reflected the excess of $5,570,703, the amount recorded forthe 50% interest in EBL as of the February 2003 purchase date, over the purchaseprice of $2,613,156.
Page 19 of 59 Pages
Liquidity and Capital ResourcesA substantial portion of our assets, similar to other brokerage firms, isliquid, consisting of cash, cash equivalents and assets readily convertible intocash, such as receivables from broker-dealers and customers and securitiesowned.
Cash and cash equivalents at March 31, 2004 reflect a reduction from the levelat December 31, 2003, principally due to the timing of employee bonus payments,which occurred in February 2004, and cash resources used for securitiespositions (including repurchase and reverse repurchase agreements) in connectionwith our institutional sales and trading operations and our institutionalsecurities financing operations.
U.S. Treasury and federal agency securities purchased under agreements to resell(reverse repurchase agreements) and U.S. Treasury and federal agency securitiessold under agreements to repurchase (repurchase agreements) are collateralizedfinancings on which we seek to earn an interest spread. The balances recorded onthese transactions, reflected on the Consolidated Statements of FinancialCondition respectively as "securities purchased under agreements to resell" and"securities sold under agreements to repurchase," are the contracted amounts,plus accrued interest. The reduction in these balances from those at December31, 2003 reflect the increased customer demand for financing that occurs at acalendar year end. We monitor the fair value of the securities purchased andsold under these agreements and obtain additional collateral or return excesscollateral where appropriate.
Securities owned and securities sold, not yet purchased reflect securitiespositions taken in connection with sales and trading operations and in our firminvestment account. Securities positions taken by our sales and tradingbusinesses are often for the purpose of facilitating anticipated customer needsand are typically hedged with offsetting positions of a similar nature.Securities owned are financed either from cash resources, by margin borrowings(if available) from broker-dealers that clear certain of these transactions onour behalf or by repurchase agreements. We are able to make delivery onsecurities sold, not yet purchased by borrowing such securities either fromclearing firms that clear certain of these transactions on our behalf or throughreverse repurchase agreements.
In the ordinary course of settling our U.S. Treasury and federal agencysecurities transactions (including repurchase and reverse repurchase agreements)we have securities failed-to-deliver and failed-to-receive obligations. Thesefails are generally resolved shortly afterwards through proper receipt/delivery.
As reflected on the Consolidated Statements of Financial Condition, and asdetailed in the table below, we had net assets relating to securities positions(including repurchase and reverse repurchase agreements) of $15.3 million atMarch 31, 2004, an increase of $8.2 million as compared to net assets relatingto securities positions of $7.1 million at December 31, 2003.
Page 20 of 59 Pages (in millions) March 31, 2004 December 31, 2003 ----------------- -----------------Securities purchased under agreements to resell $ 351.7 $ 1,446.7Receivable from clearing firm(1) 12.3Securities failed-to-deliver 82.4 90.7Securities owned 42.3 6.7Securities sold under agreements to repurchase ( 342.3) ( 1,470.5)Payable to broker-dealers and customers(2) ( 6.3)Securities failed to receive ( 77.4) ( 66.5)Securities sold, not yet purchased ( 47.4) ----------------- ----------------- Net assets relating to securities positions $ 15.3 $ 7.1 ================= =================(1) Included in receivable from broker-dealers and customers on the Consolidated Statements of Financial Condition and comprised of cash proceeds received against short sales in our firm investment account and the cash margin requirement maintained with our clearing firm for sales and trading positions.
(2) Trade date adjustment for the net purchase on March 31, 2004 of U.S. Treasury securities (which are self-cleared).
MFI is a member of the GSD-FICC for the purpose of clearing transactions in U.S.Treasury and federal agency securities and repurchase agreements collateralizedby such instruments. Pursuant to such membership, MFI is required to maintainexcess regulatory net capital of $10,000,000 and a minimum net worth (includingsubordinated borrowing) of $25 million. In addition, MFI is required to maintaina clearing deposit with GSD-FICC, based upon the level and nature of its tradingactivity (with a minimum deposit of $5,000,000), as well as certain minimumcollateral deposits with MFI's clearing brokers. The aforementioned depositshave been reflected as deposits with clearing organizations on the ConsolidatedStatements of Financial Condition.
EBL is a Type D registered firm of the FSA in the U.K., required to maintain afinancial resources requirement generally equal to six weeks averageexpenditures plus the amount of less liquid assets on hand (a $6.4 millionrequirement at March 31, 2004).
At March 31, 2004, we had $5,000,000 outstanding under a three-year revolvingcredit facility entered into by Euro Brokers Inc. ("EBI"), a U.S. subsidiary,with The Bank of New York ("BONY") in March 2003. This facility, as amended inNovember 2003, provides for borrowings of up to $10 million and is secured byEBI's receivables and the stock issued by EBI to its direct parent. Theagreement with BONY contains certain covenants which require EBI separately, andMFGI on a consolidated basis, to maintain certain financial ratios andconditions. Borrowings under this facility bear interest at a variable ratebased upon two types of borrowing options, (1) an "alternate base rate" optionwhich incurs interest at the Prime Rate plus a margin or (2) a Eurodollar optionwhich incurs interest at rates quoted in the London interbank market plus amargin. Commitment fees of .35% per annum are charged on the unused portion ofthis facility.
As of March 31, 2004, we had authorization remaining for the repurchase of up to669,193 shares of our common stock under our existing share repurchase programauthorized by our Board of Directors in July 2001. The program originallyauthorized the repurchase of up to 709,082 shares (10% of the then-outstanding
Page 21 of 59 Pagesshares), was initially expanded in the immediate aftermath of the September 11thattacks to authorize the repurchase of up to 1,200,000 shares, and was furtherexpanded in April 2003 by an additional 700,000 shares, for a total of 1,900,000shares. As has been the case with prior repurchase program authorizations,purchases are to be made from time to time as market and business conditionswarrant, and accordingly, there is no guarantee as to the timing or number ofshares to be repurchased.
In April 2004, our Board of Directors declared a common stock cash dividend of$.0625 per share for our fiscal first quarter. The dividend is payable on June15, 2004 to holders of record on May 28, 2004. In light of the new taxlegislation pertaining to dividends and our recent performance, we believe thatthe dividend, which on an annual basis is anticipated to be $.25 per share, is atax-efficient way to return value to our shareholders while at the same timeenabling us to retain sufficient earnings for growth opportunities.
In the ordinary course of our businesses, we are subject to extensive regulationat international, federal and state levels by various regulatory bodies whichare charged with safeguarding the integrity of the securities and otherfinancial markets and protecting the interest of customers. The compliancerequirements of these different regulatory bodies may include, but are notlimited to, net capital or stockholders' equity requirements.
We believe that all of our ongoing liquidity needs will be met in timely fashionfrom our cash and cash equivalents and other resources. Moreover, we havehistorically met regulatory net capital and stockholders' equity requirementsand believe we will be able to continue to do so in the future.
Forward-Looking StatementsCertain statements contained in this Item 2 and elsewhere in this report, aswell as other oral and written statements made by us to the public, contain andincorporate by reference forward-looking statements within the meaning of the"safe harbor" provisions of the Private Securities Litigation Reform Act of1995. Wherever possible, we have identified these forward-looking statements bywords such as "believes," "anticipates," "expects," "may," "intends" and similarphrases. Such forward-looking statements, which describe our current beliefsconcerning future business conditions and the outlook for our company andbusiness, are subject to significant uncertainties, many of which are beyond ourcontrol. Actual results or performance could differ materially from that whichwe expect. Uncertainties include factors such as: market and economicconditions, including the level of trading volumes in the instruments we brokerand interest rate volatilities; the effects of any additional terrorist acts oracts of war and governments' military and other responses to them; the successof our technology development and deployment; the status of our relationshipswith employees, clients, business partners, vendors and clearing firms; possiblethird-party litigations or regulatory actions against us or other unanticipatedcontingencies; the scope of our trading gains and losses; the actions of ourcompetitors; and government regulatory changes. For a fuller description ofthese and additional uncertainties, reference is made to the "Competition,""Regulation," "Cautionary Statements," "Management's Discussion and Analysis of
Page 22 of 59 PagesFinancial Condition and Results of Operations" and the "Quantitative andQualitative Disclosures about Market Risk" sections of the 2003 Form 10-K. Theforward-looking statements made herein are only made as of the date of thisreport and we undertake no obligation to publicly update such forward-lookingstatements to reflect new information or subsequent events or circumstances.
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